BEC - 17 Flashcards
AICPA.130709BEC
The following information is available for economic activity for year 1:
In billions
Financial transactions $60
Second-hand sales 50
Consumption by households 40
Investment by businesses 30
Government purchases of goods and services 20
Net exports 10
What amount is the gross domestic product for year 1?
A. $210 billion. B. $160 billion. C. $100 billion. D. $90 billion.
C. $100B
Gross domestic product (GDP) is the total output of final goods and services produced during a period. It can be measured using either the expenditures approach or the income approach. The information provided permits GDP to be measured using the expenditures approach, which is the sum of:
Consumption by individuals/households $40B
Investment by businesses 30
Government purchases 20
Net exports (net purchases by foreign buyers) 10
Total Expenditures (GDP) $100B
Which of the following production processes best describes lean manufacturing?
A. Making a small number of a high variety of unique products with relatively low-skilled labor.
B. Making a large number of standardized products with highly skilled labor.
C. Making small batches of a high variety of unique products with cross-trained labor.
D. Making a large number of standardized products with relatively low-skilled labor.
C. Making small batches of a high variety of unique products with cross-trained labor.
Lean manufacturing is accurately described as using small batches of a high variety of unique products with highly skilled, cross-trained labor.
Globalco, a U.S. parent, has subsidiaries in Germany (Gerco) and in England (Engco). Gerco produces products that are sent to Engco for final assembly and packaging. Engo then sends the goods to Globalco for retail sales in the U.S. The effective income tax rates faced by each of the companies is:
Globalco 22%
Engco 18%
Gerco 20%
If the objective of transfer prices is to minimize income taxes, which of the following policies, within legally acceptable ranges, should Globalco adopt with respect to the transfer prices?
A. Minimize transfer price from Gerco to Engco and minimize transfer price from Engco to Globalco.
B. Maximize transfer price from Gerco to Engco and maximize transfer price from Engco to Globalco.
C. Minimize transfer price from Gerco to Engco and maximize transfer price from Engco to Globalco.
D. Maximize transfer price from Gerco to Engco and minimize transfer price from Engco to Globalco.
C. Minimize transfer price from Gerco to Engco and maximize transfer price from Engco to Globalco.
Since Engco has the lowest tax rate, the lowest income tax would be achieved by the highest income reported by Engco. That would be achieved if Engco had the lowest cost (minimum transfer price from Gerco) and the highest sales price (maximum transfer price to Globalco). Therefore, a minimum transfer price to Engco and a maximum transfer price from Engco would be correct.
The U.S. M1 measure of money supply includes:
Paper Currency Y/N
Check-Writing Deposits Y/N
Savings Deposits Y/N
Paper Currency Y
Check Writing Deposits Y
Savings Deposits N
The M1 measure of money supply includes paper currency, coins, and check-writing deposits, which are the primary financial instruments used for transactions.
Check-writing deposits are amounts held by banks, savings and loan associations, and credit unions for which ownership can be transferred by writing a check. Savings deposits are not an element of the M1 definition of money.
A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and a sales price of $85 per unit. After learning that its variable costs will increase by 20%, the company is considering an increase in production to 12,000 units. Which of the following statements is correct regarding the company’s next steps?
A. If production is increased to 12,000 units, profits will increase by $50,000. B. If production is increased to 12,000 units, profits will increase by $100,000. C. If production remains at 10,000 units, profits will decrease by $50,000. D. If production remains at 10,000 units, profits will decrease by $100,000.
D. If production remains at 10,000 units, profits will decrease by $100,000.
At the current level of 10,000 units, a contribution margin per unit of $35 = $85 - $50, and fixed costs of $300,000, the contribution margin is $350,000 and the operating income is $50,000. If variable costs increase by 20%, the contribution margin per unit decreases to $25 = $35 - $60, or $250,000 total, resulting in an operating loss of $50,000. Thus, profits would decrease by $100,000.
Factoring receivables
Selling receivables to an outside party.
This would make AR go down immediately and therefore AR turnover (Sales / Ave AR) go up.
Breakeven point
The breakeven point can be thought of as the amount of contribution margin (sales minus variable costs) required to cover the fixed costs, or the point of zero profit.
Sales
- Variable Costs
- Fixed Costs
= Net Income
When NI = 0
Sales = VC + FC
EVA
Equal to NOPAT minus a charge for the cost of capital.
Economic profit and economic value added measures stress the importance of making investments only when the return exceeds cost and, in the process, value to the stockholder is maximized. Economic profit is accounting profit minus the cost of capital. EVA is a variation of economic profit. EVA is net operating profit after taxes (NOPAT) minus the (after-tax) weighted average cost of capital (WACC) multiplied by total assets (TA) minus current liabilities (CL) (net assets).
EVA = Net operating profit after taxes (NOPAT) − [(TA − CL) × WACC]
Market value added is the difference between the market value of a company (both equity and debt) and the capital that lenders and shareholders have entrusted to it over the years in the form of loans, retained earnings, and paid-in capital. Market value added is a measure of the difference between “cash in” (what investors have contributed) and “cash out” (what they could get by selling at today’s prices).
Explain a yield curve
A yield curve is used to illustrate the relative level of short-term and long-term interest rates at a point in time. At any point in time yield curves may take any one of the following three forms:
Normal: upward sloping curve where short-term rates are less than intermediate term rates which are less than long-termm rates
Inverted (abnormal): downward sloping, short-term rates are greater than longer-term rates
Flat: short/longer about same
Humped: intermediate rates are highest
Long-term rates are usually highest because the longer time period involves more interest rate risk
Calculation for Residual Capital
Residual income = Operating profit - Interest on investment
=
Operating profit
-
(Required rate of return × Invested capital)
Break-Even Units Formula
Fixed Costs / Contribution Margin = Break-Even Units
