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CPA Flash Cards > Business, Environment, and Concepts > Flashcards

Business, Environment, and Concepts Flashcards

1
Q

Define Market Risk

A

The risk that a sluggish economy will affect the value of a debt instrument

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2
Q

Define Sector Risk

A

The risk that an event in the investment’s business sector will harm the investment

For example- the banking sector is sluggish- so even stocks of healthy banks suffer

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3
Q

Define Credit/Default Risk

A

The risk that a debtor will be unable to make loan payments or pay back the principal

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4
Q

Define Interest Rate Risk

A

The risk that a change in interest rates will adversely affect the value of the note

Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.

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5
Q

What does Standard Deviation measure?

A

It measures the volatility of an investment.

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6
Q

What is Systematic Risk?

A

Risk that impacts the entire market and can’t be avoided or reduced through diversification

Example: Wars

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7
Q

What is Unsystematic Risk?

A

Relates to a particular industry or company

Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest

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8
Q

What does Beta measure?

A

Beta measures how volatile the investment is relative to the rest of the market.

In other words- how quickly (and in what amount) does the value of the stock change when the market sways?

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9
Q

What is Variance?

A

It compares volatility of an investment to the market average.

Factors include both Systematic and Unsystematic Risk.

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10
Q

What is a Derivative?

A

An asset whose value is DERIVED from the value of another asset.

Derivatives are measured at Fair Value.

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11
Q

How is an Option used?

A

Gives the buyer the option to buy or sell a financial derivative at a certain price

Traders use them to speculate where they think the price will be at a certain point and make a profit

Hedgers use them to offset risk

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12
Q

What is a Future?

A

A Forward Contract with a future value.

They are sold and traded on the futures market.

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13
Q

What is an Interest Rate Swap?

A

Forward Contract to swap payment agreements

They are highly liquid and often valued using the Zero-Coupon method.

Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR

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14
Q

What is Legal Risk?

A

Risk that a law or regulation will void the derivative

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15
Q

What is a Fair Value Hedge?

A

Hedge that protects against the value of an asset or liability changing.

Changes in value are reported in earnings.

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16
Q

What is a Cash Flow Hedge?

A

A hedge that protects against a set of future cash flows changing.

Changes in value are reported in OCI.

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17
Q

What is a Foreign Currency Hedge?

A

A hedge that protects against the value of a foreign currency changing.

For example- a foreign currency hedge might be used to protect against the following: If you have receivables denominated in a foreign currency and that currency dips in value - your receivables are worth less than before.

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18
Q

What four perspectives are included in Balanced Scorecard?

A

Financial / Customer / Internal Business Processes / Learning and Growth

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19
Q

Why was Balanced Scorecard created?

A

To measure Performance.

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20
Q

What are Strategy Maps?

A

Diagrams of Strategic Cause and Effect Relationships.

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21
Q

What is a Strategic Initiative?

A

A plan to achieve goals.

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22
Q

What measures are used under Value-Based Management?

A 
Return on Investment
Residual Income
Spread
Economic Value Added
Free Cash Flow
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23
Q

How is Return on Investment (ROI) calculated?

A

ROI : Return / Investment

Example: You Invest $100 to buy a machine that generates $60 in Operating Income

$60 / $100 : 60% ROI

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24
Q

How is Residual Income calculated?

A

Operating Income - (Required Rate of Return x Invested Capital) : Residual Income

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25
Q

What is another name for Required Rate of Return (RROR)?

A

RROR is also called ‘Cost of Capital’

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26
Q

What is Weighted Average Cost of Capital (WACC)? How is it calculated?

A

Cost of Capital is the weighted average of the interest rates you pay for your Capital.

Includes Debt and the Rate of Return your Equity Shareholders expect

Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%

Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%

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27
Q

How is Spread calculated?

A

Spread : ROI - Cost of Capital

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28
Q

What is the primary point of Economic Value Added? How is it calculated?

A

Investments should exceed costs- with an emphasis on stockholder value.

Economic Value Added : Operating Income After Tax - (Net Assets x WACC)

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29
Q

How is Free Cash Flow calculated?

A 
Operating Income After Tax
\+ Depreciation & Amortization
- Capital Expenditures
- Change in Net Working Capital
\: Free Cash Flow
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30
Q

What is measured by Six Sigma?

A

It measures a product versus its quality goal.

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31
Q

What is the Asset Turnover Ratio?

A

Sales / Average Assets

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32
Q

What does the Current Ratio tell us? How is it calculated?

A

Can the company pay their short-term liabilities?

Current Ratio : Current Assets / Current Liabilities

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33
Q

What does the Debt to Equity Ratio tell us? How is it calculated?

A

How is the company financing its capital?

Debt to Equity Ratio : Total Debt / Total Equity

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34
Q

What does the Debt to Total Assets ratio tell us? How is it calculated?

A

What proportions of the company’s assets are encumbered with debt?

Debt to Total Assets : Total Liabilities / Total Assets

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35
Q

What does Gross Margin % tell us? How is it calculated?

A

How profitable is the product after COGS?

Gross Margin : Gross Profit / Net Sales

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36
Q

What does Operating Profit Margin tell us? How is it calculated?

A

How profitable is the product after all expenses (except interest and taxes)?

Operating Profit Margin : Operating Profit / Net Sales

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37
Q

How is Times Interest Earned calculated and what does it mean?

A

Can the company make their interest payments?

