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BEC review Flashcards

1
Q

Strategic Planning

A

setting long-term overall goals and policies. Guides the org’s long-term ops.

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2
Q

Tactitcal planning

A

focuses on ST objectives and termporary techniques

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3
Q

First step in strategic planning

A

Creating a mission statement

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4
Q

Mission statement

A

identifying and org’s purpose and values

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5
Q

Second step in strategic planning

A

identify goals and objectives that flesh out the org’s mission

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6
Q

Performance measures

A

measures how well the org is meeting their goals and objectives

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7
Q

Tactics

A

specific actions to be used to meet goals

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8
Q

Master budget

A

a static budget (does not adjust for different levels of output) for the company as a whole

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9
Q

2 budgets the master budget summarizes

A

operating, financial

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10
Q

Operating budget

A

a projected income statement with its various supporting schedules

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11
Q

Financial budget

A

projected capital budget, cash budget, B/S, and statement of CFs

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12
Q

Static budgets

A

analyzes conditions for 1 level of activity. does not each time some volume changes (e.g., sales). These are usually set up for long periods and made for a whole company or each division within a comp

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13
Q

Kaizen budgeting

A

make cost projections that incorporate expectations for future improvements. If improvements don’t happen, then the budget is not met. Focuses on continous small improvements rather that huge structural changes

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14
Q

Steps in making a master budget

A

1) Estimate future sales volume 2) Use sales volume to est. revenues 3) Use collection histories to est. collections 4) Est. the cost of sales based on the number of units sold 5) Use current FG inv., budgeted ending inv., and COGS to est. the number of units to be manufactured 6) Use units to be manufactured to est the org’s material needs, labor costs, and overhead costs 7) Use material needs, current RM inv., and budgeted ending inv. to budget future purchases 8) Use purchases to est payments 9) Analyze expense and payment patterns to complete operating and cash flow budgets

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15
Q

Budgets must be prepared in what order?

A

Sales, production, direct/RM purchases, cash disbursements

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16
Q

How do you determine something like budgeted RM purchases?

A

Work backwards from budgeted unit sales (sales budget is 1st step in budgeting)

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17
Q

Flexible budgets

A

Can be adjusted for changes in volumes. This budget is prepared according to how costs behave (variable v. fixed). Thus flexible budgets use variable costing/direct costing

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18
Q

What is the flexible budget equation?

A

Y = a + Bx……“a” is the intercept or FC……“B” is slope or VC…..”x” is the cost driver….”Y” is TC

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19
Q

What is the slope?

A

Shows the effect on Y for a change in X. So it shows the effect a change in the cost driver has on the change in Y

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20
Q

What is the advantage to flexible budgeting?

A

Can be easily adapted to changes in variable costs that result from changes in sales levels. Will show how TC changes when sales levels change.

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21
Q

Correlation analysis

A

Calculates the correlation coefficient between an independent and a dependent variable.

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22
Q

Range of correlation coefficient

A

-1 to 1.

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23
Q

What does -1 show?

A

perfect negative correlation

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24
Q

What does +1 show?

A

perfect positive correlation

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25
Q

What does 0 show?

A

neglible relationship

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26
Q

Regression analysis

A

Shows the relationship btwn a dependent variable and several independent variables (multiple/multivariate regression). Or a dependent variable and only one independent variable (univariate/simple regression)

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27
Q

What does regression analysis do?

A

Tests what independent variables are the best predictor of the dependent variable

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28
Q

Coefficient of determination

A

R squared. Percentage of variation in the dependent variable explained by the percentage of variation in the independent variable. Btwn 0 and 1.

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29
Q

F-statistic

A

measure of the statistical significance of a regression model (model specification)

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30
Q

Model specification

A

Applying many different combos of independent variables to a dependent variable to see which combo fits best.

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31
Q

p-value

A

Attached to F-statistic. Probability that the overall predicted relationship (R squared) occurred by chance. P-value is for the overall fit of the model specification.

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32
Q

t-statistics

A

Attached to p-value. Shows each independents variable’s statistical significance in predicting the dependent variable. So t-statistic is for 1 indep. var. in the model specification.

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33
Q

What is a range of p-values that is very reliable?

A

.01 - .05. (i.e., there’s only a 1% to 5% chance that the overall predicted relationship of the model occurred by chance.

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34
Q

Responsibility accounting

A

Helps companies to evaluate manager’s or division’s performance by assigning them to centers of responsibility. This helps to reduce costs/increase efficiency in manufacturing.

