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CPA Exam - BEC > BEC 6: Process and Project Management, Globalization, Financial Risk Management, Decisions, and Valuation > Flashcards

BEC 6: Process and Project Management, Globalization, Financial Risk Management, Decisions, and Valuation Flashcards

1
Q

What is business process management (BPM), what five categories can its activities be grouped in, and what is the general technique/approach to it?

A

A mngt. approach that seeks to coordinate the functions of an organization to customer satisfaction.

  1. Design
  2. Modeling
  3. Execution
  4. Monitoring
  5. Optimization
  6. Define
  7. Measure
  8. Analyze
  9. Improve
  10. Control
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2
Q

Process mngt. is commonly referred to as PDCA, which is what?

A 
Plan, Do, Check, Act
Design the planned process improvement
Implement the process imp.
Monitor the process imp.
Continuously commit to the process and reassess the degree of imp.
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3
Q

What do rational methods used to select improvement initiatives involve and what are the crucial features of successful implementation activities?

A

a. Strategic gap analysis
b. Review competitive priorities
c. Review production objectives
d. Choose improvement program

  1. Internal leadership
  2. Inspections
  3. Executive support
  4. Internal process ownership
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4
Q

What is BPR, and how does it differ from business process mngt.?

A

Business Process Reengineering - techniques to help organizations rethink how work is done to dramatically improve customer satisfaction and service, cut costs of operations, and enhance competitiveness.

BPR seeks radical changes while BPM seeks incremental change.

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5
Q

What are the cost of quality conformance and nonconformance costs?

A

APIE
Appraisals - costs incurred to identify defective products or services (Conform)
Prevention - costs incurred to prevent the production or delivery of defective products or services (Conform)
Internal failure - cost of defective parts or lost production time (Failures)
External failure - costs of returns and lost customer loyalty due to defective products or services (Failures)

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6
Q

What are the two waste reduction methodologies?

A
  1. Continuous Improvement (Kaizen) - improve efficiency and effectiveness through greater operational control - occurs at the manf. stage.
  2. Process Improvement/Activity-based mngt. - Activity based costing and mngt. are highly compatible with process improvements and TQM.
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7
Q

Process mngt. incorporates many of the attributes of what?

A
  1. ABC
  2. TQM
  3. VCA
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8
Q

What is TQM, and what 7 critical factors does it identify?

A

Total Quality Mngt.: an organizational commitment to customer-focused performance that emphasizes both quality and continuous improvement.

  1. Customer focus
  2. Continuous improvement
  3. Workforce involvement - quality circles
  4. Top mngt. support - delegation and empowerment
  5. Objective measures
  6. Timely recognition
  7. Ongoing training
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9
Q

What is six sigma and the methodologies to (1) improve (1) current processes and (2) develop new processes?

A

Anticipates the use of rigorous metrics in the evaluation of goal achievement - expands the plan, do, check, act of process mngt.

  1. DMAIC
    a. Define the problem
    b. Measure key aspects of current processes
    c. Analyze data
    d. Improve or optimize current processes
    e. Control
  2. DMADV
    a. Define design goals
    b. Measure critical to quality issues
    c. Analyze design alternatives
    d. Design optimization
    e. Verify the design
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10
Q

What are the five major processes of project mngt.?

A
  1. Authorization - Beg. - get permission - project charter (contains business justification to fulfill the needs and expectations of initial stakeholders by carrying out a statement of work that will achieve the project objectives.) (statement of work: product scope/what’s delivered at end).
  2. Planning - est. “baseline” - what’s the standard for quality - involves all the activities to determine the scope of the “project,” refine objectives, and define action to obtain objectives.
  3. Implementation - “Assure quality” - activities with “completing the work” specified in planning, and producing the deliverables.
  4. Monitoring - and controlling - procedures to observe project execution to identify problems timey and take corrective action to ensure completion.
  5. Closing - project must end.
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11
Q

What is an HR plan, a scope baseline, requirements documentation, and a requirements mngt. plan?

A
  1. Formally documents planning assumptions in writing - Resources
  2. Formal written statement describing both end product (product scope) and the project scope (3 &4)
  3. Written document describing the project requirements from all stakeholders.
  4. Documents how requirements will be analyzed, documented, and managed, tracked, and reported, and how changes will be approved and processed.
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12
Q

What is a cost baseline, and what is project funding requirements?

A

Represents the amt. of money that is expected to be spent on a project - S-curve (less spent at beg. and end).

Specifies the total funding requirements and periodic funding requirements based on the cost baseline.

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13
Q

What are the elements of earned value mngt. as a method for estimating project costs?

