BEC Part 1 Flashcards
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 point
Higher Equilibrium GDP
Number of sellers increases - market can get flooded
Examples: 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 point
Lower Equilibrium GDP
Cost 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 point
Price of substitutes go up - price of beef rises- so people buy more chicken
Future price increase is expected - War in Middle East- people go out and buy gas
Market expands - i.e. people get new free health care plan- demand at clinic rises
Expansion - 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 ketchup
Boycott - Company commits social blunder- consumers boycott
Consumer income rises - Demand for inferior goods drops as people have more money to spend
Consumer tastes change
Contraction - less spending decreases equilibrium GDP
What is the Marginal Propensity to Consume?
How much you spend when your income increases
Calculate: Change in Spending / Change in Income
What is the Marginal Propensity to Save?
How much you save when income increases
Calculate: Change in Savings / Change in Income
Also 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 business
*Increases the income of a vendor
*Increases income of employees
*Increases 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 decreases
Price decreases- Revenue increases
What conditions would indicate Elastic Demand?
Many substitutes (luxury items)
Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)
Price increases- Revenue decreases
Price decreases- Revenue increases
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increases
Price decreases- Revenue decreases
What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline)
Considered inelastic if coefficient of elasticity is less than 1
5% drop in demand / 10% increase in price : .5 (inelastic)
Price increases- Revenue increases
Price decreases- Revenue decreases
What is Unitary Demand?
Total revenue will remain the same if price is increased
Considered unitary if coefficient of elasticity : 1
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in Income
Normal 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 increase
Reduced demand for loans
Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease
What happens under Demand-Pull inflation?
Overall spending increases
Demand increases (shifts right)
Market equilibrium price increases
What happens under Cost-Push inflation?
Overall production costs increase
Supply decreases (shifts left)
Market equilibrium price increases
Note: 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 interests
Included: Foreign company has US Factory
Not included: US company has foreign factory
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp Income
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments
Depreciation
What is included under the Expenditure Approach for calculating GDP?
Individual Consumption
Private Investment
Government Purchases
Net 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 input
Greater than 1 : Increasing returns to scale
Less 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 rates
No 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 recovery
Example: Stock Market or New Housing Starts
What are lagging indicators?
Conditions that occur after a recession or after a recovery
Examples: Prime Interest Rates- Unemployment
What are coincident indicators?
Conditions that occur during a recession or during a recovery
Example: 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 work
Example: 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 training
Example: 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 spending
Gamble 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 right
Fewer substitutes
They can charge higher prices
How to international trade restrictions affect foreign producers?
They are bad for foreign producers
Demand curve shifts left
Fewer buyers
They must charge lower prices
How do international trade restrictions affect foreign consumers?
They are good for foreign consumers
Supply curve shifts right
Goods purchased at lower prices in the foreign markets
How do international trade restrictions affect domestic consumers?
They are bad for domestic consumers
Supply curve shifts left
Fewer goods bought due to higher prices
What is Accounting Cost?
Explicit (Actual) cost of operating a business
Implicit 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
Internal Control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the U.S.
ALL companies that registered with SEC because they issue some type of security to the public
Who is responsible for establishing internal controls for public company?
Management is responsible for establishing and maintaining adequate internal control over financial reporting
What is the job of the Board of Directors?
1.Declare a cash dividend on both preferred and common stock
.2. Fire the President
3. Reduce pay rate of CFO
4. Oversee the work of the management team and also helps in policy and strategy decisions
The corporate responsibility section of the Act relates to:
Establishing an audit committee and the representations made by CEO & CFO
Who is responsible for establishing an audit committee?
Public Companies
What is the auditor’s communication requirement?
Disagreements with matter related to F/S to the audit committee
The Public Accounting firm is employed by:
Public Company (also called an issuer)
Can be members of the issuers’ board of directors but are to be otherwise independent:
Audit Committee
Who reports directly to the Audit committee
Auditor
Who is directly responsible for the appointment, compensation and oversight of the work of the public accounting firm?
Audit Committee
Who is responsible for resolving disputes b/w the auditors & managements?
Audit Committee
What do the CEO & CFO signature means?
- Report has been reviewed
- No untrue statement contained
- Financial statements in conformity with GAAP
What qualifies a financial expert?
Education, past experience as a public accountant or past experience as a finance officer for an issuer(public company)
An independent private sector initiative was initially established to study the factors that can lead to fraudulent financial reporting is:
Committee on Sponsoring Organizations(COSO)
What are the Five components consists of by COSO’s Framework?
