8-11 - EQs (A) - 30% Flashcards
Which of the following is not a limitation of an enterprise risk management system?
Risk relates to the future that is uncertain.
Collusion among two or more individuals can result in enterprise risk management failure.
Companies cannot avoid risk.
Enterprise risk management is subject to management override.
Ans. C
Companies cannot avoid risk. This is a fact that results in the need to have ERM
List 3 limitations of ERM
a. The effectiveness of ERM is subject to the limitations of the ability of humans to make judgments about risk and impact.
b. Well-designed ERM can break down.
c. Collusion among two or more individuals can result in ERM failures.
d. ERM systems can never be perfect due to cost-benefit constraints.
e. ERM is subject to management override.
Lyle Corporation has sold a large quantity of goods to a Japanese company on a 90-day account that is payable in Japanese yen. If management of Lyle is concerned about the transaction risk related to changes in the value of the yen, how might management hedge this risk?
Sell yen using a forward contract for delivery in 90 days.
Buy yen using a forward contract for delivery in 90 days.
Lend yen for repayment in 90 days.
Purchase a long position in the futures market for delivery of yen in 90 days.
Ans. A. Sell yen using a forward contract for delivery in 90 days.
By selling the yen, management has locked in the purchase price. When the customer pays in 90 days, the firm can deliver the yen on the forward contract with no significant gain or loss.
Hedging in the forward exchange market
Hedging in the forward exchange market. Companies can use forward contracts to hedge foreign currency transactions. As an example, assume that Company X has agreed to deliver 20,000 units of product in six months to a Japanese company who will pay for the product in yen. To mitigate the risk of losses from devaluation of the yen, Company X could enter into a forward contract to sell the yen for delivery in six months. This contract in effect locks in the price for the sale in terms of U.S. dollars.
Money market hedge
A second way to eliminate the transaction risk described in a. is to borrow money in yen when the agreement is executed. This strategy immediately converts the yen to U.S. dollars. Then, when the yen are collected from the sale, the loan can be repaid resulting in no foreign exchange loss or gain over the six-month period.
Currency futures market hedge
Futures markets exist that allow a company to purchase or sell contracts to deliver foreign currency. These contracts can be used to hedge a foreign currency transaction much like a forward contract. However, because futures contracts are standard in nature and traded on organized exchanges, they can be readily bought and sold.
GDP
The price of all goods and services produced by a domestic economy for a year
The profitability index is a variation on which of the following capital budgeting models?
Internal rate of return.
Economic value-added.
Net present value.
Discounted payback.
Ans. C Net Present Value
Profitability Index
NPV / Initial Cost
Accounting for factory overhead costs involves averaging in:
Job order costing: Y/N
Process costing: Y/N
Ans.
Job Order Costing: Y
Process Costing: Y
Factory overhead is averaged over production in both job-order costing and process costing. Because the actual costs associated with factory overhead are generally not known until after the accounting period, a predetermined overhead rate is calculated based on an estimate of overhead cost.
This rate is then used to apply overhead to production for both job-order costing and process costing.
The difference between the two methods is that job-order costing allocates the applied overhead to the number of units in each job (generally a small number of units) while process costing allocates overhead to the number units in each processing center (generally a much larger number of units).
What is a main difference between job order costing and process costing with respect to applied overhead?
job-order costing allocates the applied overhead to the number of units in each job (generally a small number of units) while process costing allocates overhead to the number units in each processing center (generally a much larger number of units).
Which of the following components is a set of standards, processes, and structures that provide the basis for carrying out internal control across the organization:
Monitoring.
Control activities.
The control environment.
Information and communication.
Ans. C Control Environment
The control environment is the set of standards, processes, and structures that provide the basis for carrying out internal control across the organization. It may be viewed as the foundation for the other components of internal control.
Quick Co. was analyzing variances for one of its operations. The initial budget forecast production of 20,000 units during the year with a variable manufacturing overhead rate of $10 per unit. Quick produced 19,000 units during the year. Actual variable manufacturing costs were $210,000. What amount would be Quick’s flexible budget variance for the year?
$10,000 favorable.
$20,000 favorable.
$10,000 unfavorable.
$20,000 unfavorable.
Ans. $20,000 unfavorable
The variance is equal to budgeted cost at actual level of production, $190,000 (19,000 × $10) minus actual costs ($210,000). Therefore, the budget variance is $20,000 unfavorable ($190,000 – $210,000).
Calculate the flexible budget variance
Budgeted cost at actual level of production minus actual costs.
