BEC - ALL Flashcards
What is the primary duty of the board of directors?
To monitor management behavior.
What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?
Oversees the boardResponsible for hiring new CEO
What is the responsibility of the audit committee of the board of directors?
The audit committee appoints and oversees the external auditor.
What is the duty of the compensation committee of the board of directors?
The compensation committee handles the CEO’s compensation package.
What does the NYSE and NASDAQ require of the board of directors?
They require the board to be independent.
What is the main goal in an executive compensation package?
The package should ensure that the goals of management should match those of the shareholders.
How can an executive compensation package ensure that goals of management align with those of shareholders?
Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.
Which influences help mold the direction that management takes?
They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS)These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties
What is shirking?
When management doesn’t act in the best interest of shareholders.It can be alleviated by tying compensation to stock performance or company profit.
What requirements are imposed on a public company under Sarbanes-Oxley?
Management must submit a report on the effectiveness of Internal Control in the 10K.Management must disclose significant Internal Control deficiencies.CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.
What characteristics are promoted by the COSO framework on Internal Control?
Reliable financial reportingEffective and efficient operationsCompliance
What are the elements of the control environment?
Integrity & EthicsCompetenceThe Board of Directors & Audit CommitteeManagement’s Operating StyleOrganizational StructureAuthority & Roles of ResponsibilitiesHR Policies
What are control activities?
A component of Internal Control that includes actions being taken to promote the control environment.
What are the basic elements of Internal Control?
Control EnvironmentRisk AssessmentControl ActivitiesInformation and CommunicationMonitoring
What is the significance of the Information and Communication aspect of Internal Control?
Management must have access to relevant and timely information to make good decisions.
How does Monitoring affect Internal Control?
Internal Control activities must be constantly monitored and evaluated for effectiveness.
What activities does the COSO framework for enterprise risk management include?
Identifies Risk FactorsPromotes Risk Response DecisionsCompares Management Risk vs. Shareholder GoalsAids in evaluating opportunitiesPromotes Quicker Capital movementDoes NOT eliminate all risk
What are possible responses to risk under the COSO framework for enterprise risk management?
Avoid or ReduceShare or Accept
What is Cost Accounting?
Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet foro Direct Materialso Direct Laboro Work in Processo Finished GoodsCost Accounting also records for the Income Statement
What is the difference between Cost Accounting and Managerial Accounting?
Cost Accounting - External Focus- GAAPManagerial Accounting - Internal Focus- Not GAAP
What are Product Costs (aka Inventory Costs)?
Prime CostsConversion Costs
What are included in Prime Costs?
Direct Material USED - Have become part of the product or had a direct impact on the productDirect Labor Used - Employees who worked on product and had direct impact
What is Factory Overhead?
All factory costs except for DM and DL used in production- including Spoilage (except for abnormal spoilage- which is a period cost and not included in OH).
What is included in Fixed Factory Overhead?
FFO : Estimated Costs / Normal CapacityUses Normal ActivityExamples of Fixed Factory OH: Depreciation (SL)- Utilities- TaxesUnder/Over-applied Fixed OH always goes to COGS
What is included in Variable Overhead?
VO : Estimated Activity / Actual ActivityUses Actual ActivityExamples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)
Where is Under/Over-applied Variable OH recorded?
If Immaterial - Goes to COGSIf Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance
Where is Under/Over-applied Fixed OH recorded?
It always goes to COGS
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
Under-applied overhead.If it’s Fixed OH- under-applied goes to COGS.If it’s Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.
What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
A credit balance indicates over-applied overhead.If Fixed overhead- it is corrected from COGS.If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.
Which variables are used to calculate Direct Material balances?
Beginning Balance DR Net purchases (plus freight-in)CR Direct Materials Used: Ending balance (goes to BS)
What variables are used to calculated Work in Process (WIP)?
Beginning Balance (End Bal of Previous WIP)DR Direct Materials UsedDR Direct Labor Used (Conversion Cost)CR COGMDR Factory Overhead Applied (Conversion Cost): Ending Balance (Goes to BS)
What variables are included in Finished Goods calculations?
Beginning BalanceDR COGM: COGAS (Cost of Goods Avail for Sale)CR COGS: Ending Balance (Goes to BS)
How does Freight In affect Cost Accounting calculations?
Inventory (Product) CostPart of DM Purchases
How does Freight Out affect Cost Accounting?
Selling (Period) CostNot part of inventory
When is Job-Order Costing used?
Used when costs are easily connected to a specific product or product line Can also be applied to servicesCalculation is the same as normal cost accounting - just use your T Accounts- DM to WIP to FG to COGS- You’re likely going to be solving for the last job in the queue
What is the Direct Method for allocating service department costs?
No services allocated between service departments- even if they serve each other. Only allocate to product(s)
What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
Under process costing- how are the units shipped calculated?
