Glossary Flashcards
What is Agency Law?
Agency Law deals with someone’s ability to bind you to a contract with a third party
What is required for Agency to exist?
Both parties must consent to the relationship and intend for an Agency relationship to exist
Agent owes Principal fiduciary duty
Principal doesn’t owe Agent fiduciary duty
A contract is NOT required and an Agency agreement is not based on Contract Law; Exception - If duties cannot be performed within a year; a signed writing is required
What is Actual Authority in an agency?
Actual Authority is what is expressly granted or is implied by the duties you expect the Agent to perform and is necessary to carry them out
What is Implied Authority in an agency?
When authority is expressly granted; it is implied that the agent has the authority to carry out the duties
Does not include authority to sell or alter a business
What is Apparent (Ostensible) Authority in an agency?
Apparent Authority is based on the third party’s perspective - they believe that the Agent has the
authority to enter into a contract based on:
- Prior dealings with agent
- Agent’s title leads the third party to believe they can enter into a contract
- The Principal hires the Agent to carry out duties that normally carry with them the rights to enter into contracts
How is an Agency terminated?
- Both Agent and Principal agree to terminate
- Principal fires Agent
- Agent fires Principal
- Agent breaches their contract by doing something like violating their obligation to act as a fiduciary to Principal
How do you terminate Apparent Authority?
- Let the public know
- Let the people or entities that the Agent previously interacted with know
- In cases of death; or Principal is otherwise not competent to contract; ALL authority is revoked
What is an Agency Coupled with an Interest?
Agent acquires an ownership interest in the Agency
Can only be terminated early (before the interest expiration date) by the Agent
Unless the Agency has a specific time limit spelled out in a contract; the Agent’s authority is irrevocable
by the Principal
When is an employee an Agent; and when does this make the employer liable?
Employees are agents while acting within the scope of their duties.
For employees who injure third parties while acting within the scope of their duties; both Employee and Employer are liable
When are Agents liable for torts (civil wrongs) they commit?
Agents are liable for torts (civil wrongs) committed whether they had authority or not
Are Agents who act outside of their authority liable?
Agents who act outside of their authority will be liable for the act
Exception - Principal ratifies the contract which relieves Agent of liability
In order to ratify; Principal must know all of the facts and must ratify before third party cancels agreement
If Principal keeps the benefits of the contract; ratification is implied
Contract must be 100% ratified or there is no contract
What is an Agent’s liability when acting for an undisclosed principle?
- Agent liable to third party even if acting within authority
- Third party can sue both Principal and Agent if Principal becomes disclosed
- Agent can then sue Principal
What are the requirements for a Power of Attorney (POA)?
Must be in writing
Must be signed by person granting the POA
Ends upon death of Principal
General POA - Agent authorized to handle all affairs
Special POA - Agent authorized to handle only specific affairs
What are the basic actions that occur in a bankruptcy?
Bankruptcy gives creditors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt. The filing halts collection activity; grants automatic stay (with certain exceptions), and stops creditors from suing debtor.
For what debts does bankruptcy NOT stop collections?
Student Loans Income taxes from previous 3 years Alimony & Child Support Debts/judgements resulting from drunk driving Pension obligations Debts relating to SOX violations Debts arising from illegal activities Debts not listed in the bankruptcy filing
How does bankruptcy of a corporation affect the owner’s ability to file bankruptcy?
It doesn’t; because the corporation is a separate legal entity.
Under bankruptcy; corporations are dissolved
Under bankruptcy; individuals are discharged
What key action will cause a bankruptcy discharge to be denied?
If a debtor fails to keep good records or falsifies documents; a discharge will be denied
What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?
Discharges all non-exempt debt
Can only be filed every 8 years from previous Chapter 7 filing
Voluntary or involuntary filing
Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)
What are the requirements for a voluntary bankruptcy filing under Chapter 7?
Must pass means test
Your income must be below the median income for your state (Note - median; i.e. middle; not mean; i.e. average)
Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005
What are the requirements for an involuntary bankruptcy filing under Chapter 7?
In some cases; your creditors can force you into Chapter 7 or Chapter 11 BK
Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property
If 12+ unsecured creditors - at least 3 must file; claims must be in excess of $15325
If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $15325
Upon filing; a judge will declare an order for relief unless the debtor protests
What entities are disallowed from involuntary Chapter 7 bankruptcy filings?
Charities
Farms
How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?
If the debtor pays the court-assigned bond to keep a property in an involuntary BK; they can
reclaim possession of their property from the interim BK trustee
What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?
Allows a business a reprieve from creditors
Creates a payment plan for the debt
Business remains in operation
At least 2/3 of each debt class of creditors must consent to reorganization
Ch. 11 Involuntary petitions are allowed
What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?
Similar to Chapter 11; but for individuals
Gives individuals a reprieve from creditors
Creates a payment plan for the debt
Ch. 13 Involuntary petitions are not allowed
What are the duties and abilities of a bankruptcy trustee?
Represents the bankruptcy estate
Can sue or be sued
Oversees bankruptcy and watches for preferential creditor payments
Oversees priority transfer of assets to creditors
How and when is a bankruptcy trustee appointed?
Optional - Creditors decide
Can be elected by creditors or can be appointed by the court
What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?
Trustee can void payments on antecedent (past) debts that occur within 90 days of a BK filing
A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value
A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (AKA a voidable preference)
When can preferential transfers be voided by a bankruptcy (BK) trustee?
Made within One Year of BK to insider - Corporate officers/directors; Partners; Relatives
Made within 3 Months of BK non-insider
Creditor receives larger payment than BK liquidation would have granted
What is the treatment of a secured creditor in a bankruptcy?
Superior to claims of other types of creditors
Can take either collateral or cash proceeds from the sale of an asset
If collateral doesn’t satisfy amount owed; Secured Creditors become a general creditor for the difference.
What is the order of priority given to unsecured creditors in a bankruptcy?
- Court Costs and Fees
- Child Support & Alimony
- Expenses from ordinary course of business during bankruptcy proceedings
- Wages owed to employees
- Retirement contributions within last 6 months
- Consumer deposits for undelivered goods
- Taxes
- Other general unsecured claims
What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?
The bankruptcy trustee can act in the best interest of the creditors and assign the leases under contract to the creditors
The trustee has 60 days to assume leases on equipment after bankruptcy is granted or the leases will be rejected
What is the bankruptcy estate?
The pool of assets available to creditors until liquidation
What assets are exempt from creditors in a bankruptcy estate?
Social security
Disability payments
Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents
How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?
Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate
What is a garnishment with respect to a bankruptcy?
Court allows a creditor to garnish or take a portion of the debtor’s paycheck
What is a mechanics lien?
Lien on real property to secure payment for a repair/improvement done to the house
A contractor builds an addition to your house and you won’t pay. They can’t repo your house; so they get a Mechanics Lien that sticks until you sell your house and they get paid
What is an artisan’s lien?
Applies to personal property like a car
If the dealership does $500 in repairs to your car; you don’t get the car back until you pay
What is a surety (co-signing)?
A third party agrees to be liable for a loan
Example: A parent co-signs on their child’s car loan
How is a surety liable in a transaction?
A surety is primarily liable
Surety can be released from liability if the creditor behaves in a way that increases the risk that they
initially agreed to
Surety can be released from liability if the debtor changes the loan agreement in a way that materially
increases the surety’s risk
What is a cosurety; and how are they liable in a transaction?
Two sureties are guaranteeing the same debt
Proportionately liable - If one cosurety is released from their obligation; then the remaining cosureties
have their proportionate share reduced by the released party’s percentage
If one surety pays more than their proportionate share of the risk; then the other sureties must compensate them for the difference; which is called Right of Contribution
What is a guarantor?
Similar to surety; but a guarantor is secondarily liable
What are the basic rights of a debtor under the Fair Debt Collection Practices Act?
Basically - your creditors have the right to collect from you; but not abuse you or embarrass you
The can’t contact you once you’re represented by an attorney
They can call other people to find out where you are; but they cannot identify themselves as collectors
They must stop calling you at work if you send them a certified letter that says my employer doesn’t allow me to take calls at work.
They must call you only at reasonable hours of the day - according to your time zone; not theirs
What are the key elements of a valid Partnership?
Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property.
Can corporations and other partnerships become partners in a partnership?
Yes; corporations and other partnerships can become partners of a partnership
Name the Basics of Partnership Formation - Form of agreement and intent
Agreement can be very informal - either ORAL; IMPLIED or WRITTEN
Intent is to make a profit
When must a partnership agreement be in writing?
Must be WRITTEN if partnership activity falls within Statute of Frauds:
A. Can’t be completed in 1 year
B. Even if partners reside in different states; not necessary unless within Statute of Frauds
C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing
How are profits shared in a partnership?
Profit sharing is equal by default
A. Unless partnership agreement says otherwise
B. Unless specified; sharing of losses follows same pattern as sharing of profits
What is the Liability of General Partners in a partnership?
Joint Liability - Partners are collectively liable for debts/torts
Several Liability - Partners are individually liable for debts/torts
Which assets may creditors of a partnership go after; and in which order?
Creditors must go after partnership assets first before suing partners individually
What are the rights of a General Partner in a partnership?
General Partners have joint control over the management of the partnership and its affairs
Unanimous vote needed to change the structure of the partnership
Each partner has full right to inspect partnership accounting and business
Partner has the authority to assign their interest to another partner
What does and does NOT happen when a General Partner assigns their partnership interest to someone else?
- Other party gets that partner’s share of the profits and/or capital contribution.
