BEC - Personal Flashcards
How do you calculate the amount of costs allocated on a physical quantity basis?
Using physical quantities costs are allocated based on the total gallons produced.
What is the expectation about inflation when long-term rates are higher than short-term rates?
If the yield curve is upward sloping, long-term rates are higher than short-term rates, including a belief that inflation will increase.
Using the dividend-yield-plus-growth-rate approach the cost of issuing new stock would be calculated using the following formula:
ks = D1 + Expected G
————
P0 – F
D1 = Next expected dividend
P0 = Current stock price
G = Growth rate in earnings
F = Flotation cost per share
The Cost of New Common Stock
If a firm is issuing new common stock, a slightly higher return must be earned. This higher return is necessary to cover the cost of distribution of the new securities (floatation or selling costs).
Debt to Equity ratio
Total Debt / Total Equity
What effect does increased demand for Japanese goods have on the value of the yen?
An increase in the demand for Japanese goods in the United States would increase demand for the yen to pay for the goods.
*Balance of payments. Balance of payments is used to refer to a system of accounts that catalogs the flow of goods between the residents of two countries. If country X is a net exporter of goods and therefore has a surplus balance of trade, countries purchasing the goods must use country X’s currency. This increases the demand of the currency and therefore its relative value.
Economic Order Quantity:
EOQ = Sq. Rt of 2aD/k
a = cost of placing one order D = annual demand in units k = cost of carrying one unit of inventory for one year
How much to order? The amount to be ordered is known as the economic order quantity (EOQ). The EOQ minimizes the sum of the ordering and carrying costs. The total inventory cost function includes carrying costs (which increase with order size) and ordering costs (which decrease with order size). The EOQ formula is derived by setting the annual carrying costs equal to annual ordering cost or by differentiating the cost function with respect to order size.
The Budgets Process
The budgets process begins with an estimate of sales and then proceeds systematically as outlined below.
a. Develop a sales forecast
b. Develop a production schedule to calculate production costs and costs of goods sold
c. Estimate other expenses and revenues
d. Complete the pro forma financial statements and budgets
Predetermined overhead rate for VARIABLE overhead
Use actual activity level
Est overhead costs = $200,000 = $2.50/hour --------------------------------- ------------------ Estimated activity level 80,000 hours
Predetermined overhead rate for FIXED overhead
Use normal capacity
Est overhead costs = $400,000 = $2.50/hour
——————————— ——————
Estimated activity level 100,000 hours
The movement along the demand curve from one price-quantity combination to another is called a(n)
Change in the quantity demanded.
Movement along the existing demand curve reflects an increase or decrease in the quantity demanded.
What is a data warehouse?
A data warehouse is an approach to online analytical processing that combines data into a subject-oriented, integrated collection of data used to support management decision-making processes.
What are maturity models?
Maturity models evaluate the sophistication of IT processes rated from a maturity level of nonexistent (0) to optimized (5).
Expected annual loss from user error
Sum of the probability of losses
Payback period
Annual cash flows
An activity-based system would allocate costs based on what?
Set up hours
Residual income
RI equals net operating income minus interest on invested capital.
Economic Value Added (EVA)
EVA equals NOPAT minus cost of capital.
What is a strategy initiative in the balanced scorecard framework?
It is a key action program required to achieve strategic objectives.
*An initiative is what must be achieved.
A statement of what the strategy must achieve and what is critical to its success.
Strategic Objective
What is one way to calculate sales?
Multiply investment turnover by the average investment.
Are government purchases part of overall demand?
Yes. Aggregate demand includes government purchases. A decrease in government purchases will decrease aggregate demand.
Cost of debt
It is equal to the interest rate of the loan adjusted for the fact that interest is deductible. Specifically, the cost is calculated as the interest rate times one minus the marginal tax rate.
As an example, if a firm’s interest rate on a long-term debt is 6% and its marginal tax rate is 30%, the cost of the debt is 4.2% (0.06 x (1.00 - .30)).
A downward-sloping yield curve depicting the term structure of interest rates implies that
Short-term rates are higher than intermediate-term rates which are higher than long-term rates.
Variable (direct) costing
Variable (direct) costing is a method of inventory costing in which all variable product costs are treated as inventoriable costs and fixed manufacturing overhead is treated as a period cost.
Variable costing is advocated because, for internal reporting, it presents a clear picture of performance when there is a significant change in inventory. However, remember that variable costing is not acceptable as GAAP for external reporting.
Typical product-costing systems synchronize the recording of accounting-system entries with the physical sequence of purchases and production. The alternative (which is normally used in high-speed automated environments) of delaying journal entries until after the physical sequences have occurred is referred to as
Which method is often used in just-in-time systems?
Backflush costing.