Beginning Inventory+ Units Started- Ending Inventory: No. Units Shipped
Which two inventory methods are used under Process Costing?
FIFOWeighted Average
What is another name for Process Costing?
Equivalent Units of Production
How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?
EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)
How are Direct Materials calculated under the Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
How are Equivalent Finished Units calculated for Direct Materials?
Units Shipped + EI x % Complete DM: EFU (Weighted Average Method) - Beginning Inventory x % Complete: EFU (FIFO)
How are Equivalent Finished Units calculated for Conversion Costs?
Units Shipped+ EI x % Complete CC: EFU (Weighted Average)- Beginning Inventory x % Complete: EFU (FIFO)
How are Direct Materials calculated under the FIFO method?
Current Costs / EFU FIFONote: FIFO method uses Current Period costs only and ignores Beginning Inventory
How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFOFIFO method uses Current Period costs only and ignores Beginning Inventory
How is WIP calculated?
Beginning balance (DM- DL- OH)+ Current Costs (DM- DL- OH)- COGM (Goes to Finished Goods)+ DM EFU x Cost per DM EFU+ CC EFU x Cost per CC EFU: Ending WIP
How do period costs and product costs relate to net sales- gross margin and operating income?
Net Sales - Product Costs: Gross Margin- Period Costs: Operating Income
What is the focus of Activity Based Costing (ABC)?
Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don’t want or don’t care aboutInventory is expensive to store and storing something is not a value-added expenditureUses Cost Pools - Different departments can have different OH ratesUses Several OH rates based on Activity - Cost Pool / Cost Driver
How do Cost Pools and Allocations compare under ABC versus traditional costing system?
Cost Pools and Allocations increase compared to a traditional costing system
What is Backflush Costing?
Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)- Works backward to flush out COGS- Mostly GAAP
What are the characteristics of By-Products?
Usually immaterial and common costs aren’t allocated to themLow Market ValueCan be valued at NRVCan be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against SalesRecognition rules are very flexible with valuing and classifying by-products
What are Cost Functions?
Measure how costs change relative to activity levelsHigh-Low MethodChange in Cost (High-Low pts) / Change in Activity (High-Low pts)
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
What is a supply curve shift?
When supply changes due to something other than price.
What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price pointHigher Equilibrium GDPNumber of sellers increases - market can get floodedExamples: Government subsidies or technology improvements that decrease costs for suppliers
What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price pointLower Equilibrium GDPCost of producing item increases Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
What is a Demand Curve Shift?
When demand changes due to something other than price.
What is a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price pointPrice of substitutes go up - price of beef rises- so people buy more chickenFuture price increase is expected - War in Middle East- people go out and buy gasMarket expands - i.e. people get new free health care plan- demand at clinic risesExpansion - more spending increases equilibrium GDP
What is a Negative Demand Curve Shift (Shift Left)?
Demand decreases at each price point.Price of complement goes up - price of beef goes up- less demand for ketchupBoycott - Company commits social blunder- consumers boycottConsumer income rises - Demand for inferior goods drops as people have more money to spendConsumer tastes changeContraction - less spending decreases equilibrium GDP
What is the Marginal Propensity to Consume?
How much you spend when your income increasesCalculate: Change in Spending / Change in Income
What is the Marginal Propensity to Save?
How much you save when income increasesCalculate: Change in Savings / Change in IncomeAlso equals 1 - Marginal Propensity to Consume
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
How does increased spending by consumers and the government affect the demand curve?
As spending by consumers or the government increases- the demand curve increases (shifts right).
How does spending change due to the multiplier effect?
The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.One consumer spends money- which:Increases the income of a businessIncreases the income of a vendorIncreases income of employeesIncreases tax revenue
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreasesPrice decreases- Revenue increases
What conditions would indicate Elastic Demand?
Many substitutes (luxury items)Considered elastic if elasticity is greater than 110% drop in demand / 8% increase in price : 1.25 (Elastic)Price increases- Revenue decreasesPrice decreases- Revenue increases
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increasesPrice decreases- Revenue decreases
What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline)Considered inelastic if coefficient of elasticity is less than 15% drop in demand / 10% increase in price : .5 (inelastic)Price increases- Revenue increasesPrice decreases- Revenue decreases
What is Unitary Demand?
Total revenue will remain the same if price is increasedConsidered unitary if coefficient of elasticity : 1
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in IncomeNormal goods greater than 1 (demand increases more than income)Inferior goods less than 1 (demand increases less than income)
What conditions occur under periods of inflation?
Interest rates increaseReduced demand for loansReduced demand for houses- autos- etc.Value of bonds and fixed income securities decreaseInferior good demand to increaseForeign goods more affordable than domesticDemand for domestic goods decrease
What happens under Demand-Pull inflation?
