BEC Flashcards
1
Q
COSO Framework Objectives (ORC)
A
Operations: Effectiveness and efficiency of operations
>Ensuring that the assets of the org are adequately safeguarded
Reporting: Reliability, timeliness, and transparency
Compliance: Ensure the entity is adhering to all applicable laws and regulations
2
Q
Components of IC (CRIME)
A
Control Environment (EBOCA) Risk Assessment (SAFR) Info and comm (OIE) Monitoring Act (SOD) Existing Control Activities (CAT P)
3
Q
Control Environment (EBOCA)
A
E - commitment to Ethics and integrity B - Board independence and oversight O - Organizational structure C - Commitment to competence A - Accountability
4
Q
Risk Assessment (SAFR)
A
S - Specify objectives >Financial reporting objectives fall here A - identify and Assess changes F - consider potential for Fraud R - identify and analyze Risks
5
Q
Information and Communication (OIE)
A
O - Obtain and use information
> Fair, accurate, complete, timely (FACT)
I - Internally communicate information
E - communicate with External parties
6
Q
Monitoring Activities (SOD)
A
S/O - Ongoing and or Separate evaluations (frequency of tests)
D - communication of Deficiences
7
Q
Existing Control Activities (CAT P)
A
C/A - select and develop Control Activities (mitigate risks)
T - select and develop Technology controls
P - deployment of Policies and Procedures
8
Q
Enterprise Risk Management (CCPIS)
A
The Culture, Capabilities, and Practices Integrated w/ Strategy - setting and performance, that orgs rely on to manage risk in creating, preserving, and realizing value
9
Q
ERM Value (CPER)
A
Value Creation (Benefit > Cost)
Value Preservation (Sustainable operating profit)
Erosion (Faulty strategy)
Realization (Div/SP > Cost to SH)
10
Q
Components of ERM (GO PRO)
A
Governance and Culture (DOVES) Objective setting and strategy (SOAR) Performance (VAPIR) Review and Revision (SIR) Ongoing information, communication, and reporting (TIP)
11
Q
Governance and Culture (DOVES)
A
D - Define desired culture
O - exercise board Oversight
V - demonstrate commitment to core Values (code of conduct)
E - attracts, develops, and retains capable Employees
S - establishes operating Structure
12
Q
Strategy and Objective Setting (SOAR)
A
S - evaluate alternative Strategies
O - formulates business Objectives (realistic given risk)
A - Analyze business context (external and internal)
R - define Risk appetite (suitable floor/ceiling)
13
Q
Performance (VAPIR)
A
V - develop portfolio View A - Asses severity of risk P - Prioritize risks I - Identify risks R - implement Risk Responses (ARTS)
14
Q
Risk Responses (ARTS)
A
Avoidance
Reduce (hedge/derivative)
Transfer/share (insurance)
Self-insure/acceptance
15
Q
Review and Revision (SIR)
A
S - assess Substantial change (change in officers, substitute product)
I - pursue Improvement in ERM
R - Review risk and performance (was hedge effective?)
16
Q
Ongoing Information, Communication, and Reporting (TIP)
A
T - Leverages information and technology (FACT)
>Use relevant info to form CA
>Data mgt in risk awareness (SEE IT)
I - Communicate risk information (MD&A)
P - Reports on risk, culture, and performance (MD&A)
>Portfolio view and level/subview
17
Q
Effective Interest Rate
A
(Principal x SAR)/ #periods = [Interest paid/period]/ net proceeds of loan
18
Q
Annual Percentage Rate
A
Effective (periodic) rate x # periods in year
19
Q
Effective Annual Percentage Rate
A
=(1 + effective periodic rate) - 1 = EAR
=(1+(Stated rate/2))^2
20
Q
Compound interest
A
= P0 * (1+i)^n
21
Q
Required Rate of Return
A
S1: Nominal Rf = Real Rf + E inflation
S2: Nominal Rf + RPs = RR
22
Q
WACC
A
(E/V)Re+(P/V)Rp+(D/V)*(Rd(1-T))
23
Q
Cost of Debt
A
S1: Effective annual interest payments/debt outstanding(net)
S2: Pretax cost of debt * (1-tax rate)
24
Q
Cost of PS
A
(Par*Rate)/ Net proceeds of PS
25
CAPM (Equity Val)
Rf+B(Rm-Rf)
26
Discounted CF Model (Equity Val)
= ((D0*1+g)/P0)+g
27
Bond Yield Plus Risk Premium (BYRP) (Equity Val)
Pretax cost of LT debt + Market risk premium
28
Growth Rate
```
ROE * Retention rate
or
[ROE * retention rate]/[1-(ROE*retention)]
ROA * DFL = ROE
Retention rate = 1-payout
Payout = DPS/EPS
```
29
Return on Investment
=NI/average Invested Capital
| =Profit margin*investment turnover
30
Operating Leverage
=% change in EBIT/% change in sales
=FC/VC
=CM/EBIT
>Operating leverage is the presence of fixed costs in operations, which allows a small change in sales to produce a larger relative change in profits.