Times Interest Earned : Earnings Before Tax & Interest / Interest Expense

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38
Q

What does Return on Assets tell us? How is it calculated?

A

What % return are the assets generating?

Return on Assets : Net Income (net of interest & taxes) / Average Total Assets

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39
Q

How is Market/Book ratio calculated?

A

Market Value of Common Stock / Book Value of Common Stock

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40
Q

What is Inventory Turnover and how is it calculated?

A

How quickly does inventory get sold?

Inventory Turnover : COGS / Average Inventory

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41
Q

What is the Quick Ratio and how is it calculated?

A

It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)

Quick Ratio : (Current Assets - Inventory) / Current Liabilities

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42
Q

What is Average Collection Period- and how is it calculated?

A

How many days does it take the company to collect payment on A/R?

Average Collection Period : Average AR / Average Sales Per Day

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43
Q

What is an Internal Failure?

A

Products have quality defects- but are caught BEFORE they leave the warehouse.

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44
Q

What is an External Failure?

A

Product reaches the customer- but they are not satisfied with the quality of the product.

This includes recalls.

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45
Q

What is Appraisal Cost?

A

Quality control- testing & inspection costs.

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46
Q

Which IT personnel roles should always be segregated?

A

Operators

Programmers

Librarians

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47
Q

What are the duties of a systems analyst?

A

Designs or purchases IT system

Responsible for flowcharts

Liaison between Users and Programmers

Note: Think IT Manager

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48
Q

What is the primary duty of a Systems Administrator?

A

A Systems Administrator controls database access.

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49
Q

What are the duties of a Systems Programmer?

A

Writes- Updates- Maintains- & Tests software- systems- and compilers

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50
Q

Which duties should a Systems Programmer NOT have?

A

In order to maximize internal control- a Systems Programmer should NOT have application programming duties/abilities or be an Operator on the system.

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51
Q

What are the duties of a Systems Operator?

A

Schedules and Monitors Jobs

Runs IT Help Desk

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52
Q

What duties should a System Operator NOT have?

A

For internal control purposes- they should not be a Programmer on the system.

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53
Q

If it is not possible to segregate duties in an IT System- what actions should be taken to compensate for internal control purposes?

A

Include Computer Logs.

Control Group should review the logs.

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54
Q

What is the purpose of a Management Information System (MIS)?

A

To assist with decision making.

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55
Q

What is an Accounting Information System (AIS)?

A

A type of Management Information System (MIS) that processes accounting transactions.

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56
Q

What are the characteristics of an Executive Information System (EIS)?

A

Specialized for Company Executive needs

Assists with Strategy Only

No Decision-Making Capabilities

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57
Q

What are the characteristics of an Expert System (ES)?

A

Computer uses reasoning

Structured

No human interpretation needed

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58
Q

What are the characteristics of a Decision Support System (DSS)?

A

Computer provides data

Gives Interactive Support

Human interpretation needed

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59
Q

What are the characteristics of an Ad Hoc computer report?

A

User initiates the report.

The report is created upon demand.

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60
Q

When are Exception reports generated?

A

Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem

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61
Q

What is a query?

A

A type of Ad Hoc report- initiated by a user.

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62
Q

What is End-User Computing?

A

The User develops and executes their own application.

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63
Q

What is the primary benefit of E-commerce?

A

E-commerce makes business transactions easier.

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64
Q

What are the risks of E-commerce?

A

Compromised data or theft.

Less paper trail for auditors.

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65
Q

What are the benefits of Electronic Data Interchange?

A

Uses globally-accepted standards

Efficient

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66
Q

What is a File Server?

A

A file server stores shared programs and documents.

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67
Q

What is the purpose of a Database?

A

Located on a File Server- a Database allows users to share documents.

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68
Q

What is the purpose of a LAN (Local Area Network)?

A

It connects computers in close proximity.

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69
Q

What is the purpose of a WAN (Wide Area Network)?

A

It connects computers that are far apart.

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70
Q

What are the characteristics of a VAN (Value-Added Network)?

A

Privately-owned Network

Serves as 3rd Party Between 2 Companies

Routes EDI Transactions

Accepts wide range of Protocols

Very Costly

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71
Q

What is the purpose of a Firewall?

A

Prevents unauthorized access to a network.

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72
Q

What are the characteristics of a virus?

A

Takes over a computer

Needs a host program to run

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73
Q

What are the characteristics of a computer worm?

A

Takes over multiple computers

Doesn’t need a host program to run

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74
Q

What is the purpose of Automated Equipment Controls?

A

They prevent and detect hardware errors.

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75
Q

What is RAM?

A

Random Access Memory.

Internal memory in the computer used during immediate processing.

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76
Q

What is a CPU?

A

Computer Processing Unit

It processes commands within a computer.

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77
Q

What is Job Control Language?

A

It schedules and allocates system resources.

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78
Q

What are examples of input devices?

A

Keyboard
Mouse
Scanner
Magnetic Ink Reader
Magnetic Tape Reader
EDI
Point of Sale Scanner

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79
Q

What are examples of Output Devices?

A

Speakers

Monitors

Printers

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80
Q

What are the characteristics of Magnetic Tape storage?

A

Sequential Access - Sorts data in order

Slower data retrieval

Header Label prevents Operator error by loading wrong tape

External Labels prevent accidental destruction by operator

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81
Q

What are the characteristics of Magnetic Disks?