Overall spending increasesDemand increases (shifts right)Market equilibrium price increases
What happens under Cost-Push inflation?
Overall production costs increaseSupply decreases (shifts left)Market equilibrium price increasesNote: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
What is Optimal Production?
When Marginal Revenue : Marginal Cost
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
What is GDP (Gross Domestic Product)?
The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interestsIncluded: Foreign company has US FactoryNot included: US company has foreign factory
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp IncomePassive IncomeTaxesEmployee SalariesForeign Income AdjustmentsDepreciation
What is included under the Expenditure Approach for calculating GDP?
Individual ConsumptionPrivate InvestmentGovernment PurchasesNet Exports
What is Nominal GDP?
Measures goods/services in current prices.
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
What is Real GDP?
Nominal GDP / GDP Deflator x 100
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
What is the Consumer Price Index (CPI)? How is it applied?
Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0((CPI Current - CPI Last) / CPI Last) * 100
How is disposable income calculated?
Personal Income - Personal Taxes
How is Return to Scale calculated?
% Increase in output / % Increase in inputGreater than 1 : Increasing returns to scaleLess than 1 : Decreasing returns to scale
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
What is a Depression?
A prolonged- severe recession with high unemployment ratesNo requisite period of time for the economy to officially be in a depression
What are the stages of the Economic Cycle?
Peak (highest)Recession (decreasing)Trough (lowest)Recover (increasing)Expansion (higher again)
What are leading indicators?
Conditions that occur before a recession or before a recoveryExample: Stock Market or New Housing Starts
What are lagging indicators?
Conditions that occur after a recession or after a recoveryExamples: Prime Interest Rates- Unemployment
What are coincident indicators?
Conditions that occur during a recession or during a recoveryExample: Manufacturing output
Which people are included in the calculation of unemployment?
Only people looking for jobs
What is Cyclical Unemployment?
GDP doesn’t grow fast enough to employ all people who are looking for workExample: People are unemployed in 2010 because there aren’t enough jobs available due to the economy
What is Frictional Unemployment?
People are changing jobs or entering the work force. This is a normal aspect of full employment.Example: A recent college graduate is looking for a job
What is Structural Unemployment?
A worker’s job skills do not match those necessary to get a job so they need education or trainingExample: A construction worker wants to work in an office- so they quit their job and get computer training
How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
What is the Real Interest Rate?
Inflation-adjusted interest rate
What is the Nominal Rate?
Rate that uses current prices
What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback.Usually results in a lower rate.US Treasuries are an example.
What is included in the M1 money supply?
Currency- Coins- and Deposits
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
What is Deficit Spending?
Increased spending levels without increased tax revenue.Lower taxes without decrease in spendingGamble that the multiplier effect will take over and boost economy
How can the Fed control the money supply?
By buying and selling the government’s securities.
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
What is a Tariff?
A tax on imported goods
What is a quota?
A limit on the number of goods that can be imported
How do international trade restrictions affect domestic producers?
They are good for domestic producers.Demand curve shifts rightFewer substitutesThey can charge higher prices
How to international trade restrictions affect foreign producers?
They are bad for foreign producersDemand curve shifts leftFewer buyersThey must charge lower prices
How do international trade restrictions affect foreign consumers?
They are good for foreign consumersSupply curve shifts rightGoods purchased at lower prices in the foreign markets
How do international trade restrictions affect domestic consumers?
They are bad for domestic consumersSupply curve shifts leftFewer goods bought due to higher prices
What is Accounting Cost?
Explicit (Actual) cost of operating a businessImplicit costs are opportunity costs
What is Accounting Profit?
Revenue - Accounting Cost
What is Economic Cost?
Explicit + Implicit Cost
What is Economic Profit?
Revenue - Economic Cost
What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
How is Net Working Capital calculated?
NWC : Current Assets - Current Liabilities
What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycleDon’t negatively impact operations
What is the Inventory Conversion Period?
Average time needed to convert materials into finished goods and sell themAverage Inventory : (BI + E) / 2Inventory Conversion Period : Average Inventory / Sales Per Day
What is the Receivables Collection Period?
Average time needed to collect A/RRCP : Average Receivables / Credit Sales Per Day
What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P paymentAverage Payables : (BP + EP) / 2Payables Deferral Period : Average Payables / (COGS/365)
What is the Cash Conversion Cycle?
Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)Inventory Conversion Period+ Receivables Collection Period- Payables Deferral Period: Cash Conversion Cycle(Inventory Really (-Pays) Cash)
What traits should Cash and Short-Term Investments have?
LiquidSafe
For what are Letters of Credit used?
Used for importing goods.Issued by importer’s bank.
What is the advantage of using Trade Credit?
No interest cost if paid timely.
What is a Lockbox System? What are the advantages?
Customer Payments are sent to a bank-managed PO box.Employees don’t have access to cash.Deposits are more timely.Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)
What is float?
