Business Flashcards
Financial risk management is a process that involves developing strategies to manage risk related to participating in financial markets. Assume that a credit union has been offering fixed-rate real estate mortgages to its members. Given conditions in financial markets, the credit union believes that it no longer can afford to offer this service and decides to begin offering variable-rate mortgages with the mortgage interest rate tied to an index and adjusted once a year. In terms of interest rate risk, the credit union has decided to \_\_\_\_\_\_\_\_ the risk. A. accept B. hedge C. transfer D. systematize
The correct answer is C.
In this instance, the credit union gives the member a variable rate mortgage where the payment would change in response to changes in an interest rate index. This involves transferring the risk of interest rate changes from the institution to the member.
If the credit union did nothing in response to this situation, they would be accepting the interest rate risk. If the institution chooses to use some form of options and/or futures contract strategy to deal with the interest rate risk, they would be hedging the risk.
FASB ASC 815
Which of the following lists comprise all of the components of the data processing cycle?
A. Batching, processing, output
B. Collection, refinement, processing, maintenance, output
C. Input, classifying, batching, verification, transmission
D. Collection, refinement, storing, output
The correct answer is B.
The usual definition of the data processing cycle (DPC) is “input-processing-output.” A listing of components of the DPC should include, as a minimum, these three components. The correct answer substitutes the term “collection” for “input.” Refinement refers to classifying and/or batching. Maintenance refers to processing-related operations such as calculation and storage.
When economists are concerned about the liquidity preference function they are interested in:
A. the relationship of the demand for money and the rate of interest.
B. the proportion of liquid (cash) reserves maintained by commercial banks.
C. the preference for a currency backed by gold.
D. a bank’s desire for accounts receivable as collateral.
The correct answer is A.
The demand for money varies inversely with the rate of interest. The liquidity preference (LP) function relates money demand to the rate of interest. As interest rates fall, the quantity of money demanded increases. As rates rise, the quantity of money demanded decreases.
The overall cost of capital is the:
A. rate of return on assets that covers the costs associated with the funds employed.
B. average rate of return a firm earns on its assets.
C. minimum rate a firm must earn on high risk projects.
D. maximum rate of return on assets.
A. rate of return on assets that covers the costs associated with the funds employed.
The correct answer is A.
The overall cost of capital is the rate of return on assets that covers the costs associated with the funds employed.
A firm’s overall cost of capital is a weighted average of the costs of the different sources of funds that the firm uses to finance its assets. These sources are usually some combination of debt and equity. Cost of capital usually refers to the cost of long-term sources of funds, such as long-term debt, preferred stock, and common stock. A firm must pay a return to the suppliers of all of these sources of funds. Theoretically, the minimum return that a firm must earn to keep the value of its stock from declining is equal to the weighted average cost of capital. If a firm earns less than this on its total assets, then there are not enough earnings to pay the suppliers of funds what they expect to receive. Since interest costs are fixed and must be paid first, common stockholders are the ones who will usually suffer a shortfall in returns. If common stockholders do not receive at least the minimum return they require for the risk they are taking by holding common stock, then the value of their investment decreases and the value of their stock falls.
A pillow manufacturer tracks its production manually. That process results in continuing inaccuracies in inventory and production records on monthly production of about 1 million pillows in three plants. Not knowing how much raw materials inventory is needed, the company maintains surplus inventory of about 25 days production usage at each plant so it can meet its delivery commitments. The company believes it would be advantageous to implement electronic data interchange (EDI) with its suppliers to facilitate just-in-time inventory management.
If implementing electronic data interchange (EDI) with suppliers permitted more frequent orders and more frequent communication about them, the company could be more effective by using electronic data interchange (EDI) to:
A. reduce costs by reducing raw materials inventory.
B. ensure that it always maintained a 25-day buffer stock.
C. track materials through production to completed orders.
D. schedule production to reduce the number of setups required.
You are correct, the answer is A.
If implementing electronic data interchange (EDI) with suppliers permitted more frequent orders and more frequent communication about them, the company could reduce costs, e.g., inventory carrying costs, by reducing raw materials inventory.
The company could ensure that it always maintained the 25-day buffer stock, but there would be no reason to do so if it could ensure more reliable deliveries by ordering more frequently. Tracking materials through production and scheduling production (intracompany processes) are not a use of electronic data interchange (EDI), which is intercompany exchange of business information.
