BEC Final Review Flashcards
What are the specific duties of BOD
provide strategic direction for the corporation and provide oversight to management
Officers are ______ to the board
fiduciary
T/F officers must be shareholders
F
T/F board members are agents
F
Which of the following are key responsibilities of the board:
Elect, remove and supervise managers
adopt, repeal, and amend bylaws
Indemnification
Reimbursement of board members for lawsuits
T/F board members can conduct business with the corporation
T - must be fair to the corporation
T/F corporation officers are agents
T
What were the outcomes of SOX
expanded disclosures
reps from CEO and CFO
What are the enhanced disclosures required
material adjustments, off-balance transactions, pro forma FS, and special purpose entities
Ownership over 10%
Title IV
enhanced financial disclosures
Title III
Corporate responsibility
Title VIII
Corporate and criminal fraud accountability
how long should auditor retain information?
seven years
Title IX
white-collar crime penalty
Periodic reports with SEC must include the following:
report complies with Securities Exchange Act 1934
information contained is fairly presented
signed by CEO & CFO
Title XI
corporate fraud accountability
What are the COSO framework objectives?
Operating
Reporting
Compliance
Operating objective
effectiveness and efficiency of an entity’s operations
Reporting
Reliability, timeliness, and transparency of an entity’s external and internal financials
Compliance
Ensure the entity is adhering to laws and regulations
What was the treadway commission established by?
private sponsoring organizations
What objective does competence relate to?
Control environment
What objective does accountability relate to?
Control environment
competence
commitment to attract, develop, and retain competent individuals
accountability
holds employees accountable for internal control responsibilities, measure of performance, and incentives
lines of organizational structure
reporting relationships should not undermine the commitment to effective financial reporting
What objective does lines of organizational structure relate to?
control environment
What are the principles related to control environment?
competence
accountability
board independence
lines of organization
ethics
setting objectives
understanding the mission, vision, and core values
assessment of operational risk
theft of merchandise
assessment of reporting risk
new accounting standards or inability to apply GAAP
assessment of compliance risk
do they meet requirements of laws and regulations?
fraud risk
considers incentives and pressure to commit fraud and ability to rationalize
what are the 3 components of the fraud triangle
incentive
opportunity
ability to rationalize
change management
assess changes that could significantly impact the system of internal control
what objective does setting objectives relate to?
risk management
what objective does assessing risk relate to?
risk management
what objective does fraud risk relate to?
risk management
what objective does change management relate to?
risk management
what are the principles of risk management?
setting objectives
assessing risks
fraud risks
change management
verificiation
confirming transactions or operations have been executed accurately and completely
ex) expenditure cycle, receiving room creates a receiving report
reconciliation
comparing data from different sources to detect and correct any discrepancies
ex) expenditure cycle, invoice comes from vendor, AP should reconcile what was ordered with what was received and make sure purchase was approved
risk reduction
control activities reduce the risk to achievement of objectives to acceptable levels
what objective does risk reduction relate to?
control activities
what objective does technology controls relate to?
control activities
what objective does policy relate to?
control activities
monitoring
testing controls and reporting on deficiencies; assessing quality of IC over time
ongoing and separate evaluations
management should establish and implement ongoing and separate evaluations regarding how IC is functioning
evaluate and communicate IC deficiencies
timely communication
what objective does ongoing and separate evaluation of IC relate to?
monitoring
what objective does evaluating and communicating IC deficiencies relate to?
monitoring
quality
information needs to be relevant, timely, and current
what is the primary purpose of the information and communication objective?
enabling internal control functions
what are the principles related to monitoring?
ongoing separate evaluations
evaluating and communicating IC
what are the principles related to information and communication?
quality
internal
external
in order to have an effective system of IC, senior management and board must
understand when operations are managed effectively
compliance with rules and regulations
preparation of financial reports that confirm to entity’s reporting objectives
what is the objective of ERM?
manage risk and create value
risk avoidance
unable to mitigate risk
risk inventory
all risks that could impact an entity
risk capacity
maximum amount of risk that an entity can absorb in pursuit of strategy
risk profile
risk at a particular level related to the risk
input edit checks (constraints)
preventative controls that assist in protecting the integrity of information and allowing complete transactions to be submitted
which of the following is an input edit check?