Time it takes to mail a payment and have it clear your bank accountMaximize float on cash paymentsMinimize float on cash receipts
What are Zero Balance Accounts?
Regional bank sends enough cash to cover daily checksAdvantages:Checks take longer to clear -more floatLow amounts of cash tied up for compensating (minimum) balances
What is the difference between Treasury Bills- Notes and Bonds?
Treasury Bills: Short term (less than one year) Think: $1 BillTreasury Notes: Medium term (less than 10 years- more than 1)Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of GovernmentGreater than 9 Months MaturityUnsecuredIssued by large firms
What are the advantages and disadvantages of Commercial Paper?
Advantages: Financing at less than Prime. No compensating balances required.Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.
What is Economic Order Quantity?
The order quantity that minimizes inventory costs.EOQ : Square Root of (2DO/C)D : Unit Demand (Annual)O : Order CostC : Cost of Inventory
What is Carrying Cost?
The cost of keeping inventory.
What is Order Cost?
Cost of executing an order and starting product production.
What is inventory reorder point?
How low inventory should get before it should be re-ordered.IOP : Average Daily Demand x Average Lead Time
What is a Just In Time (JIT) system?
Orders inventory so that you get it just in time for when it’s neededJIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
What is Factoring of receivables?
Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection
What is a Trade Discount?
Buyer saves if paid earlyExample: 1/10 Net 301% Discount if paid within 10 daysIf not- bill is still due in 30 days
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
What is the Prime Rate?
A benchmark used for lending only to the best customersMost customers will be charged Prime + 3%- for exampleIf the lending institution and the customer are not in the same country- the LIBOR rate is often used
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
How is Current Yield calculated?
CY : Interest Payment / Bond Price
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
What is a Zero Coupon Bond?
No interest payments madeBond sold at a discountInterest reflected when Bond matures
What are the characteristics of a Junk Bond?
High interest rateHigh default risk
What are debenture bonds?
Bonds unsecured by collateral
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
What is a Callable Bond?
Borrower can pay off debt early
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
What is the disadvantage of Common Stock in comparison to bonds?
Common Stock is more expensive to issue than debt.Why? Investors demand a greater ROI than debtors (bondholders)
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
What is Weighted Average Cost of Capital?
A company uses this to determine the true cost of their capitalExample:Debt costs 5%; 40% of Cap.Equity costs 12%; 60% of Cap.(5% x 40%) + (12% x 60%)WACC : 9.2%
What is CAPM?
A stock’s expected performance is based on its beta (risk) compared to that of the stock market.More risk : more expected return.
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
What is a Static Budget?
Budget targeted for a specific segment of a company.
What is a Maser Budget?
Budget targeted for the company as a wholeIncludes budgets for Operations and Cash FlowsIncludes set of budgeted Financial Statements
How do Fixed Costs affect budgeting?
Costs independent of the level activity within the relevant rangeProperty Tax is the same whether you produce 100-000 units or zero unitsHowever - Fixed Costs per unit vary given the amount of activityIf you produce fewer units- fixed costs per unit will be greater than if you produce more units - i.e. less units to spread the cost over
How do Variable Costs affect budgeting?
The more Direct Materials or Direct Labor used- the more Variable Costs per unitHowever - Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit
How are Material Variances calculated?
SAM:Standard Material Costs- Actual Material Costs= Material Variance
How are Labor Variances calculated?
SALStandard Labor Costs- Actual Labor Costs= Labor Variance
How are Overhead Variances calculated?
OATOverhead Applied- Actual Overhead Cost= Total Overhead Variance
How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&AVariable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
How is Contribution Margin calculated?
Sales Price (per unit)- Variable Cost (per unit)= Contribution Margin (per unit)
How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit)= Break-even Point Per UnitAssumption: Total Costs & Total Revenues are LINEAR
What is the focus in a Cost Center?
Management is concerned only with costs
What is the focus in a Profit Center?
Management is concerned with both costs and profits
What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
What is the Delphi technique?
Forecasting technique where Data is collected and analyzedRequires judgement/consensus
What is Regression Analysis?
A forecasting technique where Sales is the dependent variable.Simple Regression - One independent variableMultiple Regression - Multiple independent variables
What are Econometric Models?
Forecast sales using Economic Data
What are Naive Forecasting Models?
Very Simplistic- Eyeball past trends and make an estimate
How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periodsDifference: Exponential Smoothing weighs recent data more heavily
What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs OnlyIgnore Sunk CostsOpportunity Cost is a Must
Which IT personnel roles should always be segregated?
OperatorsProgrammersLibrarians
What are the duties of a systems analyst?
Designs or purchases IT systemResponsible for flowchartsLiaison between Users and ProgrammersNote: Think IT Manager
What is the primary duty of a Systems Administrator?
A Systems Administrator controls database access.