Why is a well-defined organizational structure important?
A. To inspect corporate records
B. To elect officers
C. To define lines of authority
D. To oversee the internal control structure
he correct answer is C.
Organizational structures help no one unless they are well-defined. The structure helps define lines of authority, so an organization does not have too many people in management. This structure creates working relationships between the various employees in the organization.
When evaluating capital budgeting analysis techniques, the payback period emphasizes: A. liquidity. B. profitability. C. cost of capital. D. net income.
C. The correct answer is A.
Payback period is the length of time in years required to recover the cash invested in a project. Payback is computed as net investment divided by average expected annual cash inflow.
Payback focuses on rapid recovery of cash investment (i.e., liquidity).
Immunizing a portfolio from interest rate risk by matching the duration of assets to the duration of liabilities might be ineffective and/or inappropriate because:
A. conventional duration strategies assume an upward-sloping yield curve.
B. immunization models are highly sensitive to adjustments for inflation.
C. duration matching is effective in immunizing portfolios from parallel shifts in the yield curve.
D. All of the answer choices are correct.
The correct answer is C.
Duration matching is effective in immunizing portfolios from parallel shifts in the yield curve.
Conventional duration strategies assume a flat yield curve.
Immunization only protects the nominal value of the terminal liabilities and does not adjust for inflation.
Compatibility tests are sometimes employed to determine whether an acceptable user is allowed to proceed. In order to perform compatibility tests, the system must maintain an access control matrix. The one item that is not part of an access control matrix is a:
A. list of all authorized user code numbers and passwords.
B. list of all files maintained on the system.
C. record of the type of access to which each user is entitled.
D. limit on the number of transaction inquiries that can be made by each user in a specified time period.
You are correct, the answer is D.
A limit on transaction totals and frequency is not part of the access control matrix. An access control matrix consists of:
a list of all authorized user code numbers and passwords, a list of all files and programs maintained on the system, and a record of the type of access to which each user is entitled.
The amount of inventory that a company would tend to hold in stock would increase as the:
A. sales level falls to a permanently lower level.
B. cost of carrying inventory decreases.
C. cost of running out of stock decreases.
D. length of time that goods are in transit decreases.
You are correct, the answer is B.
The EOQ model formula attempts to minimize costs when faced with the trade-off between the cost to procure and the cost to hold inventory. The formula is the square root of the quotient of two times the annual demand multiplied by the order cost (or setup cost), divided by the annual unit carrying cost.
EOQ = Square root of 2DS/Ci
Where:
D = Demand per year in units S = Setup or ordering cost per order C = Cost per unit i = Carrying cost, expressed as a percentage of inventory cost (C × i is the carrying cost per unit.)
For this formula, if carrying costs are decreased, then the EOQ will increase. As the EOQ increases, the amount of inventory that a company would tend to hold also increases.
The U.S. inflation rate is expected to be 5% per annum while the Italian lira is expected to depreciate against the U.S. dollar by 10% during the same period. During the next year, an Italian firm importing from its U.S. parent can expect its lira cost for these imports to: A. decrease by about 5%. B. increase by about 5%. C. increase by about 15%. D. decrease by about 15%.
The correct answer is C.
Taking the two events in order, if the inflation in the United States is expected to be 5%, then according to the purchasing power parity theorem of exchange rates, the exchange rate between the United States and Italy will increase by 5% (1 lira will increase in worth by 5% more dollars). On top of this expected inflation, is a 10% depreciation of the lira against the dollar, which will drive up the exchange rate another 10%, on top of the 5% inflation change. Mathematically we have:
$1.00 x 1.05 = $1.05 $1.05 x 1.10 = $1.155
Therefore, the price of imported goods to Italy will rise from $1.00 to $1.1550, an overall increase of about 15%.
To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by which of the following?
A. The managing audit partner who has responsibility for all audit engagements at that practice office
B. An audit manager or partner who has a comprehensive knowledge of the client’s business and industry
C. The CPA firm’s quality control manager or partner who has responsibility for the firm’s peer review program
D. The staff accountant who performed the substantive auditing procedures
The correct answer is B.
An audit manager or partner should perform the analytical procedures in the overall review stage because they have a more thorough understanding of the client and the industry when compared to other individuals who have less knowledge of the client and the industry.
The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing the conclusions reached and in the evaluation of the overall financial statement presentation.