A

Random Access - Finds data in random spots

Faster data retrieval

Uses Boundary Protection for data

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82
Q

What is a Gateway?

A

Connects one network to another

Note: the Internet is connected by Gateways

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83
Q

What are Parity Checks?

A

A control that detects internal data errors.

A bit is added to each character- it checks to see if a bit was lost.

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84
Q

What is an Echo Check?

A

Transmitted data is returned to the sender for verification (it echoes back to the sender)

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85
Q

What is a Change Control?

A

It authorizes program changes and approves program test results.

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86
Q

What is security software?

A

Software that controls access to IT systems.

Note: Don’t confuse this with anti-virus software

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87
Q

What is the purpose of a Digital Signature?

A

It confirms a message has not been altered.

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88
Q

List the types of computers from smallest to largest

A

PDA/Smartphone/Tablet

Microcomputer - PC- Laptop (cost-effective)

Minicomputer - Like a Mainframe- but smaller

Mainframe - Large computer with terminals attached

Supercomputer - Very powerful and very big

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89
Q

What are the units of computer data from smallest to largest?

A

Bit - 1 (on) and 0 (off)
Byte - 8 bits to a byte/character
Field - group of related characters/bytes (i.e. Name- Zip Code- Serial #)
Record - Group of related fields (i.e. Member name- address- phone number)
File - Group of related records (i.e. Membership directory)

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90
Q

What is the duty of a design engineer?

A

Determine language used for a specific computer- on a computer-to-computer basis

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91
Q

What are object programs?

A

Programs written in base computer language- not similar to English.

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92
Q

How can source programs be recognized?

A

They are written in a language close to English.

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93
Q

What is the purpose of a Compiler?

A

Takes Source language (English) and converts to Object (Computer) Language

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94
Q

How does Online Analytical Processing work?

A

It uses a Data Warehouse to support management decision making.

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95
Q

What is Data Mining?

A

Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.

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96
Q

What is the purpose of online transaction processing?

A

To process a company’s routine transactions.

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97
Q

What are the characteristics of batch processing?

A

Data held- updates multiple files all at once

Leaves a better audit trail

Uses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)

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98
Q

What does an output control check for?

A

Checks to see if output data is valid- distributed and used in an authorized manner.

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99
Q

What does a processing control check?

A

Checks if data processing produced proper output

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100
Q

What is a hash total?

A

An input control number- a meaningless sum of values included in the input.

Example would be summing a list of SSNs to make sure the data is the same once entered as it was prior to input into the system.

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101
Q

What is a validity check?

A

Checks to see if data in existing tables or files belongs in the set

For example- is there a # in an alpha-only field or a letter in a numeric-only field

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102
Q

What is a limit check?

A

Checks to see if numbers surpass a certain limit- i.e. in an age field is the number greater than 110.

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103
Q

What is a check digit?

A

An input control that adds an identification number to a set of
digits - usually at the end

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104
Q

What is a field check?

A

An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field

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105
Q

What is a Hot Site?

A

A disaster recovery system where if the main system goes down- a Hot Site is ready to take over immediately.

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106
Q

What is a Cold Site?

A

If a main system goes down- a Cold Site will take time to get set up and running.

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107
Q

What is the most common database language?

A

SQL - Standard Query Language

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108
Q

What is a Data Definition Language?

A

Defines SQL Database

Controls SQL Tables

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109
Q

What is a Data Manipulation Language?

A

Queries SQL Database tables

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110
Q

What is a Data Control Language?

A

Controls Access to SQL Database

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111
Q

What are the characteristics of a Relational Database?

A

Logical structure

Uses rows and columns similar to spreadsheet

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112
Q

What are the characteristics of a Hierarchical Database?

A

Has various levels

Uses trees to store data

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113
Q

What are the advantages of a database?

A

Data is more accessible

Reduced redundancy

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114
Q

What are the disadvantages of a database?

A

Cost of installation

Skilled personnel required to maintain

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115
Q

What are the components of a database?

A

Desktop client

Application Server

Database Server

Think: Your desktop computer runs applications and saves to a database

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116
Q

What is a Static Budget?

A

Budget targeted for a specific segment of a company.

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117
Q

What is a Maser Budget?

A

Budget targeted for the company as a whole

Includes budgets for Operations and Cash Flows

Includes set of budgeted Financial Statements

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118
Q

How do Fixed Costs affect budgeting?

A

Costs independent of the level activity within the relevant range

Property Tax is the same whether you produce 100-000 units or zero units

However - Fixed Costs per unit vary given the amount of activity

If you produce fewer units- fixed costs per unit will be greater than if you produce more units - i.e. less units to spread the cost over

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119
Q

How do Variable Costs affect budgeting?

A

The more Direct Materials or Direct Labor used- the more Variable Costs per unit

However - Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit

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120
Q

How are Material Variances calculated?

A

SAM:

Standard Material Costs
- Actual Material Costs
= Material Variance

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121
Q

How are Labor Variances calculated?

A

SAL

Standard Labor Costs
- Actual Labor Costs
= Labor Variance

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122
Q

How are Overhead Variances calculated?

A

OAT

Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance

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123
Q

How does Absorption Costing compare to Variable Costing?

A

Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A

Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs

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124
Q

How is Contribution Margin calculated?

A

Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)

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125
Q

How is Break-even Point (per unit) calculated?

