BEC Flashcards
COSO Internal Control Model - What? (5)
Control Environment, Risk Assessment, Control Activities, Information & Communication, Monitoring Activities
COSO Internal Control Model - Why? (3)
Operations, Reporting, Compliance
COSO Internal Control Model - Where? (4)
Entity, Division, Operating Unit, Function
Control Environment – the core/foundation of I/C
Control Environment - Principles
- Integrity and ethical values, 2. Independence of mgmt, 3. Competence, 4. Achieve objectives, 5. Accountability
Risk Assessment - Principles
- Objectives, 2. Assessment, 3. Fraud, 4. “Change” mgmt
Control Activities - Principles
- Risk reduction, 2. Technology controls, 3. Policies
Information & Communication - Principles
- Quality, 2. Internal, 3. External
Monitoring - Principles
- Ongoing & Periodic, 2. Address deficiencies
COSO ERM Model - 8 Components
- internal environment, 2. event identification, 3. risk assessment, 4. risk response, 5. control activities, 6. information & communication, 7. monitoring 8. objective setting
Segregation of Duties - Categories
- authorizing, 2. recording, 3. safeguarding resources, 4. reconciling, overseeing and auditing
IIA Mandatory Guidance
- Definition of internal audit, 2. Code of Ethics, 3. International Standards
IIA Code of Ethics
- Integrity, 2. Objectivity, 3. Confidentiality, 4. Competency
How often are IIA External Assessments performed?
At least once every 5 years.
Attribute Standards - Categories
1000 – Purpose, Authority and Responsibility, 1100 – Independence and Objectivity, 1200 – Proficiency and Due Care, 1300 – Quality Assurance & Improvement Program
Performance Standards - Categories
Managing the Internal Audit Activity, 2100 – Nature of Work, 2200 – Engagement Planning, 2300 – Performing the Engagement, 2400 – Communicating Results, 2500 – Monitoring Progress, 2600 – Resolution of Senior Management’s Acceptance of Risks
Free Market Flow Model
(1) Economic Resources, (2) Payment for Resources, (3) Payment for Goods/Services, (4) Providing Goods/Services
Macro - additional sections include foreign sector, financial sector, and government.
Demand Changes - Micro
size of market, income or wealth of participants, preferences, changes in prices of other goods/services, substitute goods – move in the same direction, complementary goods – move in the opposite direction
Supply Changes - Micro
number of providers, cost of inputs, technological advances
Market Equilibrium Changes - Micro
change in demand, change in supply, or change in both supply and demand
Demand and supply curves only shift when there are changes other than _______ ?
Price.
Indifference Curve
Same satisfaction in receiving two different goods, or any combination of the two goods.
Law of Diminishing Returns
Short-term: marginal product falls as more units of variable input are added to fixed inputs, Long-term: returns to scale
Elastic - D or S > P
Price Increase = Total Rev. Decreases
Price Decrease = Total Rev. Increase
Unitary Elasticity - D or S = P
Price Increase = No Change
Price Decrease = No Change
Inelastic - D or S < P
Price Increase = Total Revenue Increases
Price Decrease = Total Revenue Decreases
Perfect Competition
large # buyers/sellers, no single person can affect market price, low barriers to entry, maximized when MC = MR, Demand is horizontally sloped, Price = MR
Perfect Monopoly
single seller, no close substitutes, restricted barriers to entry, maximized when MC=MR, Demand is downwardly sloped and increasingly moving away from MR, Natural monopolies have increasing returns to scale
Monopolistic Competition
large number of sellers, differentiated products/services, low barriers to entry, maximized when MC=MR, Demand is downward sloping and increasingly moving away from MR
Oligopoly
few sellers, differentiated product, high barriers to entry, maximized when MC=MR, Demand curve is “kinked”, Elastic-Kink-Inelastic
Tacit Collusion
firms copy a larger firm’s prices, not illegal in the U.S.
Leakages
expenses not on domestic production (i.e. savings, taxes, etc.)