reasonableness test
data validation
input validation
sequence check
reasonableness
which of the following is NOT an input edit check?
field check
referential integrity check
data validation
closed loop verification
data validation
what are processing controls?
protect an organization against processed data from being incomplete or inaccurate
data matching
input validation
sequence check
cross footing
Process narratives
written documents that tell the story of a process
data flow diagrams
logical flow of data through a process
flowcharts
visual representations of how information flows through a process
system interface diagram
how users and functions interface with the organization system
economic profit
net income - WACC
perfect competition
large number of firms
very little product differentiation
no barriers to entry
firms are price takers
T/F demand in perfect competition is perfectly elastic
T
monopolistic competition
relatively large number of firms
differentiated products sold by firms in the market
few barriers to entry
firm has control over quantity produced with price set by market
T/F demand in monopolistic competition is perfectly inelastic
F - highly elastic
monopolistic competition has _______ economic profit in the long run because of barriers to entry
zero
which of the following matches the market to the type of market structure?
grocery store - monopolistic competition
corn - perfect competition
airline - oligopoly
Gas/utilities - monopoly
All of the above
oligopoly
very few firms sell differentiated products
fairly significant barriers to entry
firms are interdependent
firms face kinked demand
kinked demand
match price cuts but ignore price increases
monopoly
single firm in a market
significant barriers to entry
no substitute
ability to set output and price`
fiscal policy
government spending and taxationmo
Fundamental law of demand
price of product/service and the quantity demanded are inversely related.
what drives the fundamental law of demand
substitution effect
income effect
substitution effect
consumers tend to purchase more or less of a good when its price falls or rises in relation to price of other good
income effect
when prices are lowered (income at a constant) consumers will purchase more of the lowered price products
what is the different between movement vs shift
movement - slides along the supply or demand curve and are related to price
shift - other than changes in price
what are examples of factors that shift demand
wealth
price of related goods
consumer income
consumer expectations
number of buyers
what are examples of factors that shift supply
price expectations
product costs
price or demand of other goods
subsidies or taxes
product tech
fundamental law of supply
price and quantity supplied are directly related
what does the interaction of supply & demand dictate?
price level
what does price level dictate?
quantity demanded and supplied
price floor
set artificially high - minimum price above equilibrium line
price ceiling
set artificially low - maximum price set below the equilibrium line
what do price ceilings cause?
shortages
what do price floors cause?
surplus
T/F minimum wage is an example of a price floor?
F
T/F rent control is an example of a price floor?
T
price elasticity of demand
% change in quantity demanded / % change in price
% change formula
new - old/ old
T/F price is inelastic if its less than 1
T
T/F price is elastic if greater than 1
T
T/F is price is 0 its perfectly elastic
F - perfectly inelastic
when demand price is inelastic, ______ price results in a _____ quantity that is proportionally ______ than increase in price causing revenue to ______
increase, decrease, smaller, increase
when demand price is elastic, _____ price results in a ______ quantity that is proportionally ______ than increase in price causing revenue to _______
increase, decrease, larger, decrease
T/F if a demand is unit elastic, it will have no effect on total revenue
T
price elasticity of supply
% change in quantity supplied / % change in price
Cross elasticity
% change in number of units demanded
what does it mean when the supply curve shifts left
price increase and quantity decreases
What are porter’s five forces?
barriers to market entry
market competitiveness
existence of substitute products
bargaining power of customers
bargaining power of suppliers
what happens to PV of investments during inflation?
decreases
what happens to monetary assets/liabilities during periods of inflation?
decrease
what happens to nonmonetary assets during inflation?
increases
as prices increase, purchasing power _______, and value of money ______
decrease, decrease
what is the effect of variable interest rates during times of rising prices?
coupon goes up, keeping price closer to par value
if you think cost of production will increase in the future, borrow at a ______
fixed rate
if you think cost of production will decrease in the future, borrow at a ______
variable rate
what are internal factors of SWOT
strength, weakness
what are external factors of SWOT
opportunities, threats
what would high up front costs, patents, customer loyalty positively impact?
barriers to entry
what would collusion positively impact?
market competitiveness
what would inelastic demand positively impact?
existence of substitute products?