What are the duties of a Systems Programmer?
Writes- Updates- Maintains- & Tests software- systems- and compilers
Which duties should a Systems Programmer NOT have?
In order to maximize internal control- a Systems Programmer should NOT have application programming duties/abilities or be an Operator on the system.
What are the duties of a Systems Operator?
Schedules and Monitors JobsRuns IT Help Desk
What duties should a System Operator NOT have?
For internal control purposes- they should not be a Programmer on the system.
If it is not possible to segregate duties in an IT System- what actions should be taken to compensate for internal control purposes?
Include Computer Logs.Control Group should review the logs.
What is the purpose of a Management Information System (MIS)?
To assist with decision making.
What is an Accounting Information System (AIS)?
A type of Management Information System (MIS) that processes accounting transactions.
What are the characteristics of an Executive Information System (EIS)?
Specialized for Company Executive needsAssists with Strategy OnlyNo Decision-Making Capabilities
What are the characteristics of an Expert System (ES)?
Computer uses reasoningStructuredNo human interpretation needed
What are the characteristics of a Decision Support System (DSS)?
Computer provides dataGives Interactive SupportHuman interpretation needed
What are the characteristics of an Ad Hoc computer report?
User initiates the report.The report is created upon demand.
When are Exception reports generated?
Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem
What is a query?
A type of Ad Hoc report- initiated by a user.
What is End-User Computing?
The User develops and executes their own application.
What is the primary benefit of E-commerce?
E-commerce makes business transactions easier.
What are the risks of E-commerce?
Compromised data or theft.Less paper trail for auditors.
What are the benefits of Electronic Data Interchange?
Uses globally-accepted standardsEfficient
What is a File Server?
A file server stores shared programs and documents.
What is the purpose of a Database?
Located on a File Server- a Database allows users to share documents.
What is the purpose of a LAN (Local Area Network)?
It connects computers in close proximity.
What is the purpose of a WAN (Wide Area Network)?
It connects computers that are far apart.
What are the characteristics of a VAN (Value-Added Network)?
Privately-owned NetworkServes as 3rd Party Between 2 CompaniesRoutes EDI TransactionsAccepts wide range of ProtocolsVery Costly
What is the purpose of a Firewall?
Prevents unauthorized access to a network.
What are the characteristics of a virus?
Takes over a computerNeeds a host program to run
What are the characteristics of a computer worm?
Takes over multiple computersDoesn’t need a host program to run
What is the purpose of Automated Equipment Controls?
They prevent and detect hardware errors.
What is RAM?
Random Access Memory.Internal memory in the computer used during immediate processing.
What is a CPU?
Computer Processing UnitIt processes commands within a computer.
What is Job Control Language?
It schedules and allocates system resources.
What are examples of input devices?
KeyboardMouseScannerMagnetic Ink ReaderMagnetic Tape ReaderEDIPoint of Sale Scanner
What are examples of Output Devices?
SpeakersMonitorsPrinters
What are the characteristics of Magnetic Tape storage?
Sequential Access - Sorts data in orderSlower data retrievalHeader Label prevents Operator error by loading wrong tapeExternal Labels prevent accidental destruction by operator
What are the characteristics of Magnetic Disks?
Random Access - Finds data in random spotsFaster data retrievalUses Boundary Protection for data
What is a Gateway?
Connects one network to anotherNote: the Internet is connected by Gateways
What are Parity Checks?
A control that detects internal data errors.A bit is added to each character- it checks to see if a bit was lost.
What is an Echo Check?
Transmitted data is returned to the sender for verification (it echoes back to the sender)
What is a Change Control?
It authorizes program changes and approves program test results.
What is security software?
Software that controls access to IT systems.Note: Don’t confuse this with anti-virus software
What is the purpose of a Digital Signature?
It confirms a message has not been altered.
List the types of computers from smallest to largest
PDA/Smartphone/TabletMicrocomputer - PC- Laptop (cost-effective)Minicomputer - Like a Mainframe- but smallerMainframe - Large computer with terminals attachedSupercomputer - Very powerful and very big
What are the units of computer data from smallest to largest?
Bit - 1 (on) and 0 (off)Byte - 8 bits to a byte/characterField - group of related characters/bytes (i.e. Name- Zip Code- Serial #)Record - Group of related fields (i.e. Member name- address- phone number)File - Group of related records (i.e. Membership directory)
What is the duty of a design engineer?
Determine language used for a specific computer- on a computer-to-computer basis
What are object programs?
Programs written in base computer language- not similar to English.
How can source programs be recognized?
They are written in a language close to English.
What is the purpose of a Compiler?
Takes Source language (English) and converts to Object (Computer) Language
How does Online Analytical Processing work?
It uses a Data Warehouse to support management decision making.
What is Data Mining?
Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.
What is the purpose of online transaction processing?