Injections
added to domestic production (i.e. gov’t spending/subsidies, investment subsidies, exports)
Nominal GDP
total output of FINAL goods and services produced for exchange in the domestic market, not adjusted for changing prices
Real GDP
adjusted for changing prices
GDP “Gap”
Real GDP vs. Potential GDP, Real GDP > Potential – creates upward pressure on prices (i.e. inflation)
Expenditure Approach to GDP vs. Income Approach to GDP
Expenditure approach to GDP: uses final sales/purchases, Income approach to GDP: uses income/resources
Unemployment Rate vs. Natural Rate (Formulas)
Unemployment Rate = Unemployed/Size of Labor Force
Natural Rate = Frictional + Seasonal + Structural/Size of Labor Force
Frictional Unemployment
transition or imperfection information
Structural Unemployment
prior types of jobs have been reduced or eliminated
Seasonal Unemployment
work opportunity regularly and predictably varies by season
Cyclical Unemployment
downturn in business cycle/economic contraction
Net Exports are Positive – Aggregate Demand _________
Increases
Net Exports are Negative – Aggregate Demand _________
Decreases
Multiplier Effect
Multiplier Effect = Initial Change in Spending x (1/(1 - MPC))
Marginal Propensity to Consume
change in consumption as a % of disposable income
Marginal Propensity to Save
change in savings as a % of disposable income
Avg. Propensity to Consumer
% of disposable income spent on goods
Avg. Propensity to Save
% of disposable income saved
Aggregate Supply - Classical (Graph)
Vertical Supply
Aggregate Supply - Keynesian (Graph)
horizontal, then kinks upwards
Aggregate Supply - Conventional (Graph)
curved upwards
Causes of Inflation - Macro
demand-induced (demand pull) and supply-induced (cost push or supply push)
Consequences of Inflation
(1) lower current wealth and lower future real income, (2) higher interest rates, (3) uncertainty of economic measures
Monetary Policies
(1) reserve requirement changes, (2) open market operations, (3) discount rate
Principle of Comparative Advantage
output will be greatest when firms produce goods w/ lowest opportunity cost
Transaction Risk vs. Translation Risk
Transaction Risk: settled in a foreign currency; Translation Risk: settled in domestic currency
Economic Risk (International)
alters the value of future revenues/costs
Transfer Price Issue (International)
transfer of goods/services to affiliated entities to manipulate tax rates and profits (favorable)
Functions of World Bank
emerging countries/reconstruction
Functions of International Monetary Fund
currency crisis, banking crisis, financial debt crisis
Functions of GATT/World Trade Organization
police international trading system
Foreign Direct Investment
establishing production facilities (through financial investment) to carry out production needs.
U.S. - What % of Worldwide exports? % of World’s GDP?
10% - exports, 25% - World’s GDP
World’s Largest Exporters? (2)
Germany and China
Largest Decline in output over past 40 yrs?
Europe
PEST Analysis
Political, Economic, Social and Technological; used for a specific region/environment
Five Forces Analysis
(1) threat of entry, (2) threat of substitute goods, (3) bargaining power of buyers, (4) bargaining power of suppliers, (5) intensity of rivalry; used for industry analysis
SWOT Analysis
Internal: Strengths & Weaknesses, External: Opportunities & Threats; used in entity analysis in comparison to environment
Generic Business Strategies
Cost Leadership, Differentiation, and Focus Strategy
Sunk Costs
costs of resources incurred in the past
Opportunity Costs
discounted dollar value of benefits lost from an opportunity as a result of choosing another opportunity
Differential Costs
costs that are different between two or more alternatives
Common Stock - Risk Level/Rate of Return
most risky, highest rate of return
Preferred Stock - Risk Level/Rate of Return
characteristics of both debt and equity, more risky than debt, less risky than equity
Debt - Risk Level/Rate of Return
least risky, lowest rate of return
Weighted Average Cost of Capital (WACC)
required rate of return on each source of capital weighted by the proportion of total capital provided by each source, summed for a total weighted average.