31
Financial Leverage
% change in earnings (EBT)/% change in sales
32
Working Capital Turnover
=Sales/ Avg WC
33
Reorder Point
Safety Stock+(lead time * sales during lead time)
| >Keep time consistent
34
Economic Order Quantity
=sqrt[2SO/C}
S= Annual Sales (in units)
O= Cost/ purchase order
C - Annual carrying cost/unit
35
Supply Chain Operations Reference (SCOR) Model
1. Plan - properly balance demand and supply
2. Source - select vendors
3. Make
4. Deliver
>Must meet all four if you want to SCOR
>costs down, profits up, efficency up
36
APR of Quick Payment discount
=[360/(pay period - disc period)] * [disc/(100-disc %)]
37
Price-Earnings Ratio
current stock price/expected earnings per share
>trailing P/E = EPS0
>Forward P/E = EPS1
38
PEG
price earnings ratio/growth rate
39
Price to Sales Ratio
current stock price/expected sales per share
40
Price to Cash Flow
current stock price/expected cash flow per share
41
Price to Book value
current stock price/book value per share
42
Constant (Gordan) Growth Dividend Model
Current Price = [Dt * (1+g)] / (r-g)
| r= CAPM
43
Perpetuity
Dividend/required return
44
Annuity
=C * (1-PVF)/r
| PVF = 1/(1+r)^t
45
Economic Return
= [change in price + div inc] / beg. price
46
Valuing Tangible Assets (CALM)
```
Cost method = NBV
Appraisal value (objective)
Liquidation method = value if sold today
Market value method = replacement cost or NRV
```
47
Valuing Intangible Assets (MIC)
Market approach = actual arms length transaction
Income Approach = DCF
Cost approach = replacement and reproduction cost
48
Valuation of Options
```
Black-Scholes Model
To increase value of option:
-higher current price
-higher Rf
-higher current time to expiration
-higher measure of risk
-lower exercise/strike price
```
49
NPV Cash Flows
1. Inception = initial outflow plus additional necessary costs minus proceeds from trade-in (net of tax)
2. Operations = Cash inflows + depr. tax shield
3. Disposal of project = one time terminal year inflow
50
Total Value of equity using DDM
=[current dividends * (1+g)]/(cost of equity- g)
51
Objectives of Cost Accounting (PIE)
```
Produce costing (inv and cost of goods mfg and sold)
Income determination (profitability)
Efficiency measurements(comparisons to stds)
```
52
Prime Costs
DM+DL
53
Conversion Costs
DL+OH applied
54
Overhead Rate
Budgeted OH/Estimated cost driver
55
COGS Manufactured and Sold
```
S1: Beg. RM + purchases = AFU
S2: COGM
Beg. WIP
+DM
+DL
+MOH
=Total Manu costs avaliable
-WIP ending
=COGM
S3: COGS
Beg. FG
+COGM
=COGAFS
-End FG
=COGS
```
56
Equivalent Units - FIFO
S1: BI * (1 - % complete)
S2: Add units started and completed (completed - beg.)
S3: EI * % complete
Cost = current costs only
57
Equivalent Units - WA
S1: Beg. WIP + units completed
S2: Add EI * % complete
Cost = Beg and current
58
By-Products
Income can either be used to reduce common costs for joint products or become Misc. income
59
Joint product costing
1. Allocation by unit volume relationships
2. Sales price quotations @ split off (relative SP)
3. Sales values not available at split-off
>Final selling price - identifiable costs incurred after split (separate costs only)
60
Types of Responsibility Segments (CRPI)
Cost sbu - Responsible for controlling costs
Revenue sbu - generating revenues
Profit sbu - revenues and costs
Investment sbu - ROA responsibility
61
Controllable Margin
= contribution margin - controllable fixed costs
62
Dupont ROE
=PM * Asset TO * financial leverage
| = NI/Sales * sales/assets * assets/equity
63
Extended Dupont ROE
= tax burden * interest burden *ebit margin * asset TO * FL
| =NI/EBT * EBT/EBIT * EBIT/Sales * Sales/assets * Assets/Equity
64
Economic value added
=NOPAT- (inv *WACC)
65
Categories of the Balanced Scorecard (FICA)
Financial (profit and loss)
Internal business processes (efficient and effective production)
Customer satisfaction
Advancement of innovation and HR development (Learning and growth)
66
Coefficient of Determination
= correlation coefficient squared
>R^2
>Goodness of fit
>R^2 explains percentage of variation in Y explained by change in X
67
Breakeven analysis
in units = Total fixed costs/ CM per unit
| in dollars = Unit price * bp in units OR total fixed costs/ CM per unit
68
Required Sales Volume for Target Profit
in unit = (FC + pretax profit)/ cm per unit
pretax profit = after tax/ (1- tax rate)
Sales price per unit = (FC + VC+ pretax profit)/units sold
69
Change Control
Change control considers the manner in which management monitors and authorizes changes to a variety of information technology matters including software applications programs. Only authorized individuals should be allowed to move changes into production and the function of making the change should be segregated from the function of putting the change into production
70
Effective Annualized Percentage Cost
=((FV-discount)+transaction costs)/discount
71
Operating Cash flow ratio
Cash flow/CL
72
Relevant Costs
Direct, prime, discretionary, incremental, opportunity, avoidable
NOT relevant = sunk, uncontrollable, unavoidable
73
Operating Budgets
1. Sales
2. Production
3. DM
4. DL
5. Factory OH
6. COG Manufactured and Sold
7. S&A
74
Other Budgets
Financial Budgets
>Cash budget, Proforma F/S
Capital Budgets
>Capital additions of the org
75
Cash Budget
Cash available
Cash disbursements
Financing for min balance
76
Working Capital Management
Appropriate working capital management matches the maturity life of each asset with the length of the financial instrument used to finance that asset.