what would having a lot of customers with high switching costs and few competitors positively impact?
bargaining power of customers
what kind of market are cost leadership strategies successful?
markets where buyers have large bargaining power and price competition
what kind of market are differentiation strategies successful?
customers see value in individual products
comparative advantage
specializing in production and trade of specific products
how do you calculate comparative advantage?
commodity/comparison commodity
horizontal combination
companies in the same industry join under single management
vertical combination
combination of companies at different stages of production
circular combination
occurs when different business units with relatively removed connections come together under single management
diagonal combination
company that engages in an activity integrates with another company that provides ancillary support for that primary activity
what is facebook merging with instagram an example of?
horizontal combination
what is a cell phone company buying a car company an example of?
circular combination
what is a burger company buying a meat supplier company an example of?
vertical combination
what is a iron and steel company merging together an example of?
diagonal combination
what kind of combination is the following:
A + B = C
merger
what kind of combination is the following
Large A + B = Larger A
B can keep legal title or cease to exist
acquisition
what kind of combination is the following
smaller B + portion of larger A
purchase of assets
what kind of combination is the following
buying outstanding shares of another company at a specified price
tender offer
sell off
outright sale of a subsidiary
spin off
new, independent company that separates a subsidiary business from a parent company
equity carve out
subsidiary is made public through an initial public offering
Which of the following are part of the SCOR Model
Plan
Monitor
Source
Operations
Make
Deliver
plan, make, source, deliver
if cross elasticity is positive, goods are _____
substitutes
if cross elasticity is negative, goods are ____
complementary
a price increase in one good will cause quantity demanded to increase the other would indicate a (positive/negative) cross elasticity and the goods are _______
positive, substitutes
a price increase in one good will cause quantity demanded to decrease the other would indicate a (positive/negative) cross elasticity and the goods are _______.
negative, complementary
if income elasticity is positive, good is a _______ good
normal
if income elasticity is negative, good is a _____ good
inferior
what does income elasticity of demand measure?
% change in quantity demanded given a % change in income
what does cross elasticity measure?
% change in quantity demanded for one good caused by a price change in another?
which type of transaction results in no cash inflow?
spin off
interest rate risk
losses in underlying asset value or increase in underlying liability value as a result of changes in market interest
market risk
losses in trading value of asset or liability in markets
what kind of risk is market risk?
systematic/nondiversifiable
credit risk
inability to secure debt financing in a timely and affordable manner
default risk
possibility that a debtor may not repay the principal or interest due on their debt obligation on a timely basis
liquidity rate
investor desires to sell a security but cannot do so on a timely basis or without material price concessions
effective interest rate (periodic rate)
interest paid per period/ net proceeds of loan*
*face value - fees or charges
simple interest rate
effective periodic rate x # periods in the year
simple interest amount
total interest over the life of the loan
P X SAR X # of years
compound interest
(1 + effective periodic rate)^(#periods) - 1
compound interest amount
P x (1 + effective periodic rate)^(# years x #periods)
nominal rate
real rate of return + inflation premium
required rate
nominal rate + risk premiums*
*interest rate risk
liquidity risk
default risk
transaction exposure
gain or loss
economic exposure
value of cash flows
if FC decreases, PV cash collected ________ and PV cash paid out _______
decrease, decrease
if FC increases, PV cash collected ________ and PV cash paid out ______
increases, increases
if US dollar increases, export (more/less)
less
transaction
specific transaction; dealing with foreign currency gain or loss
economic exposure
value of cash flows could fluctuate up or down as a result in exchange rate
translation
foreign subsidiary
hedging
financial risk management technique that mitigates risk by obtaining a financial instrument that behaves opposite from hedged item
future hedge
purchase or sell a number of currency units for a negotiated price
lower interest rate risk and increased capital availability is an advantage of (ST/LT) borrowing
LT
increased liquidity and higher profitability are advantages of (ST/LT) borrowing
ST
Working capital financing
current assets being financed with trade AP and accrued liabilities
letter of credit
third party guarantee
line of credit
bank loan
T/F LT cost of borrowing is less than ST cost of borrowing
F
What are the methods of LT Financing
leasing, bonds, equity
T/F operating leases reflect a ROU asset and lease liability?