Ordinary Annuity vs. Annuity Due
Ordinary Annuity – end of the period
Annuity Due – beginning of the period
PV of a Single Amount
PV now of an amount to be received/paid at a single date
FV of a Single Amount
FV of a single amount invested now
PV of an Ordinary Annuity
PV now of an ordinary annuity to be received over some future time period
FV of an Ordinary Annuity
FV at a future time invested over some future time period
Effective Interest Rate (Formula)
Net Cost of Borrowing / Net Proceeds (deduct for bank restrictions)
GAAP FV Valuation Levels
Level 1: external, observable inputs, Level 2: similar observable inputs, Level 3: unobservable inputs
GAAP FV Valuation Approaches
Market Approach, Cost Approach, Income Approach
CAPM Model (Formula)
RoR = Risk Free RoR + beta (Expected RoR – Risk Free RoR)
Beta is a measure of what?
Volatility
Meaning of Beta (>1, =1, <1)
1 more volatile than benchmark
Business Valuation Approaches
market, income and asset approach
Types of Qualitative Forecasting
executive opinion, market research, Delphi Method
Types of Quantitative Forecasting
Time series, causal models
Capital Budgeting - Evaluation Techniques
(1) Payback period approach, (2) discounted payback period, (3) accounting rate of return, (4) net present value, (5) Internal rate of return, (6) Profitability index
Payback Period Approach
of years to recover the initial cash investment, compared to a max number of acceptable years, ignores time value of money.
Discounted Payback Period Approach
uses discounted cash flows, considers time value of money, # of years to recover will be higher than traditional method.
Accounting Rate of Return Approach
(Avg. Incremental Revs – Avg. Incremental Exp. (Annual)) / Initial (or Avg.) Investment; Uses accrual-basis of accounting (i.e. account for depreciation in expenses), ignores time value of money.
Net Present Value Approach
Inflows – Outflows = NPV, recognizes time value of money, considers entire life, relates to cost of capital.
Internal Rate of Return Approach
PV Factor = Investment Cost/Future Annual Cash Inflow
**Depreciation is not included!
Profitability Index Approach
PV of Cash Inflows/Project Cost = PI
NPV/Project Cost = PI
Higher Percentage = Higher Rank, used when limited funds are available
Financial structure includes?
All debt and equity
Capital structure includes?
only L/T debt and equity
Trade A/P Advantages/Disadvantages
no collateral, specific use (trade accounts only)
Accrued A/P Advantages/Disadvantages
no collateral, specific use (i.e. salaries payable)
S/T Notes Payable Advantages/Disadvantages
no collateral, requires compensating balance
Spontaneous Financing
occurs automatically through day-to-day operations, (i.e. general S/T payables)
Line of Credit
informal agreement to extend credit to a borrower
Revolving Credit
legal agreement to extend credit to a borrower
Letter of Credit
conditional commitment to pay a third party, has specified terms and commitments
Credit Advantages/Disadvantages
flexible, no collateral, poor credit rating results in high interest, requires compensating balance
Commercial Paper
S/T unsecured promissory note sold by large, creditworthy firms
Pledging A/R
uses a current asset, trade A/R, as security for S/T borrowings
Pledging A/R Advantages/Disadvantages
flexible, costs may be greater than other sources of S/T financing
Factoring A/R
sale of A/R to a commercial bank or other financial institution (with or w/o recourse)
Factoring A/R Advantages/Disadvantages
buyer assumes billing/collection responsibilities (except w/ recourse), cost may be greater than other sources of S/T financing
Inventory Advantages/Disadvantages
commonly available, pledged inventory may not be available when needed, costs can be greater than other sources, not available for all inventory
Types of Inventory Secured Loans
floating lien - lien all inventory, retain control
chattel mortgage - lien specific inventory, retain control
field warehouse - collateral remains at firm’s warehouse, placed under control of 3rd party
terminal warehouse - collateral moved to public warehouse
L/T Notes, Restrictive Covenants
(1) maintaining certain working capital conditions, (2) additional incurrence of debt, (3) Frequency and nature of financial information, (4) management changes
Net Lease
Lessee assumes the cost associated with ownership (executory costs - maintenance, taxes, insurance, etc.)