A

Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit

Assumption: Total Costs & Total Revenues are LINEAR

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126
Q

What is the focus in a Cost Center?

A

Management is concerned only with costs

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127
Q

What is the focus in a Profit Center?

A

Management is concerned with both costs and profits

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128
Q

What is the focus in an Investment Center?

A

Management is concerned with costs- profits- and assets

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129
Q

What is the Delphi technique?

A

Forecasting technique where Data is collected and analyzed

Requires judgement/consensus

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130
Q

What is Regression Analysis?

A

A forecasting technique where Sales is the dependent variable.

Simple Regression - One independent variable

Multiple Regression - Multiple independent variables

131
Q

What are Econometric Models?

A

Forecast sales using Economic Data

132
Q

What are Naive Forecasting Models?

A

Very Simplistic

- Eyeball past trends and make an estimate

133
Q

How does a Moving Average compare to Exponential Smoothing?

A

Both project estimates using average trends from recent periods

Difference: Exponential Smoothing weighs recent data more heavily

134
Q

What are the characteristics of Short-term Cost Analysis?

A

Uses Relevant Costs Only

Ignore Sunk Costs

Opportunity Cost is a Must

135
Q

What is the primary focus of working capital management?

A

Managing inventory & receivables (current assets & liabilities)

136
Q

How is Net Working Capital calculated?

A

NWC : Current Assets - Current Liabilities

137
Q

What are the characteristics of effective Working Capital Management?

A

Shorten the cash conversion cycle

Don’t negatively impact operations

138
Q

What is the Inventory Conversion Period?

A

Average time needed to convert materials into finished goods and sell them

Average Inventory : (BI + E) / 2

Inventory Conversion Period : Average Inventory / Sales Per Day

139
Q

What is the Receivables Collection Period?

A

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

140
Q

What is the Payables Deferral Period?

A

Average time between materials and labor purchase and their A/P payment

Average Payables : (BP + EP) / 2

Payables Deferral Period : Average Payables / (COGS/365)

141
Q

What is the Cash Conversion Cycle?

A

Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)

Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
: Cash Conversion Cycle

(Inventory Really (-Pays) Cash)

142
Q

What traits should Cash and Short-Term Investments have?

A

Liquid

Safe

143
Q

For what are Letters of Credit used?

A

Used for importing goods.

Issued by importer’s bank.

144
Q

What is the advantage of using Trade Credit?

A

No interest cost if paid timely.

145
Q

What is a Lockbox System? What are the advantages?

A

Customer Payments are sent to a bank-managed PO box.

Employees don’t have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)

146
Q

What is float?

A

Time it takes to mail a payment and have it clear your bank account

Maximize float on cash payments

Minimize float on cash receipts

147
Q

What are Zero Balance Accounts?

A

Regional bank sends enough cash to cover daily checks

Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances

148
Q

What is the difference between Treasury Bills- Notes and Bonds?

A

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

149
Q

What is commercial paper?

A

Similar to T-Bill- but issued by corporations instead of Government

Greater than 9 Months Maturity

Unsecured

Issued by large firms

150
Q

What are the advantages and disadvantages of Commercial Paper?

A

Advantages: Financing at less than Prime. No compensating balances required.

Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.

151
Q

What is Economic Order Quantity?

A

The order quantity that minimizes inventory costs.

EOQ : Square Root of (2DO/C)

D : Unit Demand (Annual)
O : Order Cost
C : Cost of Inventory

152
Q

What is Carrying Cost?

A

The cost of keeping inventory.

153
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

154
Q

What is inventory reorder point?

A

How low inventory should get before it should be re-ordered.

IOP : Average Daily Demand x Average Lead Time

155
Q

What is a Just In Time (JIT) system?

A

Orders inventory so that you get it just in time for when it’s needed

JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high

156
Q

What is Factoring of receivables?

A

Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection

157
Q

What is a Trade Discount?

A

Buyer saves if paid early

Example: 1/10 Net 30

1% Discount if paid within 10 days

If not- bill is still due in 30 days

158
Q

What is the cost of forgoing a discount?

A

(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))

159
Q

What is the Prime Rate?

A

A benchmark used for lending only to the best customers

Most customers will be charged Prime + 3%- for example

If the lending institution and the customer are not in the same country- the LIBOR rate is often used

160
Q

What is the Nominal (Face- Coupon- Stated) Rate?

A

Interest rate stated on the face of a bond.

161
Q

How is Current Yield calculated?

A

CY : Interest Payment / Bond Price

162
Q

What is the Effective (YTM- Market) Rate?

A

PV of Principle + Interest : Bond Price

163
Q

What is a Zero Coupon Bond?

A

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

164
Q

What are the characteristics of a Junk Bond?

A

High interest rate

High default risk

165
Q

What are debenture bonds?

A

Bonds unsecured by collateral

166
Q

What are subordinated debentures?

A

Debenture Bonds that will be repaid if any assets are left after liquidation of a company

167
Q

What are Redeemable Bonds?

A

Provision in Bond contract allows demand of Bond payment under certain circumstances

168
Q

What is a Callable Bond?

A

Borrower can pay off debt early

169
Q

What is a Convertible Bond?

A

Lender can demand payment via company stock instead of money

170
Q

What is a Sinking Fund?

A

Borrower deposits regular sums into an account that will eventually pay off the debt

171
Q

What is the disadvantage of Common Stock in comparison to bonds?

A

Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)

172
Q

What is the advantage of Preferred Stock?