77
Option Pricing Model Differences
There are two primary differences with the Black-Scholes model including the consideration of the option over a period of time using American-style options and it can be used for stocks that pay periodic dividends without modifying the model (which would be necessary using the Black-Scholes model).
78
Flexible Budgeting Variances
Total Variance = Actual vs. budgeted operating income
Volume variance = budgeted vs flexible OI
Flexible Budget variance = actual vs flexible OI
79
DM Variance Analysis
```
Price = Actual qty purchased * (actual price-std price)
Quantity= std price * (Actual quantity used-std quantity allowed)
```
80
DL Variances
Rate = Actual hours * (actual rate-std rate)
| Efficiency (usage) = std rate * (actual hours worked - std hours allowed)
81
Variable Manufacturing OH Variances
VOH= Actual hours * (actual rate-std rate)
| VOH Efficiency = Std rate * (Actual hours-std hours allowed)
82
Fixed Manufacturing OH Variances
FOH Budget = actual fixed OH - Budgeted FOH
FOH Volume = Budgeted FOH - STD FOH cost applied
>FOH applied = actual production * std rate
>Std rate = Budgeted OH/Est cost driver
83
Sales Variance
```
Price = (Actual SP/unit - budgeted sp/unit) * actual units sold
Volume = (Actual sp/unit - budgeted units sold) * std cm/unit
```
84
Business Cycles
* Every Peak contracts through recovery
1. Expansionary phase
2. Peak
3. Contractionary phase
4. Trough
5. Recovery
85
Factors Leading to a Shift in Aggregate Demand (TWICE G)
```
Taxes
Wealth
Interest rates
Consumer confidence
Exchange rates (appreciated currencies = AD down)
Govt Spending
```
86
Factors Leading to a Shift in Aggregate Supply
Change in input prices
| Resource availability
87
Multiplier Effect
-An increase in consumer, company, or govt spending produces a multiplied increase in the level of economic activity
=1/ (1-MPC) or 1/MPS
88
Methods for Measuring GDP
```
Expenditure Approach (GICE)
Income Approach (I PIRATED)
>Both should be equal
```
89
Expenditure Approach to measuring GDP (GICE)
Govt purchases of G/S
Investment by private domestic businesses
Consumption (personal) expenditures
Exports (net)
90
Income Approach to measuring GDP (I PIRATED)
```
Income of proprietors
Profits of corps
Interest (net)
Rental income
Adjustment for net foreign income and misc. items
Taxes (indirect business taxes)
Employee compensation
Depreciation
```
91
Money Supply
M1: checkable deposits+coins+currency+traveler's checks
M2: M1+mutual funds+money market deposits+savings accounts + CDs<100k
M3: M2+ CDs>100k
92
Monetary Policy Tools
1. Open market operations: buying/selling securities
2. Change in discount rates
3. Change in the required reserve ratio
>If RRR goes up, money supply decreases
93
Consumer Price Index
=current cost of market basket/base year cost*100
94
Inflation Rate
=(CPIcy-CPIpy)/CPIpy*100
95
Unemployment Rate
=# of unemployed seeking/ Total labor force
| >Full employment = cyclical = 0
96
Types of Unemployment
Frictional: Workers routinely changing jobs or workers temporarily laid off
Structural: Lack skills and are not located where the jobs are or tech advances in the field
Seasonal
Cyclical: Resulting from declines in real GDP during periods of contraction or recession
97
Factors shifting demand under Micro (WRITEN)
```
Wealth
R-price of Related goods (Subs/compli)
Income of the consumer
Tastes or preferences for a product
Expectations by the consumer
Number of buyers served by the market
```
98
Factors shifting supply under Micro (E COST)
```
Expectations of the supplying firm
Changes in production Costs
O- price or demand for other goods
Subsidies or taxes
Technology
```
99
Market Equilibrium
- If both S and D change, equilibrium quantity is only determinable if they both change the same way
- If both S and D change, equilibrium price is only determinable if opposite. Price is directly related to demand/inversely to supply
100
Elasticity of Demand
Elastic = > 1 = price/rev inverse
Inelastic = < 1 = price/rev direct
Unit elastic = 1 = no change in rev because of price
101
Elasticity of Supply
Elastic = > 1 = supply increases more than price
Inelastic = <1 = supply increase less than price
unit elastic = 1 = supply increase = price increase
102
Cross Elasticity
=(% change in # of units *demand/supply)/ % change in Price Y
Positive = substitute goods
Negative = Complementary goods
Zero = no relation
103
Income Elasticity of demand
=(% change in # of units * demand/supply)/ % change in income
Positive = normal good
negative = inferior good
104
International Risk Factors (Exporters Perspective)
Interest Rate Risk (want decrease)
Exchange Rate Risk (want the foreign currency to appreciate)
Foreign demand (Want increase)
Inflation risk (Want decrease)
Political risk
-Country risk= political and financial risks
105
Perfect Competition