Net Net Lease
Lessee assumes the cost associated with ownership and is responsible for a residual value at the end of the lease
Debenture bonds vs. Secured bonds
Debenture bonds: unsecured, no specific asset is designated as collateral, Secured bonds: have specific assets designated as collateral
What bonds are most likely to maintain a constant market value?
Floating rate bonds
Indenture
contract that states the terms of a bond issued by a corporation
Preferred Stock Characteristics
cumulative/noncumulative, participating/nonparticipating, protective provisions, convertible/nonconvertible, call provisions
Preferred Stock Value (PSV) Formula
Preferred Stock Value (PSV) = Annual Dividend / Required Rate of Return
Preferred Stock Expected Rate (PSER) Formula
Preferred Stock Expected Rate (PSER) = Annual Dividend / Market Price
Common Stock Characteristics
limited liability, residual claim to income and assets, right to vote, preemptive right
Common Stock Value (CSV) Formula
Common Stock Value (CSV) = Dividend in 1st Year / (Required RoR – Growth Rate)
Common Stock Expected Return (CSER) Formula
Common Stock Expected Return (CSER) = (Dividend in 1st Year / Market Price) + Growth Rate
Financing Strategies (S/T & L/T)
(1) hedging principle of financing, (2) optimum capital structure, (3) business risk constraint, (4) tax rate benefit effect
Cost of Capital Relationships
(1) macroeconomic conditions, (2) past performance of the firm, (3) amount of financing, (4) relative level of debt financing, (5) debt maturity, (6) debt security
Zero Balance Accounts
overdrafts are covered automatically by the bank, no real money in the account (i.e. monthly payroll)
Lock box System
customer’s payments are accessed directly by the company’s bank
Increase or Decrease - Receipt Float vs. Disbursement Float?
Decrease Receipt Float – receives cash sooner, Increase Disbursement float – cash paying is available longer.
Cash Conversion Cycle
cash for inventory and collection of cash from the sale of products made with inventory.
S/T Investment Opportunities
U.S. Treasury bills (safest), Federal agency securities, negotiable Certificates of Deposit, Bankers’ acceptances, commercial paper, repurchase agreements
Sharpe Ratio (Formula)
Sharpe Ratio = (Avg. RoR – Risk-Free RoR) /St. Dev.
S/T Investment Concerns
safety of principal, price stability, marketability/liquidity
Primary goal of A/R Management is to…. ?
Maximize profits
Approaches to Inventory Management
(1) Traditional Materials Requirement Planning system (MRP) – Supply Push (2) Just –In-Time (JIT) System – Demand Pull
Economic Order Quantity (EOQ) Formula
Total Inventory Cost (EOQ) = (T/Q) x O + (Q/2) x C or the square root of – (2TO/C)
Reorder Point Formula
Reorder Point = Delivery time stock + safety stock
Hedging Principle of Finance
finance S/T assets with S/T liabilities
B/S vs. I/S Ratios
must find average for B/S item (Beginning + Ending)/2
Types of Ratio Measures
liquidity/solvency, operational activity, profitability, equity/investment leverage
Working Capital vs. Working Capital Ratio
Working Capital = CA – CL
Working Capital Ratio = CA/CL
Acid Test/Quick Ratio
(Cash + Net Receivables + Marketable Securities) / Current Liabilities (Excludes Inventory!)