To process a company’s routine transactions.
What are the characteristics of batch processing?
Data held- updates multiple files all at onceLeaves a better audit trailUses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)
What does an output control check for?
Checks to see if output data is valid- distributed and used in an authorized manner.
What does a processing control check?
Checks if data processing produced proper output
What is a hash total?
An input control number- a meaningless sum of values included in the input.Example would be summing a list of SSNs to make sure the data is the same once entered as it was prior to input into the system.
What is a validity check?
Checks to see if data in existing tables or files belongs in the setFor example- is there a # in an alpha-only field or a letter in a numeric-only field
What is a limit check?
Checks to see if numbers surpass a certain limit- i.e. in an age field is the number greater than 110.
What is a check digit?
An input control that adds an identification number to a set ofdigits - usually at the end
What is a field check?
An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field
What is a Hot Site?
A disaster recovery system where if the main system goes down- a Hot Site is ready to take over immediately.
What is a Cold Site?
If a main system goes down- a Cold Site will take time to get set up and running.
What is the most common database language?
SQL - Structured Query Language
What is a Data Definition Language?
Defines SQL DatabaseControls SQL Tables
What is a Data Manipulation Language?
Queries SQL Database tables
What is a Data Control Language?
Controls Access to SQL Database
What are the characteristics of a Relational Database?
Logical structureUses rows and columns similar to spreadsheet
What are the characteristics of a Hierarchical Database?
Has various levelsUses trees to store data
What are the advantages of a database?
Data is more accessibleReduced redundancy
What are the disadvantages of a database?
Cost of installationSkilled personnel required to maintain
What are the components of a database?
Desktop clientApplication ServerDatabase ServerThink: Your desktop computer runs applications and saves to a database
What four perspectives are included in Balanced Scorecard?
Financial / Customer / Internal Business Processes / Learning and Growth
Why was Balanced Scorecard created?
To measure Performance.
What are Strategy Maps?
Diagrams of Strategic Cause and Effect Relationships.
What is a Strategic Initiative?
A plan to achieve goals.
What measures are used under Value-Based Management?
Return on InvestmentResidual IncomeSpreadEconomic Value AddedFree Cash Flow
How is Return on Investment (ROI) calculated?
ROI : Return / InvestmentExample: You Invest $100 to buy a machine that generates $60 in Operating Income$60 / $100 : 60% ROI
How is Residual Income calculated?
Operating Income - (Required Rate of Return x Invested Capital) : Residual Income
What is another name for Required Rate of Return (RROR)?
RROR is also called ‘Cost of Capital’
What is Weighted Average Cost of Capital (WACC)? How is it calculated?
Cost of Capital is the weighted average of the interest rates you pay for your Capital. Includes Debt and the Rate of Return your Equity Shareholders expectExample: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%
How is Spread calculated?
Spread : ROI - Cost of Capital
What is the primary point of Economic Value Added? How is it calculated?
Investments should exceed costs- with an emphasis on stockholder value.Economic Value Added : Operating Income After Tax - (Net Assets x WACC)
How is Free Cash Flow calculated?
Operating Income After Tax+ Depreciation & Amortization- Capital Expenditures- Change in Net Working Capital: Free Cash Flow
What is measured by Six Sigma?
It measures a product versus its quality goal.
What is the Asset Turnover Ratio?
Sales / Average Assets
What does the Current Ratio tell us? How is it calculated?
Can the company pay their short-term liabilities?Current Ratio : Current Assets / Current Liabilities
What does the Debt to Equity Ratio tell us? How is it calculated?
How is the company financing its capital?Debt to Equity Ratio : Total Debt / Total Equity
What does the Debt to Total Assets ratio tell us? How is it calculated?
What proportions of the company’s assets are encumbered with debt?Debt to Total Assets : Total Liabilities / Total Assets
What does Gross Margin % tell us? How is it calculated?
How profitable is the product after COGS?Gross Margin : Gross Profit / Net Sales
What does Operating Profit Margin tell us? How is it calculated?
How profitable is the product after all expenses (except interest and taxes)?Operating Profit Margin : Operating Profit / Net Sales
How is Times Interest Earned calculated and what does it mean?
Can the company make their interest payments?Times Interest Earned : Earnings Before Tax & Interest / Interest Expense
What does Return on Assets tell us? How is it calculated?
What % return are the assets generating?Return on Assets : Net Income (net of interest & taxes) / Average Total Assets
How is Market/Book ratio calculated?
Market Value of Common Stock / Book Value of Common Stock
What is Inventory Turnover and how is it calculated?
How quickly does inventory get sold?Inventory Turnover : COGS / Average Inventory
What is the Quick Ratio and how is it calculated?
It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)Quick Ratio : (Current Assets - Inventory) / Current Liabilities
What is Average Collection Period- and how is it calculated?
