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CPA-BEC Flashcards

1
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

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2
Q

What values are used in Capital Budgeting?

A

Capital Budgeting ONLY uses Present Value tables.

Capital Budgeting NEVER uses Fair Value.

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3
Q

When is the Present Value of $1 table used?

A

For ONE payment- ONE time.

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4
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.

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5
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.

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6
Q

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

A

1 / (( 1+i )^n)

i : interest rate
n : number of periods

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7
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

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8
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)

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9
Q

What is the rate of return on an investment called?

A

The Discount Rate.

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10
Q

What does the Discount Rate represent?

A

The rate of return on an investment used.

It represents the minimum rate of return required.

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11
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

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12
Q

What are the weaknesses of the Net Present Value system?

A

Not as simple as the Accounting Rate of Return.

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13
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.

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14
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.

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15
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

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16
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.

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17
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.

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18
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

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19
Q

When is NPV on an Investment positive?

A

When the benefits are greater than the costs.

IRR is greater than the Discount Rate

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20
Q

When is NPV on an Investment Negative?

A

When Costs are greater than Benefits

IRR is less than the Discount Rate

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21
Q

When is NPV Zero?

A

When benefits equal the Costs

IRR : Discount Rate

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22
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.

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23
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

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24
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

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25
What is the Accounting Rate of Return?
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.
26
What are the strengths of the Accounting Rate of Return (ARR)?
Simple to use People understand easily
27
What are the weaknesses of the Accounting Rate of Return (ARR)?
Can be skewed based on Depreciation method that is used. Ignores the Time Value of Money.
28
What is an Expected Return?
An approximate rate of return on assets.
29
What is the primary duty of the board of directors?
To monitor management behavior.
30
What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?
Oversees the board Responsible for hiring new CEO
31
What is the responsibility of the audit committee of the board of directors?
The audit committee appoints and oversees the external auditor.
32
What is the duty of the compensation committee of the board of directors?
The compensation committee handles the CEO's compensation package.
33
What does the NYSE and NASDAQ require of the board of directors?
They require the board to be independent.
34
What is the main goal in an executive compensation package?
The package should ensure that the goals of management should match those of the shareholders.
35
How can an executive compensation package ensure that goals of management align with those of shareholders?
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.
36
Which influences help mold the direction that management takes?
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
37
What is shirking?
When management doesn't act in the best interest of shareholders. It can be alleviated by tying compensation to stock performance or company profit.
38
What requirements are imposed on a public company under Sarbanes-Oxley?
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.
39
What characteristics are promoted by the COSO framework on Internal Control?
Reliable financial reporting Effective and efficient operations Compliance
40
What are the elements of the control environment?
``` Integrity & Ethics Competence The Board of Directors & Audit Committee Management's Operating Style Organizational Structure Authority & Roles of Responsibilities HR Policies ```
41
What are control activities?
A component of Internal Control that includes actions being taken to promote the control environment.
42
What are the basic elements of Internal Control?
``` Control Environment Risk Assessment Control Activities Information and Communication Monitoring ```
43
What is the significance of the Information and Communication aspect of Internal Control?
Management must have access to relevant and timely information to make good decisions.
44
How does Monitoring affect Internal Control?
Internal Control activities must be constantly monitored and evaluated for effectiveness.
45
What activities does the COSO framework for enterprise risk management include?
``` 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
46
What are possible responses to risk under the COSO framework for enterprise risk management?
Avoid or Reduce Share or Accept
47
What is Cost Accounting?
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
48
What is the difference between Cost Accounting and Managerial Accounting?
Cost Accounting - External Focus- GAAP Managerial Accounting - Internal Focus- Not GAAP
49
What are Product Costs (aka Inventory Costs)?
Prime Costs Conversion Costs
50
What are included in Prime Costs?
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
51
What is Factory Overhead?
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).
52
What is included in Fixed Factory Overhead?
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
53
What is included in Variable Overhead?
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)
54
Where is Under/Over-applied Variable OH recorded?
If Immaterial - Goes to COGS If Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance
55
Where is Under/Over-applied Fixed OH recorded?
It always goes to COGS
56
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
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.
57
What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
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.
58
Which variables are used to calculate Direct Material balances?
Beginning Balance DR Net purchases (plus freight-in) CR Direct Materials Used : Ending balance (goes to BS)
59
What variables are used to calculated Work in Process (WIP)?
Beginning Balance (End Bal of Previous WIP) DR Direct Materials Used DR Direct Labor Used (Conversion Cost) CR COGM DR Factory Overhead Applied (Conversion Cost) : Ending Balance (Goes to BS)
60
What variables are included in Finished Goods calculations?
Beginning Balance DR COGM : COGAS (Cost of Goods Avail for Sale) CR COGS : Ending Balance (Goes to BS)
61
How does Freight In affect Cost Accounting calculations?
Inventory (Product) Cost Part of DM Purchases
62
How does Freight Out affect Cost Accounting?
Selling (Period) Cost Not part of inventory
63
When is Job-Order Costing used?
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
64
What is the Direct Method for allocating service department costs?
No services allocated between service departments- even if they serve each other. Only allocate to product(s)
65
What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
66
Under process costing- how are the units shipped calculated?
Beginning Inventory + Units Started - Ending Inventory : No. Units Shipped
67
Which two inventory methods are used under Process Costing?
FIFO Weighted Average
68
What is another name for Process Costing?
Equivalent Units of Production
69
How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?
EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)
70
How are Direct Materials calculated under the Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
71
How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
72
How are Equivalent Finished Units calculated for Direct Materials?
Units Shipped + EI x % Complete DM : EFU (Weighted Average Method) - Beginning Inventory x % Complete : EFU (FIFO)
73
How are Equivalent Finished Units calculated for Conversion Costs?
Units Shipped + EI x % Complete CC : EFU (Weighted Average) - Beginning Inventory x % Complete : EFU (FIFO)
74
How are Direct Materials calculated under the FIFO method?
Current Costs / EFU FIFO Note: FIFO method uses Current Period costs only and ignores Beginning Inventory
75
How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFO FIFO method uses Current Period costs only and ignores Beginning Inventory
76
How is WIP calculated?
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
77
How do period costs and product costs relate to net sales- gross margin and operating income?
Net Sales - Product Costs : Gross Margin - Period Costs : Operating Income
78
What is the focus of Activity Based Costing (ABC)?
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
79
How do Cost Pools and Allocations compare under ABC versus traditional costing system?
Cost Pools and Allocations increase compared to a traditional costing system
80
What is Backflush Costing?
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
81
What are the characteristics of By-Products?
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
82
What are Cost Functions?
Measure how costs change relative to activity levels High-Low Method Change in Cost (High-Low pts) / Change in Activity (High-Low pts)
83
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
84
What is a supply curve shift?
When supply changes due to something other than price.
85
What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price point Higher Equilibrium GDP Number of sellers increases - market can get flooded Examples: Government subsidies or technology improvements that decrease costs for suppliers
86
What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price point Lower Equilibrium GDP Cost of producing item increases Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market
87
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
88
What is a Demand Curve Shift?
When demand changes due to something other than price.
89
What is a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price point Price of substitutes go up - price of beef rises- so people buy more chicken Future price increase is expected - War in Middle East- people go out and buy gas Market expands - i.e. people get new free health care plan- demand at clinic rises Expansion - more spending increases equilibrium GDP
90
What is a Negative Demand Curve Shift (Shift Left)?
Demand decreases at each price point. Price of complement goes up - price of beef goes up- less demand for ketchup Boycott - Company commits social blunder- consumers boycott Consumer income rises - Demand for inferior goods drops as people have more money to spend Consumer tastes change Contraction - less spending decreases equilibrium GDP
91
What is the Marginal Propensity to Consume?
How much you spend when your income increases Calculate: Change in Spending / Change in Income
92
What is the Marginal Propensity to Save?
How much you save when income increases Calculate: Change in Savings / Change in Income Also equals 1 - Marginal Propensity to Consume
93
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
94
How does increased spending by consumers and the government affect the demand curve?
As spending by consumers or the government increases- the demand curve increases (shifts right).
95
How does spending change due to the multiplier effect?
The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect. One consumer spends money- which: *Increases the income of a business *Increases the income of a vendor *Increases income of employees *Increases tax revenue
96
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
97
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreases Price decreases- Revenue increases
98
What conditions would indicate Elastic Demand?
Many substitutes (luxury items) Considered elastic if elasticity is greater than 1 10% drop in demand / 8% increase in price : 1.25 (Elastic) Price increases- Revenue decreases Price decreases- Revenue increases
99
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increases Price decreases- Revenue decreases
100
What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline) Considered inelastic if coefficient of elasticity is less than 1 5% drop in demand / 10% increase in price : .5 (inelastic) Price increases- Revenue increases Price decreases- Revenue decreases
101
What is Unitary Demand?
Total revenue will remain the same if price is increased Considered unitary if coefficient of elasticity : 1
102
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in Income Normal goods greater than 1 (demand increases more than income) Inferior goods less than 1 (demand increases less than income)
103
What conditions occur under periods of inflation?
Interest rates increase Reduced demand for loans Reduced demand for houses- autos- etc. Value of bonds and fixed income securities decrease Inferior good demand to increase Foreign goods more affordable than domestic Demand for domestic goods decrease
104
What happens under Demand-Pull inflation?
Overall spending increases Demand increases (shifts right) Market equilibrium price increases
105
What happens under Cost-Push inflation?
Overall production costs increase Supply decreases (shifts left) Market equilibrium price increases Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
106
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
107
What is Optimal Production?
When Marginal Revenue : Marginal Cost
108
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
109
What is GDP (Gross Domestic Product)?
The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests Included: Foreign company has US Factory Not included: US company has foreign factory
110