No barriers to entry, little product diff, firms are price takers (set by market), demand perfectly elastic
Goal: Maintain market share and respond to market conditions
-Zero profit LR
106
Monopolistic Competition
- Many sellers compete with differentiated products
- Few barriers, some influence over price, highly elastic
- Goal: Maintain market share and include a plan for enhanced product diff and extensive allocation of resources to marketing
- Zero Proft LR
107
Oligopoly
- Few dominant sellers
- Significant barriers to entry, differentiated and control over quantity produced and the price charged
- Kinked demand: If prices go down = follow, prices go up = stay put
108
Monopoly
-Single firm, insurmountable barriers to market, no substitute products, economic profits are positive in LR
109
Porters 5 Forces
1. Barriers to Entry (want high)
2. Market Competitiveness (between existing competitors)
3. Existence of Substitute products
4. Bargaining Power of customers
5. Bargaining power of suppliers
110
Types of Competitive Strategies
1. Cost Leadership
>Works well:Inferior goods, low switching costs
>Fails when: focus too much on cutting costs, overlook tech advances, or overlook the fact consumers may want improvements to the product
2. Differentiation
>Works well: Superior goods
>Fails when: costs>benefits
3. Best cost
>Works well: No generics, but buyers sensitive to value vs cost
>Fails when: losing consumers to cost leaders
4. Focus/niche strategies
>Works well: large enough demand and little competition
>Fails when: copy cats and firm is inflexible
>May emphasize a single feature
111
Sourcing requirements
Sourcing requirements generally refer to content or value-added limits on the percentage of labor or materials used in imported products. Compliance with limits may result in tariff reductions.
112
Ability to control the price a product sells for...
Any business firm that has the ability to control the price of the product it sells faces a downward-sloping demand curve for the firm. Only the firm in a competitive market is a price-taker facing a horizontal demand curve at the market equilibrium price.
113
Approaches to value chain analysis
1. Internal cost: Determine source of profit and costs of the internal activities
2. Internal differentiation: Does benefit>cost
3. Verticle linkage: Understanding the activities of the suppliers and buyers of the product and determining where value can be created external to the firms operations
114
Global CA and VS Analysis
1. Conditions of the factors of production (skilled labor force)
2. Conditions of domestic demand
3. Related and supporting industries (suppliers)
4. Firm strategy, structure, and rivalry
>Less reg, promote comp, low taxes
115
Factors driving Globalization (IT TA DO)
-Improvements in Transportation
-Technology Advancements
-Deregulation of international financial markets
-Organizational/Operational options for international business
>Avaliability of human labor, RM, or transport channels
116
Methods of Conducting International Business Ops
-FIL JVs w/ DIrect Foreign Inv and Global sourcing
Franchising
International trade
Licensing
Joint Ventures
Direct foreign inv (purchasing or starting a sub)
Global sourcing (worldwide supply chain)
117
Relevant Factors of Globalization
- Political and legal influences
- Potential for asset expropriation
- Taxes and tariffs
- Limitations on asset ownership or JV participation
- Content or value-added items
- Foreign trade zones
118
Business Combinations
-Horizontal: Between competitors
>econ of scale, costs down, profits up
-Vertical: Between diff stages of production
>Supply=backward, market=forward
-Circular: When different business units with relatively remote connections come together under single mgt
>Centralized mgt and costs down
-Diagonal: Integrating activities with ancillary support (shipping)
119
Transactions
1. Merger
2. Acquisition
3. Tender offer (offer directly to SH to buy outstanding shares)
4. Purchase of assets, NOT stock
>Division/product line
120
Divestiture
1. Sell off = no potential
2. Spin off = some potential
3. Equity carve out = Lots of value
>Cash inflow and controlling interest in IPO
121
ERM Event Identification
Events can only be identified after the organizational objectives are identified. Events will either favorably or unfavorably impact the achievement of objectives. Risks (negative events) are only identifiable within the context of the objectives that they might impede.
122
Expected Monetary Value of a risk
=% chance of occurring * cost to correct
123
Reduction in Inflation
=Decreasing aggregate demand and increasing aggregate supply
124
Business Process Management
Management approach that seeks to coordinate the functions of an org focused on the ultimate goal of continuous improvement in customer satisfaction.
