BAR 2.0 Flashcards
What are the components of Enterprise Risk Management?
GO PRO
G - Governance and Culture
O - Objective and Strategy-Setting
P - Performance
R - Review and Revision
O - Ongoing information, communication, and reporting
What are the principles that make up Governance and Culture?
DEEAD
D - Defines Desired Culture
E - Exercises board oversight
E - Establishes operating structure
A - Attracts, develops, and retains competent employees
D - Demonstrates commitment to core values
What are the principles that make up Objective and Strategy-setting Culture?
F - Formulates business objectives
A - Analyzes business context
D - Defines risk appetite
E - Evaluates alternative strategies
What are the principles that make up Performance?
I PAID
I - Identify risks
P - Prioritize risks
A - Assess severity of risk
I - Implement risk response
D - Develop portfolio review
What are the principles that make up Review and Revision?
APR
A - Assess substantial change
P - Pursue improvement in ERM
R - Review risk and performance
What are the principles that make up Ongoing information, communication, and reporting?
LCR
L - Leverages IT
C - Communicates risk information
R - Reports on risk, culture, and performance
What are the types of risk responses?
SARA
Share: Buy insurance outsource
Avoid: Leaving the line of business/location
Reduce: Diversification, hedging
Accept: Do nothing towards the risk /
What are the two broad categories risks can be classified to?
DUNS
Diversifiable
Unsystematic (think firm specific)
Non-diversifiable
Systematic (think market)
What are the types of business combinations?
Horizontal - competitors join
Vertical - combination of companies at different stages of production process
Diagonal - company joins with other company who provides ancillary support
Circular - different business units with remotes connections join under single management
What are the types of divestitures?
Sell-offs: management sees no value in keeping the segment/company (generates cash)
Spin-off: there is some value in the segment/company
Equity Carve out: key word here is offering an IPO (generates cash)
What is the formula for the WACC?
WACC=
[(E/V)Re]+[(P/V)Rp]+[(D/V)*Rd(1-T)]
V = The summed market values of the individual components of the firm’s capital structure: common stock, preferred stock, and debt
R = Required rate of return AKA the cost
T = Corporate tax rate
What are the three different types of formulas used to calculate the Cost of Retained Earnings?
1) CAPM = Risk Free Rate +[Beta*(Market Return - Risk Free Rate)]
2) Discounted CF = (Dividend per share @ end of one year/Market Value)+ Growth Rate
**Dividend per share @
end of one year =
Dividend just paid(1+
growth rate)
3) Bond Yield Plus Risk Premium = Pretax cost of LT Debt + Market Risk Premium
What are the formulas Price Elasticity of Demand, Supply, Cross elasticity, and Income
Demand= % change in quantity demanded/$ change in price
Supply = % change in supply demanded/$ change in price
Cross = % change in number of units of x demanded (supplied)/% change in price of Y
Income = % change in number of units of x demanded (supplied)/% change in income
What is the formula to calculate the Effective Interest Rate
The difference between the Effective Interest Rate and Stated Interest Rate is the deduction of loan proceeds from the calculation
What are Porters Five Forces
BBB (big baller brand) ME
B - Barriers to Entry
B - Bargaining Power of Customers
B - Bargaining Power of Suppliers
M - Market Competitiveness
E - Existence of Substitute Products
What are the types of Risk Premiums added to the risk free rate to calculate Required Rate of Return?
Maturity Premium
Liquidity Premium
Default Risk Premium
Purchasing Power/Inflation Premium
What are the required Financial Statements for Defined Benefit and Defined Contribution Plans
Defined Benefit:
1. Statement of Net Assets Available for Benefits
2. Statement of Changes in Net Assets Available for Benefits
3. Statement of Accumulated Plan Benefits
4. Statement of Changes in Accumulated Plan Benefits
Defined Contribution
1. Statement of Net Assets Available for Benefits
2. Statement of Changes in Net Assets Available for Benefits
What are the factors that change Demand curves?
W - Change in Wealth
R - Change of Related goods
I - Change in Consumer income
T - Change in consumer Tastes
E - Change in consumer Expectation
N - Change in the Number of buyers served by the market
What are the factors that change Supply curves
E - Change in price Expectation of the supplying firm
C - Change in production Costs
O - Change in the price or demand for Other goods provided by the firm
S - Change in Subsidies or taxes
T - Change in production Technology
What are the motives to hold cash as it relates to Working Capital?
TCP
Transaction Motive
Speculative Motive
Precautionary Motive
What is the formula to calculate Economic Order Quantity and what does it measure?