Defensive-Interval Ratio
(Cash + Net Receivables + Marketable Securities) / Avg. Daily Cash Expenditures
Average Collection Period
(Days in Year x Avg. A/R) / Credit Sale for Period
Times Interest Earned Ratio
(N/I + Interest Expense + Income Tax Expense) / Interest Expense
Times Preferred Dividends Earned Ratio
N/I / Annual Preferred Dividend Obligation
A/R Turnover
Net Credit Sales / Average Accounts Receivable
Avg. Number of Days Sales in Receivables
365 / A/R Turnover
Inventory Turnover
COGS / Avg. Inventory
Number of Days Supply in Inventory
365 / Inventory Turnover
A/P Turnover
Credit Purchases (or COGS + Ending – Begin Inventory) / Avg. Accounts Payable
Number of Days Purchases in Payables
365 / Accounts Payable Turnover
Capital Turnover
Annual Sales (or Revenue) / Avg. Owner’s Equity
Cash Conversion Cycle
Cash Conversion Cycle = Inventory Conversion + A/R Conversion – A/P Conversion
Operating Cycle
Inventory Conversion + A/R Conversion
Gross Profit vs. Gross Profit Margin
Gross Profit = Sales (or Revenue) – COGS
Gross Profit Margin = Gross Profit / Net Sales
Net Profit Margin
Net Profit Margin = Net Income / Net Sales
Return on Total Assets/Investments
Net Income + Interest Expense / Avg. Total Assets or Avg. Total Investments
Return on Owner’s Equity
Net Income / Avg. Stockholder’s Equity
Return on C/S Equity
Net Income – Preferred Dividends / Avg. Common Stockholder’s Equity
Residual Income
Residual Income = Net Income – Required Dollar Return
Economic Value Added
Earnings before interest – ((Opportunity Cost) x (L/T Debt + Stockholder’s Equity)
EPS (Basic)
Net Income – Preferred Dividends / Weighted Avg. Number of Shares Outstanding
Price to Earnings Ratio
Market Price for a Common Share / Earnings Per Share
Debt to Equity Ratio
Total Liabilities/Total Shareholder’s Equity
Owner’s Equity Ratio
Shareholder’s Equity / Total Assets
Debt Ratio
Total Liabilities / Total Assets
Diversifiable Risk
Unsystematic, Firm-Specific, or Company-Unique
Non-diversifiable Risk
Systematic, Market-Related
Computer Data Structures, Smallest to Largest?
bit, byte, field, record, file, database
Data Definition Language (DDL)
definition of tables/fields and relationships
Data Manipulation Language (DML)
add new records, delete old records, update existing records
Data Query Language (DQL)
extract information from the database
Database Management System
“middle-ware” between application and OS, includes DDL, DML and DQL
3 types of Software
includes (1) systems software, (2) programming languages, (3) application software
CPU Components
Control Unit, Arithmetic Logic Unit, Primary Storage (RAM & ROM)
Batch vs. Online, Real-Time (OLRT) Processing
Batch processing: group transactions for processing
Online, Real-Time (OLRT) processing: continuous, immediate
Master file equivalent to what in manual environment? Transaction file?
Master - Subsidiary Ledgers
Transaction - Journals
Twisted Pair
least expensive media for phone connections, slowest and least secure.
TCP/IP
two core network protocols that underlie the Internet
Extensible Business Reporting Language (XBRL)
used for encoding and tagging business information (i.e. F/S’s, taxation, regulation)
Operational/Transactional Processing System
general day-to-day activities (cash collection, payroll, sales, etc.)
Management Information Systems (MIS)
lower level management, summary reports, variance reports, exception reports, solving routine problems
Decision Support Systems (DSS)
non-routine problems, data-driven, large amounts of data to find relationships and patterns
Flat file vs. Database Systems
Flat file - “bad”
Database - “good”
Data mart vs. Data Warehouse
Mart - specialized for function
Warehouse - larger scale data
Both use patterns to organize data.