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35
Q

Cost center

A

Manager here is responsible only for the costs incurred in the center

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36
Q

Profit center

A

responsible for both the revenues and costs of a center

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37
Q

Investment center

A

Responsible for the revenues, costs, and capital investments of a center

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38
Q

What’s the general rule for responsibility accounting?

A

Manager’s should not be held responsible for the costs/revenues/investments that they can’t affect

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39
Q

What is the benefit of using ABC for regression?

A

Yields a greater number of potential cost drivers (b/c costs are seperated into different activities…MOH is not just a single allocation to all products based on a single cost driver). Generally, the more potential cost drivers, the better the regression model.

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40
Q

Value adding costs

A

Those that actually make the product better. Improvements that the customer will value.

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41
Q

Non-value adding costs

A

Those that increase the cost of a product but that customers don’t specifically value. (depreciation, storing, handling)

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42
Q

Does ABC seperate costs into value adding and non-value adding?

A

YES

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43
Q

Service departments

A

incur OH providing support to the production/manufacturing departments. Under ABC, firms allocate the service department OH to appropriate production departments

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44
Q

2 methods to allocate service department OH costs

A

Direct: Allocates costs from each service department directly to production departments. Step allocation: firm allocates costs from a service department both to production departments and temporarily to the other service departments

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45
Q

Step-Allocation (service department costs –> production departments)

A

1) Rank service departments by amount of services performed to the other service departments 2) Costs of 1st service dep. are allocated to remaining service deps. and production deps. Once all of the 1st service dep. costs are allocated, that dep. is removed from process. 3) Costs of next service dep. are allocated to the remaining service and production deps. Process is repeated until the costs of the last service dep have been allocated to production deps.

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46
Q

Econometric models

A

Regression analyses that incorporate company data AND industry/economy-wide measures to estimate future sales and costs

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47
Q

Time series analysis/models

A

Subset of regression that forecasts data for a SINGLE firm over time (sales/costs)

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48
Q

Delphi method

A

The use of experts in different areas when there’s little historical info to use to predict future conditions. Expert opinions are examined and sent back as a whole to each expert until a consensus.

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49
Q

What does the Delphi method avoid when properly used?

A

Experts simply agreeing with each other if they meet to discuss their opinions. Avoids GROUPTHINK.

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50
Q

Probability distribution

A

gives the likelihood of possible outcomes occurring from a single action

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51
Q

How do you get the expected value of a probability distribution?

A

Multiply each of the possible outcomes by its chance of happening and sum the amounts

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52
Q

Gordon Growth Model

A

Total Return = Distribution Rate + Growth Rate

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53
Q

What does the gordon growth model assume?

A

Reinvested assets will increase distributions by the amount of reinvestment. Ex. Investment with 3% dividend and 7% growth rate: The dividends will grow 7% each year. Growth rate of assets will be the growth rate of future dividends

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54
Q

Portfolio

A

A group of investments

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55
Q

Expected return of a portfolio

A

weighted-average of the expected return of the individual investments

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56
Q

Arithmetic average return rate

A

Add returns for several periods and divide by the number of periods. Does NOT take into account compounding

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57
Q

Geometric average return rate

A

Single annual compound rate of return needed to turn the initial value of a investment into its final value over the number of intervening periods.

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58
Q

When single period return rates are different over several periods, which method of average return gives a lower return?

A

Geometric gives a lower return. This is because compounding is included in the calculation, so a lower return is needed to get the investment to the same value (compared to arithmetic average return).

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59
Q

How do you calculate a geometric average return?

A

(value one period later - initial value) / initial value

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60
Q

Standard deviation

A

Measure of the volatility of an investment. Square root of the variance of the investment. Measure of the dispersion of a set of data from its mean.

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61
Q

What is a shortcoming of standard deviation?

A

SD gives disproportionate weight to big differences from average return (i.e., outliers skew the SD in 1 direction)

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62
Q

Coefficient of variation

A

Standard deviation / Expected Return

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63
Q

Modern Portfolio Theory

A

SD of portfolio of investments will generally be smaller than the SD of the individual investments. This is b/c each investment is unlikely to move up and down at exactly the same time.