Operation costing
Refers to a hybrid costing system that blends characteristics of both job-order and process-costing systems. It is usually applied to batches of similar products where each batch of product is a variation of a single design and requires a sequence of selected operations/activities. An operation costing system would track work in process inventory.
Process costing
A sequential costing system in which the cost of a product/service is obtained by assigning costs to masses of similar units as they are produced and then computing unit costs on an average basis. There would be a tracking of work in process inventory with a process costing system.
What is the difference between variable (direct) and absorption (full) costing methods?
Variable and absorption costing methods of accounting for fixed manufacturing overhead differ: under variable costing, fixed manufacturing overhead is expensed whereas under absorption costing, such amounts are treated as a product cost and inventoried. The treatment of fixed manufacturing overhead often results in different levels of net income between the absorption and variable costing methods. The differences are timing differences, which result from recognizing the fixed manufacturing overhead as an expense.
- In the period incurred—variable costing
- In the period in which the units to which fixed overhead has been applied are sold—absorption costing
The relationship between variable costing (VC) income and absorption costing (AC) income follows:
Sales = Production (no change in inventory) No difference in income
Sales > Production (inventory decreases) VC income greater than AC income
Sales < Production (inventory increases) VC income less than AC income
Book value per share
Common stockholders’ equity divided by number of shares of common stock outstanding
(Common stock + Retained earnings) ÷ Outstanding shares
How do you calculate equivalent units using the first-in-first-out method?
Units completed minus equivalent units in beginning inventory plus equivalent units in ending inventory
How are the depreciation expense and salvage value in the calculation of the net present value (NVP) of a proposed project? Ignore income tax considerations.
This answer is correct because depreciation expense is excluded and salvage value is included in the calculation of NPV. NPV is the difference between the required investment and the present value of the future cash flows. Since all future cash flows are included in the analysis, the inflow of cash from the salvage value of the project is included in the calculation. Depreciation, however, does not enter directly into the NPV calculation. This is because depreciation expense is a noncash flow. Note that a cash inflow will result from the tax savings generated by the depreciation deduction. However, because the question states that income tax considerations should be ignored, depreciation would be excluded from the NPV calculation.
Gross Domestic Product
Measures production. It is equal to the price of all goods and services produced by a domestic economy for a year.
Zero-balance account system
Involves making deposits to cover checks as they clear the bank.
This cash management technique involves maintaining a regional bank account to which just enough funds are transferred daily to pay the checks presented. Regional banks typically receive the checks drawn on their customers’ accounts in the morning from the Federal Reserve. The customer can then be notified as to the amount of cash needed to cover the checks and arrange to have that amount of cash transferred to the account. This arrangement has the following two advantages:
- Checks take longer to clear at a regional bank, providing more float for cash disbursements.
- Extra cash does not have to be deposited in the account for contingencies.
It is cost-effective if the amount the firm saves on interest costs from the longer float is adequate to cover any additional fees for account maintenance and cash transfers.
Unsystematic risk
Risk that exists for one particular investment or a group of like investments (e.g., technology stock).
Systematic risk
Relates to market factors that cannot be diversified away. All investments are to some degree affected by them. Examples include fluctuations in GDP, inflation, interest rates, etc.
Portfolio
Allow investors to diversify away unsystematic risk. By having a balanced portfolio, investors can theoretically eliminate this risk.
Recession
Contraction in the economy
Callable bond
A fixed interest rate and its market value fluctuates with changes in prevailing interest rates.
Convertible bond
A fixed interest rate and is convertible into stock. Therefore its market value fluctuates with both changes in prevailing interest rates and changes in the value of the stock.
Zero-coupon bond
Increases in value as it approaches its maturity.
Floating-rate
A bond with a floating rate will generally hold a steady market value because its value will not change due to changes in prevailing interest rates.
In the computation of manufacturing cost per equivalent unit, FIFO considers what costs?
Current costs only
In the computation of manufacturing cost per equivalent unit, the weighted-average method of process costing considers what costs?
When computing equivalent units of production under the weighted-average method, the work done last period on beginning work in process (BWIP) is considered. Therefore, when computing cost per equivalent unit, the cost associated with BWIP must be added to the current costs.
In a job-order cost system, the use of DIRECT materials would usually be reflected in the general ledger as an increase in
Work in process control.
In a job-order cost system, the use of INDIRECT materials would usually be reflected in the general ledger as an increase in
Factory overhead control
Dr. Manufacturing Overhead Control (MOH)
Cr. Stores Control
Debiting MOH control increases the balance of this account.
Online processing system
Posting upon entry
Batch processing method
Assigned to groups before posting
Detailed posting type
Each transaction has its own line entry in the appropriate ledger.
