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BEC CPA > B1/B2 > Flashcards

B1/B2 Flashcards

1
Q

ERM

A

Culture, capabilities, and practices that organizations rely on to manage risk in creating, preserving, and realizing value

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2
Q

Cost of debt

A

Actual interest rate - tax savings

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3
Q

Nominal dollars & inflation rate

A

Nominal dollars are the inflation rate applied to real dollars
Ex: if you have 200K in real dollars, and inflation rate is 6%, in two years to Calc nominal dollars you need to
200* (1.06) * (1.06)

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4
Q

Simple interest formula

A

FV = PV * (1 + i) ^n

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5
Q

Net cost of debt formula

A

Effective interest rate net of tax.
Ex: interest rate is 14%, and tax is 30%,
Take (1-t)* i
Or 70% * 14% = 9.8%

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6
Q

Debt ratio

A

Total debt/ total assets

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7
Q

Price to earning ratio

A

Current market price / annual earnings per share

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8
Q

NPV formula

A

Initial investment - (cash inflows * PV factor)

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9
Q

Debenture & subordinated debenture

A

Debenture: unsecured obligation of the issuing company

Subordinated debenture: bond issue that is unsecured and ranks behind senior creditors

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10
Q

Working cap

A

Current asserts - current liabilities

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11
Q

Cash conversion cycle

A

CCC = days in inventory + days in AR - days payable outstanding

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12
Q

Methods to use to delay disbursements

A

Defer payments, drafts, line of credit, zero balance accounts

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13
Q

Reorder point

A

RO = safety stock + (lead time x sales during lead time)

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14
Q

Value realization

A

Value is realized when benefits created by the organization are received by stakeholders
Can be monetary (dividends) or non monetary

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15
Q

What’s ERM framework provide

A

It’s a framework to MANAGE risk within an organizations risk appeitite, to provide a reasonable expectation in the achievement of entity objectives

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16
Q

Governance, COSO, five frameworks (DOVES)

A 
Desired culture
exercises board Oversight
demonstrates commitments to core Values
attracts capable Employees
establishes operating Structure
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17
Q

Strategy and objective setting compomonent of COSO, frameworks (SOAR)

A

evaluates alternative STRATEGIES
formulates business OBJECTIVES
ANALYZES business context
defines RISK appetite

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18
Q

Three risks considered by management under COSO

A

Inherent risk, actual residual risk, and target risidual risk

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19
Q

Five components of ERM (GO PRO)

A 
Governance & culture
strategy & OBJECTIVE setting 
PERFORMANCE
Review and revision 
information, communication, reporting (ONGOING)
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20
Q

Risk sharing

A

INSURANCE

insuring against losses to address risk

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21
Q

Risk reduction

A

Think diversification

Not eliminating risk, but diversifying options to reduce

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22
Q

Risk sharing

A

Reduce severity of risk by bringing in an outside party

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23
Q

Go pro

A

Governance and culture, sratecgy and objective setting, performance, review/revision, information communication and reporting

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24
Q

Goals of ERM

A

achieve objectives/goals, assess risk regularly, achieve financial & reporting targets

25
Q

VAPIR

A 
Performance part of coso;
Portfolio view, 
assess severity of risk, 
prioritize risk, 
identify risk, 
implement risk response
26
Q

When is risk appetite exceeded

A

The likelihood and impact of negative events exceeds residual risk

27
Q

Organizational sustainability

A

The ability of an entity to withstand the impact of large scale events

28
Q

What is the difference between inherent and residual risk according to Coso

A

The difference arises because of management actions to reduce the inherent risk
Residual risk is the risk AFTER management takes actions to reduce impact of negative event

29
Q

Under SOX, internal control must be evaluated when

A

Within 90 days PRIOR to issuer report

30
Q

EAR formula

A

EAR = 1 + (stated rate/n)^n

31
Q

How to reduce unsystematic risk

A

(Aka firm specific/ non-market risk)

Reduce by diversification

32
Q

Forward contract

A

LARGE groups of transactions (think forward = for A LOT)

33
Q

Cost to issue formula

A

Face value - price paid + transaction costs

34
Q

Firm with higher degree of operating leverage compared to industry implies what

A

Firms profits are more sensitive to changes in sales volume

35
Q

LETTER OF CREDIT

A

3rd party guarantee of obligations

If company is saying “we guarantee” its a LETTER of credit

36
Q

Considering the SCOR model of supply chain, implementing changes in engineering falls into what key process?