It would be a C.R.I.M.E if you forget C- Control Activities R- Risk Assessment I- Information & Communication M- Monitoring E- Control Environment
Referred to as the “Tone at the top”
Control Environment
COSO is sometimes referred to as:
Treadway Commission
In 1992, the COSO issued:
Internal Control
COSO issued ___________in 2004
(ERM) Enterprise Risk Management
ERM- integrated framework was issued by COSO to:
Assist organization in developing a comprehensive response to risk management
What is the intent of ERM?
To allow management to effectively deal with uncertainty, evaluate risk acceptance, and build value
How is value maximized?
When strategy balances risks and returns as well as efficiency and effectiveness in accomplishing objectives
What are four enterprise objectives defined by ERM:
S.O.R.C S-trategic O-peration R-eporting C-ompliance
The components of ERM are:
IS EAR AIM
I- Internal Environment
S- Setting Objectives
E-Event Identification
A- Assessment of Risk
R- Risk response
A-Activities(control)
I- Information & communications
M-Monitoring
____provides that framework to evaluate how an organization will respond to risk
Enterprise Risk Management(ERM)
Internal Environment is supported by eight key elements:
PHRASED C P- Philosophy(risk mgmt) H-Human resources R-Risk Appetite A-Assignment ofAuthority & Responsibility S- Organization Structure E- Integrity and Ethical values D- Board of Directors C- Committment to Competence
Risk assessment that exists after management TAKES ACTION to mitigate the adverse impact of the event:
RESIDUAL RISK
Component of ERM is similiar to the control environment of the framework and defines the tone of the organization:
Internal Environment
Focuses management on the cost/benefit of activities:
Activity Based Costing
Whats the concept of Just-in-Time?
Inventory does not add value
What are cost elements of appraisal costs?
Statistical Quality Check
Testing
Inspection
Maintenance of the laboratory
Costs incurred to discover and remove defective parts before they are shipped to the customer or the next department:
Appraisal Cost.
Example of External Failure Costs are:
Warranty Cost Liability claims Cost of returning the good Lost customers Re-engineering an external failure
The focus on lean is:
Wast Reduction & Efficiency
Synonymous with continous improvement
Kaizen
In processing costing:
All costs are assigned to products
The framework most likely to be used by management in its internal control assessment required by Sarbanes-Oxley Act of 2002
Committee of Sponsoring Organization Treadway Commission(COSO)
Business Process Management activties can be grouped into five(5) categories:
Design Modeling Execution Monitoring Optimization
Refers to an unsecured bond:
Debenture
What are the four components of credit policy?
Credit Period-when payment is due
Credit Standard-criteria as to which customers are granted credit
Collection Policy-enforcement of the collection process
Discount- reductions offered to speed up payment
What are two reasons long-term debt is cheapest?
- The interest rate an the debt is tax deductible
2. Debt is repaid first so it has less risk
Convertible bond allows the bondholder the option to:
Exchange the bond for a fixed number of shares of common stock
An average costs is also known as a(n):
Unit Cost
Inventoriable cost is an example of
Direct Material
Total fixed cost along the relevant range will:
Stays the same as volume increases
Fixed unit cost along the relevant range will:
Decrease as volume increase
Prohibits the use of the completed contract method
IFRS
Prohibits the use of LIFO method
IFRS- because inventory will be lower in periods of rising prices
Has uniform application of percentage of completion method for construction
IFRS
Emphasize reliable financial reporting
Management Philosophy & Operating Style
What principle of the control environment states that NO more than 3 layers of organization exist b/w the CFO and the individual involved in financial reporting
Organizational Structure
What principle of control environment audit committee oversee the mgmt process for defining responsibility for key financial reporting roles?
Authority & Responsibility
Provide an assessment of the performance of the system overtime and may be done on an ongoing basis or in separate evaluation
Monitoring
What principle of control environment where the Board of Directors or audit committee regularly evaluates the competencies of the CFO?
Financial Reporting Competencies
Occurs at the manufacturing stage
Kaizen
Anything that impedes the accomplishment of an objective
Constraints
An organization commitment to customer focused performance that emphasizes both quality and continous improvement
Total Quality Management(TQM)
Cost incurred to prevent the production of defective units
Prevention Costs
Record revenues and costs for batches of identical units of product
Process Costing System
Financial statement disclosures are intended to:
Ensure that the application of GAAP transactions are transparent to the reader
For the components of ERM to be functioning effectively, there cannot be:
Material Weakness of Internal Control
According to COSO, which of the following components of ERM addresses an entity’s integrity and ethical values?
Internal Environment
Control Activities are most closely related to:
Risk Responses
Return on Investment(ROI) is expressed as a:
Percentage of profit to investment
Operations can be improved with
Non-financial measure
What are the elements of the manufacturing process used in Fishbone Diagram?