Data access security related to applications may be enforced through all the following, except:
A. user identification and authentication functions incorporated in the application.
B. utility software functions.
C. user identification and authentication functions in access control software.
D. security functions provided by a database management system.
The correct answer is B.
Data access security related to applications cannot be enforced through utility software functions. Utility programs are one of the more serious “holes” in data access security since some of them can actually bypass normal access controls.
Data access security related to applications may be enforced through user identification and authentication functions incorporated in the application. Although there is a migration of control of this type away from applications to other software, most of these controls still reside in application software. Data access security related to applications may be enforced through user identification and authentication functions in access control software. Access control software has as one of its primary objectives improving data access security for all data on the system. Data access security related to applications may be enforced through security functions provided by a database management system. In fact, most database management systems provide for improved data access security while they are running.
The implementation stage is the second step in project management. What does the implementation stage entail?
A. Creating a schedule
B. Creating the plan
C. Holding meetings, monitoring progress, and tracking costs
D. Releasing the final project
The correct answer is C.
The implementation stage includes holding meetings, monitoring the progress of the project, updating the project plan, tracking costs, and communicating the progress of the project. Remember that the implementation stage coincides with the planning stage.
Carol and Jane were sitting in the local coffee shop discussing Jane’s possible strategies for constructing her investment portfolio. Carol suggested that Jane spend time reviewing the financial information for stocks she might consider purchasing and do some ratio analysis once she had obtained the information, but at the same time, it probably wouldn’t be a good idea for Jane to attempt to predict the future movements of the markets. Jane said that she would think about these suggestions, but that she had come to believe the best approach would be for her to do her analysis using charts based on the historic market data using price and trading volume to predict the future movement of stock prices. Someone overhearing this conversation would believe that Jane wanted to use ________ and did not believe in the ________.
A. passive management techniques; strong form of the efficient market hypothesis
B. beta; fundamental analysis
C. technical analysis; weak form of the efficient market hypothesis
D. asset allocation techniques; fundamental analysis
The correct answer is C.
Technical analysis involves analyzing past market data of price and volume movements to attempt to determine future price movements of individual securities. The weak form of the efficient market hypothesis suggests that information about past prices would not be of use in predicting future performance, and therefore technical analysis would not be a viable technique to use.
Fundamental analysis uses factors specific to a firm, such as financial statements, ratio analysis, projected earnings growth, and dividend yield in an attempt to find undervalued securities.
Contingency planning alternatives can vary by computer processing environment. A company is least likely to use a reciprocal processing agreement for: A. small systems. B. large batch operations. C. online teleprocessing facilities. D. small batch operations.
The correct answer is C.
Online teleprocessing would generally not involve a reciprocal processing agreement.
Reciprocal processing agreements are often used for small systems, large batch operations, and small batch operations.
Which of the following is not part of the control cycle approach to risk management?
A. Doing a profit test to determine whether a product provides a positive contribution margin
B. Developing the hedges necessary to mitigate interest rate risk
C. Determining, in both quantitative and qualitative terms, an understandable explanation of the differences between expected and actual results
D. Using the feedback loops in the modeling of expected results to update the assumptions and determine what adjustments in reserves might be necessary
The correct answer is B.
Key elements of the control cycle approach to risk management include the following:
Modeling the expected results using a set of initial assumptions Doing a profit test to determine if the product provides a contribution margin Measuring the actual results Determining, both in quantitative and qualitative terms, an understandable explanation of the differences between expected and actual results Determining what actions need to be taken with respect to the product, including possible adjustments to reserves Using the findings to strengthen the model and update the assumptions as needed with feedback from the process
The Internet is made up of a series of networks that include:
A. gateways to allow mainframe computers to connect to personal computers.
B. bridges to direct messages through the optimum data path.
C. repeaters to physically connect separate local area networks (LANs).
D. routers to strengthen data signals between distant computers.
The correct answer is A.
Gateways connect Internet computers of dissimilar networks.
Routers determine the best path for data. Bridges connect physically separate LAN's. Repeaters strengthen signal strength.
As it relates to accounts receivable, a mathematical relationship that can define the optimal credit level is: A. Carrying costs = Cost of capital. B. Carrying costs = Opportunity costs. C. Total costs = Opportunity costs. D. Total costs = Cost of capital.
correct answer is B.
Accounts receivable are at the optimal level when Carrying costs = Opportunity costs.