IaaS, PaaS, and SaaS
IaaS – Infrastructure (access hardware, storage), PaaS – Platform (create software and programs), SaaS – Software (remote access to software programs)`
Online Transaction Processing vs. Online Analytical Processing
Online Transaction Processing (OLTP): core business functions, sales, production; Online Analytical Processing (OLAP): incorporates data warehouse and data mining capabilities
System Development/Implementation Steps
(1) Planning & Feasibility, (2) Analysis, (3) Design, (4) Development, (5) Testing, (6) Implementation, (7) Maintenance
IT Segregation of Duties
(1) Development, (2) Administration & Programming, (3) Operations
Batch Back-up use ?
Checkpoint/restart controls
Online Real Time Back up use ?
rollback and recovery
E-Commerce Back-up use ?
mirrored server
IT Controls are… (general, corrective, detective, etc.)
general, some are corrective, some preventative
EDI transactions are made through a ?
value-added network (VAN)
Recovery Point vs. Time Objectivve
Recovery Point Objective – acceptable amount of data loss
Recovery Time Objective – acceptable downtime
Types of backup facilities
cold site (no actual equipment/files), warm site (already stocked w computer hardware), hot site (immediate take over)
Business Continuity Planning - Order of Importance
(1) Task Critical, (2) Business Critical, (3) Mission Critical
Application Controls for Batch Systems
(1) Financial total, (2) Hash totals, (3) Record counts
Application - Input Controls
missing data check, field check, limit test (i.e. range tests & sign tests)
Application Control - Processing Objectives
validity, completeness, accuracy
Application - Processing Controls
run-to-run controls, internal labels, audit trail controls
Application - Output Controls
spooling controls, disposal of aborted print jobs, distribution of reports, end user controls
Digital Certificate
most secure encryption technique
Digital Signature
used to ensure the message is not altered after being sent
Prime/Direct Costs
Direct Materials & Direct Labor, flows to WIP
Conversion Costs
Direct Labor & Overhead
Indirect Costs
Overhead, does not flow to WIP, “Factory Overhead Control”
Factory Overhead - Applied
flows to “WIP Inventory Control”
Actual Costing
Actual Q x Actual P; simplest, waits until all costs are known and then is recorded in accounts
Normal Costing
Actual Quantity x Predetermined Overhead; DM & DL traced to work in process when the costs become known
Standard Costing
Standard Quantity x Standard Price; predetermined estimated quantities and prices
High -Low Method (definition)
calculate change in costs between two production volume cost extremes (high and low)
High-Low Method (formula)
Difference in Costs/Difference in Units = VC per Unit
Total Cost = FC + (VC per unit x # units)
Value-added Activities
processes that contribute to the product’s ultimate value
Absorption Costing
assigns the 3 factors of production (DM, DL, and OH) to inventory.
Selling & Administrative Expenses are always period costs.
Direct/Variable Costing
assigns only variable costs (DM, DL, VOH) to inventory. Fixed overhead costs are period costs.
Selling & Administrative Expenses are always period costs.
Difference (Absorption and Direct Costing) (Formula)
Change in Inventory Level x Fixed Manufacturing OH per unit
Production > Sales, Effect on Absorption vs. Variable Costing Income?
Production > Sales, Absorption Costing Income > Variable Costing Income
Absorption vs. Direct Costing I/S
Absorption Costing I/S: Gross Margin, Direct Costing I/S: Contribution Margin
Job Costing vs. Process Costing
Job Costing: large, expensive, custom-order
Process Costing: mass-produced, small, inexpensive
Applied Overhead (Formula)
Applied Overhead = (bud. FOH/bud. volume) X (actual volume)
Process Costing Process
(1) Equivalent Units (2) Cost per Equivalent Unit (3) CGTO and Ending WIP Inventory
Cost/Equivalent Unit Formula
Cost/Equivalent Unit = Cost to be Allocated / Equivalent Units
Cost Allocation of Joint Products
(1) Relative Physical Volume (2) Relative Sales Value (3) Net Realizable Value
Last budget created during budgeting process?