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp Income Passive Income Taxes Employee Salaries Foreign Income Adjustments Depreciation
111
What is included under the Expenditure Approach for calculating GDP?
Individual Consumption Private Investment Government Purchases Net Exports
112
What is Nominal GDP?
Measures goods/services in current prices.
113
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
114
What is Real GDP?
Nominal GDP / GDP Deflator x 100
115
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
116
What is the Consumer Price Index (CPI)? How is it applied?
Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0 ((CPI Current - CPI Last) / CPI Last) * 100
117
How is disposable income calculated?
Personal Income - Personal Taxes
118
How is Return to Scale calculated?
% Increase in output / % Increase in input Greater than 1 : Increasing returns to scale Less than 1 : Decreasing returns to scale
119
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
120
What is a Depression?
A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression
121
What are the stages of the Economic Cycle?
Peak (highest) Recession (decreasing) Trough (lowest) Recover (increasing) Expansion (higher again)
122
What are leading indicators?
Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts
123
What are lagging indicators?
Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment
124
What are coincident indicators?
Conditions that occur during a recession or during a recovery Example: Manufacturing output
125
Which people are included in the calculation of unemployment?
Only people looking for jobs
126
What is Cyclical Unemployment?
GDP doesn't grow fast enough to employ all people who are looking for work Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy
127
What is Frictional Unemployment?
People are changing jobs or entering the work force. This is a normal aspect of full employment. Example: A recent college graduate is looking for a job
128
What is Structural Unemployment?
A worker's job skills do not match those necessary to get a job so they need education or training Example: A construction worker wants to work in an office- so they quit their job and get computer training
129
How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
130
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
131
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
132
What is the Real Interest Rate?
Inflation-adjusted interest rate
133
What is the Nominal Rate?
Rate that uses current prices
134
What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.
135
What is included in the M1 money supply?
Currency- Coins- and Deposits
136
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
137
What is Deficit Spending?
Increased spending levels without increased tax revenue. Lower taxes without decrease in spending Gamble that the multiplier effect will take over and boost economy
138
How can the Fed control the money supply?
By buying and selling the government's securities.
139
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
140
What is a Tariff?
A tax on imported goods
141
What is a quota?
A limit on the number of goods that can be imported
142
How do international trade restrictions affect domestic producers?
They are good for domestic producers. Demand curve shifts right Fewer substitutes They can charge higher prices
143
How to international trade restrictions affect foreign producers?
They are bad for foreign producers Demand curve shifts left Fewer buyers They must charge lower prices
144
How do international trade restrictions affect foreign consumers?
They are good for foreign consumers Supply curve shifts right Goods purchased at lower prices in the foreign markets
145
How do international trade restrictions affect domestic consumers?
They are bad for domestic consumers Supply curve shifts left Fewer goods bought due to higher prices
146
What is Accounting Cost?
Explicit (Actual) cost of operating a business Implicit costs are opportunity costs
147
What is Accounting Profit?
Revenue - Accounting Cost
148
What is Economic Cost?
Explicit + Implicit Cost
149
What is Economic Profit?
Revenue - Economic Cost
150
What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
151
How is Net Working Capital calculated?
NWC : Current Assets - Current Liabilities
152
What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycle Don't negatively impact operations
153
What is the Inventory Conversion Period?
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
154
What is the Receivables Collection Period?
Average time needed to collect A/R RCP : Average Receivables / Credit Sales Per Day
155
What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P payment Average Payables : (BP + EP) / 2 Payables Deferral Period : Average Payables / (COGS/365)
156
What is the Cash Conversion Cycle?
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)
157
What traits should Cash and Short-Term Investments have?
Liquid Safe
158
For what are Letters of Credit used?
Used for importing goods. Issued by importer's bank.
159
What is the advantage of using Trade Credit?
No interest cost if paid timely.
160
What is a Lockbox System? What are the advantages?
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)
161
What is float?
Time it takes to mail a payment and have it clear your bank account Maximize float on cash payments Minimize float on cash receipts
162
What are Zero Balance Accounts?
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
163
What is the difference between Treasury Bills- Notes and Bonds?
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
164
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of Government Greater than 9 Months Maturity Unsecured Issued by large firms
165
What are the advantages and disadvantages of Commercial Paper?
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.
166
What is Economic Order Quantity?
The order quantity that minimizes inventory costs. EOQ : Square Root of (2DO/C) D : Unit Demand (Annual) O : Order Cost C : Cost of Inventory
167
What is Carrying Cost?
The cost of keeping inventory.
168
What is Order Cost?
Cost of executing an order and starting product production.
169
What is inventory reorder point?
How low inventory should get before it should be re-ordered. IOP : Average Daily Demand x Average Lead Time
170
What is a Just In Time (JIT) system?
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
171
What is Factoring of receivables?
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
172
What is a Trade Discount?
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
173
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
174
What is the Prime Rate?
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
175
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
176
How is Current Yield calculated?
CY : Interest Payment / Bond Price
177
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
178
What is a Zero Coupon Bond?
No interest payments made Bond sold at a discount Interest reflected when Bond matures
179
What are the characteristics of a Junk Bond?
High interest rate High default risk
180
What are debenture bonds?
Bonds unsecured by collateral
181
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
182
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
183
What is a Callable Bond?
Borrower can pay off debt early
184
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
185
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
186
What is the disadvantage of Common Stock in comparison to bonds?
Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)
187
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
188
What is Weighted Average Cost of Capital?
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% ```
189
What is CAPM?
A stock's expected performance is based on its beta (risk) compared to that of the stock market. More risk : more expected return.
190
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
191
What is a Static Budget?
Budget targeted for a specific segment of a company.
192
What is a Maser Budget?
Budget targeted for the company as a whole Includes budgets for Operations and Cash Flows Includes set of budgeted Financial Statements
193
How do Fixed Costs affect budgeting?
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
194
How do Variable Costs affect budgeting?
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
195
How are Material Variances calculated?
SAM: Standard Material Costs - Actual Material Costs = Material Variance
196
How are Labor Variances calculated?
SAL Standard Labor Costs - Actual Labor Costs = Labor Variance
197
How are Overhead Variances calculated?
OAT Overhead Applied - Actual Overhead Cost = Total Overhead Variance
198
How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
199
How is Contribution Margin calculated?
Sales Price (per unit) - Variable Cost (per unit) = Contribution Margin (per unit)
200
How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit) = Break-even Point Per Unit Assumption: Total Costs & Total Revenues are LINEAR
201
What is the focus in a Cost Center?
Management is concerned only with costs
202
What is the focus in a Profit Center?
Management is concerned with both costs and profits
203
What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
204
What is the Delphi technique?
Forecasting technique where Data is collected and analyzed Requires judgement/consensus
205
What is Regression Analysis?
A forecasting technique where Sales is the dependent variable. Simple Regression - One independent variable Multiple Regression - Multiple independent variables
206
What are Econometric Models?
Forecast sales using Economic Data
207
What are Naive Forecasting Models?
Very Simplistic | - Eyeball past trends and make an estimate
208
How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periods Difference: Exponential Smoothing weighs recent data more heavily
209
What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs Only Ignore Sunk Costs Opportunity Cost is a Must
210
Which IT personnel roles should always be segregated?
Operators Programmers Librarians
211
What are the duties of a systems analyst?
Designs or purchases IT system Responsible for flowcharts Liaison between Users and Programmers Note: Think IT Manager
212
What is the primary duty of a Systems Administrator?
A Systems Administrator controls database access.
213
What are the duties of a Systems Programmer?
Writes- Updates- Maintains- & Tests software- systems- and compilers
214
Which duties should a Systems Programmer NOT have?
In order to maximize internal control- a Systems Programmer should NOT have application programming duties/abilities or be an Operator on the system.
215
What are the duties of a Systems Operator?
Schedules and Monitors Jobs Runs IT Help Desk
216
What duties should a System Operator NOT have?
For internal control purposes- they should not be a Programmer on the system.
217
If it is not possible to segregate duties in an IT System- what actions should be taken to compensate for internal control purposes?
Include Computer Logs. Control Group should review the logs.
218
What is the purpose of a Management Information System (MIS)?
To assist with decision making.
219
What is an Accounting Information System (AIS)?
A type of Management Information System (MIS) that processes accounting transactions.
220
What are the characteristics of an Executive Information System (EIS)?
Specialized for Company Executive needs Assists with Strategy Only No Decision-Making Capabilities
221
What are the characteristics of an Expert System (ES)?
Computer uses reasoning Structured No human interpretation needed
222
What are the characteristics of a Decision Support System (DSS)?
Computer provides data Gives Interactive Support Human interpretation needed
223
What are the characteristics of an Ad Hoc computer report?
User initiates the report. The report is created upon demand.
224
When are Exception reports generated?
Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem
225
What is a query?
A type of Ad Hoc report- initiated by a user.
226
What is End-User Computing?
The User develops and executes their own application.
227
What is the primary benefit of E-commerce?
E-commerce makes business transactions easier.
228
What are the risks of E-commerce?
Compromised data or theft. Less paper trail for auditors.
229
What are the benefits of Electronic Data Interchange?
Uses globally-accepted standards Efficient
230
What is a File Server?
A file server stores shared programs and documents.
231
What is the purpose of a Database?
Located on a File Server- a Database allows users to share documents.
232
What is the purpose of a LAN (Local Area Network)?
It connects computers in close proximity.
233
What is the purpose of a WAN (Wide Area Network)?
It connects computers that are far apart.
234
What are the characteristics of a VAN (Value-Added Network)?
Privately-owned Network Serves as 3rd Party Between 2 Companies Routes EDI Transactions Accepts wide range of Protocols Very Costly
235
What is the purpose of a Firewall?
Prevents unauthorized access to a network.
236
What are the characteristics of a virus?
Takes over a computer Needs a host program to run
237
What are the characteristics of a computer worm?
Takes over multiple computers Doesn't need a host program to run
238
What is the purpose of Automated Equipment Controls?
They prevent and detect hardware errors.
239
What is RAM?
Random Access Memory. Internal memory in the computer used during immediate processing.
240
What is a CPU?
Computer Processing Unit It processes commands within a computer.
241
What is Job Control Language?
It schedules and allocates system resources.
242
What are examples of input devices?
Keyboard Mouse Scanner Magnetic Ink Reader Magnetic Tape Reader EDI Point of Sale Scanner
243
What are examples of Output Devices?
Speakers Monitors Printers
244
What are the characteristics of Magnetic Tape storage?
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
245
What are the characteristics of Magnetic Disks?
Random Access - Finds data in random spots Faster data retrieval Uses Boundary Protection for data
246
What is a Gateway?
Connects one network to another Note: the Internet is connected by Gateways
247
What are Parity Checks?
A control that detects internal data errors. A bit is added to each character- it checks to see if a bit was lost.
248
What is an Echo Check?
Transmitted data is returned to the sender for verification (it echoes back to the sender)
249
What is a Change Control?
It authorizes program changes and approves program test results.
250
What is security software?
Software that controls access to IT systems. Note: Don't confuse this with anti-virus software
251
What is the purpose of a Digital Signature?
It confirms a message has not been altered.
252
List the types of computers from smallest to largest
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
253
What are the units of computer data from smallest to largest?
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)