A

Hold dividend priority over common stock

173
Q

What is Weighted Average Cost of Capital?

A

A company uses this to determine the true cost of their capital

Example:
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%
174
Q

What is CAPM?

A

A stock’s expected performance is based on its beta (risk) compared to that of the stock market.

More risk : more expected return.

175
Q

How is Cost of Debt calculated?

A

(Interest Expense - Tax Benefit) / Carrying Value of Debt

176
Q

How does a price increase affect supply?

A

When the prices of an item increases supply increases- because more sellers are willing to sell.

177
Q

What is a supply curve shift?

A

When supply changes due to something other than price.

178
Q

What are the characteristics of a positive supply curve shift (shift right)?

A

Supply increases at each price point

Higher Equilibrium GDP

Number of sellers increases - market can get flooded

Examples: Government subsidies or technology improvements that decrease costs for suppliers

179
Q

What are the characteristics of a negative supply curve shift (shift left)?

A

Supply decreases at each price point

Lower Equilibrium GDP

Cost of producing item increases

Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market

180
Q

How does price affect the demand for an item?

A

When the prices of an item increases- demand for it decreases.

181
Q

What is a Demand Curve Shift?

A

When demand changes due to something other than price.

182
Q

What is a Positive Demand Curve Shift (Shift Right)?

A

When demand increases at each price point

Price of substitutes go up - price of beef rises- so people buy more chicken

Future price increase is expected - War in Middle East- people go out and buy gas

Market expands - i.e. people get new free health care plan- demand at clinic rises

Expansion - more spending increases equilibrium GDP

183
Q

What is a Negative Demand Curve Shift (Shift Left)?

A

Demand decreases at each price point.

Price of complement goes up - price of beef goes up- less demand for ketchup

Boycott - Company commits social blunder- consumers boycott

Consumer income rises - Demand for inferior goods drops as people have more money to spend

Consumer tastes change

Contraction - less spending decreases equilibrium GDP

184
Q

What is the Marginal Propensity to Consume?

A

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

185
Q

What is the Marginal Propensity to Save?

A

How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume

186
Q

How is the multiplier effect calculated?

A

(1 / 1-MPC) x Change in Spending

187
Q

How does increased spending by consumers and the government affect the demand curve?

A

As spending by consumers or the government increases- the demand curve increases (shifts right).

188
Q

How does spending change due to the multiplier effect?

A

The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.

One consumer spends money- which:
*Increases the income of a business
*Increases the income of a vendor
*Increases income of employees
*Increases tax revenue

189
Q

How is Price Elasticity of Demand calculated?

A

% Change in Quantity Demand / % Change in Price

190
Q

Under elastic demand- how does price affect revenues?

A

Price increases- Revenue decreases

Price decreases- Revenue increases

191
Q

What conditions would indicate Elastic Demand?

A

Many substitutes (luxury items)
Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)

Price increases- Revenue decreases
Price decreases- Revenue increases

192
Q

How does revenue react to price under Inelastic Demand?

A

Price increases- Revenue increases

Price decreases- Revenue decreases

193
Q

What conditions would indicate Inelastic Demand?

A

Few substitutes (groceries- gasoline)
Considered inelastic if coefficient of elasticity is less than 1
5% drop in demand / 10% increase in price : .5 (inelastic)

Price increases- Revenue increases
Price decreases- Revenue decreases

194
Q

What is Unitary Demand?

A

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

195
Q

How is Income Elasticity of Demand calculated?

A

% Change Quantity Demanded / % Change in Income

Normal goods greater than 1 (demand increases more than income)

Inferior goods less than 1 (demand increases less than income)

196
Q

What conditions occur under periods of inflation?

A

Interest rates increase
Reduced demand for loans
Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease

197
Q

What happens under Demand-Pull inflation?

A

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases

198
Q

What happens under Cost-Push inflation?

A

Overall production costs increase
Supply decreases (shifts left)
Market equilibrium price increases

Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

199
Q

What is the Equilibrium Price?

A

The price where Quantity Supplied : Quantity Demanded

200
Q

What is Optimal Production?

A

When Marginal Revenue : Marginal Cost

201
Q

What is the result of a Price Floor?

A

Causes a surplus if above equilibrium price.

202
Q

What is GDP (Gross Domestic Product)?

A

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests

Included: Foreign company has US Factory

Not included: US company has foreign factory

203
Q

What is included under the income approach for calculating GDP?

A

Sole Proprietor and Corp Income
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments
Depreciation

204
Q

What is included under the Expenditure Approach for calculating GDP?

A

Individual Consumption

Private Investment

Government Purchases

Net Exports

205
Q

What is Nominal GDP?

A

Measures goods/services in current prices.

206
Q

For what is a GDP Deflator used?

A

Used to convert GDP to Real GDP

207
Q

What is Real GDP?

A

Nominal GDP / GDP Deflator x 100

208
Q

What is Gross National Product (GNP)?

A

Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included

209
Q

What is the Consumer Price Index (CPI)? How is it applied?

A

Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0

((CPI Current - CPI Last) / CPI Last) * 100

210
Q

How is disposable income calculated?

A

Personal Income - Personal Taxes

211
Q

How is Return to Scale calculated?

A

% Increase in output / % Increase in input

Greater than 1 : Increasing returns to scale

Less than 1 : Decreasing returns to scale

212
Q

When is the economy in Recession?