- Does NOT give assignee authority to vote on partnership business
- Assignee does NOT have right to inspect partnership books
- Assignor still maintains liability
- Partner does NOT have the right to assign their interest in partnership property or allow partner’s creditors to attach a lien.
What is the actual authority of a partner in a partnership?
Has authority to bind the partners to a contract.
What is the APPARENT authority of a partner in a partnership?
A third party reasonably believes partner has authority to bind partnership to contract
Cannot use apparent authority to add a new partner
Cannot use apparent authority to sell or bind partnership assets
With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?
Partner not liable assuming notice given.
Notice must be given to nullify apparent authority
People who had knowledge of their role must be personally notified
Public must be notified
With respect to PRECEDING debts; what is the liability of a partner in a partnership?
Old partners: Jointly and severally liable unless creditors grant novation
New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.
What happens upon the death of a partner in a partnership?
Partner’s estate gets share of partnership profits and capital account
Estate does NOT get any partnership assets
Remainder of partners own partnership assets
Heirs of decedent are not added as partners unless remaining partners unanimously agree
What happens during the winding up of a partnership and in what order?
- Creditors get paid; Partners can also be creditors
- Distributions in arrears get paid
- Partners get return of Capital accounts
- Any remaining distributions
Note: NO documents need to be filed with state to dissolve general partnership.
What are the requirements to form a Limited Partnership?
Governed by state L.P. laws
Must file L.P. certificate with Sec. of State
Only General Partners must be listed
Future additions or subtractions of G.P. require certificate to be updated with state
How are profits and losses split in a Limited Partnership?
Unlike G.P.; L.P. profits/losses are split according to capital contributions by default
True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at
the same time.
True.
A Limited Partner; however; cannot also be a General Partner and maintain limited liability.
Do limited partners have a fiduciary responsibility to a Limited Partnership?
No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership
What authority does a limited partner have under a Limited Partnership?
- Right to inspect records of the business.
- Can still vote on partnership business without losing limited liability
- Can consult and advise partnership without losing limited liability (assuming they don’t actually make the decisions)
What limitations does a limited partner have in a Limited Partnership?
- They have no authority as an agent to bind the partnership
- They can’t participate in management decisions and maintain limited liability.
What is the liability of a limited partner in a Limited Partnership?
Limited partners are liable to the extent of their capital contributions only
Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions
Becomes liable to third parties IF they knew of their involvement
When does the dissolution of a Limited Partnership occur?
Automatically happens
- Once final General Partner leaves
- Time specified in certificate lapses
- Event specified in certificate happens
- Unanimous consent by partners
- Illegal activity
What is required to form a Limited Liability Partnership (LLP)?
- Majority vote required to form LLP
- Articles of LLP filed with Secretary of State
- Governed by laws of that State
- Limited Liability Partnership must be in name
- No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner’s supervision
What are the key aspects of a Limited Liability Company (LLC)?
Members can participate in management and retain limited liability
Members don’t own any interest in LLC property
Members can assign interest; but not transfer it
Members divide profits equally unless otherwise stated
What are the key aspects of Joint Ventures (JV)?
Similar to a General Partnership; except generally; a JV is for a single business activity
Example: two companies promote a concert
Ability to bind other JV partners is limited
JV partners still have a fiduciary responsibility to JV
No state filings or paperwork necessary
What are the key aspects of a corporation?
Shareholders have limited liability to the extent of their capital contribution
C Corporations have a perpetual life and continue even after shareholder death
Corporations are a separate legal entity from their owners and can own property; sue; be sued
Corporations must file Articles of Incorporation in state of governance
What are some of the advantages of a corporation?
Ability to raise capital
Limited liability - unless actions occur that pierce the veil
Ease of ownership transfer
What actions can pierce the veil of a corporation?
Commingling of assets
Fraud
Under-capitalization
How is a corporation governed?
Board adopts Corporate Bylaws to govern company business
What items are required in a corporations Articles of Incorporation?
Name; purpose; powers of Corporation
Name of registered agent & incorporators
Stock share classes authorized; par values
Name of corporate officers NOT required
What is the biggest disadvantage of a corporation?
Double taxation
How are corporations formed by promoters?
Promoter issues prospectus; arranges capital; and is a fiduciary of the corporation.
A promoter may profit from work performed if the corporation is aware of it.
When is a corporation liable for pre-incorporation actions taken by a Promoter?
Promoter personally liable unless third party agrees to a novation and releases Promoter
from liability; UNLESS the corporation adopts.
In how many states must a corporation incorporate?
Corporations are only incorporated in one state
Become adomestic corp. in that state
Become aforeign corp. in any other state they do business in
Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations.
Dividends are NOT a shareholder right
Once declared; dividends become a liability to corporation
What are key aspects related to the holding of Preferred Stock?
No voting rights
Get first rights to dividends and liquidation
Cumulative Preferred Stock dividends that go undeclared accumulate and Corporation must pay it before issuing dividends to Common Stockholders
Participating Preferred Stock gives shareholder right to dividends in addition to what they get as Preferred Stockholders
What aspects are related to all classes of corporate stock?
Valid consideration must be given for shares
Cash; property; or services performed
No promises to pay or perform services
What are the key aspects of Treasury Stock?
No Gain/Loss recognized on Treasury stock
Have no voting rights
Can be re-purchased below par
Cannot produce dividends
What is a stock subscription and what is required for it to be valid?
An offer to buy shares of stock
Must be accepted by corporation to be valid
Offer cannot be revoked for 6 months
Subscriber becomes liable once accepted
When is a corporation liable for torts by employees?
If committed within the normal scope of the employee’s job
Even if they were disobeying orders
Per respondeat superior
What are the key aspects of a corporate officer?
Appointed by the Board of Directors
Act as Agents
Owe a fiduciary duty to the corporation
Can have legal fees paid by corporation for defense in lawsuit brought on them from carrying out their normal duties (exception- suit brought against officers by shareholders)
What are the key aspects of a corporation’s board of directors (BOD)?
Elected by shareholders
Owe fiduciary duty to corporation
Must act in good faith to avoid being liable for bad judgment
Good faith is NOT a defense for negligence
What is Ultra Vires?
Corporation management acting beyond what the Articles of Incorporation allow
Shareholders can sue for Ultra Vires
When is inspecting Board minutes the right of a shareholder?
Shareholders can inspect Board minutes and records only if request is in good faith
Who must approve mergers and consolidations?
Boards must approve
Shareholders must approve by Majority
Disapproving shareholders can get an appraisal and get their stock back at current market price
Merger does NOT need creditor approval
What characterizes a Professional Corporation?
Shares owned only by licensed professionals (CPAs; attorneys; etc.)
Limited Liability for debts
Personal Liability for negligence
Who can and cannot own an S-Corporation?
CAN be owned by Estates; Trusts; and Individuals
CANNOT be owned by a C-Corporation
What is the primary advantage of an S-Corporation?
Avoidance of Double Taxation
What are the disadvantages of an S-Corporation?
No more than 100 shareholders allowed
One class of stock allowed
Shareholders must be US Citizens/Residents
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
What values are used in Capital Budgeting?
Capital Budgeting ONLY uses Present Value tables.
Capital Budgeting NEVER uses Fair Value.
When is the Present Value of $1 table used?
For ONE payment- ONE time.
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.
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.
What is the calculation for the Present Value of $1?
1 / (( 1+i )^n)
i : interest rate
n : number of periods
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
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)
What is the rate of return on an investment called?
The Discount Rate.
What does the Discount Rate represent?
The rate of return on an investment used.
It represents the minimum rate of return required.
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
What are the weaknesses of the Net Present Value system?
Not as simple as the Accounting Rate of Return.
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.
If multiple potential rates of return are available- which is used to calculate Net Present Value?
The minimum rate of return is used.
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
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.
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.
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
When is NPV on an Investment positive?
When the benefits are greater than the costs.
IRR is greater than the Discount Rate
When is NPV on an Investment Negative?
When Costs are greater than Benefits
IRR is less than the Discount Rate
When is NPV Zero?
When benefits equal the Costs
IRR : Discount Rate
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.
What are the strengths of the Payback Method?
Takes risk into consideration
2 year payback is less risky than a 5 year payback
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
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.
What are the strengths of the Accounting Rate of Return (ARR)?
Simple to use
People understand easily
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.
What is an Expected Return?
An approximate rate of return on assets.
What must a contract contain?
Offer, Acceptance, Consideration, Proper form (oral or written), Legal subject matter, 2 Competent parties
What forms may acceptance of a contract take?
Can be written or oral
Must be in the form/method required by offeror
Must be mirror image - i.e. no changes in terms
Who can accept an offer?
Must be accepted by intended party (offeree)
Acceptance can only be made by a party who knows an offer has been made and has all of the facts - AKA a meeting of the minds
They must intend to accept
What happens if an offeree accepts a contract but puts added stipulations?
It is not acceptance; but instead becomes a counter-offer and the original offeror is now the offeree
What will void an offer?
If offeror dies or becomes insane before acceptance; offer is void.
Contract is binding if acceptance occurs before death/insanity.
What actions or circumstances will revoke a contract?
Offeror revokes and offeree receives revocation
Offeree finds out prior to acceptance that offeror has sold the item
In the case of an Option; offeror cannot revoke until the time of the option has elapsed
Initial rejection by offeree doesn’t void the option.
What is an Option?
Some amount of consideration (like money) is put forth by offeror to keep the offer open for a
stated period of time
What is a Requirements Contract? How are they limited?
These are contracts where someone becomes the exclusive provider of something in exchange for
consideration
Companies can’t get locked in to one and then have market conditions force them to sell something at
what has become an unreasonable price
What is promissory estoppel?
