BEC MCQ Notes Flashcards
Who is the person ultimately responsible for enterprise risk management within a company?
The CEO
What section SOX requires the CEO to review the financial statements?
302
What are the eight components of COSO’s ERM framework?
The eight components of COSO’s ERM framework are internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication, and monitoring. ERM processes must be monitored, deficiencies reported to management, and modifications performed when required.
What is included in GDP
GDP (gross domestic product) includes personal consumption, business investment, government expenditures, and the net difference between exports and imports.
Financial transactions are not included because they include such items as investments in securities and repayments of loans, which do not represent a real good or service produced by the economy. Second-hand sales are excluded from GDP because those items were originally produced at an earlier time and were included in GDP then.
What is the trough of a business cycle characterized by?
At a business cycle’s trough, a large portion of the nation’s productive capacity often goes unused due to the depressed level of demand in the economy. Moreover, firms and individuals are hesitant to make new investments because the expected return is far less than what it would be if the economy were in an expansion.
What does testing for basis risk involve?
Testing for basis risk would involve testing for the impact of the changes in relationships between key market interest rates.
What are the primary sources of funds for sovereign wealth funds?
The primary sources of funds for sovereign wealth funds are export earnings from commodity (energy)-based exports and the trade surplus generated by the export of manufactured goods. The trade surplus is often tied to the country having a weak currency that causes a country’s goods and services to be priced lower in terms of a foreign currency.
What is structural unemployment?
Changes over time in consumer demand, and technology that alters the structure or composition of the demand for labor, both in terms of occupation and geographic opportunities.
What are sovereign wealth funds?
Sovereign wealth funds (SWFs) are entities established by governments to make investments with foreign exchange reserves that are managed separately for official foreign exchange reserves managed by the country’s central bank within monetary policy goals. The underlying investments are made by SWFs with the goal of making a profit.
What is commercial paper?
Commercial paper is a short-term note payable which is unsecured and usually discounted.
What are the 3 basic valuation approaches?
The cost approach
The market approach
The income approach
The market approach to determining fair value uses market comparisons of identical or comparable items. A comparable item is one that has reasonable and justifiable similarity to the item being valued, be that a single asset or an entire business.
The cost approach to determining fair value is an example of the economic substitution principle. In other words, what would it cost to replace the item in question with an asset of like function and capacity?
The income approach to determining fair value focuses on the company’s ability to create earnings or some other benefit stream, such as cash inflows, and the risk related to that investment. An investor will approach any investment from the perspective of the expected future benefit streams, and the requirement that those future benefit streams need to cover not only the cost of the initial investment but also a return commensurate with its risk.
What is an active policy strategy for dividends?
Treating dividends as an active policy strategy assumes that dividends provide information to the market. If a firm chooses to use dividend policy as an active policy strategy (rather than as a residual part of a financing decision), the firm is more concerned about the announcement effects of the dividend than the available investment opportunities (alternative uses of the retained earnings). This is particularly important when management wants to signal improved prospects to the outside investors.
Which capital budgeting model that is generally considered the best model for long-range decision making?
The discounted cash flow model because the time value of money (present and future values) is considered.
In the definition of fair value, what is considered the principal market?
The principal market is considered to be one where the holder of the asset or liability being valued could find the greatest volume of similar transfers.
What is one-for-one checking?
One-for-one checking involves retaining copies of all unnumbered documents submitted for processing and checking them off individually against a report of transactions processed.
What are the reasons to hold cash?
The “Income-motive”
The “Business-motive”
The “Precautionary-motive”
The “Speculative-motive”
Which of the following terms represents the residual income that remains after the cost of all capital, including equity capital, has been deducted?
Economic Value Added
What is a ring network?
Ring networks do not have a central computer. Each site connects directly to only two other sites but is still able to communicate to all other sites via going through its neighbors. This means all data is passed through each site until arriving at the correct location. This essentially creates a loop where each link passes communication through its neighbor to the appropriate recipient. It is this configuration that gives ring network its name.
What is a database schema?
A database schema is “a view of the entire structure of the database.” It is “the organizational chart showing how the database is structured.” The database schema shows all elements of the database and areas of responsibility of individuals.
What is a web crawler?
A web crawler is a robotic computer program that searches the web for web pages to add to a directory of web pages.
What is a zero-balance account?
A zero-balance account is one that maintains a zero-balance since funds only sufficient to cover the checks presented are transferred from another account.
What is the hurdle rate of return?
The hurdle rate of return (or discount rate) is the desired (or “internal”) rate of return; that rate which the investment must return for the investor to “break even.”
This rate must reward the investor for the risk that is being assumed in the investment—the higher the risk the higher the required rate of return.
Thus, for capital budgeting purposes, management would select a high hurdle rate of return for certain projects because management wants to factor risk of the project into its consideration.
What is a letter of credit?
A letter of credit is an arrangement whereby a bank agrees to stand behind the obligation of the importer. The transaction is significantly accelerated because the exporter has virtual assurance of collection for the goods shipped to the customer (importer).
What is a likely result as the economy reaches full employment?
Inflation
As full employment approaches, demand for goods and services is rising. This increased demand usually causes an increase in price levels. The result is inflation, an increase in general levels of prices.
What is a poison put clause?
A poison put clause is a covenant that obliges the borrower to repay the bonds if a large quantity of common stock is held by a single investor and the bond rating is downgraded.
This type of bond covenant is used as a defensive strategy to prevent hostile takeovers.
What is a depository transfer check?
Depository transfer checks, or official bank checks, are used to move funds from one account to another as part of a firm’s cash management process. These checks are not cashable at any bank.
When is using the cost (asset-based) valuation appropriate?
The use of a cost (asset-based) approach for valuation is appropriate when:
the company is in liquidation.
the company is worth more in liquidation than as a going concern.
the company’s value is basically related to the assets held.
the company has had no income in recent years.
future benefit streams cannot be adequately predicted
What are four basic categories of normalization adjustments?
Nonoperating adjustments: the removal of nonoperating items included in the historical financial statements that are not part of normal operations. The performance of “odd jobs” around a business facility would be normal operating items.
Nonrecurring adjustments: the removal of unusual, unexpected, or items not likely to occur again from the financial statements. Although the son is not likely to perform these duties in the future, someone would need to do general maintenance on an ongoing basis.
Comparability adjustments: adjustments of the historical financial statements to match GAAP choices of potential guideline companies. The payment of wages is not a “GAAP” question, even though they may be excessive.
Discretionary adjustments: adjustments to the historical financial statement to include or to remove items not considered part of normal operations. Excessive wages paid to family members are considered to be discretionary items. The normalization adjustment would need to be made to bring the amount paid within going market rates.