A

When GDP growth is negative for two consecutive quarters.

213
Q

What is a Depression?

A

A prolonged- severe recession with high unemployment rates

No requisite period of time for the economy to officially be in a depression

214
Q

What are the stages of the Economic Cycle?

A

Peak (highest)
Recession (decreasing)
Trough (lowest)
Recover (increasing)
Expansion (higher again)

215
Q

What are leading indicators?

A

Conditions that occur before a recession or before a recovery

Example: Stock Market or New Housing Starts

216
Q

What are lagging indicators?

A

Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates- Unemployment

217
Q

What are coincident indicators?

A

Conditions that occur during a recession or during a recovery

Example: Manufacturing output

218
Q

Which people are included in the calculation of unemployment?

A

Only people looking for jobs

219
Q

What is Cyclical Unemployment?

A

GDP doesn’t grow fast enough to employ all people who are looking for work

Example: People are unemployed in 2010 because there aren’t enough jobs available due to the economy

220
Q

What is Frictional Unemployment?

A

People are changing jobs or entering the work force. This is a normal aspect of full employment.

Example: A recent college graduate is looking for a job

221
Q

What is Structural Unemployment?

A

A worker’s job skills do not match those necessary to get a job so they need education or training

Example: A construction worker wants to work in an office- so they quit their job and get computer training

222
Q

How does inflation relate to unemployment?

A

High Unemployment : Low Inflation (Vice Versa)

223
Q

What is the Discount Rate?

A

The rate a bank pays to borrow from the Fed.

224
Q

What is the Prime Rate?

A

The rate a bank charges their best customers on short-term borrowings.

225
Q

What is the Real Interest Rate?

A

Inflation-adjusted interest rate

226
Q

What is the Nominal Rate?

A

Rate that uses current prices

227
Q

What is the Risk-Free Rate?

A

Rate for a loan with 100% certainty of payback.

Usually results in a lower rate.

US Treasuries are an example.

228
Q

What is included in the M1 money supply?

A

Currency- Coins- and Deposits

229
Q

What is included in the M2 money supply?

A

Highly liquid assets other than currency- coins or deposits

230
Q

What is Deficit Spending?

A

Increased spending levels without increased tax revenue.

Lower taxes without decrease in spending

Gamble that the multiplier effect will take over and boost economy

231
Q

How can the Fed control the money supply?

A

By buying and selling the government’s securities.

232
Q

How does the Fed control economy-wide interest rates?

A

By adjusting the discount rate charged to banks

233
Q

What is a Tariff?

A

A tax on imported goods

234
Q

What is a quota?

A

A limit on the number of goods that can be imported

235
Q

How do international trade restrictions affect domestic producers?

A

They are good for domestic producers.

Demand curve shifts right

Fewer substitutes

They can charge higher prices

236
Q

How to international trade restrictions affect foreign producers?

A

They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices

237
Q

How do international trade restrictions affect foreign consumers?

A

They are good for foreign consumers

Supply curve shifts right

Goods purchased at lower prices in the foreign markets

238
Q

How do international trade restrictions affect domestic consumers?

A

They are bad for domestic consumers

Supply curve shifts left

Fewer goods bought due to higher prices

239
Q

What is Accounting Cost?

A

Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs

240
Q

What is Accounting Profit?

A

Revenue - Accounting Cost

241
Q

What is Economic Cost?

A

Explicit + Implicit Cost

242
Q

What is Economic Profit?

A

Revenue - Economic Cost

243
Q

What is Cost Accounting?

A

Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for
o Direct Materials
o Direct Labor
o Work in Process
o Finished Goods

Cost Accounting also records for the Income Statement

244
Q

What is the difference between Cost Accounting and Managerial Accounting?

A

Cost Accounting - External Focus- GAAP

Managerial Accounting - Internal Focus- Not GAAP

245
Q

What are Product Costs (aka Inventory Costs)?

A

Prime Costs

Conversion Costs

246
Q

What are included in Prime Costs?

A

Direct Material USED - Have become part of the product or had a direct impact on the product

Direct Labor Used - Employees who worked on product and had direct impact

247
Q

What is Factory Overhead?

A

All factory costs except for DM and DL used in production- including Spoilage (except for abnormal spoilage- which is a period cost and not included in OH).

248
Q

What is included in Fixed Factory Overhead?

A

FFO : Estimated Costs / Normal Capacity

Uses Normal Activity

Examples of Fixed Factory OH: Depreciation (SL)- Utilities- Taxes

Under/Over-applied Fixed OH always goes to COGS

249
Q

What is included in Variable Overhead?

A

VO : Estimated Activity / Actual Activity

Uses Actual Activity

Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)

250
Q

Where is Under/Over-applied Variable OH recorded?

A

If Immaterial - Goes to COGS

If Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance

251
Q

Where is Under/Over-applied Fixed OH recorded?

A

It always goes to COGS

252
Q

What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?

A

Under-applied overhead.

If it’s Fixed OH- under-applied goes to COGS.

If it’s Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.

253
Q

What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?

A

A credit balance indicates over-applied overhead.

If Fixed overhead- it is corrected from COGS.

If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.

254
Q

Which variables are used to calculate Direct Material balances?

A

Beginning Balance DR Net purchases (plus freight-in)CR Direct Materials Used
: Ending balance (goes to BS)

255
Q

What variables are used to calculated Work in Process (WIP)?