Cumulative posting system
Each transaction group has a cumulative entry total in the appropriate ledger.
Capital and operating leases differ in that the lessor
Finances the transaction through the leased asset only under a capital lease.
In a capital lease transaction, the lessee is using the lease as a financing source and the lessor is financing the transaction (providing the investment capital) through the leased asset.
The degree of operating leverage (DOL) is
A measure of the change in operating income resulting from a given change in sales.
This answer is correct. The degree of operating leverage (DOL) is a measure of the change in earnings available to common stockholders associated with a given change in sales volume. It is calculated, for a particular level of sales, as
Percentage change in sales volume
Transfer pricing
When one department in a manufacturing company sells materials to another department. The price charged is the TRANSFER PRICE. The minimum transfer price (FLOOR) is equal to avoidable outlay costs, and the ceiling is equal to the market price. Also, the most “fair” price transfer price will usually be the std variable cost + lost contribution margin.
The Enterprise Risk Management-Integrated Framework of the committee of sponsoring organizations (COSO)
A process, effected by an entity’s board of directors, management and other personnel, applied in a strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.
Disaster recovery plan assessment
An evaluation of the plan for recovery when the information system fails.
Systems assessment
An evaluation of the adequacy of a system in providing required information.
Risk assessment
The procedure managers use to identify whether the company has information that unauthorized individuals want, how these individuals could obtain the information, the value of the information, and the probability of unauthorized access occurring.
Test of controls
Test the operating effectiveness of the controls.
Internal rate of return
This method determines the rate by equating the investment with the future cash flows.
A short-term speculative rise in the worldwide value of domestic currency could be moderated by a central bank decision to
Sell domestic currency in the foreign exchange market.
Selling domestic currency would increase supply and therefore decrease price.
*Increasing the domestic interest rate would increase the value of the domestic currency
Contingency planning
Involves developing plans in the event of system failure.
Hash total
Designed to detect errors
Echo check
Designed to detect errors in transmitted data.
How do you calculate the issue price of bonds?
The issue price of bonds is equal to the present value (PV) of the maturity value plus the PV of the interest annuity. The PV must be computed using the yield rate.
Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?
Creation of multilingual disaster recovery plans.
Reduction in the frequency of data entry errors.
Off-site storage of foreign source documents.
Improvement in the audit trail for cash transactions.
Reduction in the frequency of data entry errors.
Electronic funds transfer systems minimize the need for entry of information and, therefore, reduce the chance of entry errors.
The approximated cost of not taking the discount in credit terms is calculated with the following formula:
Discount percent × 365 days
—————————- —————————————-
100% – Discount Total pay period – Discount period
In the cost of quality, costs incurred in detecting individual units of product that do not conform to specifications are what type of costs?
Costs associated with quality control and include testing and inspection.
Assume that nominal interest rates just increased substantially but that the expected future dividends for a company over the long run were not affected. As a result of the increase in nominal interest rates, the company’s stock price should
Decrease
If the nominal rate of interest increases, investors will expect a higher yield from all investments. Therefore, the stock price will decline.
Exponential smoothing
Quantitative approach to predicting sales based on historical amounts.
Linear programming
This technique is used to evaluate the use of resources when resources are constrained.
Queuing theory
Technique that is designed to solve waiting line problems.
Program Evaluation and Review Technique (PERT).
A technique used for scheduling problems.
Strategic initiative
Key action programs required to achieve strategic objectives.
Strategic objective
A statement of what the strategy must achieve and what is critical to its success.
Strategy map
Diagrams of the cause-and-effect relationships between strategic objectives.
Performance Measure
The level of performance or rate of improvement needed in the performance measure.
What is the acknowledged preventive measure for a period of DEFLATION?
Increasing the money supply
This answer is correct because in a period of deflation the government wants to encourage borrowing and investment to promote economic growth.
Greater barriers to collusion exist for oligopolistic firms when
The firms’ costs are more similar.
There are fewer firms in the industry.
General economic conditions are recessionary.
The firms’ products are standardized.
General economic conditions are recessionary.
This answer is correct. In a recession, firms in the industry have lower sales volume, higher average costs per unit, and excess capacity. The resulting profit squeeze makes price cutting more of a temptation, in the hope of gaining sales at the expense of rivals.
A lender and a borrower signed a contract for a $1,000 loan for one year. The lender asked the borrower to pay 3% interest. Inflation occurred and prices rose by 2% over the next year. The borrower repaid $1,030. What is the amount worth in real terms, after inflation?
$1,009.80
This answer is correct because the real value is equal to $1,009.80 ($1,030.00 ÷ 1.02%).
In the cost of quality, spoilage is an example of what cost?
Internal failure costs
Spoilage is an example of producing substandard products but discovering the lack of quality prior to shipment to the customer.