Machinery-settings wrong
Method-preparation incomplete
Materials- wrong consistency
Manpower- inexperienced workers
Dynamic factors that have the ability to change total costs
Cost Drivers
For the purpose of Manufacturing Overhead cost drivers are referred to as
Allocation Bases
Direct Material + Direct Labor =
Prime Cost
Direct Labor + Mfg Overhead Applied=
Conversion Cost
All costs related to the manfacture of the product is
Product Costs
Consist of Direct Material, Direct Labor & Overhead applied
Product Cost
Costs consist of both direct & indirect costs
Manufacturing Costs
Expenses includes Selling & Administrative expenses, interest expenses:
Period Costs
Performance of quality assurance occurs in which of the following processes?
Implementation
Costs that change in total but constant per unit
Variable Cost
How are cost measurement system divided?
B/w Actual,Normal, & Standard costing systems or methods
Cost incurred in the current period
FIFO
Accounts for work to be completed
FIFO
Using a balance scorecard approach, the internal business processes is measured:
Based on how well the company manages to do a particular process
What methods are used for estimating project cost?
- Judgement
- Reserve Analysis
- Vendor Bid Analysis
Under which of these circumstances would an organization be likely to offer credit terms of 2/10, net 30?
Most competitors are offering the same terms, and the organization has a shortage of cash
The BEST way to secure data integrity for a personal computer environment:
ALL computers linked to a local are network(LAN)
Expansionary fiscal policy is so named because it:
Is designed to expand real GDP
U.S. export transactions create which of the following?
A foreign demand for dollars and the satisfaction of this demand increases the supplies of foreign monies held by U.S. banks
Suppose that the economy is in the midst of a recession. Which of the following policies would be consistent with active fiscal policy
A reduction in Federal tax rates on personal and corporate income
In an income statement prepared as an internal report using the direct(variable) costing method, fixed selling and administrative expenses would
Be used in the computation of operating income but not in the computation of the contribution margin
When purchasing temporary investments, the risk associated with the ability to sell the investment is a short period of time
Liquidity Risk
The acquisition of market share acquired during the year would be measured under which of the critical success factors in a balanced scorecard approach?
Innovation and Learning
Focuses on long and not short-term goals
Balanced scorecard
Which group of ratios would be useful in evaluating the effectiveness of working capital management?
Acid-test ratio
Inventory turnover ratio
Average collection period ratio
Lean manufacturing works best when
Consultants are used to train others to see ineffeicienies in a business process
In the United States, business cycles have occurred against a backdrop of a long-run trend of :
Rising real GDP
A shift in the supply curve downward and to the right, with the demand curve unchanged, will lead to:
Lower price and a larger equilibrium quantity
The first step of the lean manufacturing process is to
Let customers determine what value means to them
A chief audit executive should report administratively to the
The chief executive officer
The time that must pass in order for a member of the board of directs to be considered independent from a company where that member was once an employee according to the National Association of Securities Dealers Automated Quotation Systems(NASDAQ) is
3 years
The New York Stock Exchange requires how many years elapse between prior company employment and appointment to the board of directors by an individual.
5 years
All compensation of the chief financial officer must be disclosed to the
SEC
What is best definition of a company’s risk tolerance or its risk appetite?
Risk appetite is the product of ALL of the risk tolerances in a company’s business processes
Measurement of the quantitative sales plan vs budgeted sales plan would fall under which critical success factor in a balanced scorecard approach
Internal Business processes
Companies that have implemented a Just-In-Time production environment usually experience
A decrease in the number of raw material vendors
Factors that might cause a firm to increase the debt in its financial structure?
An increase in the corporate income tax rate
A firm’s target or optimal capital structure is consistent with:
Minimum weighted average cost of capital
What is an automated clearinghouse (ACH) electronic transfer?
Electronic payment to a company’s account at a concentration bank
How can the working capital of a firm be increased?
Refinancing of accounts payable with a two-year note payble
What is the purpose of a lock box system?