254
What is the duty of a design engineer?
Determine language used for a specific computer- on a computer-to-computer basis
255
What are object programs?
Programs written in base computer language- not similar to English.
256
How can source programs be recognized?
They are written in a language close to English.
257
What is the purpose of a Compiler?
Takes Source language (English) and converts to Object (Computer) Language
258
How does Online Analytical Processing work?
It uses a Data Warehouse to support management decision making.
259
What is Data Mining?
Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.
260
What is the purpose of online transaction processing?
To process a company's routine transactions.
261
What are the characteristics of batch processing?
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)
262
What does an output control check for?
Checks to see if output data is valid- distributed and used in an authorized manner.
263
What does a processing control check?
Checks if data processing produced proper output
264
What is a hash total?
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.
265
What is a validity check?
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
266
What is a limit check?
Checks to see if numbers surpass a certain limit- i.e. in an age field is the number greater than 110.
267
What is a check digit?
An input control that adds an identification number to a set of digits - usually at the end
268
What is a field check?
An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field
269
What is a Hot Site?
A disaster recovery system where if the main system goes down- a Hot Site is ready to take over immediately.
270
What is a Cold Site?
If a main system goes down- a Cold Site will take time to get set up and running.
271
What is the most common database language?
SQL - Structured Query Language
272
What is a Data Definition Language?
Defines SQL Database Controls SQL Tables
273
What is a Data Manipulation Language?
Queries SQL Database tables
274
What is a Data Control Language?
Controls Access to SQL Database
275
What are the characteristics of a Relational Database?
Logical structure Uses rows and columns similar to spreadsheet
276
What are the characteristics of a Hierarchical Database?
Has various levels Uses trees to store data
277
What are the advantages of a database?
Data is more accessible Reduced redundancy
278
What are the disadvantages of a database?
Cost of installation Skilled personnel required to maintain
279
What are the components of a database?
Desktop client Application Server Database Server Think: Your desktop computer runs applications and saves to a database
280
What four perspectives are included in Balanced Scorecard?
Financial / Customer / Internal Business Processes / Learning and Growth
281
Why was Balanced Scorecard created?
To measure Performance.
282
What are Strategy Maps?
Diagrams of Strategic Cause and Effect Relationships.
283
What is a Strategic Initiative?
A plan to achieve goals.
284
What measures are used under Value-Based Management?
``` Return on Investment Residual Income Spread Economic Value Added Free Cash Flow ```
285
How is Return on Investment (ROI) calculated?
ROI : Return / Investment Example: You Invest $100 to buy a machine that generates $60 in Operating Income $60 / $100 : 60% ROI
286
How is Residual Income calculated?
Operating Income - (Required Rate of Return x Invested Capital) : Residual Income
287
What is another name for Required Rate of Return (RROR)?
RROR is also called 'Cost of Capital'
288
What is Weighted Average Cost of Capital (WACC)? How is it calculated?
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%
289
How is Spread calculated?
Spread : ROI - Cost of Capital
290
What is the primary point of Economic Value Added? How is it calculated?
Investments should exceed costs- with an emphasis on stockholder value. Economic Value Added : Operating Income After Tax - (Net Assets x WACC)
291
How is Free Cash Flow calculated?
``` Operating Income After Tax + Depreciation & Amortization - Capital Expenditures - Change in Net Working Capital : Free Cash Flow ```
292
What is measured by Six Sigma?
It measures a product versus its quality goal.
293
What is the Asset Turnover Ratio?
Sales / Average Assets
294
What does the Current Ratio tell us? How is it calculated?
Can the company pay their short-term liabilities? Current Ratio : Current Assets / Current Liabilities
295
What does the Debt to Equity Ratio tell us? How is it calculated?
How is the company financing its capital? Debt to Equity Ratio : Total Debt / Total Equity
296
What does the Debt to Total Assets ratio tell us? How is it calculated?
What proportions of the company's assets are encumbered with debt? Debt to Total Assets : Total Liabilities / Total Assets
297
What does Gross Margin % tell us? How is it calculated?
How profitable is the product after COGS? Gross Margin : Gross Profit / Net Sales
298
What does Operating Profit Margin tell us? How is it calculated?
How profitable is the product after all expenses (except interest and taxes)? Operating Profit Margin : Operating Profit / Net Sales
299
How is Times Interest Earned calculated and what does it mean?
Can the company make their interest payments? Times Interest Earned : Earnings Before Tax & Interest / Interest Expense
300
What does Return on Assets tell us? How is it calculated?
What % return are the assets generating? Return on Assets : Net Income (net of interest & taxes) / Average Total Assets
301
How is Market/Book ratio calculated?
Market Value of Common Stock / Book Value of Common Stock
302
What is Inventory Turnover and how is it calculated?
How quickly does inventory get sold? Inventory Turnover : COGS / Average Inventory
303
What is the Quick Ratio and how is it calculated?
It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory) Quick Ratio : (Current Assets - Inventory) / Current Liabilities
304
What is Average Collection Period- and how is it calculated?
How many days does it take the company to collect payment on A/R? Average Collection Period : Average AR / Average Sales Per Day
305
What is an Internal Failure?
Products have quality defects- but are caught BEFORE they leave the warehouse.
306
What is an External Failure?
Product reaches the customer- but they are not satisfied with the quality of the product. This includes recalls.
307
What is Appraisal Cost?
Quality control- testing & inspection costs.
308
Define Market Risk
The risk that a sluggish economy will affect the value of a debt instrument
309
Define Sector Risk
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
310
Define Credit/Default Risk
The risk that a debtor will be unable to make loan payments or pay back the principal
311
Define Interest Rate Risk
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.
312
What does Standard Deviation measure?
It measures the volatility of an investment.
313
What is Systematic Risk?
Risk that impacts the entire market and can't be avoided or reduced through diversification Example: Wars
314
What is Unsystematic Risk?
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
315
What does Beta measure?
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?
316
What is Variance?
It compares volatility of an investment to the market average. Factors include both Systematic and Unsystematic Risk.
317
What is a Derivative?
An asset whose value is DERIVED from the value of another asset. Derivatives are measured at Fair Value.
318
How is an Option used?
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
319
What is a Future?
A Forward Contract with a future value. They are sold and traded on the futures market.
320
What is an Interest Rate Swap?
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
321
What is Legal Risk?
Risk that a law or regulation will void the derivative
322
What is a Fair Value Hedge?
Hedge that protects against the value of an asset or liability changing. Changes in value are reported in earnings.
323
What is a Cash Flow Hedge?
A hedge that protects against a set of future cash flows changing. Changes in value are reported in OCI.
324
What is a Foreign Currency Hedge?
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.
325
What is Capital Budgeting? How is it used?
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
326
What values are used in Capital Budgeting?
Capital Budgeting ONLY uses Present Value tables. Capital Budgeting NEVER uses Fair Value.
327
When is the Present Value of $1 table used?
For ONE payment- ONE time.
328
When is the Present Value of an Annuity Due used?
Multiple payments made over time- where the payments are made at the START of the period.
329
When is the Present Value of an Ordinary Annuity of $1 (PVOA) used?
Multiple payments over time- where payments are made at the END of the period. Think A for Arrears.
330
What is the calculation for the Present Value of $1?
1 / (( 1+i )^n) i : interest rate n : number of periods
331
What is Net Present Value (NPV)?
A preferred method of evaluating profitability. One of two methods that use the Time Value of Money : PV of Future Cash Flows - Investment
332
How is NPV used to calculate future benefit?
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)
333
What is the rate of return on an investment called?
The Discount Rate.
334
What does the Discount Rate represent?
The rate of return on an investment used. It represents the minimum rate of return required.
335
What are the strengths of the Net Present Value system?
Uses the Time Value of Money Uses all cash flows- not just the cash flows to arrive at Payback Takes risks into consideration
336
What are the weaknesses of the Net Present Value system?
Not as simple as the Accounting Rate of Return.
337
How do Salvage Value and Depreciation affect Net Present Value?
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.
338
If multiple potential rates of return are available- which is used to calculate Net Present Value?
The minimum rate of return is used.
339
What is the Internal Rate of Return (IRR)?
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
340
Which rate of return is used to re-invest cash flows for Internal Rate of Return?
Cash flows are re-invested at the rate of return earned by the original investment.
341
How does the rate used for Internal Rate of Return (IRR) compare to that used for Net Present Value (NPV)?
Rate of return for IRR is the rate earned by the investment. Rate of return for NPV is the minimum rate.
342
What are the strengths and weaknesses of the Internal Rate of Return system?
Strengths: Uses Time Value of Money- Cash Flow emphasis Weakness: Uneven cash flows lead to varied IRR
343
When is NPV on an Investment positive?
When the benefits are greater than the costs. IRR is greater than the Discount Rate
344
When is NPV on an Investment Negative?
When Costs are greater than Benefits IRR is less than the Discount Rate
345
When is NPV Zero?
When benefits equal the Costs IRR : Discount Rate
346
What is the Payback Method? How is it calculated?
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.
347
What are the strengths of the Payback Method?
Takes risk into consideration 2 year payback is less risky than a 5 year payback
348
What are the weaknesses of the payback method?
Ignores the Time Value of Money Exception: Discount payback method Ignores cash flow after the initial investment is paid back
349
What is the Accounting Rate of Return?
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.
350
What are the strengths of the Accounting Rate of Return (ARR)?
Simple to use People understand easily
351
What are the weaknesses of the Accounting Rate of Return (ARR)?
Can be skewed based on Depreciation method that is used. Ignores the Time Value of Money.
352
What is an Expected Return?
An approximate rate of return on assets.
353
What is the primary duty of the board of directors?
To monitor management behavior.
354
What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?
Oversees the board Responsible for hiring new CEO
355
What is the responsibility of the audit committee of the board of directors?
The audit committee appoints and oversees the external auditor.
356
What is the duty of the compensation committee of the board of directors?
The compensation committee handles the CEO's compensation package.
357
What does the NYSE and NASDAQ require of the board of directors?
They require the board to be independent.
358
What is the main goal in an executive compensation package?
The package should ensure that the goals of management should match those of the shareholders.
359
How can an executive compensation package ensure that goals of management align with those of shareholders?
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.
360
Which influences help mold the direction that management takes?
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
361
What is shirking?
When management doesn't act in the best interest of shareholders. It can be alleviated by tying compensation to stock performance or company profit.
362
What requirements are imposed on a public company under Sarbanes-Oxley?
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.
363
What characteristics are promoted by the COSO framework on Internal Control?
Reliable financial reporting Effective and efficient operations Compliance
364
What are the elements of the control environment?
``` Integrity & Ethics Competence The Board of Directors & Audit Committee Management's Operating Style Organizational Structure Authority & Roles of Responsibilities HR Policies ```
365
What are control activities?
A component of Internal Control that includes actions being taken to promote the control environment.
366
What are the basic elements of Internal Control?
``` Control Environment Risk Assessment Control Activities Information and Communication Monitoring ```
367
What is the significance of the Information and Communication aspect of Internal Control?
Management must have access to relevant and timely information to make good decisions.
368
How does Monitoring affect Internal Control?
Internal Control activities must be constantly monitored and evaluated for effectiveness.
369
What activities does the COSO framework for enterprise risk management include?
``` 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
370
What are possible responses to risk under the COSO framework for enterprise risk management?
Avoid or Reduce Share or Accept
371
What is Cost Accounting?
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
372
What is the difference between Cost Accounting and Managerial Accounting?
Cost Accounting - External Focus- GAAP Managerial Accounting - Internal Focus- Not GAAP
373
What are Product Costs (aka Inventory Costs)?
Prime Costs Conversion Costs
374
What are included in Prime Costs?
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
375
What is Factory Overhead?
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).
376
What is included in Fixed Factory Overhead?
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
377
What is included in Variable Overhead?