Cash
Receivables - Dec/Incr, Effect on Cash
Decrease - Cash Increases
Increase - Cash Decreases
Payables - Dec/Incr., effect on Cash
Decrease - Cash Decreases
Increase - Cash Increases
Static Budget
budgeted costs for budgeted output
R squared
coefficient of determination, indicates the degree to which the behavior of the independent variable predicts the behavior of the dependent variable.
Y = A + Bx
A – y-intercept, B – slope, x – independent variable, Y – dependent variable
Effect on income vs. Effect on Break-even
Effect on income is the opposite of the effect on the break-even point.
Basic Breakeven Formula
(Quantity x Sales Price) = FC + (Quantity x VC per unit)
Break even in units vs. Break even in dollars
Breakeven in units = Fixed Costs/Contribution Margin
Breakeven in dollars = Total FC/Contribution Margin Ratio
Contribution Margin vs. Contribution Margin Ratio
Contribution Margin = Sales Revenue – Variable Costs
Contribution Margin Ratio = Contribution Margin/Sales Revenue
Operating Income Formula (in terms of Contribution Margin)
Contribution Margin – Fixed Costs = Operating Income
Assumptions in Cost-Volume-Profit Analysis
Price, Variable Cost/Unit, and Fixed Costs behave as constants.
Volume is the only driver of costs and revenues.
Sales in Units based on a Target Profit (Formula)
Sales in Units (for Profits) = (FC + Target Profit) / CM per Unit
Margin of Safety
difference between the current sales level and the breakeven point.
Price/Rate Variance
Price/Rate Variance = Difference in Rates (Standard – Actual) x Actual Quantity
Usage/Efficiency Variance
Usage/Efficiency Variance = Difference in Quantities (Standard – Actual) x Standard Rate
Total Variance
Total Variance = (AQ x AP) – (SQ x SP), Rate & Efficiency Variance netted together.
What kind of costs are not considered in a special order situation?
Fixed Costs.
Transfer Pricing Methods
- Market based, 2. Cost based, 3. Negotiated price
Transfer Minimum vs. Maximum Price
Transfer minimum: 1. Direct cost if it has excess capacity, or 2. its market price if it does not have excess capacity
Transfer maximum: market selling price
Just in Time Production Characteristics
“pull” process, schedule is determined by the actual sale of goods, L/T contracts w small number of suppliers, high quality raw materials, suppliers paid on periodic basis instead of each time there is an order
Backflush costing
costing is delayed until finished goods or COGS
Quality of Design vs. Quality of Conformance
Quality of Design: meeting or exceeding the needs and wants of customers
Quality of Conformance: conforming to the design specifications
Prevention of Defects
Prevention of defects is cheaper than the cost of failure and increases the quality of conformance.
Costs of Quality
Costs of Quality: (1) Conformance costs - prevention costs, appraisal costs, (2) Non-Conformance costs - internal failure costs, external failure costs
Balance Scorecard
provides a comprehensive view of overall performance using both financial and non-financial measures. 4 categories: Financial, Customer, Internal Business Processes, Learning/Innovation/Growth
ROI (Normal and DuPont Approach)
ROI = Net Income / Total Assets ROI = Return on Sales: (NI/Sales) x Asset Turnover or Capital (DuPont Approach)
Residual income (Formula)
Residual Income = Operating Income – (Required RoR x Invested Capital)
Economic Value Added
Net Operating Profit after Tax – WACC (Total Assets – Current Liabilities)
Operating Profit Margin vs. Profit Margin
Operating Profit Margin = Operating Income / Sales
Profit Margin = Net Income / Net Sales
PERT vs. CPM
PERT: program evaluation and review technique
CPM: Critical Path Method
Operating Leverage
A measurement of the degree to which a firm or project incurs a combination of fixed and variable costs.
Coupon or Stated Interest Rate
determines cash interest paid
Effective Interest or Yield Rate
used for interest expense and bond price
Bond Price (formula)
present value of future cash payments discounted at the yield rate at issuance