>Incremental Change
125
Business Process Reengineering
Related to BPM, but involves more radical changes in workflow and the tasks
>Often driven by change in technology
126
BPM Activities
1. Design: Identification of existing process and how processes function
2. Modeling: What if analysis
3. Execution: Changes are implemented and key indicators developed
4. Monitoring: Compared with expectations
5. Optimization: Continue to refine the process
127
BPM Techniques
Define: Original process is baseline
Measure: Indicators that will show the change
Analyze: Determine target/optimal improvement
Improve: Select and implement
Control: Monitor and apply data to improvement
128
BPM -> PDCA
```
Plan: design
Do: implement
Check: monitor
Act
>Repeat
```
129
Management Philosophies and Techniques for Performance Improvement
1. Just-in-time
>Inv mgt, pull approach
2. Total quality management
>Quality and process improvement
>Continous improvement, ongoing training, workforce involvement
3. Quality audits and Gap Analysis
>Difference between industry best practices and the current practices
4. Lean manufacturing
>Inventory management
>Value-added activities
>Kaizen: Continous improvement efforts to improve the efficiency and effectiveness of orgs through greater operational control
>Activity-based mgt
>focuses on the cost of activities and seeks to only invest resources in value-added activity.
5. Theory of constraints
>Constraint management
6. Six sigma (continuous quality improvement)
>Use of rigorous metrics in the evaluation of goal achievement
>Quality and process improvement
>Define the problem; Measure key aspects of the current process; Analyze data; Improve or optimize current processes; Control
7. Demand flow: Manages resources using customer demand as the basis for resource allocation
130
IT Governance Areas of Focus/ objectives
1. Strategic alignment
2. Value delivery
3. Resource mgt
4. Risk mgt
5. Performance measures
131
Principles of Tech-driven strategy development
1. Tech is a core input
2. Continual process
3. Power to change long-held business assumptions (open-minded)
4. Create innovation for existing businesses and emerging technologies to create new markets/products
5. Innovative emerging business opportunities must be managed separately and differently
6. Customer preferences, internal efficiencies, and ways that it can maximize for advantage of an entity
132
Risk Assessment Process
1. Prepare a business analysis: Identification of business units, depts and processes essential to survival of entity
2. Identify info resources: hardware, software, services, people, databases
3. Categorize information resources by impact: H/M/L on effect of day-to-day ops
4. Categorize and identify risks by likelihood: H/M/L of occurrence
5. Align information resources with associated risks and corrective actions
6. Recommendations for mitigating risk
133
Big Data (4 Vs)
Volume: Too large for traditional database software to store
Velocity: Able to analyze data in real-time
Variety: variety of sources
Veracity: Bias or irrelevant data must be mined
134
Data Analytics Processes
Descriptive: Describe events that have already occurred
Predictive: Predict what could happen
Prescriptive: Use optimization and simulation algorithms to affect future decisions
135
Role of Info Systems in Key Business Processes with Entity
1. Accounting Info System
2. Customer Relationship Mgt
3. Enterprise risk mgt
4. Inventory mgt
5. Mgt info systems
6. MIS-Decision support system
7. MIS-Executive info system
8. Supply Chain mgt
136
Accounting Info System
>Records and classifies valid transactions and records transactions at proper value and period
>Creates audit trails to trace transactions from source documents to the ledger and vice versa
137
Customer Relationship Mgt (CRM)
- Provides sales force automation and customer services
| - Increases customer satisfaction and increases revenue/profitability and reduce sales and customer support costs
138
Enterprise Resource Planning Systems
- Cross-functional system integrating and automating many business processes and systems
- Improves productivity, increases efficiency, decreases costs, and streamlines processes across various business processes
139
Inventory Management
- Tracks quality of times a company maintains and triggers orders when quantities fall below predetermined levels
- Improves accuracy of orders, increases organization, increases efficiency and productivity
140
Management Information Systems
- Provides users reports to support effective business decisions
- Enables strategic planning decisions, as well as tactical execution of strategy
141
MIS - Decision Support System
- Extension of an MIS providing interactive tools to support decision making
- Facilitates preparation of forecast or allows modeling of various aspects of a decision
142
MIS - Executive Information Systems
- Extension of an MIS providing senior executives internal and external information
- Ease of access to information to assist in strategic decision making and consolidates information into a level of detail appropriate for senior executives
143
Supply Chain Management
-Focuses on what, when, where, and how of a sale
-Achieves flexibility and responsiveness in meeting demands of customers and business partners within planning, sourcing, making, and delivering
components
-The close linkage and coordination of the activities involved in buying, making, and moving a product
144
Letter of Credit vs. Line of Credit
Letter: A third-party guarantee of obligations incurred by a company
Line: ST borrowing
145
Anticipated Price
= P1 * multiplier
146
Pareto Diagram
Used to rank and analyze the individual and cumulative causes of defects
147
SOX
Under the Sarbanes-Oxley Act of 2002, internal controls must be evaluated within 90 days prior to the issuer's report.