EOQ= Square root of (2 x sales x cost per PO)/carrying cost per unit)
Intents to minimize total order and carrying costs
What are the formulas for marginal analysis?
DM Price Variance= Actual Q. Purchased x (Actual price - stdrd price)
DM Q. Usage Variance= Standard price x (Actual q. used - stdrd q. used)
DL Rate Variance= Actual hrs worked x (actual rate - standard rate)
DL efficiency variance= Standard rate (actual hrs worked - stdrd hrs)
What is the formula to calculate Reorder point Quantity and what does it measure?
Reorder point=Safety stock + (lead time x sales during lead time)
Measures when a company should order or manufacture additional inventory to meet demand and to avoid incurring stock out costs
What is the formula to calculate APR of quick payment discount and what does it measure?
APR = (360/Pay period - Discount Period) x (Discount %/100% - Discount %)
Measures the impact of not taking advantage of discount
What are Annuities and Ordinary Annuities due?
Annuity Due: Beginning of Period
Ordinary Annuity: End of the period
What are the different ways to calculate Return on Assets?
1) Return on Asset= Net Income/Average Total Assets
2) Profit Margin x Asset Turnover
Profit Margin= Net Income/Sales
Asset Turnover= Sales/Average Total Assets
What are the methods used to value Tangible Assets?
CALM
Cost Method
Appraisal Method
Liquidation Method
Market Value Method
What are the methods used to value Intangible Assets?
MIC
Market Method
Income Method
Cost Method
What are critical success factors classified as?
FICA
F - Financial (CRPI)
I - Internal Business* Processes
C - Customer Satisfaction*
A - Advancement of innovation and HR development*
*Nonfinancial Measures
What are the components of the Financial portion of the Balanced Scorecard in order from lowest to highest level of oversight?
CRPI
Cost Strategic Business Unit
Revenue Strategic Business Unit
Profit Strategic Business Unit
Investment Strategic Business Unit
What is the Formula to Calculate Revenue Using the Percentage of Completion Method?
Step 1: Calculate GP
Contract Price - Estmt’d Total Cost
Step 2: Calculate %
Total Cost to Date/Total Estimate Cost of Contract
Step 3: Compute Profit To Date
Step 1 x Step 2
Step 4: Compute Profit Earned for CY:
CY GP - PY GP
What is the five step approach to revenue recognition?
I STAR
I: Identify Contract With Customer
S: Determine the Separate Performance Obligations
T: Determine the Transaction Price
A: Allocate the Transaction Price to Difference Performance Obligations
R: Recognize Revenue
How to calculate impairment of intangible assets (including Goodwill) with indefinite lives
If Carrying/Book Value is greater than the Fair Value, then the difference is considered the impairment and is recorded as a loss.
Note: remember that when calculating impairment regarding Goodwill, the impairment can only be as large as the actual Goodwill
What are the journal entries recorded during 1) Construction Period and 2) When construction is completed using the percentage of completion method and the completed contract method?
During Construction Period:
-Percentage of Completion Method:
CIP
Materials, cash,etc..
(to record costs incurred)
AR
Progress Billing
(to record billings on contract)
Cash
AR
(to record payments received)
Cost of LT construction contracts
CIP
Revenue
-Complete Contract Method:
CIP
Materials, cash,etc..
(to record costs incurred)
AR
Progress Billing
(to record billings on contract)
Cash
AR
(to record payments received)
When construction is complete:
-Percentage of Completion Method:
Progress Billings
CIP
(to close construction accounts)
-Complete Contract Method:
Progress Billings
Revenue
(to close billings to revenue)
Cost of LT Construction Contracts
CIP
(to close CIP to expense)
Non-compensatory and Compensatory stock options
Noncompensatory Compensation:
Expense is recognized when option is exercised
Compensatory** -
Compensation Expense is allocated over the service/vesting period
Remember that they are valued at Fair Value as of the Grant Date
What are the entries to record Compensation Expense, Exercised Options, Expiration of Options under Compensatory method
Compensation Expense:
Compensation Expense
APIC - Stock Option
Exercised Option:
Cash
APIC - Stock Option
Common Stock
APIC - Excess of Par
Expired Option:
APIC - Stock Options
APIC - Expired Stock Options
Research & Development Costs are expensed unless they meet the following criteria
1) Materials, equipment, or facilities have an alternate future use
2) R&D costs are incurred on behalf of others through a contractual agreement
3) R&D is in process as it is associated with the purchase of a company (acquisition)
Under the assumption that you will Sell, Lease or License Computer Software, when should Computer Software Development Costs be capitalized?