Control objectives
(1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.
Excess Profitability index
The profitability index is the present value of the cash inflows divided by the investment outlay
System programmers
Programmers are in charge of software.
Systems programmers are given responsibility for maintaining system software, including operating systems and compilers.
The market value of a firm’s outstanding common shares will be higher, everything else equal, if
Investors have a lower required return on equity.
Investors expect lower dividend growth.
Investors have longer expected holding periods.
Investors have shorter expected holding periods.
Investors have a lower required return on equity.
Investors value common shares more highly if they have a lower required return because then they apply a lower discount rate to the expected future dividend stream of the company.
The discount rate (hurdle rate of return) must be determined in advance for the Internal rate of return method. Net present value method. Payback period method. Time adjusted rate of return method.
Net present value method.
This answer is correct. There are two capital budgeting methods which consider time value of money: internal rate of return and net present value. Under the net present value method, all cash inflows and outflows related to a capital project are discounted to a present value and netted to arrive at a net present value for the project. In order to discount the inflows and outflows, a discount rate must be determined in advance of the analysis of the project.
Internal rate of return method
This method determines the actual rate of return earned by analyzing the expected cash flows of a project. The discount rate is used after the rate of return is computed to determine the project’s acceptability (through comparison of the rates).
Annual cost of carrying inventory
Average inventory level × Unit cost × Cost of capital.
Ex: A company sells 1,500 units of a particular item each year and orders the items in equal quantities of 500 units at a price of $5 per unit. No safety stocks are held. If the company has a cost of capital of 12%, its annual cost of carrying inventory is
(order size / 2) × $5 × 0.12 = (500 / 2) × $5 × 0.12 = $150.
Johnson Co., distributor of candles, has reported the following budget assumptions for year 1: No change in candles inventory level; cash disbursement to candle manufacturer, $300,000; target accounts payable ending balance for Year 1 is 150% of accounts payable beginning balance; and sales price is set at a markup of 20% of candle purchase price. The candle manufacturer is Johnson’s only vendor, and all purchases are made on credit. The accounts payable has a balance of $100,000 at the beginning of Year 1.
What is the budgeted gross margin for Year 1? $60,000 $70,000 $75,000 $87,500
$70,000
This answer is correct because cost of sales is equal to $350,000 ($300,000 payments to supplier − $100,000 beginning accounts payable + $150,000 ending accounts payable + $0 change in inventory), and 20% of $350,000 (cost of sales) is equal to $70,000.
A company purchased property that it expects to sell for $14,000 next year. The net present value of the investment is $1,000. The company is guaranteed an interest rate of 12% by the bank. What amount did the company pay for the property? $11,500 $12,500 $13,000 $13,500
11,500
The amount paid is $11,500. The present value of the sales price of $14,000 discounted at 12% for one year is equal to $12,500 ($14,000/1.12). If the net present value of the investment is equal to $1,000, the purchase price must be equal to $11,500 ($12,500 − $1,000).
How do you calculate purchase price?
Purchase price is equal to the net present value of the investment plus the present value of the selling price.
Data control language
Composed of commands used to control a database, including controlling which users have various privileges (e.g., who is able to read from and write to various portions of the database).
ROI
Net Operating Profit / Invested Capital
If a government were to use only fiscal policy to stimulate the economy from a recession, it would
Lower consumer taxes and increase government spending.
A reduction in taxes or an increase in government spending would serve to stimulate the economy (increase the demand for goods and services).
Monetary supply
Increasing money supply
For the current period production levels, Woodwork Co. budgeted 11,000 board feet of production and purchased 15,000 board feet. The material cost was budgeted at $7 per foot. The actual cost for the period was $8.50 per foot.
What was Woodwork’s material price variance for the period? $6,000 unfavorable. $16,500 unfavorable. $19,500 unfavorable. $22,500 unfavorable.
$22,500 unfavorable.
This answer is correct because the material price variance is calculated by multiplying the actual price ($8.50) minus the standard price ($7.00) by the actual quantity used (15,000). Therefore, the material price variance is equal to $22,500 unfavorable [($8.50 – $7.00) × 15,000].
System analyst
Assigned the operating responsibility for designing a computer installation, including flowcharts of data processing routines.
Responsible for designing the computer system, including the goals of the system and means of achieving those goals, based upon the nature of the business and its information needs. The systems analyst also must outline the data processing system for the computer programmer with system flowcharts.
Computer programmers
Write detailed programs based upon the work of the systems analyst.
Data processing manager
Has overall responsibility for the computer operations function (systems design, programming, operations, library, etc.).
Internal auditor
May review the systems design and program flowcharts, but is not responsible for the computer design.