148
Risk
Diversifiable
Unsystematic
Non-diversifiable
Systematic (market)
149
Gross National Product (GNP)
Measure of the market value of all final goods and services produced by residents of a country, regardless of whether or not the resident produces the G/S domestically or abroad
150
The Phillips Curve
- Measures changes in AD
| - Inverse relationship between the rate of inflation and unemployment
151
Inflation
- Demand-pull: caused by increases in aggregate demand
| - Cost-push: caused by reductions in SRAS
152
Fiscal Policy
Tools include taxation and spending
153
Money Supply Manipulation
```
Expansionary = combat recession
>Fiscal: Increase AD
>Monetary: Increase AD, GDP and prices
Contractionary = Combat inflation
>Fiscal: decrease AD
>Monetary: increase unemployment, decrease AD, GDP, and prices
```
154
Recession
A period of at least two consecutive periods of falling real GDP and rising unemployment
155
SOX Section 404
The intent of Section 404 of the Sarbanes-Oxley Act is to give investors reasonable assurance that material unauthorized transactions or improper use of assets have been prevented or timely detected. This is facilitated by maintaining records that accurately reflect transactions, by recording all transactions, and by ensuring that all transactions are authorized by management. There is no need to prevent authorized transactions.
156
Yield and Maturity
The relationship between yield and maturity is plotted in a yield curve. The yield curve is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest. If short-term yields are lower than long-term yields, then the curve is referred to as a positive (or "normal") yield curve.
If short-term yields are higher than long-term yields, then the curve is referred to as an inverted (or "negative") yield curve.
If 1-year note yields are expected to be higher than those of 10-year maturities, then investors are expecting reduced inflation in the future as reflected in the lower long-term returns. Normally, long-term notes have higher risk and return because of rising interest rates.
157
External Auditors and IC
Under SEC rules, external auditors may prepare or gather information, as long as the client management directs the process, including deciding which controls to document. Management is ultimately responsible for documenting internal controls and must be actively involved in the process. Restructuring the controls or deciding on which suggestions to implement would impair the auditor's independence.
158
Normal Profit
Economic profit minus total costs.
159
Control Deficiency
A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. However, the existence of control exceptions does NOT necessarily mean a control deficiency exists, as internal controls are not expected to operate perfectly all of the time. Compen¬sating controls should be considered when determining whether an identified control deficiency is a significant deficiency or a material weakness.
160
Risks -Exposure to loss
-Interest rate (yield) risk: Losses in underlying asset value or increases in underlying liability value as a result of changes in market interest rates
>Investor
-Market risk: Losses in trading value. Nondiversifiable
>Investor
-Credit risk: Inability to secure debt financing in a timely and affordable manner
>Borrower
-Default risk: Possibility that a debtor may not repay the principal or interest due on their debt obligation on a timely basis
>Creditor
-Liquidity: Investor desires to sell security but cannot do so on a timely basis or w/o material price concessions
>Investor
161
Exchange Rate Fluctutaions
```
*The higher the demand for a currency, the greater the ER
Trade Factors:
>Inflation: ↑, D, ER↓, P↓
>Income levels:↑. D↑, ER↑
>Govt controls:↑, D, ER↑
Financial Factors:
>interest rates:↑, D↑, ER↑
>capital flows:↑, D↑, ER↑
```
162
Risk Exposures Implied by ER Fluctuations
- Transaction exposure
- Economic exposure
- Translation exposure
163
Transaction Exposure
Economic L/G upon settlement of a transaction in a foreign currency
164
Economic Exposure
The possibility that the value of cash flows could fluctuate up or down as a result of changes in exchange rates
-appreciation and depreciation of a currency
165
Translation Exposure
Potential that the consolidation of the FS of domestic parents with foreign subs will result in changes in account balances and income as a result of ER fluctuations
166
Hedging to Mitigate Transaction Exposure
-Futures: Buy or sell a number of currency units for a negotiated price on a stated date
>Used for smaller amounts
-Forward: Same as future but for large amounts
-Money market: FOreign money markets to meet future cash flow needs and mitigate ER risks by investing in financial institutions of the foreign economy
-Currency options: Option to execute the hedge transaction, required payment of consideration
-Currency swap: Agree to swap their currencies received at a future date for a negotiated ER
167
Hedging to mitigate Economic and Translation Exposure
-Restructuring: Restructuring the sources of income and expense to the consolidated entity
168
Transfer pricing
Developing transfer pricing arrangements between domestic parents and foreign subs to minimize local taxes
-If nonglobal, generally consider negotiated, market, or cost fo pricing
169
ST vs LT Financing
ST:
>Advantages: Increased liquidity, higher profitability, and lower financing costs
>Disadvantages: higher interest rate risk and reduced capital available
LT:
>opposite of ST
170
Cost of Leasing
```
Operating:
1. Pmt * (1-T) = after tax pmt
2. After tax pmt * PVF = Net cost
Finance:
1. depr * T = $ saved
2. Initial cost - PV of tax shield = net cost
```
171
Debentures and bonds
1. Debenture = unsecured bond
| 2, Subordinated
172
Degree of Financial Leverage
=% change in EBT(EPS)/% change EBIT
| -Looking to cover fixed interest costs
173
Degree of Total Leverage
=DOL*DFL
| -FIrms use both leverages in an attempt to increase profits
174
Beta
Volatility of target stock relative to overall mkt volatility
175
Executive Penalties for CEO/CFO
Under the Sarbanes-Oxley Act of 2002, a chief executive officer or chief financial officer who misrepresents the company’s finances may be penalized by being fined and imprisoned. For defective certifications, executives could be fined up to $1 million and/or 10 years in prison. For willfully defective certifications, executives could be fined up to $5 million and/or 20 years in prison.