How many days does it take the company to collect payment on A/R?Average Collection Period : Average AR / Average Sales Per Day
What is an Internal Failure?
Products have quality defects- but are caught BEFORE they leave the warehouse.
What is an External Failure?
Product reaches the customer- but they are not satisfied with the quality of the product.This includes recalls.
What is Appraisal Cost?
Quality control- testing & inspection costs.
Define Market Risk
The risk that a sluggish economy will affect the value of a debt instrument
Define Sector Risk
The risk that an event in the investment’s business sector will harm the investmentFor example- the banking sector is sluggish- so even stocks of healthy banks suffer
Define Credit/Default Risk
The risk that a debtor will be unable to make loan payments or pay back the principal
Define Interest Rate Risk
The risk that a change in interest rates will adversely affect the value of the noteExample: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.
What does Standard Deviation measure?
It measures the volatility of an investment.
What is Systematic Risk?
Risk that impacts the entire market and can’t be avoided or reduced through diversificationExample: Wars
What is Unsystematic Risk?
Relates to a particular industry or companyExample: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest
What does Beta measure?
Beta measures how volatile the investment is relative to the rest of the market.In other words- how quickly (and in what amount) does the value of the stock change when the market sways?
What is Variance?
It compares volatility of an investment to the market average.Factors include both Systematic and Unsystematic Risk.
What is a Derivative?
An asset whose value is DERIVED from the value of another asset.Derivatives are measured at Fair Value.
How is an Option used?
Gives the buyer the option to buy or sell a financial derivative at a certain priceTraders use them to speculate where they think the price will be at a certain point and make a profitHedgers use them to offset risk
What is a Future?
A Forward Contract with a future value.They are sold and traded on the futures market.
What is an Interest Rate Swap?
Forward Contract to swap payment agreementsThey are highly liquid and often valued using the Zero-Coupon method.Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR
What is Legal Risk?
Risk that a law or regulation will void the derivative
What is a Fair Value Hedge?
Hedge that protects against the value of an asset or liability changing.Changes in value are reported in earnings.
What is a Cash Flow Hedge?
A hedge that protects against a set of future cash flows changing.Changes in value are reported in OCI.
What is a Foreign Currency Hedge?
A hedge that protects against the value of a foreign currency changing.For example- a foreign currency hedge might be used to protect against the following: If you have receivables denominated in a foreign currency and that currency dips in value - your receivables are worth less than before.
What is the primary duty of the board of directors?
To monitor management behavior.
What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?
Oversees the boardResponsible for hiring new CEO
What is the responsibility of the audit committee of the board of directors?
The audit committee appoints and oversees the external auditor.
What is the duty of the compensation committee of the board of directors?
The compensation committee handles the CEO’s compensation package.
What does the NYSE and NASDAQ require of the board of directors?
They require the board to be independent.
What is the main goal in an executive compensation package?
The package should ensure that the goals of management should match those of the shareholders.
How can an executive compensation package ensure that goals of management align with those of shareholders?
Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.
Which influences help mold the direction that management takes?
They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS)These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties
What is shirking?
When management doesn’t act in the best interest of shareholders.It can be alleviated by tying compensation to stock performance or company profit.
What requirements are imposed on a public company under Sarbanes-Oxley?
Management must submit a report on the effectiveness of Internal Control in the 10K.Management must disclose significant Internal Control deficiencies.CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.
What characteristics are promoted by the COSO framework on Internal Control?
Reliable financial reportingEffective and efficient operationsCompliance
What are the elements of the control environment?
Integrity & EthicsCompetenceThe Board of Directors & Audit CommitteeManagement’s Operating StyleOrganizational StructureAuthority & Roles of ResponsibilitiesHR Policies
What are control activities?
A component of Internal Control that includes actions being taken to promote the control environment.
What are the basic elements of Internal Control?
Control EnvironmentRisk AssessmentControl ActivitiesInformation and CommunicationMonitoring
What is the significance of the Information and Communication aspect of Internal Control?
Management must have access to relevant and timely information to make good decisions.
How does Monitoring affect Internal Control?
Internal Control activities must be constantly monitored and evaluated for effectiveness.
What activities does the COSO framework for enterprise risk management include?
Identifies Risk FactorsPromotes Risk Response DecisionsCompares Management Risk vs. Shareholder GoalsAids in evaluating opportunitiesPromotes Quicker Capital movementDoes NOT eliminate all risk
What are possible responses to risk under the COSO framework for enterprise risk management?
Avoid or ReduceShare or Accept
What is Cost Accounting?
Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet foro Direct Materialso Direct Laboro Work in Processo Finished GoodsCost Accounting also records for the Income Statement
What is the difference between Cost Accounting and Managerial Accounting?
Cost Accounting - External Focus- GAAPManagerial Accounting - Internal Focus- Not GAAP
What are Product Costs (aka Inventory Costs)?