A

a. Planned Value (PV) - amt. project should be worth at a particular point.
b. Earned Value (EV) - physical work completed to date and authorized budget for that task.
c. Actual Cost (AC) - actual cost to date.
d. Estimate At Completion (EAC) - est. total cost of project at completion.
e. Cost Performance Index (CPI) - EV/AC - If CPI < 1, project is over budget.

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14
Q

What are deliverable and how is quality identified?

A

Product or service project must deliver

SMART
Specific - criteria clearly defined and precise?
Measurable - criteria objective and measurable?
Attainable - realistically achievable results?
Relevant - correlate to project objective?
Time-based - sufficient time allowed? enough time to achieve this?

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15
Q

What is diversification, and what are the 2 broad categories of risk?

A

Process of selecting investments of different (or offsetting) risks.

DUNS
D  Diversifiable risk
U      Unsystematic (non-mkt./firm-specific)
N  Non-diversifiable risk
S      Systematic (mkt.)

D - can be eliminated through diversification - e.g. strikes, lawsuits, regulation, loss of key account

N - cannot be eliminated - e.g. war, high inflation, recession, political events - affects all

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16
Q

What are the four types of risk?

A
  1. Interest rate risk (yield risk) - deals with fluctuations in value due to changing interest rates.
  2. Market risk - deals with fluctuations in value as a result of operating within an economy - non-diversifiable.
  3. Credit risk - impacts borrowers - a company’s inability to secure financing or favorable credit terms b/c of poor ratings.
  4. Default risk - impacts lenders - possibility that debtors do not repay.
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17
Q

What is the stated interest rate, the effective interest rate, the annual percentage rate, and the effective annual percentage rate (APR), and their formulas?

A
  1. Nominal interest rate - before any adjs.; in agreement.
  2. Actual finance charge after reducing loan proceeds for charges and fees = int. pd. per period/net proceeds.
  3. Non-compounded version of effective APR - required for disclosure by federal regulations = annual int. pd./net proceeds OR effective periodic * # of payments per yr.
  4. Represents stated int. rate adj. for compounding periods = [1 + (i/p)]^p - 1 (i = stated int. rate & p = compounding periods per yr.)
18
Q

What is simple and compound interest and their formulas?

A
  1. Total int. over life of loan - represented by int. pd. only on original amt. w/o regard to compounding. = S1 = P0(i)(n) = (principal * int. rate)/(time period * # of periods).
  2. Represents int. earnings of exp. that’s based on principal plus any unpaid int. earnings or exps. - higher than simple = FVn = P0 (1 + i)^n = FV w/o compounding = principal * int. rate * # of periods
19
Q

How do you get to the required rate of return?

A 
Real rate of return
\+ Inflation Premium (IP)
= Nominal rate of return
\+ Risk Premium
       Int. rate risk (MRP)
       Liquidity risk (LP)
       Default risk (DRP)
= Required rate of return
20
Q

What are the circumstances that impact exchange rates?

A

Trade-related factors: (Demand for goods)
Relative inflation rates
Relative income levels
Gov’t controls (Trade restrictions)

Financial factors: (Demand for securities)
Relative int. rates
Capital flow

21
Q

What is transaction exposure, and how do you measure it?

A

Deals with exchange rate risk - defined as the potential that an organization could suffer economic loss or experience economic gain upon settlement of individual transactions as a result of changes in the exchange rate - measured in relation to currency variability or currency correlation. - measurement in two steps:

  1. Project foreign currency inflows and outflows (A/R & A/P).
  2. Est. the variability (risk) associated with the foreign currency.
22
Q

What is economic exposure and how is it measured?

A

The potential that the PV of an organization’s cash flows could increase or decrease as a result of changes in the exchange rate - defined through local currency appreciation or depreciation and measured in relation to earnings and cash flows.

Foreign currency Dep. App.
Domestic currency App. (down) Dep. (up)
Foreign net inflows Loss Gain
Currency net outflows Gain Loss

23
Q

What is translation exposure, and how do you measure it?

A

Risk that assets, liabs., equity, or income of a consolidated organization that includes foreign subsidiaries will change as a result of changes in exchange rates - defined by degree of foreign involvement, location of foreign subs., and acct. methods used and measured in relation to the impact of an organization’s earnings or comprehensive income - increases as foreign involvement by subs increases.

24
Q

What is hedging?

A

Financial risk mngt. technique of acquiring a financial instrument that behaves oppositely from the hedged item to mitigate risks of fluctuations in value.

25
Q

What is a futures hedge?

A

Entitles holder to purchase or sell a particular number of currency units of an identified currency for a negotiated price on a stated date - denominated in standard amts. and tend to be used for smaller transactions - particular transaction.

26
Q

What is a forward hedge?