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)
378
Where is Under/Over-applied Variable OH recorded?
If Immaterial - Goes to COGS If Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance
379
Where is Under/Over-applied Fixed OH recorded?
It always goes to COGS
380
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
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.
381
What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
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.
382
Which variables are used to calculate Direct Material balances?
Beginning Balance DR Net purchases (plus freight-in) CR Direct Materials Used : Ending balance (goes to BS)
383
What variables are used to calculated Work in Process (WIP)?
Beginning Balance (End Bal of Previous WIP) DR Direct Materials Used DR Direct Labor Used (Conversion Cost) CR COGM DR Factory Overhead Applied (Conversion Cost) : Ending Balance (Goes to BS)
384
What variables are included in Finished Goods calculations?
Beginning Balance DR COGM : COGAS (Cost of Goods Avail for Sale) CR COGS : Ending Balance (Goes to BS)
385
How does Freight In affect Cost Accounting calculations?
Inventory (Product) Cost Part of DM Purchases
386
How does Freight Out affect Cost Accounting?
Selling (Period) Cost Not part of inventory
387
When is Job-Order Costing used?
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
388
What is the Direct Method for allocating service department costs?
No services allocated between service departments- even if they serve each other. Only allocate to product(s)
389
What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
390
Under process costing- how are the units shipped calculated?
Beginning Inventory + Units Started - Ending Inventory : No. Units Shipped
391
Which two inventory methods are used under Process Costing?
FIFO Weighted Average
392
What is another name for Process Costing?
Equivalent Units of Production
393
How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?
EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)
394
How are Direct Materials calculated under the Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
395
How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
396
How are Equivalent Finished Units calculated for Direct Materials?
Units Shipped + EI x % Complete DM : EFU (Weighted Average Method) - Beginning Inventory x % Complete : EFU (FIFO)
397
How are Equivalent Finished Units calculated for Conversion Costs?
Units Shipped + EI x % Complete CC : EFU (Weighted Average) - Beginning Inventory x % Complete : EFU (FIFO)
398
How are Direct Materials calculated under the FIFO method?
Current Costs / EFU FIFO Note: FIFO method uses Current Period costs only and ignores Beginning Inventory
399
How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFO FIFO method uses Current Period costs only and ignores Beginning Inventory
400
How is WIP calculated?
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
401
How do period costs and product costs relate to net sales- gross margin and operating income?
Net Sales - Product Costs : Gross Margin - Period Costs : Operating Income
402
What is the focus of Activity Based Costing (ABC)?
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
403
How do Cost Pools and Allocations compare under ABC versus traditional costing system?
Cost Pools and Allocations increase compared to a traditional costing system
404
What is Backflush Costing?
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
405
What are the characteristics of By-Products?
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
406
What are Cost Functions?
Measure how costs change relative to activity levels High-Low Method Change in Cost (High-Low pts) / Change in Activity (High-Low pts)
407
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
408
What is a supply curve shift?
When supply changes due to something other than price.
409
What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price point Higher Equilibrium GDP Number of sellers increases - market can get flooded Examples: Government subsidies or technology improvements that decrease costs for suppliers
410
What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price point Lower Equilibrium GDP Cost of producing item increases Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market
411
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
412
What is a Demand Curve Shift?
When demand changes due to something other than price.
413
What is a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price point Price of substitutes go up - price of beef rises- so people buy more chicken Future price increase is expected - War in Middle East- people go out and buy gas Market expands - i.e. people get new free health care plan- demand at clinic rises Expansion - more spending increases equilibrium GDP
414
What is a Negative Demand Curve Shift (Shift Left)?
Demand decreases at each price point. Price of complement goes up - price of beef goes up- less demand for ketchup Boycott - Company commits social blunder- consumers boycott Consumer income rises - Demand for inferior goods drops as people have more money to spend Consumer tastes change Contraction - less spending decreases equilibrium GDP
415
What is the Marginal Propensity to Consume?
How much you spend when your income increases Calculate: Change in Spending / Change in Income
416
What is the Marginal Propensity to Save?
How much you save when income increases Calculate: Change in Savings / Change in Income Also equals 1 - Marginal Propensity to Consume
417
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
418
How does increased spending by consumers and the government affect the demand curve?
As spending by consumers or the government increases- the demand curve increases (shifts right).
419
How does spending change due to the multiplier effect?
The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect. One consumer spends money- which: *Increases the income of a business *Increases the income of a vendor *Increases income of employees *Increases tax revenue
420
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
421
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreases Price decreases- Revenue increases
422
What conditions would indicate Elastic Demand?
Many substitutes (luxury items) Considered elastic if elasticity is greater than 1 10% drop in demand / 8% increase in price : 1.25 (Elastic) Price increases- Revenue decreases Price decreases- Revenue increases
423
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increases Price decreases- Revenue decreases
424
What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline) Considered inelastic if coefficient of elasticity is less than 1 5% drop in demand / 10% increase in price : .5 (inelastic) Price increases- Revenue increases Price decreases- Revenue decreases
425
What is Unitary Demand?
Total revenue will remain the same if price is increased Considered unitary if coefficient of elasticity : 1
426
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in Income Normal goods greater than 1 (demand increases more than income) Inferior goods less than 1 (demand increases less than income)
427
What conditions occur under periods of inflation?
Interest rates increase Reduced demand for loans Reduced demand for houses- autos- etc. Value of bonds and fixed income securities decrease Inferior good demand to increase Foreign goods more affordable than domestic Demand for domestic goods decrease
428
What happens under Demand-Pull inflation?
Overall spending increases Demand increases (shifts right) Market equilibrium price increases
429
What happens under Cost-Push inflation?
Overall production costs increase Supply decreases (shifts left) Market equilibrium price increases Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
430
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
431
What is Optimal Production?
When Marginal Revenue : Marginal Cost
432
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
433
What is GDP (Gross Domestic Product)?
The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests Included: Foreign company has US Factory Not included: US company has foreign factory
434
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp Income Passive Income Taxes Employee Salaries Foreign Income Adjustments Depreciation
435
What is included under the Expenditure Approach for calculating GDP?
Individual Consumption Private Investment Government Purchases Net Exports
436
What is Nominal GDP?
Measures goods/services in current prices.
437
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
438
What is Real GDP?
Nominal GDP / GDP Deflator x 100
439
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
440
What is the Consumer Price Index (CPI)? How is it applied?
Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0 ((CPI Current - CPI Last) / CPI Last) * 100
441
How is disposable income calculated?
Personal Income - Personal Taxes
442
How is Return to Scale calculated?
% Increase in output / % Increase in input Greater than 1 : Increasing returns to scale Less than 1 : Decreasing returns to scale
443
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
444
What is a Depression?
A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression
445
What are the stages of the Economic Cycle?
Peak (highest) Recession (decreasing) Trough (lowest) Recover (increasing) Expansion (higher again)
446
What are leading indicators?
Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts
447
What are lagging indicators?
Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment
448
What are coincident indicators?
Conditions that occur during a recession or during a recovery Example: Manufacturing output
449
Which people are included in the calculation of unemployment?
Only people looking for jobs
450
What is Cyclical Unemployment?
GDP doesn't grow fast enough to employ all people who are looking for work Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy
451
What is Frictional Unemployment?
People are changing jobs or entering the work force. This is a normal aspect of full employment. Example: A recent college graduate is looking for a job
452
What is Structural Unemployment?
A worker's job skills do not match those necessary to get a job so they need education or training Example: A construction worker wants to work in an office- so they quit their job and get computer training
453
How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
454
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
455
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
456
What is the Real Interest Rate?
Inflation-adjusted interest rate
457
What is the Nominal Rate?
Rate that uses current prices
458
What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.
459
What is included in the M1 money supply?
Currency- Coins- and Deposits
460
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
461
What is Deficit Spending?
Increased spending levels without increased tax revenue. Lower taxes without decrease in spending Gamble that the multiplier effect will take over and boost economy
462
How can the Fed control the money supply?
By buying and selling the government's securities.
463
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
464
What is a Tariff?
A tax on imported goods
465
What is a quota?
A limit on the number of goods that can be imported
466
How do international trade restrictions affect domestic producers?
They are good for domestic producers. Demand curve shifts right Fewer substitutes They can charge higher prices
467
How to international trade restrictions affect foreign producers?
They are bad for foreign producers Demand curve shifts left Fewer buyers They must charge lower prices
468
How do international trade restrictions affect foreign consumers?
They are good for foreign consumers Supply curve shifts right Goods purchased at lower prices in the foreign markets
469
How do international trade restrictions affect domestic consumers?
They are bad for domestic consumers Supply curve shifts left Fewer goods bought due to higher prices
470
What is Accounting Cost?
Explicit (Actual) cost of operating a business Implicit costs are opportunity costs
471
What is Accounting Profit?
Revenue - Accounting Cost
472
What is Economic Cost?
Explicit + Implicit Cost
473
What is Economic Profit?
Revenue - Economic Cost
474
What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
475
How is Net Working Capital calculated?
NWC : Current Assets - Current Liabilities
476
What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycle Don't negatively impact operations
477
What is the Inventory Conversion Period?
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
478
What is the Receivables Collection Period?
Average time needed to collect A/R RCP : Average Receivables / Credit Sales Per Day
479
What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P payment Average Payables : (BP + EP) / 2 Payables Deferral Period : Average Payables / (COGS/365)
480
What is the Cash Conversion Cycle?
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)
481
What traits should Cash and Short-Term Investments have?
Liquid Safe
482
For what are Letters of Credit used?
Used for importing goods. Issued by importer's bank.
483
What is the advantage of using Trade Credit?
No interest cost if paid timely.
484
What is a Lockbox System? What are the advantages?
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)
485
What is float?
Time it takes to mail a payment and have it clear your bank account Maximize float on cash payments Minimize float on cash receipts
486
What are Zero Balance Accounts?
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
487
What is the difference between Treasury Bills- Notes and Bonds?
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
488
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of Government Greater than 9 Months Maturity Unsecured Issued by large firms
489
What are the advantages and disadvantages of Commercial Paper?
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.
490
What is Economic Order Quantity?
The order quantity that minimizes inventory costs. EOQ : Square Root of (2DO/C) D : Unit Demand (Annual) O : Order Cost C : Cost of Inventory
491
What is Carrying Cost?
The cost of keeping inventory.
492
What is Order Cost?
Cost of executing an order and starting product production.
493
What is inventory reorder point?
How low inventory should get before it should be re-ordered. IOP : Average Daily Demand x Average Lead Time
494
What is a Just In Time (JIT) system?
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
495
What is Factoring of receivables?
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
496
What is a Trade Discount?
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
497
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
498
What is the Prime Rate?
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
499
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
500
How is Current Yield calculated?