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64
Q

Correlation coefficient

A

1: when one investment goes up, the other investment goes up proportionally the same amount. -1: when one investment goes down, the other investment goes up proportionally the same amount. 0: There is no relationship btwn the investments

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65
Q

T/F: Correlation coefficient < 1 means SD of the portfolio is < the average SD of the individual investments

A

TRUE; the diffs. in the investmens’ price fluctuations somewhat offset each other

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66
Q

NOTE:

A

A high covariance means the investments move in similar directions. A low covariance means the investments move in different directions.

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67
Q

How do investors try to eliminate unsystematic risk?

A

By combining investments that have low covariance with each other.

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68
Q

Unsystematic risk

A

risk that pertains to only one investment. When a portfolio of investments have very low covariance, unsystematic risk is greatly reduced b/c as one investment goes up, the others go down.

69
Q

Systematic risk

A

Unavoidable risk that cannot be diversified away. This is the risk of the market as a whole. Results from economy-wide factos like GDP, inflation, interest rates, etc.

70
Q

What do investors expect from bearing systematic risk?

A

The market’s expected returns.

71
Q

What would investors bearing unsystematic risk have to expect?

A

Expected (average) returns less than the market’s b/c they are bearing risks that may be avoided.

72
Q

Mean-variance optimization

A

Gives the portfolio with the highest expected return for a particular level of volatility. This portfolio is known as the efficient portfolio for that level of variance.

73
Q

Efficient frontier

A

Plots the combo of assets that yield the most efficient portfolios for various risk levels

74
Q

Beta

A

Measures how the changes in the value of an individual investment compares with changes in the value of a market-wide portfolio. Thus, it compares the volatility of an individual investment relative to the volatility of the market.

75
Q

What does a beta of 1 indicate? .5?

A

1: The investment changes in value exactly at the rate that the market does. .5: the investment changes in value at half the rate that the market does

76
Q

CAPM

A

Suggests that investments with higher betas should have higher expected returns to compensate for the extra risk

77
Q

Alpha

A

Measures how much better an investment performs than the return predicted by its beta.

78
Q

Efficient Market Hypothesis

A

States that stock prices already have all existing info. Thus, an alpha greater than 0 is just luck. The best portfolio invests in all the stocks in the market (thereby eliminating unsystematic risks).

79
Q

Bull market (charge)

A

A period during which prices have risen > 20% from their previous trough

80
Q

Bear market (hibernate)

A

A period during which prices have fallen > 20% from their previous peak

81
Q

When referring to credit risk, who has the risk?

A

The borrower has credit risk. (i.e., risk of nonpayment)

82
Q

Sector risk

A

fraction of a borrower’s credit risk due to being in a particular industry

83
Q

Concentration of credit risk

A

credit risk from lending to only a few borrowers or those only in a specific industry

84
Q

Market risk

A

risk that economy-wide conditions will tank the value of all pre-existing assets (this is INDEPENDENT OF CREDIT RISK)

85
Q

Interest rate risk

A

risk that rising interest rates will tank the value of pre-existing bonds/loans

86
Q

Yield Curve

A

Shows U.S. Treasury rates for differing maturities (usually 3 months to 30 years). The shape of this curve is important b/c most bonds and loans are priced based on this curve.

87
Q

Normal yield curve

A

interest rates increase as maturities increase

88
Q

Liquidity preference theory

A

Interest rates should normally be higher for longer terms than for shorter terms b/c investors demand higher compensation for investments that are more subject to various risks (the longer the term, the more shit that could happen) Ex. interest rate risk is more of a concern for a 30 year bond than for a 2 month bond

89
Q

Inverted yield curve

A

interest rates decrease as maturities increase

90
Q

Expectations theory

A

LT int. rates reflect expected future ST int. rates. Ex. if the economy expects ST int. rates to go down in the future, then a 30 year bond today will pay low interest (to match the expectation of low interest in the future)

91
Q

Flat yield curve

A

int. rates are similar across terms.

92
Q

Market segmentation theory

A

B/c participants in bond/loan markets focus on lending for different terms, the change in conditions for these individual markets (e.g., depsitory institution) will result in a change in interest rates for the particular term the market uses for loans

93
Q

Humped yield curve

A

B/c of changing expectations, rates for intermediate term loans may be higher than rates for ST and LT loans

94
Q

What does the yield curve commonly look like when the gov’t is using expansionary policy?

A

Normal (increasing rates over time to maturity)

95
Q

When is a project deemed to have been managed effectively?

