B1 Flashcards
The primary roles of an entity’s board of directors (2)
- Safeguard company’s assets
2. Maximize shareholder return
Fiduciary duties of a member of the board of directors (4)
- Right to rely
- Liability for unlawful distributions/dividends
- Duty of loyalty
- Corporate opportunity doctrine
SOX Title III-Corporate Responsibility
The corporate responsibility section of the act relates to the establishment of an audit committee and the representations made by key corporate officers, typically the CEO and CFO
SOX Title IV-Enhanced Financial Disclosures
The enhanced financial disclosures associated with issuer reports includes additional details regarding the financial statements, internal controls, and the operations of the audit committee
Definition of Internal Control
A process that is designed and implemented by an organization’s management, board of directors and other employees to provide reasonable assurance that it will achieve its compliance, operating, and reporting objectives
The 3 categories of objectives within the COSO framework
ORC
Operating
Reporting
Compliance
Operations Objectives
Relate to the effectiveness and efficiency of an entity’s operations. Includes financial and operations performance goals as well as ensuring that the assets of an organization are adequately safeguarded against potential losses.
Reporting Objectives
Pertain to the reliability, timeliness, and transparency of an entity’s external and internal financial and non-financial reporting as established by regulators, accounting standard setters, or the firm’s internal policies.
Compliance Objectives
Established to ensure that the entity is adhering to all applicable laws and regulations
The 5 principles related to the control environment EBOCA)
- commitment to Ethics and integrity
- Board independence and oversight
- Organizational structure
- Commitment to competence
- Accountability
ERM enterprise objectives (4)
SORC
Strategic
Operations
Reporting
Compliance
Strategic Objectives
High-level goals designed to achieve the mission
The sequence of enterprise risk management framework components (IS EAR AIM)
Internal environment (EBOCA HR) Setting objectives (strategic & related) Event identification Assessment of risk Risk response control Activities Information and communication Monitoring
ERM-Internal Environment 8 Components
EBOCA HR
commitment to Ethical values and integrity
Board oversight
Organizational structure
Commitment to competence
Accountability
Human resources standards
Risk management philosophy and Risk appetite
4 ways to respond to risk
- Avoidance
- Reduction
- Sharing
- Acceptance
Total Factor Productivity Ratios (TFP)
output/total costs
Partial Productivity Ratios (PPRs)
Output/specific quantity
Control Charts
A graphical tool that is used to plot a comparison of actual results by batch or other suitable constant interval to an acceptable range. They show if there is a trend toward improved quality conformance or deteriorating quality conformance
Pareto Diagrams
Used to determine the quality-control issues that are most frequent and often demand the greatest attention. Demonstrates the frequency of defects from highest to lowest frequency.
Cost Objects
Defined as resources or activities that serve as the basis for management decisions. Require separate cost measurement and may be products, product lines, departments, geographic territories, or any other classifications that aids in decision making.
Prime Costs
Direct materials+direct labor
Conversion Costs
Direct labor+overhead applied
Product Costs
- All costs related to the manufacturing of the product
- Are inventoriable (assets on the balance sheet)
- Consist of DM, DL, and OH applied
Period Costs
- Expensed in the period in which they are incurred
- Not inventoriable
- The costs of selling the product and administering and managing the operations of the firm
- Include SG&A and Interest
The 3 most important objectives of cost accounting systems (PIE)
- Product costing (inventory and cost of goods manufactured and sold)
- Income determination (profitability)
- Efficiency measurements (comparisons to standards)
Direct Costs
- Can be easily traced to a cost pool or object, as the cost directly relates to that item
- Includes direct raw materials and direct labor
Direct Raw Materials
The costs of materials purchased to be used in production (including freight-in net of any applicable purchase discounts) plus a reasonable amount for normal scrap created by the process
Direct Labor
The cost of labor that is directly related to the production of the product or the performance of a service plus a reasonable amount of expected down time
Indirect Costs
- Not easily traceable to a cost pool or cost object
- Typically incurred to the benefit of two or more cost pools or objects
Variable Costs
- Total costs change proportionally with the cost driver
- Per unit costs remain constant
- The short-run and long-run effects of variable costs are the same within the relevant ranges
Fixed Costs
- In the short term and within a relevant range, a fixed cost does not change when the cost driver changes