After they have reached technological feasibility, otherwise, they are expensed.
Note: They are amortized using the greater of the following formulas:
% of Revenue: Total Capitalized amount x (Current Gross Revenue/Total Projected Gross Revenue)
OR
Straight line= Total Capitalized amount/Useful life
What are the Criteria to Calculate the 10% size test for Revenue, P/L, and Assets?
- Revenue: The segments revenue (external and internal) must be >= to combined segment revenue (external and internal)
- P/L: Revenues - Directly Traceable Costs - Reasonable Allocated Costs
- Assets: 10% or more of Total Identifiable Assets
What are the entries to record the acquisition of a company for cash and common stock?
Cash
Dr. Investment in Subsidiary
Cr. Cash
Common stock
Dr. Investment in Subsidiary
Cr. Common Stock (at Par)
Cr. APIC - Excess of Par
*** Remember to record the investment when the company is ACQUIRED
What are the Consolidation Adjustments made when consolidation a parent and subsidiary?
CAR IN BIG
*CAR **IN **BIG
C - Common Stock - Subsidiary
A - Additional Paid-In Capital - Subsidiary
R - Retained Earnings - Subsidiary
I - Investment in Subsidiary
N- Noncontrolling interest (if not 100% owned)
B - Balance Sheet adjustments to FV
I - Identifiable intangible Assets to FV
G - Goodwill***
Dr. Balance
**Cr. Balance
**Goodwill if FV is less than what one pays otherwise, its treated as a gain
Regarding Derivatives, what are the Underlying and Notional amounts and how is the Value/Settlement Amount determined?
Underlying: Specified price (strike price)
Notional Amount: specified unit of measure (currency units, shares, lbs)
Multiply both to get the Value/Settlement amount
***They might ask what the initial investment is: this is just the premium that one pays to be able to hedge in the future
What are the two methods used when Translating foreign currency in relation to consolidating Financial Statements?
1) Translation Method**
2) Remeasurement Method
**Used only when the currency is considered a functional currency (when the subsidiary is using the country’s currency)
How do I treat Balance Sheet and Income Statement transactions under both methods of translation?
Translation Method:
Income Statement - All weighted average
Balance Sheet -
1. Assets & Liabilities @ current rate
2. Common stock & APIC @ Historical Rate
Remeasurement Method:
Balance Sheet -
1. Monetary Items @ current rate
2. Nonmonetary items @ historical rate
Income Statement -
1. Non balance sheet related items @ weighted average
2. Balance sheet related items @ historical rate
What are the three sets of books used by governmental funds?
BAE
Budget**
Activity
Encumbrances
**Remember that the entry for these are booked on the opposite side
What are the Budgetary Accounting JEs for the beginning and ending of the year?
Beginning:
Dr. Estimated Revenue Control
Dr. Budgetary Control (if deficit)
Cr. Appropriations Control
Cr. Budgetary Control (if surplus)
Ending:
Dr. Appropriations Control
Dr. Budgetary Control (if surplus)
Cr. Estimated Revenue Control
Cr. Budgetary Control (if deficit)
Note: the entries are a zero sum game
What are the JEs to set up the encumbrance and budgetary control, once an invoice is received, and to record actual expenditures?
JE to set up Encumbrance and Budgetary control:
Dr. Encumbrance
Cr. Budgetary Control
JE when an invoice is received:
Cr. Budgetary Control
Dr. Encumbrance
JE to record actual expense:
Dr. Expenditure
Cr. Vouchers Payable (cash)
What are the types of Governmental funds and their purpose?
GSD CP
General Fund: its a catch all for administrative activities, provides interfund transfers to other Governmental funds
Special Revenue Fund: Revenues and expenditures that are legally restricted or committed for specific purposes
Debt Service Fund: accounts or resources accumulated to pay LT Debt (principal and interest) only for governmental funds - required when legally mandated
Capital Projects Funds: established for the construction, purchase, or leasing of significant fixed assets.
Permanent Funds: should be used to report resources that are legally restricted to the extent that only earnings, and not principal, may be used to support government programs (similar treatment to endowment funds but instead of funding a not for profit’s operations, they fund government programs)
What are the types of Proprietary funds and their purpose?
IE
Internal Service Fund: established to finance and account for services and supplies provided exclusively to other departments within a government unit.
Enterprise Fund: established to account for operations that are financed and operated in a manner similar to private businesses.
What are the types of Fiduciary funds and their purpose?