Promises to donate are legally enforceable
Basically; you can’t tell a charity; Hey; if you buy this
$100;000 piece of land; I’ll pay for the building that
will go on it; and then renege on your promise
What can make a contract VOID?
Fraud in the execution
Formed under extreme duress - extreme
Illegal
What can make a contract VOIDABLE?
Fraud in the inducement
Party not competent to contract
Formed under SIMPLE duress
Undue influence
What is the result of a clerical error in a contract?
The contract is unenforceable.
Example: Person signs a contract to pay $500.00 to have
their lawn re-seeded but due to clerical error; it actually reads $5000.00
Contracts under the Statute of Frauds must be in what form to be valid?
They must be in writing.
What makes a contract subject to the Statute of Frauds?
o Cannot be completed within one year
o Involves the purchase of real estate
o $500+ Sale of Goods
o Co-signing and guaranteeing the debt of another
What is the parol evidence rule?
Prevents one party to a written contract from coming in after the fact and claiming that a certain
conversation took place that conflicts with what is agreed upon in the written contract
It also prevents using an oral argument to read into the meaning of what is written on paper
If it’s on paper; it trumps what was agreed-upon orally prior to the written contract
Note: does not negate oral agreements made AFTER the contract or disallow oral words from clarifying ambiguous contract language.
What are the requirements for the assignment of a contract?
Contracts are assignable to a third party beneficiary; but must be done so in good faith
Obligations may be assignable- Assignor is still liable
Assignor may be released from liability if other party grants a novation
When can contracts be discharged by law?
Party under contract is bankrupt
Party under contract dies or is incapacitated
Party cannot physically complete the contract (i.e. They are in prison so can’t finish building your house)
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
What is a supply curve shift?
When supply changes due to something other than price.
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
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
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
What is a Demand Curve Shift?
When demand changes due to something other than price.
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
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
What is the Marginal Propensity to Consume?
How much you spend when your income increases
Calculate: Change in Spending / Change in Income
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
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
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).
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
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreases
Price decreases- Revenue increases
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
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increases
Price decreases- Revenue decreases
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
What is Unitary Demand?
Total revenue will remain the same if price is increased
Considered unitary if coefficient of elasticity : 1
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)
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
What happens under Demand-Pull inflation?
Overall spending increases
Demand increases (shifts right)
Market equilibrium price increases
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
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
What is Optimal Production?
When Marginal Revenue : Marginal Cost
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
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
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp Income
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments
Depreciation
What is included under the Expenditure Approach for calculating GDP?
Individual Consumption
Private Investment
Government Purchases
Net Exports
What is Nominal GDP?
Measures goods/services in current prices.
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
What is Real GDP?
Nominal GDP / GDP Deflator x 100
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
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
How is disposable income calculated?
Personal Income - Personal Taxes
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
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
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
What are the stages of the Economic Cycle?
Peak (highest)
Recession (decreasing)
Trough (lowest)
Recover (increasing)
Expansion (higher again)
What are leading indicators?
Conditions that occur before a recession or before a recovery
Example: Stock Market or New Housing Starts
What are lagging indicators?
Conditions that occur after a recession or after a recovery
Examples: Prime Interest Rates- Unemployment
What are coincident indicators?
Conditions that occur during a recession or during a recovery
Example: Manufacturing output
Which people are included in the calculation of unemployment?
Only people looking for jobs
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
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
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
How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
What is the Real Interest Rate?
Inflation-adjusted interest rate
What is the Nominal Rate?
Rate that uses current prices
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.
What is included in the M1 money supply?
Currency- Coins- and Deposits
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
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
How can the Fed control the money supply?
By buying and selling the government’s securities.
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
What is a Tariff?
A tax on imported goods
What is a quota?
A limit on the number of goods that can be imported
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
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
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
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
What is Accounting Cost?
Explicit (Actual) cost of operating a business
Implicit costs are opportunity costs
What is Accounting Profit?
Revenue - Accounting Cost
What is Economic Cost?
Explicit + Implicit Cost
What is Economic Profit?
Revenue - Economic Cost
What is the majority of an auditor’s work in determining an audit opinion?
Collection of evidence to support the opinion.
Of what does audit Evidence consist?
Evidence consists of client accounting data and supporting documentation from client or from third parties.
What is the relationship between Evidence and Detection Risk?
Evidence has an inverse relationship with Detection Risk
The one aspect of Audit Risk an auditor can control through (N)ature (T)iming (E)xtent of audit procedures.
Inherent Risk and Control risk are outside of auditor’s control.
Which aspects of Audit Risk can an auditor control?
Detection Risk which is decreased by gathering evidence.
Which aspects of Audit Risk can an auditor NOT control?
Inherent Risk and Control Risk are outside of an auditor’s control.
How does a high level of acceptable Detection Risk affect an audit?
Less Evidence collected. Opens door for incremental audit risk - Internal Control should be strong.
Business and transactions should be relatively stable and predictable.
(N) Less-competent Evidence collected
(T) Interim testing acceptable
(E) Fewer transactions are verified.
What should occur when a low level of Detection Risk is acceptable?
More Evidence collected
(N) More-competent Evidence collected
(T) End of year balance testing
(E) More transactions are verified
What are the primary risks in an audit for a typical for-profit company?
Auditors are there to verify that
Assets & Revenues are not overstated
Expenses & Liabilities are not understated
Exception - if the CPA Exam states that it is a tax-driven company flip them around
What is the primary constraint on audit evidence?
Cost vs. Benefit is a primary constraint.
What characteristics should audit evidence have?
Sufficient (quantity)
Appropriate: Relevant & Reliable (Quality)
How does the quality of audit evidence vary depending on who has provided it?
Best evidence: Observation of activity by auditor.
2nd Best: Originates from External Parties and is sent directly to auditor (or failing that items are generated by third party and provided to auditor by the client such as a bank statement)
Weakest: Oral evidence from management.
Which documents are the most persuasive and credible?
Third party documents are more persuasive and credible than internally-prepared docs
Auditor Knowledge = Most Persuasive
3rd Party info given to auditor
3rd Party info given to client
Internally-prepared doc
What are Substantive Procedures?
Test substance/amounts/values. They help to reduce the risk of material misstatements. They only test accuracy of financial statements and dollar amounts - they don’t test internal controls.
What are the substantive tests that are most often performed?
Trace (or Vouch) Reconcile Analytical Procedures Confirmations Examine evidence that supports management assertions.
(T.R.A.C.E.)
When performing audit procedures what should auditors focus on?
Auditors focus first on Balance Sheet Accounts then associated Income Statement items
How is Cash audited?
Assurance Level is High.
Acceptable Detection Risk is Low.
How is Accounts Receivable audited?
If Acceptable DR is High - Negative Confirmation is used - Customer only responds if balance is materially wrong.
If Acceptable DR is Low - Positive Confirmation is used - Customer asked to confirm by telling auditor the balance.
Corresponding Income Statement Account - Revenue
How is Accounts Payable audited?
Review purchase orders/invoices
Confirm with Vendors
Corresponding Income Statement Account - Various Expenses
How is Inventory audited?
Examine purchase agreements
Look at Board Minutes
Is Inventory held as collateral?
Corresponding Income Statement Account - COGS
How are beginning balances audited?
Should match last year’s ending balance.
What is the general presumption for auditing Ending Balances?
If Beginning Balance Additions Subtractions are OK then Ending Balances should also be OK.
How is a Statement of Cash Flows audited?
Foot all balances - Check the Math
Trace Cash Flow items to other Financial Statements
Check classifications - Operating Activities Investing Activities Financing Activities
Under the Indirect Method what must be disclosed on a Statement of Cash Flows?
Interest Paid
Income Taxes Paid
Non-cash Transactions
Cash and Cash Equivalents Definitions
Under the Direct Method what must be disclosed on a Statement of Cash Flows?
Results as if you had used Indirect Method
Non-cash Transactions
Cash and Cash Equivalents Definition
What are Subsequent Events and what do they require?
Subsequent events occur after the Balance Sheet Date but before the audit report is issued.
Auditor needs to make inquiries and assess if they affect the audit report.
What should occur if the audit report has already been issued and the auditor becomes aware of a situation that was present as of the Balance Sheet date (a subsequent event)?
If audit report has already been issued and auditor becomes aware of a situation that was present as of the BS date client should issue a disclosure to financial statement users and/or revise the financial statement.
Regulatory agencies might need to get involved under some circumstances.
What should an auditor do if they discover they have forgotten to perform a substantive procedure?
If auditor discovers that they forgot to perform a substantive procedure auditor should determine if other substantive procedures performed served as a substitute.
Otherwise support for their audit opinion could be jeopardized.
When are Analytical Procedures required?
REQUIRED When planning the audit (preliminary)
REQUIRED When reviewing the audit (final)
Analytical procedures may be also performed optionally along with the substantive testing.
Use of Analytical Procedures in the audit must be documented.
How do Analytical Procedures assist the auditor?
Helps the Auditor:
Determine if Management Assertions are reasonable
Develop audit plan
Develop some expectations about the financial statement and hopefully bring to light any glaring errors on financial statement
What is the focus of Analytical Procedures?
Analytical Procedure focus is on dollar amounts (not internal controls)
Analyzes Financial Data: Do Financial Statements Make Sense?
Comparison of data between years
How is the Current Ratio calculated?
Current Ratio = Current Assets / Current Liabilities
How is the Quick Ratio calculated?
Quick Ratio = Liquid Assets / Current Liabilities
How is the Asset Turnover calculated?