- Fixed costs remain constant in total but they vary per unit
- Given enough time, andy cost can be considered variable
Semi-variable costs
Costs that include components that remain constant over the relevant range and include components that fluctuate in direct relation to production
Relevant Range
-The range for which the assumptions of the cost driver are valid
Cost of Goods Manufactured Statement
WIP, beginning \+DM used \+DL \+Manufacturing OH applied =Total manufacturing costs available -WIP, ending =Cost of goods manufactured
Direct Materials Used Formula
Raw Mat, beginning
+purchases
-Raw Mat, ending
=DM used
Cost of Goods Sold Statement
Finished goods, beginning \+Cost of goods manufactured =Cost of goods AFS -Finished goods, ending =Cost of goods sold
Job-Order Costing
The method of product costing that identifies the job as the cost objective and is used when there are relatively few units produced or when each unit is unique or easily identifiable
Process Costing
A method of product costing that averages costs and applies them to a large number of homogenous items
Equivalent Units
The amount of direct material, direct labor, or conversion costs necessary to complete one unit of production
EUP under FIFO (3 components)
- Beginning WIP * % to be completed
- Units completed-Beginning WIP
- Ending WIP * % completed
EUP under Weighted-Average (2 components)
- Units completed
2. Ending WIP * % completed
Normal Spoilage
- Occurs under regular operating conditions and is included in the standard cost of the manufactured product
- Capitalized as part of inventory
Abnormal Spoilage
- Should not occur under normal operating conditions
- Not included in the standard cost of a manufactured product
- Treated as a period cost
Comparison of EUP calculation under FIFO and Weighted-Average
- Under FIFO, the calculation consists of 3 elements representing current period production, whereas under the weighted average method, the calculation consists of only 2 elements
- FIFO represents only costs incurred in the current period. The weighted average includes both current period costs plus prior period units
Activity
Any work performed inside a firm
Resource
An element used to perform an activity
Cost Driver
Activity bases that are closely correlated with the incurrence of manufacturing overhead costs in an activity center, and they are often used as allocation bases for applying overhead costs to cost objects
Examples of Jobs that would Use Job-Costing
- Construction of buildings or ships
- Aircraft assembly
- Printing
- Special purpose machinery
- CPA Firm
- Management consulting firm
- Repair shops
- Industrial research projects
Examples of Jobs that would use process costing
- Oil& gas
- Chemicals
- Steel
- Textiles
Title VIII-Corporate and Criminal Fraud Accountability
- Criminal penalties for altering documents
- Statute of limitations for securities fraud
- Whistle blower protection
- Criminal penalties for securities fraud
Structure of COSO framework
There are 5 integrated components of internal control, including the control environment, risk assessment, information and communication, monitoring activities, and (existing) control activities. These components are needed to achieve the three objectives of internal control. Each component has associated principles that represent fundamental concepts.
Enterprise Risk Management-Integrated Framework
- issued to assist organizations in developing a comprehensive response to risk management
- all entities face uncertainty
- value is maximized when strategy balances risks and returns as well as efficiency and effectiveness in accomplishing objectives
Enterprise risk management definition
ERM is a process, effected by an entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.
Inherent risk
The risk to an organization that exists if management takes no action to change the likelihood or impact of an adverse event.
Residual risk
The risk to an organization that exists after management takes action to mitigate the adverse impact of the event.
Risk avoidance
-management election to avoid or terminate risk
Risk reduction
Management election to reduce or mitigate risk (derivative instruments)
Risk sharing
Management reducing risk by transferring it (insurance)
Risk acceptance
The company takes no action, proceeds with event.
When traditional costing is used, the application of overhead is accomplished in two steps…
- calculated OH rate= budgeted OH costs/estimated cost driver
- Applied OH=actual cost driver*OH rate
Job cost records
- maintained for each product, service, or batch of products, and they serve as the primary records used to accumulate all costs for the job
- include: materials requisitions, labor time tickets
Activity based costing
Refines traditional costing methods and assumes that the resource-consuming activities with specific purposes cause costs. ABC assumes that the best way to assign indirect costs to products (cost objects) is based on the product’s demand for resource consuming activities.