Accelerates the inflow of funds
In a computer system environment, the procedures that include the equipment configuration, program, and data files to be used as well as description of conditions that may require interruption of a program executive are known as:
Operating documentation
Initial Cost / Annual Net Cash Inflow
Payback period
Computes the years needed to recoup an investment
Payback period
The required rate of return must be less than the project(s)
Internal Rate of Return
A project with a positive NPV will have an IRR greater than
The required rate of return
The profitability index is a variation of what capital budgeting models
Net Present Value
Discount Cash Flow Method includes
NPV
IRR
Profitability index
The capital budgeting model that is considered the BEST model for long-range decision making is the:
Discount Cash Flow
Relevant cash flows are those that we can keep
After paying taxes
The objective of the discounted cash flow(DCF) method is to
Focus the attention of management on RELEVANT cash flows appropriately discounted to present value
Rate used to discount future cash flows is set by management using any number of different approaches such as
- Mgmt may use a WACC method
- Mgmt may simply assign a target for new projects to meet
- Mgmt may recommend that the discount rate be related to the risk specific to the proposed project
Depreciation tax shield =
Depreciation expense x Marginal tax rate
Focus decision makers on both liquidity and risk
Payback Period Method
The Lower the better for
Payback Period Method
Limitation of Payback Period Method
- Time value of money is ignored
- Cash flows after the initial investment is recovered are NOT considered
- Reinvestment of cash flows is NOT considered
- Total projecIt profitablity is neglected
Is the desired or minimum rate of return that is set by mgmt to evaluate investment
Hurdle Rate
Use of accelerated(instead of straight-line) depreciation methods
Increases the present value of the depreciation tax shield
The next best alternative is
The opportunity cost
Positive Result(Result > or = Zero)
= Make Investment
Negative Result(Result < Zero)
= Do Not Make Investment
When comparing two investment alternatives that have different expected returns and standard deviations, what statistical measure should be used to select the superior option?
Coefficient of variation
The risk premium is comprised of five components
- Business risk
- Financial risk
- Liquidity risk
- Currency risk
- Country risk
The length of time required for an investment’s discounted cash flow to equal its initial cost (net investment) is the definition of which capital budgeting technique?
Discounted payback period
Is evaluated in dollars
NPV
is evaluated in percentage
IRR
assumes reinvestment at the cost of capital
NPV
IRR assumes reinvestment of each cash flow at
THE IRR
In making decisions about the use of assets, benefits that are passed up are referred to as:
OPPORTUNITY COST
Value of Perpetuity(Preferred Stock) =
Annual Cash Flow / Required Rate of Return
A preferred stock is
perpetuity
Retention rate is
the percentage of each dollar earned that the firm keeps
ROE x Retention Rate
= Growth Rate
Activity-based costing is based on two principles. First, activities consume resources. Second:
Second, these resources are consumed by products, services, or other cost objectives (output).
Activity Based Costing is typically used to distribute which of the following cost to products and services?
Overhead cost
Under variable costing, fixed manufacturing overhead is expensed immediately
As a period cost
under absorption costing, such amounts are treated as a product cost and added to -
the cost of inventory
Absorption costing is used for
External Reporting purposes
Variable cost is used
Internal-decision making purposes
Job order costing is a costing system that distributes cost:
To customer orders based on Direct Material, Direct Labor and Overhead consumed by this specific job which is considered unique
Traditional process, job order, and standard cost accounting have always focused exclusively on -
the manufacturing process.
A company produces a product in a long-series of automated steps that requires little direct material and direct labor but a lot of overhead. What costing system is the company most likely to use?
Activity-based costing
Requires many steps in the process and overhead is a significant cost.
Activity-based costing
A standard costing system focuses on
target costs that are attainable when a system is operating efficiently (but not under ideal conditions). It is the foundation for variance analysis that identifies variances in overhead, labor, and material costs
In an activity-based cost system, the company tries to determine
a cost driver for each separate cost
Activities that add no value to end customers
such as costs of rework, scrap, and some materials and packaging, are considered non-value added activities.
One of the primary purposes of a standard costing system is
to identify what is driving variances between actual costs and those based on standard per unit costs for products.
Overhead is assigned for each separate activity under:
Activity Based Accounting
The maximization of throughout is an inherent concept in which of the following management philosophies?
THEORY OF CONSTRAINTS
The maximization of throughout is an inherent concept in which of the following management philosophies?
THEORY OF CONSTRAINTS
Unlike business process reengineering, business process management:
SEEKS INCREMENTAL CHANGE
Unlike business process reengineering, business process management:
SEEKS INCREMENTAL CHANGE
In the United States, business cycles have occurred against a backup of a long-run trend of:
Rising real GDP
Recurring upswings and downswings in an economy’s real GDP over time are called
Business Cycle
What is an appropriate fiscal policy for severe demand pull inflation
A tax rate increase
Measurement of the quantitative sales plan versus budgeted sales plan would fall under which critical success factor in a balanced scorecard approach
Internal Business Processes
The process considered most downstream of the following is
Development
Parity Checks
Detects internal data errors
Bit added to each characters, check to see if a bit was lost