A

Holder purchases or sells currency for negotiated price at a future point - b/w businesses and commercial banks - larger transactions - anticipate need to buy/sell at a particular point.

27
Q

What is a money market hedge?

A

Uses international money markets to plan to meet future currency requirements - uses domestic currency to purchase foreign at current spot rates and invest them in securities timed to mature at the same time as the related payables.

28
Q

What are currency option hedges?

A

Gives businesses the option of executing the option contract or purely settling the original transaction:
Payables: Call option (option to buy) - option price < exchange rate, exercise option/buy call.
Receivables: Put option (option to sell) - option price > exchange rate, exercise option/sell put.

29
Q

What are the rates, advantages, disadvantages, and strategies of short-term and long-term debt?

A 
Short-term debt:
Lower rates
Increased liquidity and profitability
Increased int. rate risk and credit risk
Use with higher levels of temporary working capital
Long-term debt:
Higher rates
Decreased int. rate risk and credit risk
Decreased liquidity and profitability
Use with higher levels of permanent working capital
30
Q

What are debentures and bonds, and what are subordinated debentures?

A

Debentures and bonds represent LT indebtedness generally supported by agreements known as indentures, which specify terms and conditions, including coupon rate and maturity dates - bonds are secured by a rev. or asset pledge and debentures are unsecured.

Subordinated debentures - ranks behind senior creditors

31
Q

What are income bonds, junk bonds, and mortgage bonds?

A
  1. Securities that pay int. only upon achievement of target income levels.
  2. Unsecured, high risk and return - to raise capital for acquisition and leveraged buyouts.
  3. Protected from default by a lien of assets of issuing company.
32
Q

What are the general characteristics of debt and equity financing?

A

Debt Equity
Flexibility No Yes
Tax Deductibility Yes No
EPS Dilution No Yes
Increased Risk Yes No
Cost Low High
Return Fixed Variable

33
Q

What is a perpetuity (zero growth stock), and its formula?

A

When the periodic cash flows paid by an annuity last forever (preferred stock)
PV of perpetuity = stock value/share = P = D/R
P = price; D = Div. (par * fixed %); R = required return

34
Q

What is constant growth (dividend discount model), and its formula?

A

Assumes div. pay. are the cash flows of an entity security and intrinsic value of co.’s stock is the PV of expected future div. - can use if divs. are assumed to grow at a constant rate.
Stock value/share with assumed growth = Pt = D(t+1)/(R-G)
-> D(t+1) = Div.0 * (1+g)
For future prices, say 3 yrs. from today = (1+g)^4

35
Q

What is the price-earnings (P/E) ratio? How to get to current stock price?

A

P0 (price/value today) / E1 (expected earning in 1 yr.)

Current stock price = P/E ratio * anticipated EPS incoming year -> (P0/E1) * E1

36
Q

What is the PEG ratio? Current stock price?

A

PEG = (P0/E1) / G (G = 100 * expected g rate)

P0 = PEG * E1 * G

37
Q

What is the price-to-sales ratio? Value of equity?

A

P0/S1 (S1 - expected sales in 1 yr.)

P0 = (P0/S1) * S1

38
Q

What is the price-to-cash flow ratio? Value of equity?

A

P0/CF1

P0 = (P0/CF1) * CF1

39
Q

What is the IPPF, and what two categories of authoritative guidance can be divided into and what goes under them?

A

International Professional Practices Framework - organizes the authoritative guidance published by the IIA (Institute of Internal Auditors).

  1. Mandatory Guidance:
    a. Definition of internal auditing
    b. International standards
    c. Code of ethics: integrity, objectivity, confidentiality, and competency.
  2. Endorsed and strongly recommended guidance:
    a. Position papers
    b. Practice advisories
    c. Practice guides
40
Q

What are the standards for internal auditors?

A
  1. Attribute standards - general standards under GAAS - related to auditor independence, technical proficiency, and professional care.
  2. Performance standards - fieldwork and reporting standards under GAAS - related to planning and supervision of the engagement and documentation of evidence or basis for conclusions, and generic reporting requirements.
  3. Implementation standards - imbedded within the attribute and reporting standards to address the requirements of implementing assurance and consulting activities.
41
Q

What are the attribute standards included in the International Standards for the Practice of Internal Auditing?

A

Purpose, authority, and responsibility
Independence and objectivity
Proficiency and due professional care
Quality assurance and improvement program

42
Q

What are the seven areas of performance standards?

A
  1. Managing the internal audit activity
  2. Nature of the work
  3. Engagement planning
  4. Performing the engagement
  5. Communicating results
  6. Monitoring progress
  7. Management’s acceptance of risk

CPA Exam - BEC (6 decks)

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