B1

Question 1

What type of risk can be reduced by diversification?

Answer 1

labor strikes

Question 2

What kind of risk exists when a company only uses equity financing?

Answer 2

business risk (you’re using your own earnings to capitalize your operations, so you’re exposed to the risks of your own unique circumstances)

Question 3

Effective tax rate calculation

Answer 3

1. calculate actual interest: loan amount X interest rate
2. subtract any additional interest earned or discounted interest earned in advance: loan amount X additional interest rate
   (ex. earns interest at an annual rate of 3%)
3. figure out the numerator: actual interest - additional interest earned or discounted interest earned in advance
4. figure out the denominator: loan amount - compensating amount or amount needed to have at all times for transaction purposes
5. divide numerator by denominator

Question 4

How would you calculate the net gain (economic substance) of a future or forward contract?

Answer 4

1. multiply the change in rates by the # of units
2. subtract the cost of the contract (if the change in step #1 was an increase)

Question 5

If the dollar price of the euro rises, how will this affect the USD?

Answer 5

the USD will depreciate against the euro (a higher dollar amount compared to the euro means the USD is getting weaker and goods are more expensive for foreign entities)

note: outflows would decrease and inflows would increase b/c the domestic company (US) can afford more goods with a cheaper dollar

Question 6

What are the assertions regarding the establishment of internal control systems are required to be made by the CEO and CFO b/c of SOX?

Answer 6

1. material info has been made available
2. the controls have been evaluated within 90 days of the report issue date
3. the effectiveness of the controls

Question 7

What are elements in the PLAN phase of the Supply Chain Operations Reference Model?

Answer 7

-determining demand requirements
-making make/buy decisions
-assessing capacity concerns and capabilities

Question 8

According to COSO, the difference between inherent risk and residual risk arises b/c of what?

Answer 8

actions taken by management to reduce inherent risk

residual risk = inherent risk - impact of management’s actions

Question 9

What is the risk response (risk appetite) when you sell off a business unit or product line?

Answer 9

avoidance

Question 10

T/F: The act of the CFO updating the audit committee about the status of internal control is a monitoring activity.

Answer 10

False - this is just reporting deficiencies

Question 11

How to calculate the effective annualized interest rate on a loan:

Answer 11

1. calculate the actual finance charge
   bank loan x annual interest rate
2. subtract any interest earned (if any) on additional compensating balance
   a) compensating balance x interest rate that the checking account earns
   b) net interest cost = amount in step 1 - amount in step 2
3. divide the difference (net interest) by the loan proceeds the company has use of:
   net interest / (bank loan - compensating balance) = effective interest rate