Asset Turnover = Net Sales / Average Assets
How is the Inventory Turnover calculated?
Inventory Turnover = COGS / Average Inventory
How is Gross Margin % calculated?
Gross Margin % = Gross Margin / Sales
What type of testing are ratios?
Ratios are Analytical Procedures
What type of procedure is a Budget vs. Actual comparison?
Budget vs. Actual comparisons are Analytical Procedures.
List Common Types of Analytical Procedures
Ratio analysis
Budget vs. Actual comparison
Comparison of data between years
Use of non-financial data to predict expected values for financial data
How do management assertions affect the audit?
Management assertions help the auditor to plan the audit and select substantive tests.
What assertions do auditors test?
Presentation - Cutoff Classification - Is it in the right period and category?
Existence/ Occurrence - Did it happen? Does it exist?
Rights & Obligations - Does the company own them?
Completeness - Was everything recorded?
Valuation - Are they worth the amount at which they are recorded?
(PERCV)
What assertions are tests for transaction classes?
Occurrence
Cutoff
Classification
Completeness
Accuracy
For which assertions are disclosures tested?
Occurrence
Completeness
Classification
Accuracy
Is testing the validity of direct evidence a basic audit procedure?
No it is an extended procedure.
For example you don’t have to take a loan covenant document and go search out that it’s a valid loan covenant. Instead you consider the source - if it’s externally prepared it’s more persuasive.
How are Management Estimates audited?
First and foremost you need to understand management’s rationale and methods for developing estimates before you can judge reasonableness.
Next Auditor should formulate their own opinion on what a good estimate should be and compare it.
Finally determine if subsequent events affect the estimate.
Whose property are audit documentation (audit workpapers)? In what form must they be?
Audit workpapers are the property of the auditor.
They can be paper or electronic.
They must include a WRITTEN audit program (either paper or electronic).
What is the Current File?
Information pertaining to the current year’s audit.
What is the Permanent File?
Information used for this audit and future audits which is updated as needed.
How long must audit workpapers be maintained?
Must be kept for 5 years after the audit release date or according to regulations whichever is longer.
Must be kept for 7 years under PCAOB Audit
PCAOB audits also require an Engagement Completion Document
What is the primary requirement for audit workpapers besides being written?
Any experienced auditor should be able to look at your work and understand what you did.
How should documents added to work papers be treated?
If further documents are added to the work papers after the audit report is issued it must be documented as to who added them why they were added and any effects on the audit report.
How should documents removed from workpapers be treated?
After the audit report is released the firm has 60 days to subtract from the file.
You can still add to the file if you document it but you cannot delete any information after 60 days.
Note - for SEC auditors the PCAOB only allows deletions up to 45 days after issuance of the audit report.
What does an audit procedures should be applied to Required Supplementary Information?
The auditor should make management inquiries about RSI and obtain written assertions regarding its preparation. The auditor should compare the RSI to the rest of the financial statements to ensure consistency.
Definition
Slide
Represent an organization’s beliefs and ideals about what is good or bad, acceptable and unacceptable and influences the behavior of the organization.
13
An environment where people do the right thing at the right time. The board of directors and management define culture. Culture, within Enterprise Risk Management, is described by “risk” on a continuum from “risk averse” to “risk aggressive”.
93
The culture, capabilities, and practices integrated with strategy-setting and performance that organizations rely on to manage the risk in creating, preserving and realizing value.
28
An occurrence or set of occurrences. Events may be negative (natural disasters) or positive (improved tax rates).
26
Refers to the allocation of roles, authorities and responsibilities among stakeholders, the board and management.
20
Governance and Culture forms the basis for all other ERM components and is supported by the following principles:
- Exercise of board oversight
- Establishment of operating structures
- Definition of desired culture
- Demonstration of commitment to core values
- Attracting, developing and retaining capable individuals
65
Represents the continual, iterative process of obtaining information and sharing throughout the entity and is supported by the following principles:
- Leveraging information and technology
- Communication of risk information
- Reporting on risk culture and performance
69
The process put into effect by an entity to provide reasonable assurance that objectives will be achieved.
22
Represents the core purpose of the entity. The
mission represents why the Company exists and what it hopes to accomplish.
13
Operating structure defines how the entity organizes and carries out its day to day operations.
84
Definition
Slide
Includes identification and assessment of risk that affect an entity’s’ ability to achieve its strategy and business objectives and is supported by the following principles:
- Risk identification
- Risk assessment
- Risk prioritization
- Risk responses
- Development of a portfolio view
67
Relates to actions, tasks and functions to achieve or exceed an entity’s strategy and business objectives.
21
The amount of risk taken to achieve strategy and business objectives is appropriate for the entity.
33
Enables the organization to determine how well enterprise risk management capabilities and practices increased value over time and support the following principles:
- Assessment of substantial change
- Review of risk and performance
- Pursuit of improvement of ERM
68
Risk the entity will assume in pursuit of value.
34
Provides a composite view of risk that defines the relationship between risk and performance.
42
A measurement of considerations such as the likelihood and impact of events or the time it takes to recover from events.
27
Refers to an organization’s plan to achieve its mission and vision and to apply its core values.
19
Represent the integration of ERM into the organization’s strategic plan and is supported by the following principles:
- Analysis of business context
- Definition of risk appetite
- Evaluation of alternative strategies
- Formulation of business objectives
66
The manner of communication of values.
105
The state of not knowing how or if potential events may manifest.
27
Occurs when the benefits of value exceed its cost of resources used.
10
Occurs with faulty strategy and inefficient/ineffective operations.
11
Occurs when ongoing operations efficiently and effectively sustain created benefits.
10
Definition
Slide
Occurs when benefits created by the organization are received by stakeholders in either monetary or nonmonetary form.
12
Represent the aspirations of the entity and what it hopes to achieve over time.
13
Definition
Slide
No action is taken to change the severity of risk. This response is appropriate when the risk to strategy and business objective is already within risk appetite.
102
Actual residual risk represents the risk remaining after risk response have been implemented to reduce risk severity. Actual residual risk should be equal to a less than the target residual risk.
87
Action is taken to remove the risk. Choosing avoidance suggests that the organization was not able to identify a response that would reduce the risk to an acceptable level of severity.
102
Business context is defined by the Framework as the trends, relationships and other factors that influence an organization’s current future strategy and business objectives.
11
Business objectives are specific measureable or observable, attainable and relevant targets that provide the link to practices within the entity to support the achievement of strategy.
41
When measuring the severity of risk, impact represents the result or effect of risk. The impact of a risk may be positive or negative relative to the strategy or business objective.
81
Inherent risk is the risk to an entity in the absence of any direct or focused actions by management to alter its severity.
87
When measuring the severity of risk, likelihood represents the possibility of risk occurring. This may be expressed in terms of a probability or frequency occurring.
81
Action is taken that accepts increased risk to achieve improved performance. When choosing to pursue risk, management understands the nature and extent of any changes required to achieve desired performance while not exceeding the boundaries of acceptable tolerance.
103
Action is taken to reduce the severity of the risk. Risk reduction involves any number of everyday business decisions that reduce risk to an amount of severity aligned with the target residual risk profile and risk appetite.
103
Risk appetite is a measure of risks that are acceptable or unacceptable. Risk appetite may encompass a single depiction or several depictions that align and collectively specify the acceptable types and amount of risk.
28
Definition
Slide
Risk capacity represents the maximum amount of risk the entity can absorb in pursuit of strategy and business objectives.
24
Risk categories are the shared common groups of risk that potentially impact multiple business objectives.
44
A risk inventory is a listing of the risk that entity faces.
61
Action is taken to reduce the severity of risk by transferring or otherwise sharing a portion of risk. As with the reduce response, sharing risk lowers residual risk in alignment with risk appetite.
104
Target risk is the amount of risk that an entity prefers to assume in pursuit of its strategy and business objectives knowing that risk responses have been implemented.
87
Tolerance describes the range of acceptable outcomes related to achieving a business objective within the risk appetite. Tolerance is the acceptable variation in performance and is closely linked to risk appetite.
46
Triggers are typically changes in the business context, but may also be changes in the risk appetite and they serve as early warning indicators of changes to assumptions supporting the severity assessment. The organization strives to identify trigger that will prompt a reassessment of severity when required.
90
Definition
Slide
The quantified financial loss per year.
18
The estimated frequency of a threat event occurring in a year.
18
Programs designed to detect and remove malware such as worms, viruses, and other malicious software.
88
The monetary value of the replacement of the
asset, or the income value through use of the asset.
18
A threat event that exploits a vulnerability.
14
Software running on infected computers that are
used to launch attacks from multiple platforms.
117
Assessment of qualitative and quantitative impacts on the organization due to specific disruptive events.
23
Covers how evidence is secured and stored at all times and shows who has it, who has seen it, and where it has been.
121
A value that is computed based on the contents of the document.
63
Model designed to guide policies for information security within an organization.
26
Set of processes, best practices, and technology that protects critical infrastructure such as networks and databases from accidental or
intentional damage due to attacks, unauthorized access, or natural disasters.
10
Data stored in a shared environment alongside data from other customers.
101
The data owner may reside under one legal
jurisdiction, but the data itself may reside under one or more separate jurisdictions.
103
Strategies to prevent data loss.
60
The data owner’s legal control of the data.
103
A layered defense consisting of two or more defensive methods.
27
Service that translates domain names into their numeric IP addresses.
75
The proportion of the asset value that is likely to
be lost through a particular threat.
18
Protocol used to transfer files from one computer
to another over a network.