Layton Company has implemented an enterprise risk management system and has responded to a particular risk by purchasing insurance. Such a response is characterized by COSO’s Enterprise Risk Management Framework as: Avoidance. Sharing. Acceptance. Reduction.
Sharing
Sharing involves reducing risk likelihood or impact by transferring or sharing a portion of the risk.
Avoidance involves exiting the activity that gives rise to the risk.
Acceptance involves taking no action.
Reduction involves taking action to reduce likelihood or impact.
Quick (acid) ratio
Cash equivalents plus accounts receivables and prepayments divided by current liabilities.
OR
Cash and cash equivalents + AR + marketable securities divided by current liabilities
Commercial paper
A form of unsecured promissory note issued by large, creditworthy firms. It is sold primarily to other firms, insurance companies, pension funds, banks, and mutual funds. Commercial paper typically has maturity dates that vary from one day to nine months. This form of financing is very favorable for corporations with the financial strength to issue it. The rate is often 2 to 3% less than the prime rate and there are no compensating balance requirements. However, the market is less predictable than bank financing.
What does Computer Integrated Manufacturing (CIM) do?
It improves manufacturing processes.
Reduction in the costs of spoilage, reworked units, and scrap. This is a major emphasis for CIM as well as for the total quality management programs that usually precede it.
Book value and depreciation expense for factory equipment may be either higher or lower with CIM.
The normal expectation is that working capital will be reduced as investments shift from current to fixed assets.
Actual or potential market share changes may trigger investments in CIM.
Information systems manager
Developing long-range plans and directing application development and computer operations.
Control group
Maintaining control over the completeness, accuracy, and distribution of input and output.
Systems programmer
Selecting, implementing, and maintaining system software, including operating systems, network software, and the database management system.
A company purchases inventory on terms of net 30 days and resells to its customers on terms of net 15 days. The inventory conversion period averages 60 days. What is the company's cash conversion cycle? 15 days. 45 days. 75 days. 105 days.
45 days
The cash conversion cycle is equal to the inventory conversion period plus the receivables conversion period minus the payables deferral period (45 days = 60 days + 15 days − 30 days).
The purpose of a detailed analysis of average collection period is to evaluate what?
Liquidity
Control activities
Encompass policies and procedures that ensure that management’s directives are carried out.
Control environment
Sets the tone of an organization by influencing the control consciousness of people. It may be viewed as the foundation for the other components of internal control. Control environment factors include integrity and ethical values; commitment to competence; board of directors or audit committee; management’s philosophy and operating style; organizational structure; assignment of authority and responsibility; and human resource policies and practices.
Normal yield curve
One in which short-term rates are lower than intermediate-term rates which are lower than long-term rates. Therefore, the curve is upward sloping.
Breakeven analysis assumes over the relevant range that
Total costs are *linear.
There are a number of underlying assumptions to breakeven analysis that need to be considered in the calculation and interpretation of breakeven computations. One of these assumptions is that the behavior of total cost and total revenue is linear, even though in actuality it may not be. It is important to note that under breakeven analysis, the linearity assumption is only applicable for a particular relevant range of activity and is not assumed for all levels of activity. Since the actual behavior of total cost and total revenue within a relevant range is usually close to being linear, this assumption will only slightly affect the precision and reliability in a given breakeven calculation.
*linear - In mathematics, linear refers to an equation or function that is the equation of a straight line and takes the form y = mx + b, where “m” is equal to the slope, and “b” is equal to the y-intercept.
Evaluators.
Gross profit is equal to sales minus cost of goods sold, and cost of goods sold is equal to beginning finished goods inventory plus cost of goods manufactured minus ending finished goods inventory.
Monitoring
Characterized by ongoing activities and separate evaluations.
Which costs are controllable by the manager?
The product line manager can control the revenue from sales, variable production costs, variable selling and administrative costs, and the traceable discretionary fixed costs. The committed (infrastructure) fixed costs would not be controllable by the product line manager because these costs arise from having property, plant, equipment, and a functioning organization structure, which would be beyond the realm of control of the product line manager. The common fixed costs are those costs that arise from operating a facility, operation, or activity that is shared by two or more managers, thus, these costs would not be controllable by a single product line manager.
Which of the following is not a characteristic of a purely competitive market?
Differentiated products.
No significant control over product price exerted by individual firms.
No barriers to entry for new firms.
A very large number of producing firms.
Differentiated products.
Product differentiation is not a characteristic of a purely competitive market. It is a characteristic of monopolistically competitive markets and may characterize an oligopolistic market.
Coefficient of cross-elasticity
The coefficient of cross-elasticity = percent change in demand for X ÷ percent change in the price of Y.