A

Meets its objectives within the planned time and costs

96
Q

Effective mangement of projects requires 4 elements:

A

Resources, time, money, scope

97
Q

The 5 seperate process of projects:

A

1) Initiation 2) Planning 3) Execution 4) Monitoring and Control 5) Closure

98
Q

Project initiation involves what?

A

Selecting most promising projects w/in the firm’s contraints, approval and support of the project by officers, selecting a project mngr or committee

99
Q

Project planning

A

What tasks are to be done, by whom, and when

100
Q

Statement of work

A

describes in narrative form the work that’s to be done

101
Q

SOW includes what?

A

Project specifications, milestone schedule, work breakdown structure

102
Q

Program evaluation and review technique

A

PERT: used when the project’s completion time is hard to predict. PERT schedules and controls these projects. Tries to identify the critical path, or the shortest time in which a project may be finished.

103
Q

What are the time estimates that PERT computes?

A

optimistic, most likely, pessimistic. These times are used to gauge how long it’s likely for something to take place. (can use expected value here)

104
Q

Slack time

A

difference btwn a task’s expected time and the latest it can be finished w/o delaying other overall project

105
Q

What does slack time assume?

A

tasks are completed simultaneously. project consists of tasks a and b. b takes 10 hrs and a takes 4 hours. a has 6 hours of slack time.

106
Q

Critical path method

A

similar to PERT. Uses only ONE time estimate. How long the task usually takes. Use this method when task’s time are easier to predict.

107
Q

Graphical evaluation and review technique

A

GERT. permits tasks to be looped or branched out. Some tasks can be done many different ways.

108
Q

ABC analysis

A

ranks tasks based on importance A = urgent and important B = important but not urgent C = neither urgent nor important

109
Q

Project crashing

A

adding more resources than usual to a task to speed it up. Crash time is the time it takes for a task to be done with more resources.

110
Q

How do you manage project risks?

A

Use controls similar to ERM or enter into contracts (e.g., insurance/derivatives)

111
Q

What are 3 problems encountered during project execution?

A

Organizational uncertainty, uncommon decision-making conditions, lack of mgmt support

112
Q

Organizational uncertainty

A

failure by the firm’s mgmt to describe the relationships btwn the firm’s mngrs and the project leaders. (Who has power over who?)

113
Q

Uncommon decision making conditions

A

Many projects are ST and need quick decisions and employ leaders from 1 part of the firm that have no info on other parts.

114
Q

Lack of mgmt support

A

Manager’s may delay/refuse requests from the project team for resources or cooperation

115
Q

Monitoring and control

A

How is the project doing? Do we need to adjust it?

116
Q

Closure

A

Have all tasks been completed? Complete all project related contracts/financial docs

117
Q

How are derivatives settled?

A

Through cash transfers taking into acct how the prices of the asset evolved relative to the terms set in the contract

118
Q

What 3 characteristics do derivatives have?

A

No net investment, and underlying and a notional amount, net settlement (NUNS)

119
Q

Notional amount

A

amount of some financial asset that you agree to buy/sell in the future

120
Q

Underlying price

A

the underlying price of the asset on which the derivative is based. This determines the derivative’s price.

121
Q

What are the types of derivatives?

A

options, futures, forwards, swaps

122
Q

Option

A

allows holder to call (buy) or put (sell) an underlying asset at a pre-specified price during a pre-specified period (american) or at a specified date (euro) THIS IS NOT A CONTRACT.

123
Q

Forwards

A

2 parties agree to buy and sell an underlying asset at a pre-specified price at a future date

124
Q

Futures

A

std. versions of forwards for std. amounts

125
Q

Swaps

A

2 parties agree to swap certain streams of payments

126
Q

Currency swap

A

2 parties agree to swap CFs in 2 currencies. If effective, this removes exchange risk for both parties

127
Q

What are the purposes of derivatives?

A

Speculation, hedging

128
Q

Speculation

A

Trying to profit from derivatives. Profits are made when you’re on the side of the transaction for which the predicted action actually occurs.

129
Q

Hedging

A

Use derivs. to reduce their risk exposure

130
Q

Risks associated with derivatives

A

Credit, market, legal, basis

131
Q

Market risk

A

adverse changes in economy will affect the FV of the derivative. Only applicable for speculation

132
Q

Legal risk

A

regulatory changes may alter or void the derivative contract

133
Q

basis risk

A

Changes in the value of the derivative may not exactly match changes in the value of the asset that’s being hedged

134
Q

FV Hedge

A

hedge against changes in the value of an aseet or liability that the firm has or expects to have

135
Q

Cash flow hedge

A

hedge against fluctuations in future CFs

136
Q

foreign currenct hedge

A

hedge against the effects of fluctuations in the value of a foreign currency on the value of assets, liabs., or CFs

137
Q

What value should derivatives be reported at?