Prime CostsConversion Costs
What are included in Prime Costs?
Direct Material USED - Have become part of the product or had a direct impact on the productDirect Labor Used - Employees who worked on product and had direct impact
What is Factory Overhead?
All factory costs except for DM and DL used in production- including Spoilage (except for abnormal spoilage- which is a period cost and not included in OH).
What is included in Fixed Factory Overhead?
FFO : Estimated Costs / Normal CapacityUses Normal ActivityExamples of Fixed Factory OH: Depreciation (SL)- Utilities- TaxesUnder/Over-applied Fixed OH always goes to COGS
What is included in Variable Overhead?
VO : Estimated Activity / Actual ActivityUses Actual ActivityExamples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)
Where is Under/Over-applied Variable OH recorded?
If Immaterial - Goes to COGSIf Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance
Where is Under/Over-applied Fixed OH recorded?
It always goes to COGS
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
Under-applied overhead.If it’s Fixed OH- under-applied goes to COGS.If it’s Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.
What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
A credit balance indicates over-applied overhead.If Fixed overhead- it is corrected from COGS.If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.
Which variables are used to calculate Direct Material balances?
Beginning Balance DR Net purchases (plus freight-in)CR Direct Materials Used: Ending balance (goes to BS)
What variables are used to calculated Work in Process (WIP)?
Beginning Balance (End Bal of Previous WIP)DR Direct Materials UsedDR Direct Labor Used (Conversion Cost)CR COGMDR Factory Overhead Applied (Conversion Cost): Ending Balance (Goes to BS)
What variables are included in Finished Goods calculations?
Beginning BalanceDR COGM: COGAS (Cost of Goods Avail for Sale)CR COGS: Ending Balance (Goes to BS)
How does Freight In affect Cost Accounting calculations?
Inventory (Product) CostPart of DM Purchases
How does Freight Out affect Cost Accounting?
Selling (Period) CostNot part of inventory
When is Job-Order Costing used?
Used when costs are easily connected to a specific product or product line Can also be applied to servicesCalculation is the same as normal cost accounting - just use your T Accounts- DM to WIP to FG to COGS- You’re likely going to be solving for the last job in the queue
What is the Direct Method for allocating service department costs?
No services allocated between service departments- even if they serve each other. Only allocate to product(s)
What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
Under process costing- how are the units shipped calculated?
Beginning Inventory+ Units Started- Ending Inventory: No. Units Shipped
Which two inventory methods are used under Process Costing?
FIFOWeighted Average
What is another name for Process Costing?
Equivalent Units of Production
How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?
EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)
How are Direct Materials calculated under the Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
How are Equivalent Finished Units calculated for Direct Materials?
Units Shipped + EI x % Complete DM: EFU (Weighted Average Method) - Beginning Inventory x % Complete: EFU (FIFO)
How are Equivalent Finished Units calculated for Conversion Costs?
Units Shipped+ EI x % Complete CC: EFU (Weighted Average)- Beginning Inventory x % Complete: EFU (FIFO)
How are Direct Materials calculated under the FIFO method?
Current Costs / EFU FIFONote: FIFO method uses Current Period costs only and ignores Beginning Inventory
How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFOFIFO method uses Current Period costs only and ignores Beginning Inventory
How is WIP calculated?
Beginning balance (DM- DL- OH)+ Current Costs (DM- DL- OH)- COGM (Goes to Finished Goods)+ DM EFU x Cost per DM EFU+ CC EFU x Cost per CC EFU: Ending WIP
How do period costs and product costs relate to net sales- gross margin and operating income?
Net Sales - Product Costs: Gross Margin- Period Costs: Operating Income
What is the focus of Activity Based Costing (ABC)?
Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don’t want or don’t care aboutInventory is expensive to store and storing something is not a value-added expenditureUses Cost Pools - Different departments can have different OH ratesUses Several OH rates based on Activity - Cost Pool / Cost Driver
How do Cost Pools and Allocations compare under ABC versus traditional costing system?
Cost Pools and Allocations increase compared to a traditional costing system
What is Backflush Costing?
Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)- Works backward to flush out COGS- Mostly GAAP
What are the characteristics of By-Products?
Usually immaterial and common costs aren’t allocated to themLow Market ValueCan be valued at NRVCan be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against SalesRecognition rules are very flexible with valuing and classifying by-products
What are Cost Functions?
Measure how costs change relative to activity levelsHigh-Low MethodChange in Cost (High-Low pts) / Change in Activity (High-Low pts)
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
What is a supply curve shift?
When supply changes due to something other than price.
What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price pointHigher Equilibrium GDPNumber of sellers increases - market can get floodedExamples: Government subsidies or technology improvements that decrease costs for suppliers
What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price pointLower Equilibrium GDPCost of producing item increases Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