If the dollar price of the euro rises, which of the following will occur? The dollar depreciates against the euro. The euro depreciates against the dollar. The euro will buy fewer European goods. The euro will buy fewer U.S. goods.
The dollar depreciates against the euro.
This answer is correct because if the euro increases in value in terms of dollars, the dollar depreciates.
A way to calculate sales
Investment turnover x Average Investment
The U.S. dollar has a free-floating exchange rate. When the dollar has fallen considerably in relation to other currencies, the
Trade account in the U.S. balance of payments is neither in a deficit nor in a surplus because of the floating exchange rates.
Capital account in the U.S. balance of payments is neither in a deficit nor in a surplus because of the floating exchange rates.
Fall in the dollar’s value cannot be expected to have any effect on the U.S. trade balance.
Cheaper dollar helps U.S. exporters of domestically produced goods..
Cheaper dollar helps U.S. exporters of domestically produced goods..
When the dollar becomes weaker, it makes US exports less expensive.
This answer is correct. A cheaper dollar helps U.S. exporters because it makes their products less expensive
In portfolio analysis a measure that is used to express the extent of the relationship among a set of investments is the Standard deviation. Expected return. Coefficient of correlation. Percentage return.
Coefficient of correlation
An effective portfolio is one in which the investments are negatively correlated. Thus, when the return on some investments is declining the return on others is increasing.
In preparing its cash budget for July 2012, Reed Company made the following projections:
Sales $1,500,000 Gross profit (based on sales) 25% Decrease in inventories $70,000 Decrease in accounts payable for inventories $120,000
For July 2012 what were the estimated cash disbursements for inventories? $935,000 $1,050,000 $1,055,000 $1,175,000
$1,175,000
The solutions approach is to use T-accounts for inventory and accounts payable to find cash disbursements.
Purchases of inventory on account equal the CGS minus the decrease in inventories.
1,500,000 x 75% = $1,125,000 + *$50,000 = $1,175,000
*(120,000-70,000)
If management has a variable rate short-term loan and is concerned about the volatility of short-term interest rates, which of the following would not be an effective hedging strategy?
Purchase a short position in the Treasury bill futures market.
Enter into an interest rate swap.
Enter into a forward contract to sell Treasury bonds in the future.
Enter into a forward contract to purchase Treasury bills in the future.
Enter into a forward contract to purchase Treasury bills in the future.
This answer is correct. Purchasing Treasury bills will put the firm at additional risk with respect to short-term interest rates.
*Treasury bill - a short-dated government security, yielding no interest but issued at a discount on its redemption price.
The Bread Company is planning to purchase a new machine which it will depreciate on a straight-line basis over a 10-year period. A full year’s depreciation will be taken in the year of acquisition. The machine is expected to produce cash flow from operations, net of income taxes, of $3,000 in each of the 10 years.; The accounting (book value) rate of return is expected to be 10% on the initial increase in required investment. The cost of the new machine will be $12,000 $13,500 $15,000 $30,000
$15,000
The accounting rate of return equals accounting net income over book value. The book value of the new machine would be its cost. The $3,000 cash flow net of income taxes does not reflect the 10% straight-line depreciation. The solutions approach is to set up a formula in which cost is equal to $3,000 minus depreciation (which is 10% of cost) divided by the 10% rate of return. The numerator is the expected increase in accounting income. The denominator is the capitalization rate, 10%. Solving the formula indicates that the cost of the machine is $15,000.
Cost = $3,000 – .10 (cost) .10
.10 cost = $3,000 – .10 cost
.20 cost = $3,000
Cost = $15,000
What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?
To cause the price of the company’s stock to rise.
To lower the company’s bond rating.
To reduce the risk for existing bondholders.
To reduce the interest rate on the bonds being sold.
To reduce the interest rate on the bonds being sold.
This answer is correct because such a covenant would reduce the interest rate on the debt being issued.
If the U.S. dollar declines in value relative to the currencies of many of its trading partners, the likely result is that
Foreign currencies will depreciate against the dollar.
The U.S. trade deficit will worsen.
U.S. exports will tend to increase.
U.S. imports will tend to increase.
U.S. exports will tend to increase.
This answer is correct. A weaker dollar decreases the prices of U.S. exports, which should increase the demand for these goods.
Sussex Company has budgeted its operations for February 2012. No change in inventory level during the month is planned. Selected data from estimated amounts are as follows:
Net loss $100,000
Increase in accounts payable 40,000
Depreciation expense 35,000
Decrease in gross amounts of trade accounts receivable 60,000
Purchase of office equipment on 45-day credit terms 15,000
Provision for estimated warranty liability 10,000
How much change in cash position is expected for February? $15,000 decrease. $25,000 decrease. $30,000 increase. $45,000 increase.
$45,000 increase.