176
Change Management
a systematic approach to transitioning individuals, teams, and organizations to a desired future state. For an organization, change management means defining and implementing procedures and/or technologies to deal with changes in the business environment and to profit from changing opportunities.
177
IC Risks
Residual risk is the risk that remains after controls are taken into account (i.e., net risk). Inherent risk is the risk that an activity would pose if no controls or other mitigating factors were in place (i.e., gross risk or risk before controls). Event risk is the risk that an unforeseen event will negatively impact the company (e.g., a fire). Detection risk is one of the three elements that comprise audit risk, along with inherent risk and control risk. It is the risk that an auditor will conclude that no material errors are present in the financial statements when in fact there are.
178
Cash Mgt Strategies
1. Fee Reduction: compensating balances, trade credit, commercial paper
2. Expedite deposits: zero, balance account, EFTs, lockbox
179
Operating Cycle
=Days to sell + days to collect
180
Subjective Assumptions used in valuations
Generalized rules of thumb:
-Tendency to use stereotyped characterizations
-Use adjustments from presumed baselines
-Use of intuition rather than analysis
Behavior Biases
-Excessive optimism: overestimating positive results
-Confirmation bias
-Overconfidence
-Illusion of control: Actions of financial managers will cause E ↓
Effect of Loss Aversion
-Losses are more distracting than gains
-Managers are generally averse to sure losses
181
Financial Decision Models
-Use NPV to determine whether to accept a project
| >If limited capital, then use PI to rank projects
182
Access Controls
```
1. Logical
>User access
>Passwords = Ab3$, age(90 days), reuse, length(8)
>Network and host-based firewalls
>Access control lists
>Encryption: 128 bit, digital certificates, digital signatures, e-signitures, scrambling information
2. Physical
>Segregation of duties
>Monitoring and control of access to and from facilitie
>Backup files
>Uninterrupted power supply
>Program modification controls
>Malware detection
```
183
Major players in the disaster recovery plan
-Application software vendors, IT and business area personnel, disaster recovery service provider, provisions/hardware vendors, senior mgt
184
Steps in disaster recovery
1. Assess risks
2. Identify mission-critical apps
3. Develop a plan
4. Determine responsibilities of the personnel
5. Test the plan
185
Split mirror backup
Use a remote server to back up large amounts of data offline that can be restored in the event of a disaster.
186
Multiple data center backups
1. Full backup
2. Partial backup
>Incremental=copying only the data items that have changed since the last backup
>Differential= copies all changes made since the last FULL backup
187
Input Controls
Verify that transaction data is valid, complete, and accurate. May include data validation, prenumbered forms, and well-defined source data preparation procedures
188
Processing Controls
Verify that all transactions are processing correctly during file maintenance. May include data matching, use of file labels, recalc of batch totals, cross-footing, and zero balance tests, write protection mechanisms, and data processing integrity procedures.
189
Output Controls
Verify the accuracy and integrity of reports. May include review of output, recon procedures, external data recon, and output encryption
190
Segregation of duties in IT
System analysts and computer programmers/computer operators/security administrators
191
IT Controls
Preventative: Security awareness training, firewalls
Detective: antivirus, system monitoring
Corrective: backup data restore
192
Technology risks
- Strategic: Choosing an inappropriate tech
- Operating: Doing the right things in the wrong way
- Financial: Financial resources lost, wasted, or stolen
- Information: Loss of data integrity, incomplete transactions, or hackers
193
Internal Benchmarks
- Control Chart: Determine zero defects (within acceptable range)
- Pareto diagram/Histogram: Frequency of defects
- Cause/effect or fishbone: Used to identify recurring costly defects and then break down the problems that led to the defects (Methods, machines, material, measurements?)
194
Residual Income
=NI - (NBV * hurdle rate)
| >Hurdle = cost of equity
195
Cost Basis
1. Products
2. Depts
3. Geo area
196
Direct Labor
Includes downtime, setting up, training, breaks
197
Failure Demand
Demand for services in a shared-service environment due to failure to provide quality service to the customer the first time.
198
Software Testing
Alpha Test is characterized by testing software by a user on the premises of the developer under due supervision of the developer.
Beta Test, however, is a test which is carried out by a user independently of the developer and is usually done at the user’s premises.
199
Time-Sharing Center
A time-sharing center has a computer remotely accessed by a number of different users, who are unaware of each other.
200
Transmission Control Protocol and Internet Protocol (TCP/IP)
An IP number is a unique number (like an address) assigned to a computer in a network. TCP/IP-supported transmissions include such activities as viewing web pages. Personal computers may access the Internet. TCP/IP is a communications protocol designed to network dissimilar systems. An IP port is a number assigned to user sessions and server applications rather than hardware.