CY : Interest Payment / Bond Price
501
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
502
What is a Zero Coupon Bond?
No interest payments made Bond sold at a discount Interest reflected when Bond matures
503
What are the characteristics of a Junk Bond?
High interest rate High default risk
504
What are debenture bonds?
Bonds unsecured by collateral
505
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
506
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
507
What is a Callable Bond?
Borrower can pay off debt early
508
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
509
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
510
What is the disadvantage of Common Stock in comparison to bonds?
Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)
511
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
512
What is Weighted Average Cost of Capital?
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% ```
513
What is CAPM?
A stock's expected performance is based on its beta (risk) compared to that of the stock market. More risk : more expected return.
514
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
515
What is a Static Budget?
Budget targeted for a specific segment of a company.
516
What is a Maser Budget?
Budget targeted for the company as a whole Includes budgets for Operations and Cash Flows Includes set of budgeted Financial Statements
517
How do Fixed Costs affect budgeting?
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
518
How do Variable Costs affect budgeting?
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
519
How are Material Variances calculated?
SAM: Standard Material Costs - Actual Material Costs = Material Variance
520
How are Labor Variances calculated?
SAL Standard Labor Costs - Actual Labor Costs = Labor Variance
521
How are Overhead Variances calculated?
OAT Overhead Applied - Actual Overhead Cost = Total Overhead Variance
522
How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
523
How is Contribution Margin calculated?
Sales Price (per unit) - Variable Cost (per unit) = Contribution Margin (per unit)
524
How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit) = Break-even Point Per Unit Assumption: Total Costs & Total Revenues are LINEAR
525
What is the focus in a Cost Center?
Management is concerned only with costs
526
What is the focus in a Profit Center?
Management is concerned with both costs and profits
527
What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
528
What is the Delphi technique?
Forecasting technique where Data is collected and analyzed Requires judgement/consensus
529
What is Regression Analysis?
A forecasting technique where Sales is the dependent variable. Simple Regression - One independent variable Multiple Regression - Multiple independent variables
530
What are Econometric Models?
Forecast sales using Economic Data
531
What are Naive Forecasting Models?
Very Simplistic | - Eyeball past trends and make an estimate
532
How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periods Difference: Exponential Smoothing weighs recent data more heavily
533
What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs Only Ignore Sunk Costs Opportunity Cost is a Must
534
Which IT personnel roles should always be segregated?
Operators Programmers Librarians
535
What are the duties of a systems analyst?
Designs or purchases IT system Responsible for flowcharts Liaison between Users and Programmers Note: Think IT Manager
536
What is the primary duty of a Systems Administrator?
A Systems Administrator controls database access.
537
What are the duties of a Systems Programmer?
Writes- Updates- Maintains- & Tests software- systems- and compilers
538
Which duties should a Systems Programmer NOT have?
In order to maximize internal control- a Systems Programmer should NOT have application programming duties/abilities or be an Operator on the system.
539
What are the duties of a Systems Operator?
Schedules and Monitors Jobs Runs IT Help Desk
540
What duties should a System Operator NOT have?
For internal control purposes- they should not be a Programmer on the system.
541
If it is not possible to segregate duties in an IT System- what actions should be taken to compensate for internal control purposes?
Include Computer Logs. Control Group should review the logs.
542
What is the purpose of a Management Information System (MIS)?
To assist with decision making.
543
What is an Accounting Information System (AIS)?
A type of Management Information System (MIS) that processes accounting transactions.
544
What are the characteristics of an Executive Information System (EIS)?
Specialized for Company Executive needs Assists with Strategy Only No Decision-Making Capabilities
545
What are the characteristics of an Expert System (ES)?
Computer uses reasoning Structured No human interpretation needed
546
What are the characteristics of a Decision Support System (DSS)?
Computer provides data Gives Interactive Support Human interpretation needed
547
What are the characteristics of an Ad Hoc computer report?
User initiates the report. The report is created upon demand.
548
When are Exception reports generated?
Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem
549
What is a query?
A type of Ad Hoc report- initiated by a user.
550
What is End-User Computing?
The User develops and executes their own application.
551
What is the primary benefit of E-commerce?
E-commerce makes business transactions easier.
552
What are the risks of E-commerce?
Compromised data or theft. Less paper trail for auditors.
553
What are the benefits of Electronic Data Interchange?
Uses globally-accepted standards Efficient
554
What is a File Server?
A file server stores shared programs and documents.
555
What is the purpose of a Database?
Located on a File Server- a Database allows users to share documents.
556
What is the purpose of a LAN (Local Area Network)?
It connects computers in close proximity.
557
What is the purpose of a WAN (Wide Area Network)?
It connects computers that are far apart.
558
What are the characteristics of a VAN (Value-Added Network)?
Privately-owned Network Serves as 3rd Party Between 2 Companies Routes EDI Transactions Accepts wide range of Protocols Very Costly
559
What is the purpose of a Firewall?
Prevents unauthorized access to a network.
560
What are the characteristics of a virus?
Takes over a computer Needs a host program to run
561
What are the characteristics of a computer worm?
Takes over multiple computers Doesn't need a host program to run
562
What is the purpose of Automated Equipment Controls?
They prevent and detect hardware errors.
563
What is RAM?
Random Access Memory. Internal memory in the computer used during immediate processing.
564
What is a CPU?
Computer Processing Unit It processes commands within a computer.
565
What is Job Control Language?
It schedules and allocates system resources.
566
What are examples of input devices?
Keyboard Mouse Scanner Magnetic Ink Reader Magnetic Tape Reader EDI Point of Sale Scanner
567
What are examples of Output Devices?
Speakers Monitors Printers
568
What are the characteristics of Magnetic Tape storage?
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
569
What are the characteristics of Magnetic Disks?
Random Access - Finds data in random spots Faster data retrieval Uses Boundary Protection for data
570
What is a Gateway?
Connects one network to another Note: the Internet is connected by Gateways
571
What are Parity Checks?
A control that detects internal data errors. A bit is added to each character- it checks to see if a bit was lost.
572
What is an Echo Check?
Transmitted data is returned to the sender for verification (it echoes back to the sender)
573
What is a Change Control?
It authorizes program changes and approves program test results.
574
What is security software?
Software that controls access to IT systems. Note: Don't confuse this with anti-virus software
575
What is the purpose of a Digital Signature?
It confirms a message has not been altered.
576
List the types of computers from smallest to largest
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
577
What are the units of computer data from smallest to largest?
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)
578
What is the duty of a design engineer?
Determine language used for a specific computer- on a computer-to-computer basis
579
What are object programs?
Programs written in base computer language- not similar to English.
580
How can source programs be recognized?
They are written in a language close to English.
581
What is the purpose of a Compiler?
Takes Source language (English) and converts to Object (Computer) Language
582
How does Online Analytical Processing work?
It uses a Data Warehouse to support management decision making.
583
What is Data Mining?
Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.
584
What is the purpose of online transaction processing?
To process a company's routine transactions.
585
What are the characteristics of batch processing?
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)
586
What does an output control check for?
Checks to see if output data is valid- distributed and used in an authorized manner.
587
What does a processing control check?
Checks if data processing produced proper output
588
What is a hash total?
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.
589
What is a validity check?
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
590
What is a limit check?
Checks to see if numbers surpass a certain limit- i.e. in an age field is the number greater than 110.
591
What is a check digit?
An input control that adds an identification number to a set of digits - usually at the end
592
What is a field check?
An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field
593
What is a Hot Site?
A disaster recovery system where if the main system goes down- a Hot Site is ready to take over immediately.
594
What is a Cold Site?
If a main system goes down- a Cold Site will take time to get set up and running.
595
What is the most common database language?
SQL - Structured Query Language
596
What is a Data Definition Language?
Defines SQL Database Controls SQL Tables
597
What is a Data Manipulation Language?
Queries SQL Database tables
598
What is a Data Control Language?
Controls Access to SQL Database
599
What are the characteristics of a Relational Database?
Logical structure Uses rows and columns similar to spreadsheet
600
What are the characteristics of a Hierarchical Database?
Has various levels Uses trees to store data
601
What are the advantages of a database?
Data is more accessible Reduced redundancy
602
What are the disadvantages of a database?
Cost of installation Skilled personnel required to maintain
603
What are the components of a database?
Desktop client Application Server Database Server Think: Your desktop computer runs applications and saves to a database
604
What four perspectives are included in Balanced Scorecard?
Financial / Customer / Internal Business Processes / Learning and Growth
605
Why was Balanced Scorecard created?
To measure Performance.
606
What are Strategy Maps?
Diagrams of Strategic Cause and Effect Relationships.
607
What is a Strategic Initiative?
A plan to achieve goals.
608
What measures are used under Value-Based Management?
``` Return on Investment Residual Income Spread Economic Value Added Free Cash Flow ```
609
How is Return on Investment (ROI) calculated?
ROI : Return / Investment Example: You Invest $100 to buy a machine that generates $60 in Operating Income $60 / $100 : 60% ROI
610
How is Residual Income calculated?
Operating Income - (Required Rate of Return x Invested Capital) : Residual Income
611
What is another name for Required Rate of Return (RROR)?
RROR is also called 'Cost of Capital'
612
What is Weighted Average Cost of Capital (WACC)? How is it calculated?
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%
613
How is Spread calculated?
Spread : ROI - Cost of Capital
614
What is the primary point of Economic Value Added? How is it calculated?
Investments should exceed costs- with an emphasis on stockholder value. Economic Value Added : Operating Income After Tax - (Net Assets x WACC)
615
How is Free Cash Flow calculated?
``` Operating Income After Tax + Depreciation & Amortization - Capital Expenditures - Change in Net Working Capital : Free Cash Flow ```
616
What is measured by Six Sigma?
It measures a product versus its quality goal.
617
What is the Asset Turnover Ratio?
Sales / Average Assets
618
What does the Current Ratio tell us? How is it calculated?
Can the company pay their short-term liabilities? Current Ratio : Current Assets / Current Liabilities
619
What does the Debt to Equity Ratio tell us? How is it calculated?
How is the company financing its capital? Debt to Equity Ratio : Total Debt / Total Equity
620
What does the Debt to Total Assets ratio tell us? How is it calculated?
What proportions of the company's assets are encumbered with debt? Debt to Total Assets : Total Liabilities / Total Assets
621
What does Gross Margin % tell us? How is it calculated?
How profitable is the product after COGS? Gross Margin : Gross Profit / Net Sales
622
What does Operating Profit Margin tell us? How is it calculated?
How profitable is the product after all expenses (except interest and taxes)? Operating Profit Margin : Operating Profit / Net Sales
623
How is Times Interest Earned calculated and what does it mean?
Can the company make their interest payments? Times Interest Earned : Earnings Before Tax & Interest / Interest Expense
624
What does Return on Assets tell us? How is it calculated?
What % return are the assets generating? Return on Assets : Net Income (net of interest & taxes) / Average Total Assets
625
How is Market/Book ratio calculated?
Market Value of Common Stock / Book Value of Common Stock
626
What is Inventory Turnover and how is it calculated?
How quickly does inventory get sold? Inventory Turnover : COGS / Average Inventory
627
What is the Quick Ratio and how is it calculated?
It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory) Quick Ratio : (Current Assets - Inventory) / Current Liabilities
628
What is Average Collection Period- and how is it calculated?
How many days does it take the company to collect payment on A/R? Average Collection Period : Average AR / Average Sales Per Day
629
What is an Internal Failure?
Products have quality defects- but are caught BEFORE they leave the warehouse.
630
What is an External Failure?
Product reaches the customer- but they are not satisfied with the quality of the product. This includes recalls.
631
What is Appraisal Cost?
Quality control- testing & inspection costs.
632
Define Market Risk
The risk that a sluggish economy will affect the value of a debt instrument
633
Define Sector Risk
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
634
Define Credit/Default Risk
The risk that a debtor will be unable to make loan payments or pay back the principal
635
Define Interest Rate Risk
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.
636