A

Beginning Balance (End Bal of Previous WIP)DR Direct Materials UsedDR Direct Labor Used (Conversion Cost)CR COGMDR Factory Overhead Applied (Conversion Cost)
: Ending Balance (Goes to BS)

256
Q

What variables are included in Finished Goods calculations?

A

Beginning BalanceDR COGM
: COGAS (Cost of Goods Avail for Sale)
CR COGS
: Ending Balance (Goes to BS)

257
Q

How does Freight In affect Cost Accounting calculations?

A

Inventory (Product) Cost

Part of DM Purchases

258
Q

How does Freight Out affect Cost Accounting?

A

Selling (Period) Cost

Not part of inventory

259
Q

When is Job-Order Costing used?

A

Used when costs are easily connected to a specific product or product line

Can also be applied to services

Calculation is the same as normal cost accounting - just use your T Accounts
- DM to WIP to FG to COGS
- You’re likely going to be solving for the last job in the queue

260
Q

What is the Direct Method for allocating service department costs?

A

No services allocated between service departments- even if they serve each other. Only allocate to product(s)

261
Q

What is the Step Method for allocating service department costs?

A

Services can be allocated to both other service departments and the product(s)

262
Q

Under process costing- how are the units shipped calculated?

A

Beginning Inventory+ Units Started- Ending Inventory
: No. Units Shipped

263
Q

Which two inventory methods are used under Process Costing?

A

FIFO

Weighted Average

264
Q

What is another name for Process Costing?

A

Equivalent Units of Production

265
Q

How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?

A

EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)

266
Q

How are Direct Materials calculated under the Weighted Average Method?

A

Beginning Inventory + Current Costs / EFU WA

267
Q

How are Conversion Costs calculated under Weighted Average Method?

A

Beginning Inventory + Current Costs / EFU WA

268
Q

How are Equivalent Finished Units calculated for Direct Materials?

A

Units Shipped + EI x % Complete DM
: EFU (Weighted Average Method)

  • Beginning Inventory x % Complete
    : EFU (FIFO)
269
Q

How are Equivalent Finished Units calculated for Conversion Costs?

A

Units Shipped+ EI x % Complete CC
: EFU (Weighted Average)

  • Beginning Inventory x % Complete
    : EFU (FIFO)
270
Q

How are Direct Materials calculated under the FIFO method?

A

Current Costs / EFU FIFO

Note: FIFO method uses Current Period costs only and ignores Beginning Inventory

271
Q

How are Conversion Costs calculated under the FIFO method?

A

Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory

272
Q

How is WIP calculated?

A

Beginning balance (DM- DL- OH)+ Current Costs (DM- DL- OH)- COGM (Goes to Finished Goods)+ DM EFU x Cost per DM EFU+ CC EFU x Cost per CC EFU
: Ending WIP

273
Q

How do period costs and product costs relate to net sales- gross margin and operating income?

A

Net Sales - Product Costs
: Gross Margin
- Period Costs
: Operating Income

274
Q

What is the focus of Activity Based Costing (ABC)?

A

Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don’t want or don’t care about

Inventory is expensive to store and storing something is not a value-added expenditure

Uses Cost Pools - Different departments can have different OH rates

Uses Several OH rates based on Activity - Cost Pool / Cost Driver

275
Q

How do Cost Pools and Allocations compare under ABC versus traditional costing system?

A

Cost Pools and Allocations increase compared to a traditional costing system

276
Q

What is Backflush Costing?

A

Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)

  • Works backward to flush out COGS
  • Mostly GAAP
277
Q

What are the characteristics of By-Products?

A

Usually immaterial and common costs aren’t allocated to them
Low Market Value
Can be valued at NRV
Can be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against Sales
Recognition rules are very flexible with valuing and classifying by-products

278
Q

What are Cost Functions?

A

Measure how costs change relative to activity levels

High-Low Method

Change in Cost (High-Low pts) / Change in Activity (High-Low pts)

279
Q

What is the primary duty of the board of directors?

A

To monitor management behavior.

280
Q

What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?

A

Oversees the board

Responsible for hiring new CEO

281
Q

What is the responsibility of the audit committee of the board of directors?

A

The audit committee appoints and oversees the external auditor.

282
Q

What is the duty of the compensation committee of the board of directors?

A

The compensation committee handles the CEO’s compensation package.

283
Q

What does the NYSE and NASDAQ require of the board of directors?

A

They require the board to be independent.

284
Q

What is the main goal in an executive compensation package?

A

The package should ensure that the goals of management should match those of the shareholders.

285
Q

How can an executive compensation package ensure that goals of management align with those of shareholders?

A

Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.

286
Q

Which influences help mold the direction that management takes?

A

They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS)

These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties

287
Q

What is shirking?

A

When management doesn’t act in the best interest of shareholders.

It can be alleviated by tying compensation to stock performance or company profit.

288
Q

What requirements are imposed on a public company under Sarbanes-Oxley?

A

Management must submit a report on the effectiveness of Internal Control in the 10K.

Management must disclose significant Internal Control deficiencies.

CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.

289
Q

What characteristics are promoted by the COSO framework on Internal Control?

A

Reliable financial reporting

Effective and efficient operations

Compliance

290
Q

What are the elements of the control environment?

A 
Integrity & Ethics
Competence
The Board of Directors & Audit Committee
Management's Operating Style
Organizational Structure
Authority & Roles of Responsibilities
HR Policies
291
Q

What are control activities?