This answer is correct. One approach to the solution is to arrange the data in the format used for a cash from operations section of a statement of cash flows.
Net loss $(100,000)
Add: Expenses not requiring cash:
Depreciation $35,000
Warranty expense 10,000 45,000
Changes in AR and AP:
Decrease in AR $60,000
Increase in AP 40,000 100,000
Change in cash position from operations $ 45,000
The purchase of office equipment will not affect cash during February.
Strategy map.
Diagrams of the cause-and-effect relationships between strategic objectives.
Value chain
Sequence of business processes in which usefulness is added to the products or services.
A firm has daily cash receipts of $100,000 and collection time of 4 days. A bank has offered to reduce the collection time on the firm’s deposits by 2 days for a monthly fee of $500. If money market rates are expected to average 6% during the year, the net annual benefit (loss) from having this service is $ 3,000 $12,000 $0 $ 6,000
$6,000
This answer is correct. A reduction of 2 days of collection time on receipts of $100,000 would increase the firm’s average cash balance by $200,000 (2 × $100,000). This would save the firm interest in the amount of $12,000 ($200,000 × 6%). The net benefit is the interest savings, $12,000, less the fee, $6,000, or $6,000.
What’s another way to calculate COGS?
Cost of goods sold is equal to beginning finished goods inventory plus cost of goods manufactured minus ending finished goods inventory.
Which technique deals with severity of problems?
A tool which indicates how frequently each type of defect occurs is a Control chart. Pareto diagram. Cause-and-effect diagram. Fishbone diagram.
Pareto diagram
A Pareto chart ranks the causes of process variations by the degree of impact on quality.
Capital asset pricing
Calculated using the risk free interest rate, the stock’s beta coefficient, and the estimated return on the market to calculate the cost of equity.
Capital budget
Plan that assesses the long-term needs of the company for plant and equipment purchases.
Financial budget
Plan to ensure that there are sufficient funds available for the operating needs of the company.
Strategic plan
Exercise that sets the long-range goals of the company, including the consideration of external influences caused by others in the market.
Operating budget
Plan that coordinates and communicates a company’s plan for the coming year to all departments and divisions.
A multiperiod project has a positive net present value. Which of the following statements is correct regarding its required rate of return?
Less than the company’s weighted-average cost of capital (WACC).
Less than the project’s internal rate of return.
Greater than the company’s weighted-average cost of capital (WACC).
Greater than the project’s internal rate of return.
This answer is correct. If the project has a positive net present value it has a return greater than the required return.
Less than the project’s internal rate of return.
This answer is correct. If the project has a positive net present value it has a return greater than the required return.
Cost of goods manufactured
DM + DL + manufacturing overhead
In the past, four direct labor hours were required to produce each unit of product Y. Material costs were $200 per unit, the direct labor rate was $20 per hour, and factory overhead was 3 times direct labor cost. In budgeting for next year, management is planning to outsource some manufacturing activities and to further automate others. Management estimates that these plans will reduce labor hours by 25%, increase the factory overhead rate to 3.6 times direct labor costs, and increase material costs by $30 per unit. Management plans to manufacture 10,000 units.
What amount should management budget for cost of goods manufactured? $4,820,000 $5,060,000 $5,200,000 $6,500,000
$5,060,000
Cost of goods manufactured is calculated by adding direct materials, direct labor, and manufacturing overhead for the number of units produced during the period. If labor costs are expected to decrease by 25%, the revised budgeted labor hours are 3 hours (4 hours × 75%). The revised budgeted material costs are equal to $230 ($200 + 30). Therefore, the costs of goods manufactured is equal to direct labor costs of $600,000 (10,000 units × 3 hours × $20) plus direct material costs of $2,300,000 (10,000 units × $230) plus manufacturing overhead of $2,160,000 ($600,000 labor costs × 3.6) = $5,060,000.
How do you calculate needed purchases?
Amount required for production minus expected beginning inventory plus required ending inventory.
Direct Method
Simply allocates the costs of each service department to each of the producing departments based on a relative level of the apportionment base. For example, if a service department had costs of $140,000, and producing departments X and Y used 80% and 20% of the apportionment base, X and Y would be assigned $112,000 and $28,000 respectively. Note that the direct method ignores use of services by other service departments. For example, the direct method would ignore the fact that service department A uses the services of service department B. The essence of the direct method is shown in the following diagram.
Conversion cost
Total production costs minus raw material costs
Cost of raw materials used in production
The cost of raw materials used in production was $5,700 ($6,000 + $500 beginning inventory – $800 ending inventory).
Total production costs
The total production costs for the month were $12,200 ($12,000 cost of goods sold + $1,400 ending inventory – $1,200 beginning inventory.
How do you calculate. spread between the return on investment and the required rate of return for the Consumer Products Division?