What does Standard Deviation measure?
It measures the volatility of an investment.
637
What is Systematic Risk?
Risk that impacts the entire market and can't be avoided or reduced through diversification Example: Wars
638
What is Unsystematic Risk?
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
639
What does Beta measure?
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?
640
What is Variance?
It compares volatility of an investment to the market average. Factors include both Systematic and Unsystematic Risk.
641
What is a Derivative?
An asset whose value is DERIVED from the value of another asset. Derivatives are measured at Fair Value.
642
How is an Option used?
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
643
What is a Future?
A Forward Contract with a future value. They are sold and traded on the futures market.
644
What is an Interest Rate Swap?
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
645
What is Legal Risk?
Risk that a law or regulation will void the derivative
646
What is a Fair Value Hedge?
Hedge that protects against the value of an asset or liability changing. Changes in value are reported in earnings.
647
What is a Cash Flow Hedge?
A hedge that protects against a set of future cash flows changing. Changes in value are reported in OCI.
648
What is a Foreign Currency Hedge?
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.
649
What is Capital Budgeting? How is it used?
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
650
What values are used in Capital Budgeting?
Capital Budgeting ONLY uses Present Value tables. Capital Budgeting NEVER uses Fair Value.
651
When is the Present Value of $1 table used?
For ONE payment- ONE time.
652
When is the Present Value of an Annuity Due used?
Multiple payments made over time- where the payments are made at the START of the period.
653
When is the Present Value of an Ordinary Annuity of $1 (PVOA) used?
Multiple payments over time- where payments are made at the END of the period. Think A for Arrears.
654
What is the calculation for the Present Value of $1?
1 / (( 1+i )^n) i : interest rate n : number of periods
655
What is Net Present Value (NPV)?
A preferred method of evaluating profitability. One of two methods that use the Time Value of Money : PV of Future Cash Flows - Investment
656
How is NPV used to calculate future benefit?
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)
657
What is the rate of return on an investment called?
The Discount Rate.
658
What does the Discount Rate represent?
The rate of return on an investment used. It represents the minimum rate of return required.
659
What are the strengths of the Net Present Value system?
Uses the Time Value of Money Uses all cash flows- not just the cash flows to arrive at Payback Takes risks into consideration
660
What are the weaknesses of the Net Present Value system?
Not as simple as the Accounting Rate of Return.
661
How do Salvage Value and Depreciation affect Net Present Value?
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.
662
If multiple potential rates of return are available- which is used to calculate Net Present Value?
The minimum rate of return is used.
663
What is the Internal Rate of Return (IRR)?
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
664
Which rate of return is used to re-invest cash flows for Internal Rate of Return?
Cash flows are re-invested at the rate of return earned by the original investment.
665
How does the rate used for Internal Rate of Return (IRR) compare to that used for Net Present Value (NPV)?
Rate of return for IRR is the rate earned by the investment. Rate of return for NPV is the minimum rate.
666
What are the strengths and weaknesses of the Internal Rate of Return system?
Strengths: Uses Time Value of Money- Cash Flow emphasis Weakness: Uneven cash flows lead to varied IRR
667
When is NPV on an Investment positive?
When the benefits are greater than the costs. IRR is greater than the Discount Rate
668
When is NPV on an Investment Negative?
When Costs are greater than Benefits IRR is less than the Discount Rate
669
When is NPV Zero?
When benefits equal the Costs IRR : Discount Rate
670
What is the Payback Method? How is it calculated?
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.
671
What are the strengths of the Payback Method?
Takes risk into consideration 2 year payback is less risky than a 5 year payback
672
What are the weaknesses of the payback method?
Ignores the Time Value of Money Exception: Discount payback method Ignores cash flow after the initial investment is paid back
673
What is the Accounting Rate of Return?
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.
674
What are the strengths of the Accounting Rate of Return (ARR)?
Simple to use People understand easily
675
What are the weaknesses of the Accounting Rate of Return (ARR)?
Can be skewed based on Depreciation method that is used. Ignores the Time Value of Money.
676
What is an Expected Return?
An approximate rate of return on assets.
677
Define Market Risk
The risk that a sluggish economy will affect the value of a debt instrument
678
Define Sector Risk
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
679
Define Credit/Default Risk
The risk that a debtor will be unable to make loan payments or pay back the principal
680
Define Interest Rate Risk
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.
681
What does Standard Deviation measure?
It measures the volatility of an investment.
682
What is Systematic Risk?
Risk that impacts the entire market and can't be avoided or reduced through diversification Example: Wars
683
What is Unsystematic Risk?
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
684
What does Beta measure?
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?
685
What is Variance?
It compares volatility of an investment to the market average. Factors include both Systematic and Unsystematic Risk.
686
What is a Derivative?
An asset whose value is DERIVED from the value of another asset. Derivatives are measured at Fair Value.
687
How is an Option used?
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
688
What is a Future?
A Forward Contract with a future value. They are sold and traded on the futures market.
689
What is an Interest Rate Swap?
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
690
What is Legal Risk?
Risk that a law or regulation will void the derivative
691
What is a Fair Value Hedge?
Hedge that protects against the value of an asset or liability changing. Changes in value are reported in earnings.
692
What is a Cash Flow Hedge?
A hedge that protects against a set of future cash flows changing. Changes in value are reported in OCI.
693
What is a Foreign Currency Hedge?
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.
694
What is Capital Budgeting? How is it used?
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
695
What values are used in Capital Budgeting?
Capital Budgeting ONLY uses Present Value tables. Capital Budgeting NEVER uses Fair Value.
696
When is the Present Value of $1 table used?
For ONE payment- ONE time.
697
When is the Present Value of an Annuity Due used?
Multiple payments made over time- where the payments are made at the START of the period.
698
When is the Present Value of an Ordinary Annuity of $1 (PVOA) used?
Multiple payments over time- where payments are made at the END of the period. Think A for Arrears.
699
What is the calculation for the Present Value of $1?
1 / (( 1+i )^n) i : interest rate n : number of periods
700
What is Net Present Value (NPV)?
A preferred method of evaluating profitability. One of two methods that use the Time Value of Money : PV of Future Cash Flows - Investment
701
How is NPV used to calculate future benefit?
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)
702
What is the rate of return on an investment called?
The Discount Rate.
703
What does the Discount Rate represent?
The rate of return on an investment used. It represents the minimum rate of return required.
704
What are the strengths of the Net Present Value system?
Uses the Time Value of Money Uses all cash flows- not just the cash flows to arrive at Payback Takes risks into consideration
705
What are the weaknesses of the Net Present Value system?
Not as simple as the Accounting Rate of Return.
706
How do Salvage Value and Depreciation affect Net Present Value?
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.
707
If multiple potential rates of return are available- which is used to calculate Net Present Value?
The minimum rate of return is used.
708
What is the Internal Rate of Return (IRR)?
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
709
Which rate of return is used to re-invest cash flows for Internal Rate of Return?
Cash flows are re-invested at the rate of return earned by the original investment.
710
How does the rate used for Internal Rate of Return (IRR) compare to that used for Net Present Value (NPV)?
Rate of return for IRR is the rate earned by the investment. Rate of return for NPV is the minimum rate.
711
What are the strengths and weaknesses of the Internal Rate of Return system?
Strengths: Uses Time Value of Money- Cash Flow emphasis Weakness: Uneven cash flows lead to varied IRR
712
When is NPV on an Investment positive?
When the benefits are greater than the costs. IRR is greater than the Discount Rate
713
When is NPV on an Investment Negative?
When Costs are greater than Benefits IRR is less than the Discount Rate
714
When is NPV Zero?
When benefits equal the Costs IRR : Discount Rate
715
What is the Payback Method? How is it calculated?
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.
716
What are the strengths of the Payback Method?
Takes risk into consideration 2 year payback is less risky than a 5 year payback
717
What are the weaknesses of the payback method?
Ignores the Time Value of Money Exception: Discount payback method Ignores cash flow after the initial investment is paid back
718
What is the Accounting Rate of Return?
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.
719
What are the strengths of the Accounting Rate of Return (ARR)?
Simple to use People understand easily
720
What are the weaknesses of the Accounting Rate of Return (ARR)?
Can be skewed based on Depreciation method that is used. Ignores the Time Value of Money.
721
What is an Expected Return?
An approximate rate of return on assets.
722
What is the primary duty of the board of directors?
To monitor management behavior.
723
What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?
Oversees the board Responsible for hiring new CEO
724
What is the responsibility of the audit committee of the board of directors?
The audit committee appoints and oversees the external auditor.
725
What is the duty of the compensation committee of the board of directors?
The compensation committee handles the CEO's compensation package.
726
What does the NYSE and NASDAQ require of the board of directors?
They require the board to be independent.
727
What is the main goal in an executive compensation package?
The package should ensure that the goals of management should match those of the shareholders.
728
How can an executive compensation package ensure that goals of management align with those of shareholders?
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.
729
Which influences help mold the direction that management takes?
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
730
What is shirking?
When management doesn't act in the best interest of shareholders. It can be alleviated by tying compensation to stock performance or company profit.
731
What requirements are imposed on a public company under Sarbanes-Oxley?
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.
732
What characteristics are promoted by the COSO framework on Internal Control?
Reliable financial reporting Effective and efficient operations Compliance
733
What are the elements of the control environment?
``` Integrity & Ethics Competence The Board of Directors & Audit Committee Management's Operating Style Organizational Structure Authority & Roles of Responsibilities HR Policies ```
734
What are control activities?
A component of Internal Control that includes actions being taken to promote the control environment.
735
What are the basic elements of Internal Control?
``` Control Environment Risk Assessment Control Activities Information and Communication Monitoring ```
736
What is the significance of the Information and Communication aspect of Internal Control?
Management must have access to relevant and timely information to make good decisions.
737
How does Monitoring affect Internal Control?
Internal Control activities must be constantly monitored and evaluated for effectiveness.
738
What activities does the COSO framework for enterprise risk management include?
``` 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
739
What are possible responses to risk under the COSO framework for enterprise risk management?
Avoid or Reduce Share or Accept
740
What is Cost Accounting?
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
741
What is the difference between Cost Accounting and Managerial Accounting?
Cost Accounting - External Focus- GAAP Managerial Accounting - Internal Focus- Not GAAP
742
What are Product Costs (aka Inventory Costs)?
Prime Costs Conversion Costs
743
What are included in Prime Costs?
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
744
What is Factory Overhead?
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).
745
What is included in Fixed Factory Overhead?
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
746
What is included in Variable Overhead?
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)
747
Where is Under/Over-applied Variable OH recorded?
If Immaterial - Goes to COGS If Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance
748
Where is Under/Over-applied Fixed OH recorded?
It always goes to COGS
749
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
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.
750
What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
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.
751
Which variables are used to calculate Direct Material balances?
Beginning Balance DR Net purchases (plus freight-in) CR Direct Materials Used : Ending balance (goes to BS)
752
What variables are used to calculated Work in Process (WIP)?
Beginning Balance (End Bal of Previous WIP) DR Direct Materials Used DR Direct Labor Used (Conversion Cost) CR COGM DR Factory Overhead Applied (Conversion Cost) : Ending Balance (Goes to BS)
753
What variables are included in Finished Goods calculations?
Beginning Balance DR COGM : COGAS (Cost of Goods Avail for Sale) CR COGS : Ending Balance (Goes to BS)
754
How does Freight In affect Cost Accounting calculations?
Inventory (Product) Cost Part of DM Purchases
755
How does Freight Out affect Cost Accounting?
Selling (Period) Cost Not part of inventory
756
When is Job-Order Costing used?
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
757
What is the Direct Method for allocating service department costs?