201
Distributed Processing
an allocation of various processing tasks to various business divisions, with some tasks centralized and some decentralized. A local area network (LAN) typically is restricted to a small physical location, such as a building.`
202
Data Security Controls
The primary objective of data security controls is to ensure that storage media are subject to authorization prior to access, change, or destruction.
203
Conformance Costs
Appraisal costs: Incurred to discover and remove defective parts before shipment. Examples: Statistical quality checks, testing, and inspection.
Prevention costs: Incurred to prevent the production of defective units. Examples: employee training, inspection, redesigning products and processes, and searching for higher-quality suppliers
204
Nonconformance costs (Costs of Failure)
Internal failure: Necessary to cure a defect discovered BEFORE the product is sent to the customer. Examples: rework labor, scrap, tooling changes, disposal, cost of a lost unit, and downtime
External failure: Necessary to cure a defect AFTER the product is sent to the customer. Examples: warranty costs, costs for returning the good, liability claims, lost customers and reengineering.
205
Regression Analysis
Single regression only considers one independent variable while multiple regression analysis considers more than one independent variable.
206
Break-Even Point w/ Multiple products
P1 x % + P2 x % =WACM
207
Uncertainty in ERM
not knowing how or if potential events may manifest themselves in the context of achieving future strategies and business objectives.
208
Denial of Service Attack
A denial of service attack is an attempt to make a machine or network resource unavailable to its intended users. One common method of denial of service attack involves saturating the target machine with false requests, so much so that it cannot respond to legitimate traffic or it responds so slowly as to be rendered essentially unavailable. A DoS attack usually comes with a high ransom fee by hackers to free up the system.
209
Profit as % of Sales
Profit = Selling Price – Cost Price – Sales Commission – Fixed Costs
210
Imputed Cost
An imputed cost is not recognized by GAAP, but is estimated in order to model economic reality for decision making purposes. Interest is not paid on internally generated cash, although an imputed amount often is determined to recognize the interest that owners’ otherwise would earn on that money.
211
Market Vs. Cost Transfer Pricing
Market-based transfer pricing is the normal market price that would be paid in an intermediate market between independent buyers and sellers. This method is preferred when the following conditions are satisfied:
1. The market for the intermediate product is perfectly competitive.
2. Selling division has no unused capacity.
3. Interdependencies of subunits are minimal.
4. There are no additional costs or benefits to the company as a whole from buying or selling in the external market instead of transacting internally.
On the other hand, cost-based transfer pricing is used when the external market for the product does not exist or the external market prices are not easily available. Cost-based transfer pricing may be based on variable manufacturing costs, total manufacturing costs or full product cost. The disadvantage with this system is that often only one division bears the cost of the product and while it maximizes the profit of one division, it creates losses for the other.
212
System Development Life Cycle
```
Planning
Analysis
Design
Development
Testing
Implementation
Maintenance
```
213
Investor Types
A speculator purposely assumes risk in the foreign exchange market. The second-best answer to this question is an arbitrageur; an arbitrageur buys in one market and sells in another at a slightly higher price, and thus, has significantly less risk than a speculator.
214
System Analysts Pictorials
A system flowchart is a graphic portrayal of a system’s data flow and information processing, including hardware. A
data-flow diagram doesn’t include information on hardware. A decision table illustrates all the various possibilities
in a given situation. A PERT chart is a scheduling tool for use on many types of projects, not merely IT projects.
215
Steering Committee Responsibilities
- Setting policies for various information systems.
- Ensuring support, guidance, and participation of the top management.
- Coordination and integration of information systems to increase goal congruence and avoid goal conflicts.
216
Closed Loop Verification
a mechanism whereby one party verifies the purported identity of another party by requiring them to supply a copy of a token transmitted to the canonical or trusted point of contact for that identity.
217
Worth after Inflation
FV * (1+interest/1+inflation)
218
Son-Father-Grandfather concept
The most recent file is called the son, the second most recent file is called the father, and the preceding file is called the grandfather. The process includes reading the previous file, recording transactions being processed, and then creating a new updated master file.
219
Advantages
- A comparative advantage stems from specializing in the trade and production of specific products. If a country is able to produce a product more efficiently and cost effectively than its peers, selling these products overseas offers a potential for higher profits.
- Absolute advantage refers to a company's ability to produce more output (relative to a set amount of resources) than its peers. The extent to which a company exports a good that is complementary will depend on the export strategy for the other good or goods with which it is sold.
220
Stages of Change Continuum
The COSO identifies four stages of the change continuum beginning with control baseline, followed by change identification, change management, and then control validation/update. The control baseline is the starting point at which management can understand the design of the internal control system and whether controls have been put in place to accomplish the organization's internal control objectives. Change management occurs as needed adjustments to the internal control system are implemented. Because a new product line is now under the purview of the manager, this will affect not only the baseline but also the change management sequence.
221
Hash Total
A hash total is a detective control, not a preventive control. A hash total attempts to detect if numbers that are not normally added (such as account numbers) have been processed incorrectly. A batch total is used for numbers, such as dollars, that are normally added.