79
Protocol used to enable retrieval and transfer of
web pages over a network.
78
Definition
Slide
Cloud model of service delivery where the basic computing infrastructure of servers, software, and network equipment is provided as an on-demand
service.
95
Systems that monitor network communications and generate alerts if any malicious traffic is detected.
87
Systems that monitor, detect, and prevent traffic from entering the network.
88
Access control principle that states that a single entity shall have access only to the assets it needs to complete its required duties.
36
A directory service protocol commonly used for storing users and passwords.
31
A computer network that links devices within a building or group of adjacent buildings.
74
Media access control address of a computer that
is a unique identifier assigned to network interfaces for communication.
90
A time measurement that specifies the average time between failures.
46
The downtime or the average time required to
repair a device after a failure.
46
A portable computing device.
47
A software architecture in which a single instance of software runs on a server and serves multiple tenants or customers.
99
A technique used by malicious users to capture
sensitive information.
76
Cloud model of service delivery where the computing platform is provided as an on-demand service upon which applications can be developed and deployed.
94
Risk analysis on information about an asset or activity that cannot be reduced to measurable
values.
16
Risk analysis about an asset that provides risk in
measurable values.
18
A two-dimensional barcode.
55
Definition
Slide
Malware that takes control of a system usually by encrypting the hard drive and demands the owner pay a ransom to receive the keys to unlock
the drive.
117
The maximum period of time or amount of transaction data that the business can afford to lose during a successful recovery.
130
The time frame within which a system should be recovered.
129
Amount of risk remaining after implementing countermeasures.
21
An exposure to loss or damage due to threats,
vulnerabilities, and attacks.
14
Risk treatment where the risk is accepted as is without implementing any countermeasure or protection.
20
A systematic process of identifying risk and
estimating the loss if the risk materializes.
15
Risk treatment where the activity that introduced the risk is discontinued or avoided entirely.
21
Risk treatment where countermeasures are used to reduce the risk.
21
Risk treatment whereby risk is moved to another entity.
21
Applications that hide certain things, such as processes, from the operating system.
116
Security management practices.
25
Access control principle that states that no single entity shall have so many privileges or authorizations that the entity can complete critical processes or business functions on its own.
36
The monetary cost of the expected loss due to a
single threat event.
18
Cloud model of service delivery where one or more applications are provided for use on demand.
94
Connecting one device to another device, usually
to access the Internet or other network.
54
Any event that could compromise security by causing loss or damage to organizational assets.
14
Malware that enters a system or network under
the guise of another program.
116
A reference to a web resource that specifies its location on a computer network, usually a web address.
75
Definition
Slide
A private network that extends across a public
network using encryption to maintain privacy.
51
A hole or gap in a system through which a threat can be exploited.
14
Explicit listing of entities that are authorized to provide a particular service or access.
52
A computer network that extends over a large geographic area.
74
Wireless LAN.
90
Definition
Slide
Under the activity-based approach, overhead is allocated to the various production activities and
then to the products.
98
Activity-based budgeting uses activities as the fundamental cost object.
36
Agency is a legal relationship in which one person or entity (the principal) appoints another person or entity (the agent) to act on his/her behalf.
6
Cost allocation can be based on competitive rates. Overhead can be charged to benefiting departments based on rates or some other equitable basis that charges based on usage or benefit. This method promotes fair accountability
for overhead costs and motivation for responsible action.
95
Cost allocation can be based on full cost recovery. Full cost recovery allocates cost based on full cost, or fully-allocated cost. Fully- allocated costs are total manufacturing and selling and administrative expenses. This method also promotes fair accountability for overhead costs and motivation for responsible
action.
96
Overhead costs can be allocated based on sales. Overhead is allocated in relation to the department’s sales volume relative to the sales volume of the entire organization. Although simple to implement and easy to understand, allocation based on sales has several disadvantages.
93
All overhead costs can be assigned to corporate headquarters (i.e., the overhead can be left in a cost pool).
94
Authority is the right to use resources to accomplish a task or achieve an objective. Authority can be delegated, and it represents the ability to use the means of an organization to accomplish an objective.
25
Salary is a payment that is fixed in amount.
61
Bonuses are paid to an employee upon the attainment, achievement, etc. of certain quantitative and other goals (e.g., sales, profits, costs, etc.) set by the company.
61
Definition
Slide
A budget is a quantitative and formal statement of the plans of an organization, and it follows the structure of an organization. A budget is usually prepared only after the completion of a plan that includes the objectives of the organization.
Variations from the budget and the subsequent responses are the control functions of a budget. Although a budget is always quantified, it may be stated in non-financial terms (e.g., units). In addition, external factors (the state of the economy, competition actions, changes in the labor markets, etc.) and internal factors (new product development, types of responsibility centers, marketing efforts, changes in various expectations, etc.) will influence the development
of the budget.
30
Budgetary slack is the planned overestimation of budgeted expenses and is used by employees to hedge against the unexpected. It is a particular feature of participative budgeting and is essentially the practice of “padding” budgets to make objectives easier to achieve. Budgetary slack can be defined as the difference between what the managers expect the results will be and what the managers have budgeted the results to
be.
53
Budgeting is an integral part of the planning and control process.
30
Budgets and standards are methods of performance evaluation and are used as tools for achieving goal congruence.
9
Centralized authority describes a low degree of delegation in which authority is retained by top
management to a greater degree.
26
Compensation pools are the funds from which
the bonuses will be paid.
63
Concurrent controls are also known as screening controls, and they are applied during an operation (currently) such as:
- Verification of airline reservation information on a real time basis, and
- Quality checks during the manufacturing process.
84
Definition
Slide
A continuous budget adds a month (or quarter, year, etc.) in the future with the passage of each period of time. Thus, a certain period is always projected into the future. A continuous budget may be part of a strategic plan, but it does not stay unchanged, as it is being continually updated. Any budgeting technique works better if revenues and expenses can be forecasted with some reliability, but continuous budgets allow frequent revision, which helps the process in the
case of unreliable forecasts.
35
A contribution center is responsible for revenue and direct costs.
97
A cost center is the least complex segment for which costs are allocated. A cost center is responsible for costs only.
97
Decentralized authority describes a delegation of authority to a greater degree. Authority is not retained by top management, but is, instead, passed to lower management. Subordinates are granted significant autonomy and independence in operating the company and making decisions.
26
The departmental approach considers both service departments and production departments. Overhead is first allocated to each of the departments and then to the product. All departments receive their share of the allocated indirect costs and their own direct costs. Then, the service department costs are allocated to the production departments. Finally, the production
department costs are allocated to the products.
98
Under the direct approach, overhead is allocated directly to the products. This is the easiest of the three methods, but it ignores reciprocal service flows back and forth between departments. The
share of overhead is simply calculated only for each production department.
98
Earnings are synonymous with income, and earnings per share would be an effective means
by which to evaluate budgeted income.
110
Flexible budgets present a plan for a range of activity so that they can be adjusted based on
volume.
35
Definition
Slide
Goal congruence describes a condition that exists where the personal and organizational goals of decision-makers throughout the firm are consistent and mutually supportive. It is built on several ideas, including the distinction between authority and responsibility and the use of performance monitoring tools to focus attention. Although complete and perfect goal congruence is an ideal, it is virtually impossible to attain, as the short-term goals of employees within the firm (e.g., employees desire current compensation to be set at high levels) are often not consistent with those of the firm (e.g., the firm desires compensation to be at lower levels to maximize benefits derived from employees). It is is achieved through a series of incentives and performance evaluation systems designed to motivate human behaviors that are consistent
with the objectives of the organization.
8
Imposed control is the traditional top-down management style.
82
Incremental budgeting simply adds an increment (often a percentage) to the prior budget. It is the
opposite of zero-based budgeting.
36
Internal rate of return measures the rate of return over the life of the investment. It also assumes that all positive cash flows are reinvested and earn the same rate. These factors make IRR
inappropriate for evaluating budgeted income for a given year.
111
An investment center is responsible for revenues,
expenses, and invested capital.
97
Management by exception is the control technique used to focus management’s attention on those items that deviate significantly from the standard. Items that do not deviate from the standard are assumed to require no management attention, and management is not distracted by
irrelevant details.
88
Management by objective goals are set using participative techniques, and individual goals are aligned with organizational objectives, which enhances goal congruence throughout the organization.
89
Definition
Slide
A mission statement is a general, conceptual overview of the organization’s objectives. The mission statement of a firm should:
1. Provide an overall guide to those in high-level decision-making positions.
2. State the moral and ethical principles that guide the actions of the firm.
3. Create a business climate or culture that can be communicated to employees and
customers.
12
Operational objectives set the specific plans for
implementing the tactics to achieve strategic objectives.
14
The participatory budgetary approach reflects the behavioral or modern school of management. As the name implies, participatory budgeting encourages wide participation by the individuals affected by the budget. This approach begins at lower levels and allows subordinates to develop initial budgets to reflect department needs (although the overall firm goals are initially determined by top management). Joint decision- making is required, and communication is enhanced. In the participatory budgetary approach, responsibilities of the organization are
not changed, but the authority to make important decisions is delegated.
48
Payment options are the way in which payment is offered to the employee (generally in cash or in stock).
63
Performance evaluation is the process of determining the degree of success in accomplishing a task in terms of both efficiency and effectiveness.
9
Policies are designed to help guide decision-
making. They are broad guidelines.
15
Post-action controls detect errors after they have occurred. They are applied on output and include:
a. Standard-to-actual variance analysis, and
b. Quality checks on goods produced
84
Definition
Slide
Preliminary controls are preventative controls that attempt to stop problems before they occur.
