Deck 1 Flashcards
Under the COSO Internal Control, what principle is a situation referring to when it mentions establishing performance measures, incentives, or rewards?
Principle 5 under Control Environment:
The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives.
All of the following are the rates used in the NPV analysis except:
Cost of capital
Hurdle rate
Discount rate
Accounting rate of return
Accounting rate of return - The accounting rate of return is a capital budgeting technique, not a rate.
All of these are rates used in the NPV analysis:
Cost of capital
Hurdle rate
Discount rate
Required rate of return
The imputed interest rate used in the residual income approach for performance measurement and evaluation can be characterized as the what?
Historical weighted average cost of capital for the company
Historical WACC is usually used as the target or hurdle rate in the residual income approach.
The use of an accelerated method instead of the straight line method of depreciation in computing the NPV of a project has the effect of what?
Increasing the PV of the depreciation tax shield.
The greater the depreciation expense, the greater the tax shield.
Regression analysis does what?
Estimates the dependent cost variable.
Regressions analysis is a statistical model that can estimate the dependent cost variable based on changes in the independent variable.
How do you determine the period costs under the absorption method and the variable method?
Absorption Method:
Period Costs:
-Variable and Fixed SG&A expenses
Variable Method:
Period Costs
-Variable and Fixed SG&A expenses
-Fixed Overhead
Direct labor, direct materials, and variable costs are production costs under both methods. Fixes overhead is a production cost under the absorption method only.
Not all risks can be eliminated by development for a portfolio. What type of risk cant be eliminated through a portfolio?
Systematic Risks
Portfolio theory is concerned with construction of an investment portfolio that efficiently balances its risk with its rate of return. Risk is often reduced by diversification, the process of mixing investments of different or offsetting risks. The broad categories of risk are summarized in the following mnemonic to get us DUNS.
Diversifiable
Unsystematic (non-market/firm-specific)
Non-diversifiable
Systematic (market)
What are some examples of items that, under a standard cost system, would or would not attribute to labor variances?
Items that would attribute to price variances:
- The payment of hourly rates instead of prescribed piecework rates
- Labor rate predictions
- The use of a single average standard rate
Items that would NOT attribute to price variances:
-Union contracts approved before the budgeting cycle (because they are approved before the budget, they are used as the basis for the budget)
Is Probability analysis an extension of sensitivity analysis?
Yes
Probability (risk) analysis is used to examine the possible outcomes given different alternatives. Sensitivity analysis uses a trial and error method in which the sensitivity of the solution to changes in variables is calculated. Therefore, probability analysis is an extension of sensitivity analysis.
The ERM integrated framework states that an organization must identify events, both positive and negative, as part of its risk management program. Which is done first? Event identification or development of objectives?
Development of objectives
Events can only be identified after the organizational objectives are identified. Events will either favorably or unfavorably impact the achievement of objectives.
The successful and profitable launch of a new product line by an entity represents what?
Value realization
Value Creation
Value creation
The successful and profitable launch of a new product represents value creation. Value is created when benefits of value exceed the cost of resources used.
It is not value realization. Value is realized when benefits created by the organization are received by stakeholders in either monetary or nonmonetary form.
What are some facts about trade credit?
- Trade credit is subject to risk of buyer default.
- Trade credit is not a source of long-term financing to the seller.
- Trade credit is an important source of financing for small firms.
- Trade credit is usually an expensive source of external financing.
Which of the following factors would not be relevant when determining the risk premium on a specific security?
Earnings per share
Relative seniority
Relative liquidity
Length of maturity
Earnings per share
The risk premium on a security in essence compensates an investor for the risk associated with the security’s cash flows. Earnings per share (EPS) is calculated by taking net income and dividing it by the number of common shares of stock outstanding. There is no additional risk component factored into the risk premium as a result of the EPS calculation.
The required rate of return is generally computed as the risk–free rate of return plus a number of risk premium adjustments. What risk adjustments are used to compute the required rate of return?
Default Risk, Maturity Risk, and Purchasing power risk Premium
- Default risk premium (DRP) is an appropriate risk adjustment to the risk-free rate of return and is the additional compensation demanded by lenders for bearing the risk that the issuer of the security will fail to pay interest or fail to repay the principal.
- Maturity risk premium (MRP), or interest rate risk, is an appropriate risk adjustment to the risk-free rate of return and is the compensation investors demand for bearing risk. This risk increases with the term to maturity.
- Purchasing power risk premium, or inflation premium (IP), is an appropriate risk adjustment to the risk free-rate of return and is the compensation investors require to bear the risk that price levels may change and affect asset values or the purchasing power of invested dollars (e.g., real estate).
The budgeted per unit contribution margin will impact all of the following sales variances except which item:
Market size variance
Sales price variance
Sales quantity variance
Market share variance
Sales price variance
The sales price variance takes into account the difference between the actual sales price per unit and the budgeted sales price per unit. That differential is then multiplied by actual sold units. The budgeted per unit contribution margin is not an element of the sales price variance calculation.