No services allocated between service departments- even if they serve each other. Only allocate to product(s)
758
What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
759
Under process costing- how are the units shipped calculated?
Beginning Inventory + Units Started - Ending Inventory : No. Units Shipped
760
Which two inventory methods are used under Process Costing?
FIFO Weighted Average
761
What is another name for Process Costing?
Equivalent Units of Production
762
How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?
EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)
763
How are Direct Materials calculated under the Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
764
How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
765
How are Equivalent Finished Units calculated for Direct Materials?
Units Shipped + EI x % Complete DM : EFU (Weighted Average Method) - Beginning Inventory x % Complete : EFU (FIFO)
766
How are Equivalent Finished Units calculated for Conversion Costs?
Units Shipped + EI x % Complete CC : EFU (Weighted Average) - Beginning Inventory x % Complete : EFU (FIFO)
767
How are Direct Materials calculated under the FIFO method?
Current Costs / EFU FIFO Note: FIFO method uses Current Period costs only and ignores Beginning Inventory
768
How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFO FIFO method uses Current Period costs only and ignores Beginning Inventory
769
How is WIP calculated?
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
770
How do period costs and product costs relate to net sales- gross margin and operating income?
Net Sales - Product Costs : Gross Margin - Period Costs : Operating Income
771
What is the focus of Activity Based Costing (ABC)?
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
772
How do Cost Pools and Allocations compare under ABC versus traditional costing system?
Cost Pools and Allocations increase compared to a traditional costing system
773
What is Backflush Costing?
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
774
What are the characteristics of By-Products?
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
775
What are Cost Functions?
Measure how costs change relative to activity levels High-Low Method Change in Cost (High-Low pts) / Change in Activity (High-Low pts)
776
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
777
What is a supply curve shift?
When supply changes due to something other than price.
778
What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price point Higher Equilibrium GDP Number of sellers increases - market can get flooded Examples: Government subsidies or technology improvements that decrease costs for suppliers
779
What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price point Lower Equilibrium GDP Cost of producing item increases Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market
780
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
781
What is a Demand Curve Shift?
When demand changes due to something other than price.
782
What is a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price point Price of substitutes go up - price of beef rises- so people buy more chicken Future price increase is expected - War in Middle East- people go out and buy gas Market expands - i.e. people get new free health care plan- demand at clinic rises Expansion - more spending increases equilibrium GDP
783
What is a Negative Demand Curve Shift (Shift Left)?
Demand decreases at each price point. Price of complement goes up - price of beef goes up- less demand for ketchup Boycott - Company commits social blunder- consumers boycott Consumer income rises - Demand for inferior goods drops as people have more money to spend Consumer tastes change Contraction - less spending decreases equilibrium GDP
784
What is the Marginal Propensity to Consume?
How much you spend when your income increases Calculate: Change in Spending / Change in Income
785
What is the Marginal Propensity to Save?
How much you save when income increases Calculate: Change in Savings / Change in Income Also equals 1 - Marginal Propensity to Consume
786
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
787
How does increased spending by consumers and the government affect the demand curve?
As spending by consumers or the government increases- the demand curve increases (shifts right).
788
How does spending change due to the multiplier effect?
The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect. One consumer spends money- which: *Increases the income of a business *Increases the income of a vendor *Increases income of employees *Increases tax revenue
789
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
790
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreases Price decreases- Revenue increases
791
What conditions would indicate Elastic Demand?
Many substitutes (luxury items) Considered elastic if elasticity is greater than 1 10% drop in demand / 8% increase in price : 1.25 (Elastic) Price increases- Revenue decreases Price decreases- Revenue increases
792
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increases Price decreases- Revenue decreases
793
What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline) Considered inelastic if coefficient of elasticity is less than 1 5% drop in demand / 10% increase in price : .5 (inelastic) Price increases- Revenue increases Price decreases- Revenue decreases
794
What is Unitary Demand?
Total revenue will remain the same if price is increased Considered unitary if coefficient of elasticity : 1
795
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in Income Normal goods greater than 1 (demand increases more than income) Inferior goods less than 1 (demand increases less than income)
796
What conditions occur under periods of inflation?
Interest rates increase Reduced demand for loans Reduced demand for houses- autos- etc. Value of bonds and fixed income securities decrease Inferior good demand to increase Foreign goods more affordable than domestic Demand for domestic goods decrease
797
What happens under Demand-Pull inflation?
Overall spending increases Demand increases (shifts right) Market equilibrium price increases
798
What happens under Cost-Push inflation?
Overall production costs increase Supply decreases (shifts left) Market equilibrium price increases Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
799
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
800
What is Optimal Production?
When Marginal Revenue : Marginal Cost
801
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
802
What is GDP (Gross Domestic Product)?
The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests Included: Foreign company has US Factory Not included: US company has foreign factory
803
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp Income Passive Income Taxes Employee Salaries Foreign Income Adjustments Depreciation
804
What is included under the Expenditure Approach for calculating GDP?
Individual Consumption Private Investment Government Purchases Net Exports
805
What is Nominal GDP?
Measures goods/services in current prices.
806
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
807
What is Real GDP?
Nominal GDP / GDP Deflator x 100
808
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
809
What is the Consumer Price Index (CPI)? How is it applied?
Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0 ((CPI Current - CPI Last) / CPI Last) * 100
810
How is disposable income calculated?
Personal Income - Personal Taxes
811
How is Return to Scale calculated?
% Increase in output / % Increase in input Greater than 1 : Increasing returns to scale Less than 1 : Decreasing returns to scale
812
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
813
What is a Depression?
A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression
814
What are the stages of the Economic Cycle?
Peak (highest) Recession (decreasing) Trough (lowest) Recover (increasing) Expansion (higher again)
815
What are leading indicators?
Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts
816
What are lagging indicators?
Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment
817
What are coincident indicators?
Conditions that occur during a recession or during a recovery Example: Manufacturing output
818
Which people are included in the calculation of unemployment?
Only people looking for jobs
819
What is Cyclical Unemployment?
GDP doesn't grow fast enough to employ all people who are looking for work Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy
820
What is Frictional Unemployment?
People are changing jobs or entering the work force. This is a normal aspect of full employment. Example: A recent college graduate is looking for a job
821
What is Structural Unemployment?
A worker's job skills do not match those necessary to get a job so they need education or training Example: A construction worker wants to work in an office- so they quit their job and get computer training
822
How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
823
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
824
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
825
What is the Real Interest Rate?
Inflation-adjusted interest rate
826
What is the Nominal Rate?
Rate that uses current prices
827
What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.
828
What is included in the M1 money supply?
Currency- Coins- and Deposits
829
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
830
What is Deficit Spending?
Increased spending levels without increased tax revenue. Lower taxes without decrease in spending Gamble that the multiplier effect will take over and boost economy
831
How can the Fed control the money supply?
By buying and selling the government's securities.
832
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
833
What is a Tariff?
A tax on imported goods
834
What is a quota?
A limit on the number of goods that can be imported
835
How do international trade restrictions affect domestic producers?
They are good for domestic producers. Demand curve shifts right Fewer substitutes They can charge higher prices
836
How to international trade restrictions affect foreign producers?
They are bad for foreign producers Demand curve shifts left Fewer buyers They must charge lower prices
837
How do international trade restrictions affect foreign consumers?
They are good for foreign consumers Supply curve shifts right Goods purchased at lower prices in the foreign markets
838
How do international trade restrictions affect domestic consumers?
They are bad for domestic consumers Supply curve shifts left Fewer goods bought due to higher prices
839
What is Accounting Cost?
Explicit (Actual) cost of operating a business Implicit costs are opportunity costs
840
What is Accounting Profit?
Revenue - Accounting Cost
841
What is Economic Cost?
Explicit + Implicit Cost
842
What is Economic Profit?
Revenue - Economic Cost
843
What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
844
How is Net Working Capital calculated?
NWC : Current Assets - Current Liabilities
845
What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycle Don't negatively impact operations
846
What is the Inventory Conversion Period?
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
847
What is the Receivables Collection Period?
Average time needed to collect A/R RCP : Average Receivables / Credit Sales Per Day
848
What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P payment Average Payables : (BP + EP) / 2 Payables Deferral Period : Average Payables / (COGS/365)
849
What is the Cash Conversion Cycle?
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)
850
What traits should Cash and Short-Term Investments have?
Liquid Safe
851
For what are Letters of Credit used?
Used for importing goods. Issued by importer's bank.
852
What is the advantage of using Trade Credit?
No interest cost if paid timely.
853
What is a Lockbox System? What are the advantages?
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)
854
What is float?
Time it takes to mail a payment and have it clear your bank account Maximize float on cash payments Minimize float on cash receipts
855
What are Zero Balance Accounts?
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
856
What is the difference between Treasury Bills- Notes and Bonds?
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
857
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of Government Greater than 9 Months Maturity Unsecured Issued by large firms
858
What are the advantages and disadvantages of Commercial Paper?
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.
859
What is Economic Order Quantity?
The order quantity that minimizes inventory costs. EOQ : Square Root of (2DO/C) D : Unit Demand (Annual) O : Order Cost C : Cost of Inventory
860
What is Carrying Cost?
The cost of keeping inventory.
861
What is Order Cost?
Cost of executing an order and starting product production.
862
What is inventory reorder point?
How low inventory should get before it should be re-ordered. IOP : Average Daily Demand x Average Lead Time
863
What is a Just In Time (JIT) system?
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
864
What is Factoring of receivables?
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
865
What is a Trade Discount?
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
866
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
867
What is the Prime Rate?
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
868
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
869
How is Current Yield calculated?
CY : Interest Payment / Bond Price
870
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
871
What is a Zero Coupon Bond?
No interest payments made Bond sold at a discount Interest reflected when Bond matures
872
What are the characteristics of a Junk Bond?
High interest rate High default risk
873
What are debenture bonds?
Bonds unsecured by collateral
874
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
875
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
876
What is a Callable Bond?
Borrower can pay off debt early
877
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
878
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
879
What is the disadvantage of Common Stock in comparison to bonds?
Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)
880
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
881
What is Weighted Average Cost of Capital?
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% ```
882
What is CAPM?
A stock's expected performance is based on its beta (risk) compared to that of the stock market. More risk : more expected return.
883
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
884
What is a Static Budget?
Budget targeted for a specific segment of a company.
885
What is a Maser Budget?
Budget targeted for the company as a whole Includes budgets for Operations and Cash Flows Includes set of budgeted Financial Statements
886
How do Fixed Costs affect budgeting?
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