They are also known as steering or feed-forward controls (such as planning), and they are applied on inputs such as:
1. Quality control inspection of raw materials upon receipt, and
2. Verifying the accuracy of subsidiary journal totals before throughput to the general ledger.
84
The price/earnings ratio is an effective way to evaluate projected income, especially from the
point of view of an investor.
110
The principal-agent model identifies two factors of the performance of managers that affect the relationship between the employee (manager) and firm when contracts between the two are created: uncertainty and the lack of observation. In a perfect world, the contract would be based on a predetermined amount of effort that the manager would provide in return for
compensation.
20
Procedures are specific directions (instructions) on how to accomplish a task.
15
A profit center is responsible for revenues and expenses.
97
Program budgeting treats a program as an autonomous business unit. The process gathers costs for a particular budget according to the program, rather than charging them to the person responsible for the costs.
36
Residual income is defined as income in excess of desired minimum return.
111
Responsibility is the obligation to accomplish a task or achieve an objective. It is the job of achieving the objective. Ultimate responsibility cannot be delegated, and ultimately, the greatest
burden falls on those with responsibility.
25
Definition
Slide
A responsibility accounting system is a system of accounting that recognizes various responsibilities or decision centers throughout an organization and reflects the plans and actions of each of these centers by assigning particular revenues and costs to the one having the responsibility for making decisions about those revenues and costs. It is a system that measures the plans and actions of each responsibility
center.
90
Return on investment blends all the major
ingredients of profitability in one ratio (or number).
110
Risk aversion is the bias towards avoiding a situation that has an uncertain outcome, even if that outcome has an expected outcome that is favorable. Managers who have a large part of their total compensation tied to the attainment of certain goals (i.e., a large part of their pay is via bonus) tend to avoid situations that are unpredictable.
69
Rules are specific (restrictive) operational guides. They are usually inflexible and designed to assist in the implementation of procedures. Rules, insofar as they are restrictive, are often viewed
as negative.
15
Self-control is the more modern, participative style
82
Standards are developed to evaluate
performance of operating characteristics and represent budgets presented on a per unit basis
39
Static budgets are based on assumed fixed levels of activity (e.g., one volume of production) and are often referred to as master budgets.
Static budgets are not changed once they have been set, even if the output changes.
35
Definition
Slide
Strategic planning is the process of developing a statement of long-range goals for an organization and defining the strategies and policies that will help the organization achieve those goals.
Strategy analysis is fundamental to both long- term and short-term planning and considers overall organizational questions, such as:
1. What are the objectives or what is the mission of the organization?
2. How is the organization affected by the general economy?
3. What trends will affect the organization’s market?
4. What structure will best serve the organization’s needs?
5. What opportunities are available?
6. What is the optimum capital structure?
13
Tactics are the means for attaining objectives developed during strategic planning. Examples of tactics include:
- Outlining strategies for technological development,
- Market expansion, and
- Product development.
14
Zero-based budgeting (ZBB) requires justification of all expenditures every year and may present a firm commitment. However, these budgets may be adjusted for changes in activity level.
Activities are prioritized according to the program most vital to the organization.
36
Definition
Slide
Budget allowing management to evaluate the capital additions of the organization over a single
or multi-year period.
119
Budget estimating the cash receipts and cash disbursements to occur during the budget period.
106
Rolling budgets which add a new budget month as each current month expires.
44
Accumulates information from the direct materials, direct labor, and factory overhead budgets factoring in changes in inventory levels
to estimate the cost of goods manufactured and sold for a given period.
95
Budget estimating the hours and rates for workers directly involved in meeting production requirements.
85
Budget estimating the quantity and cost of direct
materials to be used in production.
81
Approach assuming that budgets begin with expenses that are ten percent less than the previous year.
42
Budget for all manufacturing costs not classified
as direct materials or direct labor.
91
Flexible budgets derive the expenses and revenues allowed from the output achieved. Thus, volumes achieved that are different from plan do not distort performance evaluation using
flexible budgets.
56
Budgeting process which demands continuous cost performance improvement expecting process improvement both within the organization and from suppliers.
52
Budgets which estimate all costs and revenues attributable to a product from initial research and development until final customer service and
support are withdrawn.
63
Alternative to zero-based budgeting that prioritizes programs and allocates limited
resources to them in order of priority.
42
Describe the organization’s goals and objectives
in financial, quantitative, and qualitative terms.
105
Definition
Slide
Budget for each product or each department estimating the amount that will be produced stated in units.
75
Represents the sales forecast associated with planned or anticipated conditions.
71
Budget estimating the non-manufacturing expenses to be incurred during the budget period.
99
Budgeting process requiring managers to begin the process at zero and provide justification for all expenditures every year.
36
Definition
Slide
Budget variance analysis analyzes differences in the budget and helps companies adjust budgeting procedures to avoid similar
discrepancies in the future.
41
A variance from standard that could have been prevented.
54
Currently attainable standards are based on costs that result from work performed by employees with appropriate training and experience but without extraordinary effort. Provisions are made for normal spoilage and downtime.
14
Direct labor is work performed by employees who actually produce the product.
20
Direct labor variance computes the difference in
the actual direct labor costs and the standard labor costs.
64
Direct materials are input items that ultimately result in the product.
20
The direct materials price variance is the
difference between the actual price for materials and the standard price.
57
The direct materials quantity variance is the
difference between the actual amount of materials used and the standard amount.
59
A favorable variance occurs when the actual
results exceed the planned, budgeted, or expected results.
52
Fixed manufacturing overhead consists of costs such as rent, insurance, and property taxes.
56
The fixed overhead budget (spending) variance computes the difference between budgeted and actual fixed production overhead costs.
75
The fixed overhead volume variance is the difference between the fixed production costs budgeted and the fixed production costs used
during the period.
76
A flexible budget is a financial plan prepared in a manner that allows for adjustments for changes in production or sales and accurately reflects expected costs for the adjusted output.
33
An ideal standard is the operating result based on perfect conditions with no idle time, no inefficiencies, no breakdowns, and no waste.
12
Definition
Slide
Labor Cost Standard is the estimate of the labor hours required to produce a unit of product and
the cost of labor per unit.
21
Manufacturing overhead includes indirect costs associated with a factory or production operation.
20
The analysis of manufacturing overhead variances compares the actual overhead incurred in a period to the applied overhead in that same period.
70
Materials Cost Standard is the estimate of the quantity of materials needed for a unit of product and the unit costs to purchase the materials
used.
21
Participative standards are set by both managers and the individuals who are held accountable to
those standards.
17
The price standard determines how much a particular input material should cost.
26
The quantity standard determines how much of a particular material should be used to produce one unit of product.
26
The relevant range is the production range, often defined as a percentage above and below a target output level, for which the flexible budget assumptions hold.
33
Standard Costing is the process of using an
expected or standard cost in the accounting records for a period.
6
An uncontrollable variance is a difference from a standard that could not have been prevented by management.
54
An unfavorable variance occurs when the actual results do not exceed the planned, budgeted, or
expected results.
53
The variable overhead rate (spending) variance illustrates the difference between variable production overhead expense and the standard
variable overhead expense.
72
Variable manufacturing overhead consists of
costs such as indirect materials and indirect labor, utilities, repairs, and maintenance.
56
A variance is a difference; in this case, it is the difference between the standard cost and the actual cost.
6
Definition
Slide
Variance analysis is the process of comparing some measure of performance to a plan, budget,
or standard for that measure.
31
Definition
Slide
Budget variance analysis analyzes differences in the budget and helps companies adjust budgeting procedures to avoid similar
discrepancies in the future.
41
A variance from standard that could have been prevented.
54
Currently attainable standards are based on costs that result from work performed by employees with appropriate training and experience but without extraordinary effort. Provisions are made for normal spoilage and downtime.
14
Direct labor is work performed by employees who actually produce the product.
20
Direct labor variance computes the difference in
the actual direct labor costs and the standard labor costs.
64
Direct materials are input items that ultimately result in the product.
20
The direct materials price variance is the
difference between the actual price for materials and the standard price.
57
The direct materials quantity variance is the
difference between the actual amount of materials used and the standard amount.
59
A favorable variance occurs when the actual
results exceed the planned, budgeted, or expected results.
52
Fixed manufacturing overhead consists of costs such as rent, insurance, and property taxes.
56
The fixed overhead budget (spending) variance computes the difference between budgeted and actual fixed production overhead costs.
75
The fixed overhead volume variance is the difference between the fixed production costs budgeted and the fixed production costs used
during the period.
76
A flexible budget is a financial plan prepared in a manner that allows for adjustments for changes in production or sales and accurately reflects expected costs for the adjusted output.
33
An ideal standard is the operating result based on perfect conditions with no idle time, no inefficiencies, no breakdowns, and no waste.
12
Definition
Slide
Labor Cost Standard is the estimate of the labor hours required to produce a unit of product and
the cost of labor per unit.
21
Manufacturing overhead includes indirect costs associated with a factory or production operation.
20
The analysis of manufacturing overhead variances compares the actual overhead incurred in a period to the applied overhead in that same period.
70
Materials Cost Standard is the estimate of the quantity of materials needed for a unit of product and the unit costs to purchase the materials
used.
21
Participative standards are set by both managers and the individuals who are held accountable to
those standards.
17
The price standard determines how much a particular input material should cost.
26
The quantity standard determines how much of a particular material should be used to produce one unit of product.
26
The relevant range is the production range, often defined as a percentage above and below a target output level, for which the flexible budget assumptions hold.
33
Standard Costing is the process of using an
expected or standard cost in the accounting records for a period.