A

A component of Internal Control that includes actions being taken to promote the control environment.

292
Q

What are the basic elements of Internal Control?

A 
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring
293
Q

What is the significance of the Information and Communication aspect of Internal Control?

A

Management must have access to relevant and timely information to make good decisions.

294
Q

How does Monitoring affect Internal Control?

A

Internal Control activities must be constantly monitored and evaluated for effectiveness.

295
Q

What activities does the COSO framework for enterprise risk management include?

A 
Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement

Does NOT eliminate all risk

296
Q

What are possible responses to risk under the COSO framework for enterprise risk management?

A

Avoid or Reduce

Share or Accept

297
Q

What is Capital Budgeting? How is it used?

A

Managerial Accounting technique used to evaluate different investment options

Helps management make decisions

Uses both accounting and non-accounting information

Internal focus

GAAP is not mandatory

298
Q

What values are used in Capital Budgeting?

A

Capital Budgeting ONLY uses Present Value tables.

Capital Budgeting NEVER uses Fair Value.

299
Q

When is the Present Value of $1 table used?

A

For ONE payment- ONE time.

300
Q

When is the Present Value of an Annuity Due used?

A

Multiple payments made over time- where the payments are made at the START of the period.

301
Q

When is the Present Value of an Ordinary Annuity of $1 (PVOA) used?

A

Multiple payments over time- where payments are made at the END of the period.

Think A for Arrears.

302
Q

What is the calculation for the Present Value of $1?

A

1 / (( 1+i )^n)

i : interest rate
n : number of periods

303
Q

What is Net Present Value (NPV)?

A

A preferred method of evaluating profitability.

One of two methods that use the Time Value of Money
: PV of Future Cash Flows - Investment

304
Q

How is NPV used to calculate future benefit?

A

NPV : PV Future Cash Flows - Investment

If NPV is Negative- Cost is greater than benefits (bad investment)

If NPV is Positive- Cost is less than benefit (good investment)

If NPV : 0- Cost : Benefit (Management is indifferent)

305
Q

What is the rate of return on an investment called?

A

The Discount Rate.

306
Q

What does the Discount Rate represent?

A

The rate of return on an investment used.

It represents the minimum rate of return required.

307
Q

What are the strengths of the Net Present Value system?

A

Uses the Time Value of Money

Uses all cash flows- not just the cash flows to arrive at Payback

Takes risks into consideration

308
Q

What are the weaknesses of the Net Present Value system?

A

Not as simple as the Accounting Rate of Return.

309
Q

How do Salvage Value and Depreciation affect Net Present Value?

A

NPV includes Salvage Value because it is a future cash inflow.

NPV does NOT include depreciation because it is non-cash.

Exception - If a CPA Exam question says to include tax considerations- then you have to include depreciation because of income tax savings generated by depreciation.

310
Q

If multiple potential rates of return are available- which is used to calculate Net Present Value?

A

The minimum rate of return is used.

311
Q

What is the Internal Rate of Return (IRR)?

A

It calculates a project’s actual rate of return through the project’s expected cash flows.

IRR is the rate of return required for PV of future cash flows to EQUAL the investment.

Investment / After Tax Annual Cash Inflow : PV Factor

312
Q

Which rate of return is used to re-invest cash flows for Internal Rate of Return?

A

Cash flows are re-invested at the rate of return earned by the original investment.

313
Q

How does the rate used for Internal Rate of Return (IRR) compare to that used for Net Present Value (NPV)?

A

Rate of return for IRR is the rate earned by the investment.

Rate of return for NPV is the minimum rate.

314
Q

What are the strengths and weaknesses of the Internal Rate of Return system?

A

Strengths: Uses Time Value of Money- Cash Flow emphasis

Weakness: Uneven cash flows lead to varied IRR

315
Q

When is NPV on an Investment positive?

A

When the benefits are greater than the costs.

IRR is greater than the Discount Rate

316
Q

When is NPV on an Investment Negative?

A

When Costs are greater than Benefits

IRR is less than the Discount Rate

317
Q

When is NPV Zero?

A

When benefits equal the Costs

IRR : Discount Rate

318
Q

What is the Payback Method? How is it calculated?

A

It measures an investment in terms of how long it takes to recoup the initial investment via Annual Cash Inflow

Investment / Annual Cash Inflow : Payback Method

Compare to a targeted timeframe; if payback is shorter than target- it’s a good investment. If payback is longer than target- it’s a bad investment.

319
Q

What are the strengths of the Payback Method?

A

Takes risk into consideration

2 year payback is less risky than a 5 year payback

320
Q

What are the weaknesses of the payback method?

A

Ignores the Time Value of Money

Exception: Discount payback method

Ignores cash flow after the initial investment is paid back

321
Q

What is the Accounting Rate of Return?

A

An approximate rate of return on assets

ARR : Net Income / Average Investment

Compare to a targeted return rate; if ARR greater than target- good investment. If ARR less than target- bad investment.

322
Q

What are the strengths of the Accounting Rate of Return (ARR)?

A

Simple to use

People understand easily

323
Q

What are the weaknesses of the Accounting Rate of Return (ARR)?

A

Can be skewed based on Depreciation method that is used.

Ignores the Time Value of Money.

324
Q

What is an Expected Return?

A

An approximate rate of return on assets.

CPA Flash Cards (6 decks)

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