T
What happens to the ROU asset and lease liability?
ROU amortizes and lease liability is paid down over the life of the lease; lease expense recognized on income statement
T/F finance leases reflect a ROU asset and lease liability
T - can make an election not to recognize it
T/F operating leases contain lease payments that consist of part interest and part principal paydown
F - finance leases
what is the advantage of a financing lease?
depreciation
how do you calculate the net cost for an operating lease vs a financing lease?
operating lease:
1. lease payment x (1- tax rate)= after tax payment
2. after tax payment X PV factor = Net cost
financing lease
1. depreciation x tax rate= offsets cost of asset
2. initial cost - PV of depreciation tax shield = net cost
what is a debenture
unsecured bond
subordinated debenture
unsecured obligations that rank behind senior fixed income securities; greater risk, increased cost to borrow
T/F debt financing exposes to more risk but has a higher rate of return
T
operating leverage formula
% change in EBIT/% change in sales
financial leverage formula
% change in EBT (earnings before tax) or EPS/ % change in EBIT
after tax cost of debt
pretax cost of debt x (1-tax rate)
pretax cost of debt
face amount x coupon rate
cost of preferred stock
preferred stock dividends/ net proceeds of preferred stock
cost of retained earnings
risk free rate + risk premium
risk premium
beta coefficient of stock X market premium
market premium
market rate - risk free rate
what does beta represent?
volatility of target stock relative to overall market volatility
WACC formula
((common equity/ market value) X cost) + ((preferred equity/ market value) X cost) + ((debt/market value) X required rate of return (1-tax rate)
what is financial leverage?
the degree to which a company uses debt rather than equity in its capital structure
APR of quick payment discount
360/(pay period - discount period) X Discount/(100-discount %)
what’s the advantage to having more debt on balance sheet?
higher return
debt to equity
total liabilities/total equity
total debt ratio
total liabilities/total assets
quick ratio
cash and cash equivalents + ST marketable securities + net receivables/ current liabilities
what are the three ways to manage cash
reduce fees
expedite deposits
fraud protection
what are the two ways to reduce fees?
compensating balances
trade credit
compensating balance
what are the three ways to expedite deposits
zero account balance
electronic fund transfer
lockbox system
compensating balance
bank fees are waived when customer maintains minimum account balance
trade credit
buying on credit maximizes availability of funding with no or reduced charges
commercial paper
source of short term financing and an investment of idle cash by the buyer
zero account balance
maintains a zero balance to reduce elapsed time between accounts and maximizes availability of cash
inventory turnover
COGS/Average inventory
Days in inventory
Ending inventory/(COGS/365)
Receivable turnover
sales/net AR
operating cycle
length of time from the initial expenditure until the time cash is collected from customers
what does a high inventory turnover mean?
higher demand;inventory is sold quickly; good
what does lower days in inventory mean?
takes less days to sell inventory; higher demand; good
what does a lower AR turnover mean?
lower amount of sales, bad
days sales in AR
ending net AR/ (Net sales/365)
what does a lower days sales in AR mean?
payments are made quickly; good
change in a credit policy is an improvement if the overall operating cycle _______
decreases
cash conversion cycle (net operating cycle)
days to sell + # days to collect - # days to pay
operating cycle
days to sell + # days to collect
AP turnover
COGS/Avg AP
What does a low AP turnover mean?
slower payment to suppliers; favorable credit term or cash flow issue
what does EOG assume?
demand is constant
EOQ formula
sqrt(2SO/C)
annual or monthly sales in units
cost per purchase
carrying cost per unit or monthly
reorder point
safety stock + lead time x sales during that lead time
Trade Factors
Inflation rates increase
purchasing power down, thus rate of currency decreases
Trade Factors
Income levels
if income in DC is up, demand for foreign goods/services also increases
If US $ appreciates and paying in FC
Gain
If US $ appreciates and receiving in FS
Loss
If US $ depreciates and paying in FC
Loss
If US $ appreciates and receiving in FC
Gain
Futures Hedge
Purchase or sell a number of currency units for a negotiated price on a stated date
When are futures hedges used?
Smaller amounts
Forward hedge
Owner is entitled to buy or sell volumes of currency at a point in time
When are forward hedges used?