6
An uncontrollable variance is a difference from a standard that could not have been prevented by management.
54
An unfavorable variance occurs when the actual results do not exceed the planned, budgeted, or
expected results.
53
The variable overhead rate (spending) variance illustrates the difference between variable production overhead expense and the standard
variable overhead expense.
72
Variable manufacturing overhead consists of
costs such as indirect materials and indirect labor, utilities, repairs, and maintenance.
56
A variance is a difference; in this case, it is the difference between the standard cost and the actual cost.
6
Definition
Slide
Variance analysis is the process of comparing some measure of performance to a plan, budget,
or standard for that measure.
31
Definition
Slide
Objectives specifically concerned with the entity’s
adherence to laws and regulations.
11
Actions established through policies and procedures that enable the entity to mitigate risk to achieve its objectives.
109
Set of standards, processes, and structures that provide the basis for carrying out internal control across the organization.
47
Acronym referencing the five internal control components: Control Environment, Risk Assessment, Information & Communication, Monitoring Activities, and Existing Control
Activities.
19
Shortcoming in a component or components and relevant principles that reduces the likelihood that
the entity can achieve its objectives.
32
Controls designed to discover an unintended event.
116
Information is used to implement, monitor, and respond to control abnormalities, while communication is the continual, iterative process of providing, sharing, and obtaining necessary information.
139
Set of activities that involve people, processes, data, and technology which enables the organization to obtain, generate, use, and communicate transactions and information to maintain accountability, measure, and review
performance.
140
Risk that exists without adjustment for management’s mitigating efforts.
100
Process effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives related to operations,
reporting, and compliance.
9
Internal control deficiency or combination of
deficiencies that severely reduces the likelihood that the entity can achieve its objectives.
32
Assess whether each of the five components of internal control and relevant principles is present
and functioning.
128
Definition
Slide
Objectives addressing the efficiency and effectiveness of internal controls, assist the entity in evaluating operational and financial performance goals, and safeguard assets against
loss.
10
Controls designed to avoid an unintended event.
116
Objectives addressing reporting issues for both internal and external users in financial and non- financial contexts.
11
Risk that remains after management responses are taken into account.
100
Possibility that an event will occur and adversely
affect the achievement of an entity’s objectives.
80
What are the three major types of funds in governmental accounting?
Governmental, Proprietary, Fiduciary
Which two accounting bases are used in governmental accounting?
Accrual basis - current economic resources focus (revenues recognized when earned)
Modified accrual basis - current financial resources focus (revenues recognized when available and measurable)
What is a budget appropriation?
The highest amount allowed for a particular expenditure under a budget.
What is an encumbrance?
Records purchase and reserves it for the encumbrance.
What is the opening budgetary entry?
Dr Estimated Revenues Control
Cr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
What is the closing budgetary entry?
Dr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Cr Estimated Revenues Control
What are the types of governmental funds?
General Fund
Special Revenue Fund
Permanent Fund
Capital Projects Fund
Debt Service Fund
What is a General Fund?
The operating fund of the governmental unit
Records Significant Revenues: Taxes; Tickets; Fines; Licenses
Records Significant Expenditures: Police; Education; Fire Dept
What is a Special Revenue Fund?
Restricted for a specific purpose such as street repair.
What is a Permanent Fund?
Legally restricted fund; where only earnings can be used to fund programs.
Principal remains intact.
What is a Capital Projects Fund?
Used to acquire and build facilities.
What is a Debt Service Fund?
Handles repayment of long-term debt and related interest.
Which fund statements are issued in Governmental Accounting?
Balance Sheet
Statement of Revenues; Expenditures; and Changes in Fund Balance
When is Revenue recorded in Governmental Accounting?
When it is BOTH available and measurable; regardless of when it is spent.
What is Derived Tax Revenue?
Money collected from people doing things:
Sales tax (buying cars) or income tax (people working)
What is Imposed Tax Revenue?
Tax assessed just because things exist
Example: property tax on a car (even if it’s never driven); real estate tax
Recorded as a revenue when BUDGETED.
Estimated uncollectible property tax revenues don’t offset revenues; so don’t net them.
What are the types of Proprietary Funds?
Internal Service Funds - to serve the needs of other governmental units (i.e. motor pool)
Enterprise Funds - provide goods or services to external users (i.e. post office)
What are the Fund Balance Types?
Restricted - Restricted by Contributor
Committed - Restricted by Government
Assigned - Intended for a purpose
Unassigned - Available to be spent
Non-spendable - Not in a spendable state
What are the types of Fiduciary Funds?
Agency Fund - government acts as an agent or custodian
Pension Trust Fund - Government is a trustee for a pension plan
Investment Trust Fund - Government is a trustee over a series of investments
Private Purpose Trust - Trust that benefits various individuals and entities
How are Assets & Liabilities presented on the Statement of Net Position?
Assets (Current & Non-Current)
Deferred Outflows of Resources
Liabilities (Current & Non-Current)
Deferred Inflows of Resources
How are Capital Assets shown on a governmental Statement of Net Position?
They are shown net of debt
Asset Cost - Accumulated Depreciation - Asset Liabilities : Net Assets
How is infrastructure reported on a governmental Statement of Net Position?
Modified approach:
Reported at cost; no accumulated depreciation
How is a Statement of Net Position divided?
Into Governmental Activities and Business Activities
How are activities presented in a Statement of Activities?
They are divided by function
If the activities of a component are distinguishable from the rest of the governmental entity; then discreet presentation is required
If the activities of the component cannot be identified and separated from the rest of the governmental activities; then blended presentation is warranted.
Component units are reported in the Entity-Wide Financial Statements and not the Fund Financial Statements.
What is the primary objective of governmental accounting?
To provide information that is useful and benefits a wide range of users including:
Costs of services provided
Sufficiency of revenues to cover costs
Financial position of entity
What Financial Statements are required for Defined Benefit Pension plans?
Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position
What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?
Assets; Deferred Outfows; Liabilities; Deferred Inflows; Fiduciary Net Position
What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?
Additions (Contributions and Net Investment Income) - Deductions (Benefits Payments and Admin Expense) : Net Change in Fiduciary Net Position
What should be included in the Financial Statement notes for Defined Benefit Pension Plans?
Types of Benefits; Plan Member Classes; Board Information; Investment Policies and FV Determination
Which organization’s standards are the most authoritative in the hierarchy of international accounting?
The International Accounting Standards Board (IASB)
Where is the first place management should look for guidance on international recognition and accounting policies?
The International Financial Reporting Standards (IFRS) issued by the IASB
Which framework helps to develop standards for international accounting?
The IASB Framework
- The framework is NOT a standard itself
- The framework does not supersede any standard’s authority
What is the objective of the IFRS framework?
To provide users with information on international accounting.
What basis of accounting is allowed under IFRS?
Only the Accrual Basis of Accounting is allowed under IFRS.
What are the Qualitative Characteristics of accounting information within IFRS?
Relevance & Faithful Representation
Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions
What are the Enhancing Characteristics of IFRS?
Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand
How does comparability differ under GAAP versus IFRS?
Comparative information from prior year is required under IFRS.
GAAP requires that if multiple years are presented they are consistently prepared however it doesn’t require prior year comparative statements.
What is the Pervasive Constraint within IFRS?
Cost vs. Benefit
Which items are considered reporting elements under IFRS?
Asset
Liability
Equity
Income
Expense
What are the criteria for recognition on IFRS financial statements?
Probable future economic benefit
Can be measured reliably
If the value or outcome cannot be measured reliably IFRS requires the use of the Cost Recovery Method.
When transitioning to IFRS what type of financial statement must be produced for the first reporting period?
A full comparative statement using IFRS.
If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?
January 1 2011 because a full year of comparative statements is required from the previous year
For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?
The Fair Value election
Where on the financial statements are adjustments for adopting to IFRS made?
In the entity’s retained earnings or equity
How is the completed contract method used under IFRS?
Completed contract method is not allowed under IFRS.
How is LIFO treated under IFRS?
IFRS does not allow LIFO.
Which financial statements are required under IFRS?
Statement of Comprehensive Income
Statement of Changes in Equity
How is the term income used in IFRS?
Income is used instead of revenue and encompasses BOTH revenue and gains.
How is the term profit used in IFRS?
In IFRS the term profit is used instead of Net Income.
How does IFRS treat gains?
They are treated the same as revenue and are not separated on the financial statements.
How does IFRS treat losses?
In IFRS losses are treated the same as expenses but they ARE separated on the financial statements.
How does refinancing of current liabilities to long-term liabilities under IFRS differ from GAAP?
Under IFRS current liabilities can only be refinanced into a non-current liability if the refinance agreement is EXECUTED prior to the balance sheet date.
GAAP requires only intent to refinance not actual execution.
How do contingent liabilities differ between GAAP and IFRS?
Under GAAP there are three classifications of contingent liabilities - Probable Reasonably Possible and Remote.
Under IFRS contingencies are uncertain future events and are classified as a provision if probable and measurable even if uncertain in timing or amount.
How are Financial Assets recorded under IFRS?
Recorded on the Statement of Financial Position using one of three methods
- Amortized Cost 2. Fair Value through OCI or 3. Fair Value through Profit or Loss
How are deferred taxes treated under IFRS?
They use the liability method - all deferred tax liabilities must be reported but only probable deferred tax assets can be reported.
They are non-current on the statement of financial position.
When can deferred tax assets and liabilities be netted under IFRS?
ONLY if they are related to the same country/taxing authority
For example China Deferred Tax Assets can’t offset Japan Deferred Tax Liabilities
Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?