ROI minus the cost of capital.
Which of the following actions is the acknowledged preventive measure for a period of deflation? Increasing interest rates. Increasing the money supply. Decreasing interest rates. Decreasing the money supply.
Increasing the money supply.
In a period of deflation, interest rates are negative.
This answer is correct because in a period of deflation the government wants to encourage borrowing and investment to promote economic growth.
Increasing interest rates is a preventive measure for a period of INflation.
Banker’s acceptance
A time draft, payable on a specified future date, with the bank guaranteeing the payment.
A company has an online order processing system. The company is in the process of determining the dollar amount of loss from user error. The company estimates the probability of occurrence of user error to be 90%, with evenly distributed losses ranging from $1,000 to $30,000. What is the expected annual loss from user error? $13,050 $13,500 $13,950 $14,400
$13,950
The expected loss is equal to $13,950 (($30,000 + $1,000)/2 × 90%).
The expected loss of an evenly distributed loss range is equal to the sum of the ends of the ranges divided by the sum of the probability of losses
Materials requirements planning
A computerized system that plans manufacturing based on demand estimates.
In portfolio analysis a measure that is used to express the extent of the relationship among a set of investments is the Standard deviation. Expected return. Coefficient of correlation. Percentage return.
Coefficient of correlation
This answer is correct. An effective portfolio is one in which the investments are negatively correlated. Thus, when the return on some investments is declining the return on others is increasing.
A firm sells on terms of 2/10 net 60. It sells 1,000 units per day at a unit price of $10. On 60% of sales, customers take the cash discount. On the remaining 40% of sales, customers pay, on average, in 70 days. What would be the impact on the balance of accounts receivable if the firm initiates a more aggressive collection policy and is able to reduce the average payment period to 60 days for those customers not taking the cash discount? (Assume sales levels are unaffected by the change in policy.) Decrease by $4,000. Decrease by $40,000. Decrease by $240,000. Decrease by $280,000
Decrease by $40,000.
This answer is correct. On the 40% of sales to customers not taking the cash discount, a 10-day reduction in the average collection period will reduce the accounts receivable balance as follows: .4 × Daily unit sales × Unit price × Reduction in days outstanding = .4 × 1,000 × $10 × 10 = $40,000.
Which of the following inventory management techniques focuses on a set of procedures to determine inventory levels for demand-dependent inventory types such as work-in-process and raw materials? Materials requirements planning. Cycle counting. Safety stock reorder point. Economic order quantity.
Materials requirements planning.
This answer is correct because materials requirements planning is a computerized system that plans manufacturing based on demand estimates.
Cycle costing
Deals with costing of facilities or products.
Safety stock reorder point
A technique used to balance inventory holding costs against the costs of stockouts.
Under a standard cost system, the material efficiency variances are the responsibility of Production and industrial engineering. Purchasing and industrial engineering. Purchasing and sales. Sales and industrial engineering.
Production and industrial engineering
The production and industrial engineering departments have control over the usage of materials.
Which of the following rates is most commonly compared to the internal rate of return to evaluate whether to make an investment? Short-term rate on US Treasury bonds. Prime rate of interest. Weighted-average cost of capital. Long-term rate on US Treasury bonds.
Weighted-average cost of capital.
The weighted-average cost of capital provides a measure of the cost of the funds that the company is considering investing in a project.
The zero-coupon method is used to determine the fair value of Stocks. Options. Interest rate swaps. Foreign currency contracts.
Interest rate swaps.
The zero-coupon method is used to determine the fair value of interest rate swaps.
Assume that management of Trayco has generated the following data about an investment project that has a five-year life:
Initial investment $100,000
Additional investment in working capital 5,000
Cash flows before income taxes for years 1 through 5 30,000
Yearly depreciation for tax purposes 20,000
Terminal value of machine 0
Cost of capital 8%
Present value of $1 received after 5 years discounted at 8% .681
Present value of an ordinary annuity of $1 for 5 years at 8% 3.993
Assume that Trayco’s marginal tax rate is 30% and all cash flows come at the end of the year. What is the amount of the after-tax cash flow in year 2? $30,000 $21,000 $27,000 $25,000
$27,000
This answer is correct. The after-tax cash flows are calculated by taking the before-tax cash flows and deducting the income taxes. Since depreciation is deductible for tax purposes, income taxes for year two are $3,000 [($30,000 cash flows – $20,000 depreciation) × 30%]. Therefore, after-tax cash flows are equal to $27,000 ($30,000 cash flows before taxes – $3,000 taxes).
Online analytical processing system.
A software technology that enables the user to query the system (retrieve data), and conduct an analysis.
Online transaction-processing system.
One that supports day-to-day operations.