CIPPOE
Custodial funds: to collect cash to be held temporarily for an authorized recipient to whom it will be later disbursed (catch all fund of all Fiduciary activity funds)
Investment Trust Funds: to keep record of external investment pools
Private purpose trust funds: designated fund for reporting all other trust arrangements under which principal and income are for specific individuals, private organizations, other governments
Pension and Other Employee Benefit Trust Funds: account for government sponsored defined benefit and defined contributions plans and other employee benefits
What are the components of the ACFR?
1) Introductory Section (Unaudited)
2) Basic Financial Statements*
3) Statistical Section (Unaudited)
*Composed of:
Management Discussion and Analysis, Government-wide and Fund Financial Statements, and Required Supplementary Information
What’s the criteria to be considered a Primary Government
Primary government reports by itSELF
Separately
Elected Governing Body
Legally Separate
Fiscally Independent
*Must meet all 3 otherwise it is considered a component unit
What is the criteria to determine whether a component unit should be presented using the Blended approach
1) is the BOD of the primary government the same of the component unit?
2) Does the component unit serve the government exclusively?
3) Does the organization not qualify as a legal entity?
*Only one has to apply to use the blended approach
What are the components of the Statement of Net Position?
Statement of Net Position - RUN
Restricted
Unrestricted
Net Investment in Capital Assets
What are the Program Revenue and Expense category types in relation to the Government-wide financial statements?
Program Revenue - COC
Chargers for Services
Operating Grants and Contributions
Capital Grants and Contributions
Expense - reported by program
What is the formula for NPV
Step 1: Calculate after-tax cash flow= Annual Net CF x (1- tax rate)
Step 2: Add depreciate benefit= Depreciation x Tax rate
Step 3: Multiply result by appropriate PV of annuity
Step 4: Subtract initial CF
*remember there might be a disposal but that CF is only factored in the last year of the asset
What is the criteria a fund must meet to be considered a major fund and therefore reported on the Government-wide Financial statements?
1) 10% or larger of its corresponding fund and
2) 5% or larger of the total of corresponding fund and enterprise funds (or governmental depending on the call of the question)
*General funds are considered major regardless of whether it meets the test
What are the transactions reconciled between the Government-wide financial statements and the Fund financial statements?
Statement of Net Position (Balance Sheet):
CAN I
+ Capital Assets
- Accumulated Depreciation
- Non-current liabilities
+ Internal Service fund net position
Statement of Revenues, Expenditures, and Changes in Fund balance (Income Statement):
CPAS RIDES
+ Capital outlay expenditures
+ Principal payment on debt
- Asset disposal (NBV)
- Sources (other than financing sourced)
+ Revenue
- Interest Expense
- Depreciation Expense
+ Internal service fund net revenue
What is the mnemonic used to determine whether a lease classifies as a sales-type lease from the perspective of the lessor?
OWNES PC
Ownership of the asset transfers at the end of the lease term
Written option is reasonably certain to be exercised
Net present value of payments and any guaranteed residual value is equal to or greater than 90% of the asset’s fair value
Economic life of the asset represents at least 75% of the term
Specialized asset that doesn’t have another function
If none are met then the lease defaults to the following criteria:
Present value of the sum of the lease payments is equal to or substantially exceeds the asset’s fair value
Collections of payments are probable
*If all are met, then the lease is a Direct Finance Lease, if one or none, then its an Operating lease
What are the formulas for Residual Income and Economic Value added
1) Residual Income = Net Income - (NBV x Hurdle Rate)
2) EVA = NOPAT - (Investment x WACC)
NOPAT = EBIT x (1-T)
What is the formula to apply overheard?
Step 1 - Calculate OH Rate:
OH Rate= All Bdgtd OH Costs/Single Esmtd costs driver
Step 2 - Calculate Applied OH Rate: Actual Cost Driver x Step 1
What are the formulas to calculate Raw Materials Used, Cost of Goods Manufactured, and Ending Finished Goods Inventory?
Raw Materials Used =
Beginning RM + RM Purchased - Ending RM
COG Manufactured = Beginning Work In Process + Manufacturing Costs*
-Ending Work in Process
Ending Finished Goods Inventory= Beginning FG Inventory + COG Manufactured - Cost of Goods Sold
*DM + DL + OH
What is the formula for breakeven point in units and dollars
Units = Total FC/Contribution Margin per unit
Dollars = Total FC/Contribution Margin ratio
What are the formulas for Target Profit in units and dollars?
Units = FC + Pretax profit/CM per unit
Dollars = VC + FC + Pretax profit OR
FC + Pretax profit/CM Ratio