887
How do Variable Costs affect budgeting?
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
888
How are Material Variances calculated?
SAM: Standard Material Costs - Actual Material Costs = Material Variance
889
How are Labor Variances calculated?
SAL Standard Labor Costs - Actual Labor Costs = Labor Variance
890
How are Overhead Variances calculated?
OAT Overhead Applied - Actual Overhead Cost = Total Overhead Variance
891
How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
892
How is Contribution Margin calculated?
Sales Price (per unit) - Variable Cost (per unit) = Contribution Margin (per unit)
893
How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit) = Break-even Point Per Unit Assumption: Total Costs & Total Revenues are LINEAR
894
What is the focus in a Cost Center?
Management is concerned only with costs
895
What is the focus in a Profit Center?
Management is concerned with both costs and profits
896
What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
897
What is the Delphi technique?
Forecasting technique where Data is collected and analyzed Requires judgement/consensus
898
What is Regression Analysis?
A forecasting technique where Sales is the dependent variable. Simple Regression - One independent variable Multiple Regression - Multiple independent variables
899
What are Econometric Models?
Forecast sales using Economic Data
900
What are Naive Forecasting Models?
Very Simplistic | - Eyeball past trends and make an estimate
901
How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periods Difference: Exponential Smoothing weighs recent data more heavily
902
What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs Only Ignore Sunk Costs Opportunity Cost is a Must
903
Which IT personnel roles should always be segregated?
Operators Programmers Librarians
904
What are the duties of a systems analyst?
Designs or purchases IT system Responsible for flowcharts Liaison between Users and Programmers Note: Think IT Manager
905
What is the primary duty of a Systems Administrator?
A Systems Administrator controls database access.
906
What are the duties of a Systems Programmer?
Writes- Updates- Maintains- & Tests software- systems- and compilers
907
Which duties should a Systems Programmer NOT have?
In order to maximize internal control- a Systems Programmer should NOT have application programming duties/abilities or be an Operator on the system.
908
What are the duties of a Systems Operator?
Schedules and Monitors Jobs Runs IT Help Desk
909
What duties should a System Operator NOT have?
For internal control purposes- they should not be a Programmer on the system.
910
If it is not possible to segregate duties in an IT System- what actions should be taken to compensate for internal control purposes?
Include Computer Logs. Control Group should review the logs.
911
What is the purpose of a Management Information System (MIS)?
To assist with decision making.
912
What is an Accounting Information System (AIS)?
A type of Management Information System (MIS) that processes accounting transactions.
913
What are the characteristics of an Executive Information System (EIS)?
Specialized for Company Executive needs Assists with Strategy Only No Decision-Making Capabilities
914
What are the characteristics of an Expert System (ES)?
Computer uses reasoning Structured No human interpretation needed
915
What are the characteristics of a Decision Support System (DSS)?
Computer provides data Gives Interactive Support Human interpretation needed
916
What are the characteristics of an Ad Hoc computer report?
User initiates the report. The report is created upon demand.
917
When are Exception reports generated?
Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem
918
What is a query?
A type of Ad Hoc report- initiated by a user.
919
What is End-User Computing?
The User develops and executes their own application.
920
What is the primary benefit of E-commerce?
E-commerce makes business transactions easier.
921
What are the risks of E-commerce?
Compromised data or theft. Less paper trail for auditors.
922
What are the benefits of Electronic Data Interchange?
Uses globally-accepted standards Efficient
923
What is a File Server?
A file server stores shared programs and documents.
924
What is the purpose of a Database?
Located on a File Server- a Database allows users to share documents.
925
What is the purpose of a LAN (Local Area Network)?
It connects computers in close proximity.
926
What is the purpose of a WAN (Wide Area Network)?
It connects computers that are far apart.
927
What are the characteristics of a VAN (Value-Added Network)?
Privately-owned Network Serves as 3rd Party Between 2 Companies Routes EDI Transactions Accepts wide range of Protocols Very Costly
928
What is the purpose of a Firewall?
Prevents unauthorized access to a network.
929
What are the characteristics of a virus?
Takes over a computer Needs a host program to run
930
What are the characteristics of a computer worm?
Takes over multiple computers Doesn't need a host program to run
931
What is the purpose of Automated Equipment Controls?
They prevent and detect hardware errors.
932
What is RAM?
Random Access Memory. Internal memory in the computer used during immediate processing.
933
What is a CPU?
Computer Processing Unit It processes commands within a computer.
934
What is Job Control Language?
It schedules and allocates system resources.
935
What are examples of input devices?
Keyboard Mouse Scanner Magnetic Ink Reader Magnetic Tape Reader EDI Point of Sale Scanner
936
What are examples of Output Devices?
Speakers Monitors Printers
937
What are the characteristics of Magnetic Tape storage?
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
938
What are the characteristics of Magnetic Disks?
Random Access - Finds data in random spots Faster data retrieval Uses Boundary Protection for data
939
What is a Gateway?
Connects one network to another Note: the Internet is connected by Gateways
940
What are Parity Checks?
A control that detects internal data errors. A bit is added to each character- it checks to see if a bit was lost.
941
What is an Echo Check?
Transmitted data is returned to the sender for verification (it echoes back to the sender)
942
What is a Change Control?
It authorizes program changes and approves program test results.
943
What is security software?
Software that controls access to IT systems. Note: Don't confuse this with anti-virus software
944
What is the purpose of a Digital Signature?
It confirms a message has not been altered.
945
List the types of computers from smallest to largest
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
946
What are the units of computer data from smallest to largest?
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)
947
What is the duty of a design engineer?
Determine language used for a specific computer- on a computer-to-computer basis
948
What are object programs?
Programs written in base computer language- not similar to English.
949
How can source programs be recognized?
They are written in a language close to English.
950
What is the purpose of a Compiler?
Takes Source language (English) and converts to Object (Computer) Language
951
How does Online Analytical Processing work?
It uses a Data Warehouse to support management decision making.
952
What is Data Mining?
Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.
953
What is the purpose of online transaction processing?
To process a company's routine transactions.
954
What are the characteristics of batch processing?
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)
955
What does an output control check for?
Checks to see if output data is valid- distributed and used in an authorized manner.
956
What does a processing control check?
Checks if data processing produced proper output
957
What is a hash total?
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.
958
What is a validity check?
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
959
What is a limit check?
Checks to see if numbers surpass a certain limit- i.e. in an age field is the number greater than 110.
960
What is a check digit?
An input control that adds an identification number to a set of digits - usually at the end
961
What is a field check?
An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field
962
What is a Hot Site?
A disaster recovery system where if the main system goes down- a Hot Site is ready to take over immediately.
963
What is a Cold Site?
If a main system goes down- a Cold Site will take time to get set up and running.
964
What is the most common database language?
SQL - Structured Query Language
965
What is a Data Definition Language?
Defines SQL Database Controls SQL Tables
966
What is a Data Manipulation Language?
Queries SQL Database tables
967
What is a Data Control Language?
Controls Access to SQL Database
968
What are the characteristics of a Relational Database?
Logical structure Uses rows and columns similar to spreadsheet
969
What are the characteristics of a Hierarchical Database?
Has various levels Uses trees to store data
970
What are the advantages of a database?
Data is more accessible Reduced redundancy
971
What are the disadvantages of a database?
Cost of installation Skilled personnel required to maintain
972
What are the components of a database?
Desktop client Application Server Database Server Think: Your desktop computer runs applications and saves to a database
973
What four perspectives are included in Balanced Scorecard?
Financial / Customer / Internal Business Processes / Learning and Growth
974
Why was Balanced Scorecard created?
To measure Performance.
975
What are Strategy Maps?
Diagrams of Strategic Cause and Effect Relationships.
976
What is a Strategic Initiative?
A plan to achieve goals.
977
What measures are used under Value-Based Management?
``` Return on Investment Residual Income Spread Economic Value Added Free Cash Flow ```
978
How is Return on Investment (ROI) calculated?
ROI : Return / Investment Example: You Invest $100 to buy a machine that generates $60 in Operating Income $60 / $100 : 60% ROI
979
How is Residual Income calculated?
Operating Income - (Required Rate of Return x Invested Capital) : Residual Income
980
What is another name for Required Rate of Return (RROR)?
RROR is also called 'Cost of Capital'
981
What is Weighted Average Cost of Capital (WACC)? How is it calculated?
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%
982
How is Spread calculated?
Spread : ROI - Cost of Capital
983
What is the primary point of Economic Value Added? How is it calculated?
Investments should exceed costs- with an emphasis on stockholder value. Economic Value Added : Operating Income After Tax - (Net Assets x WACC)
984
How is Free Cash Flow calculated?
``` Operating Income After Tax + Depreciation & Amortization - Capital Expenditures - Change in Net Working Capital : Free Cash Flow ```
985
What is measured by Six Sigma?
It measures a product versus its quality goal.
986
What is the Asset Turnover Ratio?
Sales / Average Assets
987
What does the Current Ratio tell us? How is it calculated?
Can the company pay their short-term liabilities? Current Ratio : Current Assets / Current Liabilities
988
What does the Debt to Equity Ratio tell us? How is it calculated?
How is the company financing its capital? Debt to Equity Ratio : Total Debt / Total Equity
989
What does the Debt to Total Assets ratio tell us? How is it calculated?
What proportions of the company's assets are encumbered with debt? Debt to Total Assets : Total Liabilities / Total Assets
990
What does Gross Margin % tell us? How is it calculated?
How profitable is the product after COGS? Gross Margin : Gross Profit / Net Sales
991
What does Operating Profit Margin tell us? How is it calculated?
How profitable is the product after all expenses (except interest and taxes)? Operating Profit Margin : Operating Profit / Net Sales
992
How is Times Interest Earned calculated and what does it mean?
Can the company make their interest payments? Times Interest Earned : Earnings Before Tax & Interest / Interest Expense
993
What does Return on Assets tell us? How is it calculated?
What % return are the assets generating? Return on Assets : Net Income (net of interest & taxes) / Average Total Assets
994
How is Market/Book ratio calculated?
Market Value of Common Stock / Book Value of Common Stock
995
What is Inventory Turnover and how is it calculated?
How quickly does inventory get sold? Inventory Turnover : COGS / Average Inventory
996
What is the Quick Ratio and how is it calculated?
It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory) Quick Ratio : (Current Assets - Inventory) / Current Liabilities
997
What is Average Collection Period- and how is it calculated?
How many days does it take the company to collect payment on A/R? Average Collection Period : Average AR / Average Sales Per Day
998
What is an Internal Failure?
Products have quality defects- but are caught BEFORE they leave the warehouse.
999
What is an External Failure?
Product reaches the customer- but they are not satisfied with the quality of the product. This includes recalls.
1000
What is Appraisal Cost?
Quality control- testing & inspection costs.
1001
Define Market Risk
The risk that a sluggish economy will affect the value of a debt instrument
1002
Define Sector Risk
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
1003
Define Credit/Default Risk
The risk that a debtor will be unable to make loan payments or pay back the principal
1004
Define Interest Rate Risk
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.
1005
What does Standard Deviation measure?
It measures the volatility of an investment.
1006
What is Systematic Risk?
Risk that impacts the entire market and can't be avoided or reduced through diversification Example: Wars
1007
What is Unsystematic Risk?
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
1008
What does Beta measure?
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?
1009
What is Variance?
It compares volatility of an investment to the market average. Factors include both Systematic and Unsystematic Risk.
1010
What is a Derivative?
An asset whose value is DERIVED from the value of another asset. Derivatives are measured at Fair Value.
1011
How is an Option used?
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
1012
What is a Future?
A Forward Contract with a future value. They are sold and traded on the futures market.
1013
What is an Interest Rate Swap?
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
1014
What is Legal Risk?
Risk that a law or regulation will void the derivative
1015
What is a Fair Value Hedge?
Hedge that protects against the value of an asset or liability changing. Changes in value are reported in earnings.
1016
What is a Cash Flow Hedge?
A hedge that protects against a set of future cash flows changing. Changes in value are reported in OCI.
1017
What is a Foreign Currency Hedge?
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.

CPA (10 decks)

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