A

Fair value. But a change in the FV of the derivative, if effective, will be matched by a change in the value of the hedged asset in the opposite direction

138
Q

FV hedges

A

only the net effect of the changes in the value of the derivative and the value of the hedged asset is reported in earnings. Nothing will be reported if the derivative completely offsets a change in the value of the asset

139
Q

CF hedges

A

Effective part of derivative value change is reported in OCI on B/S. Ineffective part of derivative value change is reported in earnings on I/S

140
Q

Measuring hedge effectiveness

A

The degree to which a change in the value of the asset is matched by an opposite change in the value of the hedge. Thus, the ineffective portion is a loss and should be included in NI. The effective portion is a gain and should be reported in OCI (on B/S) b/c it’s an asset.

141
Q

Ways to value derivatives

A

Black-Scholes: stock options. Monte carlo sims, binomial trees. Zero-coupon method: interest rate swaps.

142
Q

Balanced scorecard

A

Allows performance measures to be grouped into 4 perspectives

143
Q

4 perspectives of the balanced scorecard

A

internal processes, financial, customer, learning and growth

144
Q

Internal process perspective

A

measuring averages and variances in the cost, time, and number of defects involved in producing and delivering a product or service

145
Q

Customer perspective

A

measuring customer satisfaction

146
Q

Financial perspective

A

measures profitability, revenue, asset growth, soundness (debt equity ratios)

147
Q

Learning and growth perspective

A

ensure that the key drivers of a orgs’ LT ability to achieve their mission are not neglected in pursuit of ST objectives. Focuses on employees and technology

148
Q

What does the balanced scorecard commonly include?

A

strategic objectives, performance measures, baseline performance, targets, strategic initiatives

149
Q

Strategic objectives

A

firm’s goals and what is need to achieve them

150
Q

performance measures

A

quantitative methods determining how well the strategic objectives are being met

151
Q

baseline performance

A

how well the firm is doing under each performance measure

152
Q

targets

A

amount of improvement being sought for each baseline performance measure

153
Q

strategic initiatives

A

changes the firm will make to achieve its strategic objectives

154
Q

Cause and effect linkages

A

Firms try to identify how initiatives are effecting their performance measures. This can help to identify which measures are actually performance drivers and which are performance measures

155
Q

Sunk costs

A

These are irrelevant to future decisions

156
Q

Strategy maps

A

diagrams that help to find cause and effect linkages

157
Q

decision trees

A

Graphical aid that highlights chains of decisions that will/will not happen under various scenarios. If X happens, then Y. If Z happens, then A.

158
Q

Value Based Management

A

Measures all aspects of a company to identify the economic value added (EVA) that different activities contribute. This focuses on the financial scorecard in the balanced scorecard

159
Q

Disadvantages to VBM

A

May focus on activities that increase profitability in the ST or have direct cost-to-profit linkages. Ex. cost cutting boosts profit in the ST but not LT. But, R&D boosts profit in the LT

160
Q

Value chain

A

sequence of processes through which a product becomes more valuable

161
Q

Competitive benchmarking

A

Cross sectional: 1 time period for multiple firms. Time-series: data from 1 firm over time. Panel data analysis: data for multiple firms over time

162
Q

Generic benchmarking

A

Track performance of 1 firm against all firms, even if outside of industry. This may not be very useful.

163
Q

Pareto Principle

A

80% of quality problems result form only 20% of the possible causes. Focus on most important causes first

164
Q

Six sigma quality

A

percentage of products that are in acceptable form. 1 sigma = 68% of products are acceptable. 6 sigma = 99.99999% of products are acceptable. 6 sigma = 3.4 defects per million

165
Q

Theory of constraints

A

helps to max profitability and overcome production bottlenecks by focusing production on those products with the highest CM/unit

166
Q

Bottleneck resource

A

Demand exceeds capacity for resource

167
Q

Nonbottleneck resource

A

Capacity exceeds demand for resource

168
Q

Throughput contribution

A

Revenues - DM COGS….a CM for direct materials.

BEC (2 decks)

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