Carrying costs are costs that are associated with the granting of credit (such as bad debts), the costs of managing that credit, and the delay in receiving cash.
Opportunity costs are sales that are lost from refusing to offer credit.
Globalization is a process by which nations of the world become integrated through global networks of communication. Its current success is tied to a number of socioeconomic effects, with one of the key effects being:
A. an understanding that the success of the emerging economies is more than simply the cost advantage they have due to having relatively low-cost labor.
B. the relatively large labor force in emerging markets and declining birth rates that have historically been associated with dynamic positive economic change.
C. an undervalued currency in emerging economies that would stimulate exports and strong investment in infrastructure.
D. the fact that innovation blowbacks as the low-priced, high-quality products developed for the emerging economics now will be effectively marketed and sold in the developed world.
The correct answer is B.
Socioeconomic effects are the social and economic experiences and realities that help mold one’s personality, attitudes, and lifestyle. Declining birth rates reduce the dependency ratio, and the large labor force tends to keep wages low as economic activity expands. Most of the world’s currently developed economies were in this phase of the demographic cycle when they began their economic expansion.
It is important to maintain proper segregation of duties in a computer environment. Which of the following access setups is appropriate?
A. Users have update access for production data
B. Users have update access for production data and application programmers have update access for production programs
C. Application programmers have update access for production data and users have update access for production programs
D. Users have update access for production data and application programmers have update access for both production data and programs
The correct answer is A.
Users need to update data through applications programs.
Application programmers should not be able to change production programs. They should submit changes to the change control unit.
Application programmers should never have update access to production data. Users have no need to change production programs.
An auditor has completed an inventory count in a warehouse where she has identified a large discrepancy in the inventory count. She must now communicate her findings to her audit client, who may not receive this information favorably and who may become confrontative.
When communicating with auditees, there are both situational factors and message characteristics that can damage the communication process. An auditor has only limited control over situational factors but has substantial control over message characteristics.
The behavioral science literature identifies diffusion as an effective approach to resolving conflict. An auditor effectively using diffusion in working with a confrontative auditee would:
A. set aside critical issues temporarily and try to reach agreement on less controversial issues first.
B. emphasize differences between the parties.
C. avoid the conflict situation.
D. identify the sources of conflict and address them directly.
The correct answer is A.
Diffusion involves setting aside the conflict situation and concentrating on less controversial issues.
A firm that often factors its accounts receivable has an agreement with its finance company that requires the firm to maintain a 6% reserve and charges 1% commission on the amount of receivables. The net proceeds would be further reduced by an annual interest charge of 10%. Assuming a 360-day year, what amount of cash (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account that is due in 90 days is turned over to the finance company? A. $93,000 B. $90,000 C. $83,000 D. $90,675
The correct answer is D.
Factoring involves the sale of accounts receivable as a way for the seller to obtain financing. However, the seller receives an amount less than the face amount of the accounts sold to compensate the factor for assuming the risk and the costs of collection. In this case, the amount of cash the seller will receive from the finance company is $90,675, computed as follows:
Face amount of accounts receivable factored = $100,000
LESS: 6% reserve = .06 x $100,000 = $6,000
1% commission = .01 x $100,000 = $1,000 7,000
--------
Net amount available $ 93,000
LESS: 10% interest = .10 x $93,000 x (90 / 360) = 2,325
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Cash proceeds $ 90,675
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Five brand managers in a consumer food products company met regularly to figure out what price points were being lowered by their competitors and how well coupon promotions did. The data they needed to analyze consisted of about 50 gigabytes of daily point-of-sale (POS) data from major grocery chains for each month. The brand managers are competent users of spreadsheet and database software on personal computers (PCs). They considered several alternative software options to access and manipulate data to answer their questions.
Another brand manager suspected that several days of the POS data from one grocery chain were missing. The best approach for detecting missing rows in the data would be to:
A. sort on product identification code and identify missing product identification codes.
B. sort on store identification code and identify missing product identification codes.
C. compare product identification codes for consecutive periods.
D. compare product identification codes by store for consecutive periods.
The correct answer is D.
Comparison of product identification codes by store for consecutive periods could reveal periods in which some products had no sales, a possible indication of missing data.
Unless product identification codes are consecutive, missing data would not be evident. This is not likely. A sort of store identification codes would produce all product identification codes and related data for each store. This would not be useful. Comparison of product identification codes for consecutive periods would not permit detection of missing rows of data.