A

MAKE

37
Q

Four components of SCOR

A

Plan, source, make, deliver

38
Q

SCOR; plan

A

Determining demand, planning inventory, configuring supply chain, make/buy decisions

39
Q

SCOR; source

A

Which vendors, vendor pmts, oversee quality assurance

40
Q

SCOR; Make

A

Manage production, manufacture product, test product, release inventory, analyze capacity

41
Q

SCOR; deliver

A

Manage ORDERS, ship products, label products, manage AR

42
Q

3 carrying costs

A

Insurance costs, cost of capital invested into inventory, cost of obsolescence, opportunity cost on inventory investment

43
Q

What increases EOQ

A

Remember formula for EOQ = SQRT ( [2 * SO] / C )
S= sales quantity in units
O = cost per purchase ORDER
C = cost of carrying one unit in stock for one year

Order size will get larger as “S” or “O” gets bigger (numerator) or “C” gets smaller (denominator)

44
Q

Why would a company agree to debt covenant which limits % of its long term debt

A

Reduce coupon rate on NEW bonds sold

45
Q

Benefits of a lockbox system

A

Expedites cash inflows by having a bank receive pmts directly. This reduces AR outstanding
Aka:
(Minimize collection float)

46
Q

If the dollar price against the euro rises,

A

This means the dollar is DEPRECIATING against the euro

Euro will get more expensive

47
Q

What 3 things impact safety stock levels

A

Uncertain sales forecasts
Dissastisfaction of customers
Uncertain lead times

48
Q

What 3 things impact the optimal level of inventory

A

Time required to receive inventory (lead time), cost per unit of inventory ( & associated carry costs), cost of placing an order for merchandise

49
Q

MRP (materials requirements planning)

A

Inventory management technique that projects and plans inventory levels in order to control usage of raw materials in the production process

50
Q

Audit committee financial expert must have experience specifically with what

A

Internal accounting controls

51
Q

According to SOX 2002, how many years is the penalty for destroying, covering up documents under title VIII

A

20 years

52
Q

What is the purpose of a written code of conduct, according to coso

A

Helps management set tone for the organization; promoting honest/ethical conduct, teamwork, compliance, appropriate disclosure

53
Q

Liquidity risk

A

Risk associated with the ability to sell temporary investment in a short period of time without significant price concessions

54
Q

Definition of Price risk, and what technique would a company use to manage it

A

Price risk = exposure an investor has to a decline in the value of a portfolio or individual securities
Using market value at risk analysis would help the company understand and quantify the value at risk

55
Q

Types of risk (DUNS)

A

Diversifiable, unsystematic (non-market/firm specific), non-diversifiable, systematic

56
Q

Put option

A

Gives the owner the option to sell a specific security at fixed conditions of price and time
*PUT an offer to sell a security later vs CALL you when I want to buy it (since call options are options to buy)

57
Q

What does it mean when an investor’s certainty equivalent is greater than the value of an investment alternative?

A

This means the point at which the investor is indifferent about risk actually exceeds the expected return on the investment, so they are seeking lower return for higher risk

This is risk seeking behavior

58
Q

Required rate of return is calculating by adding what 4 risk premiums to the risk free rate

A

MP+IP+LP+DRP
Maturity risk premium (MP)(from exposure to the same interest rate over time)
Purchasing power risk/inflation premium (IP)(based on risk of changing price levels)
Liquidity risk premium (LP) (risk of not being able to convert an asset to cash at FMV)
default risk premium (DRP) (risk issuer will fail to pay interest/principal)

BEC CPA (11 decks)

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