The enacted rate or substantially enacted tax rate.
(GAAP is the enacted tax rate only)
Which items are recorded on the Income Statement in IFRS?
Income
Finance Costs
Tax Expense
Discontinued Ops
Profit/Loss
Non-controlling interest in Profit/Loss
Net profit/loss attributable from equity
How are property plant and equipment (PP&E) recorded and valued under IFRS?
Recorded at cost
Valued using either:
Cost model - asset carried at cost less accumulated depreciation and impairment loss
Revaluation model - asset adjusted to fair value less accumulated depreciation
What are the requirements for using the revaluation model for PP&E under IFRS?
Asset must be able to be reliably measured
Must be applied to whole class of assets not just one asset
No guidance on how often assets should be revalued under IFRS
How is investment property reported under IFRS?
Initially recorded at cost
Revalued using either Fair Value model or Cost model
How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?
Recorded on the Income Statement
Investment P/L : IS
PP&E P/L : OCI
Under IFRS how is investment property reported under the Cost Model?
Carried at Cost minus Accumulated Depreciation
Fair Value must still be disclosed in the notes to the financial statements
How are leases reported under IFRS?
Operating Leases can be recorded as Investment Property if measured at Fair Value
All other investment property must use Fair Value Model if one asset uses it
How are intangible assets valued under IFRS?
Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)
or
the Revaluation Model (Fair Value less Accumulated Depreciation)
How is internally generated goodwill reported under IFRS?
It is not recognized.
How is amortization of intangibles handled under IFRS?
If asset has a finite life it is amortized over useful life.
If asset has indefinite life it is not amortized but is tested for impairment at the reporting date.
When must a lease be recorded as a Finance Lease under IFRS?
If the substantial risks of ownership have passed to the Lessee then the Lease must be accounted for as a Finance Lease
How are defined benefit plans recorded under IFRS?
Project-unit-credit method calculates the PV of the defined benefit obligation
How are interest expense and/or finance costs classified on an IFRS statement of cash flows?
They can be classified as either Operating or Financing
Once a classification is chosen all future costs must be classified there
How are significant non-cash transactions recorded on an IFRS statement of cash flows?
They must be included in the notes to the financial statements.
How are Investments in Subsidiaries Valued?
Investments in Subsidiaries under IFRS are valued three ways: 1. Cost 2. Fair Value 3. Equity Method
When is an audit of IT NOT required?
Controls are redundant to another department
The system does not appear to be reliable and testing controls would not be an efficient use of time
Costs exceed benefit
When can an audit of IT be performed without directly interacting with the system?
System isn’t complex or complicated
System output is detailed
What is the role of a Database Administrator?
Maintains database
Restricts access
Responsible for IT internal control
What is the role of a Systems Analyst?
Recommends changes or upgrades
Liaison between IT and users
What is the role of the data Librarian?
Responsible for disc storage
Holds system documentation
What is the benefit of Generalized Audit Software in an audit?
Uses computer speed to quickly sort data and files- which leads to a more efficient audit
Compatible with different client IT systems
Extracts evidence from client databases
Tests data without auditor needing to spend time learning the IT system in detail
Client-tailored or commercially produced
What is a Relational Database?
Group of related spreadsheets
Retrieves information through Queries
What is a Data Definition Language?
A language that defines a database and gives information on database structure.
It maintains tables- which can be joined together.
It establishes database constraints.
What functions are performed by a Data Manipulation Language?
Maintains and queries a database
Auditor needs information- so client uses DML to get the information needed
What functions are performed by a Data Control Language?
A Data Control Language controls a database and restricts access to the database.
What are Check Digits?
A numerical character consistently added to a set of numbers.
It makes it more difficult for a fraudulent account to be set up or go undetected.
What is the purpose of a Code Review?
A Code Review tests a program’s processing logic.
Advantageous because auditor gains a greater understanding of the program.
What is the purpose of a Limit Test?
Examines data and looks for reasonableness using upper and lower limits to determine if data fits the correct range.
Did anyone score higher than 100%?
What is the Test Data Method?
Auditor processes data with client’s computer - fake transactions are used to test program control procedures.
Each control needs to only be tested once
Problem with this method - fake data could combine with real data.
How can Operating Systems Logs be utilized during an audit?
Auditor can review logs to see which applications were run and by whom.
What is the purpose of Access Security Software?
Helpful in online environments
Restricts computer access - may use encryption.
How can Library Management Software assist with an audit?
Library Management Software logs any changes to system/applications etc.
How can Embedded Audit Modules in software be utilized in an audit?
Assist with audit calculations
Enable continuous monitoring in an audit environment that is changing
Weakness: requires implementation into the system design
Example: SCARF - Collects information based on some criteria and can be analyzed at a later time (necessary because the audit environment is continually changing)
What is an Audit Hook?
An Audit Hook is an application instruction that gives auditor control over the application.
What is the purpose of Transaction Tagging?
Transaction Tagging allows logging of company transactions and activities.
How do Extended Records assist in audit trail creation?
Extended Records add audit data to financial records.
How does Real Time Processing affect an audit?
Destroys prior data when updated
aka Destructive Updating
Requires well-documented Audit Trail
What is the risk of auditing System outputs versus Application outputs?
If the auditor only audits the outputs of a computer system and doesn’t also audit the software applications- an error in the applications could be missed.
What is a Compiler?
Software that translates source program (similar to English) into a language that the computer can understand
How is Parallel Simulation utilized during an audit?
Client data is processed using Generalized Audit Software (GAS)
Sample size can be expanded without significantly increasing the audit cost
GAS output compared to client output
What does auditing internal control in a company’s IT environment accomplish?
Plan the rest of audit- Shorter audit trails that may expire- Less documentation
Assess the level of Control Risk - Unauthorized access to systems or data is more difficult to catch
Systems access controls adds another layer to separation of duties analysis
Focus should be on the general controls- new systems development- current systems changes- and program or data access control or computer ops control changes
If Internal Control is poor and a company’s accounting practices are sloppy - which risk is higher?
Control risk increases with poor Internal Controls and sloppy accounting practices.
If Internal Control is poor - what is the effect on the audit?
Auditor will need to perform more testing and dig deeper into accounts in order to arrive at an opinion regarding the financial statements.
What does Internal Control provide reasonable assurance for?
Internal control provides reasonable assurance that
Material misstatements will be prevented
Reliability/integrity of financial statements will be preserved
Assets are protected against misuse
What is required in an examination of Internal Control under Sarbanes-Oxley?
CEO/CFO must disclose Internal Control deficiencies
Management must provide assessment of Internal Control
Management must certify Financial Statements
What is the relationship between Internal Control and Substantive Testing?
Inverse Relationship
Stronger Internal Controls - Less Testing Needed
Weaker Internal Controls - More Testing Needed
What are the 3 objectives of Internal Control?
Reliability of Financial Reporting
Operational Efficiency/Effectiveness
Compliance with Law and Regulations
What are the 5 components of Internal Control?
Control Environment
Risk Assessment
Information and Communication
Monitoring
Control Activities
What is the purpose for a Control Environment assessment?
Sets tone for the entire company
What are the components of the Control Environment?
Integrity/Ethics of Management
Competence of Management
Organizational Structure
Human Resource Policies
Assignment of Authority/Responsibility
Management’s Style (riskier with a dominant/aggressive individual)
Board/Audit Committee involvement
What does an auditor’s assessment of Detection Risk determine?
Detection Risk determines nature- timing- and extent of audit procedures.
What determines the acceptable level of Detection Risk?
Risk of material misstatement determines acceptable level of Detection Risk
What items could increase the risk of material misstatement?
Rapid growth in the company.
The methods management uses to identify risk- estimate its significance and assess the likelihood of occurrence
Major changes to operations- personnel- systems- IT- products- corporate organization- and foreign operations.
What happens when Control Risk is assessed to be at the maximum level?
No Internal Control testing is performed.
All audit procedures are increased in intensity to compensate for increased risk.
What happens when Control Risk is below the maximum level?
Auditor tests Internal Controls.
Auditor evaluates Control Risk based on tests
Auditor adjusts substantive tests accordingly
Weaker Internal Control - More substantive tests
Stronger Internal Control - Less substantive tests
Describe some common examples of Control Activities.
Performance Reviews
Information Processing
Physical Controls
Segregation of Duties
What should an auditor understand with respect to Information and Communication on an audit?
Understand Client’s
Major transaction classes
Transaction initiation
Support records/documents
Transaction processing
Financial Statement internal reporting process
Financial Statement external reporting process
How must an auditor document understanding of Internal Control?
Through written documentation such as Internal Control memos- flowcharts- and questionnaires
What questions should be asked to determine the risk of material misstatement?
Were all transactions recorded?
Were they timely?
Measured appropriately?
Recorded in correct period?
Presented and disclosed properly?
Did Management communicate their responsibilities?
What is the purpose of testing Internal Controls?
Auditor needs reasonable assurance that controls are functioning as designed and effective
Internal Control Testing should be strong as (IRON) so that nothing gets past them
Inquiry - Interview company personnel
Re-performance - Can it be replicated?
Observation - Watch the control be applied
INspection - Dig into the details/documents
If results are as expected- substantive procedures do not need to be adjusted
When can controls tested by an auditor in a prior year be used in the current year’s audit assessment?
Controls tested by auditor in a prior year can be used in the current year’s audit assuming they are re-tested every third year
Exception If the control has changed since the last audit
What happens if Internal Controls are deficient?
Control Risk increases
Scope of substantive procedures increases
Detection Risk decreases
Material Weakness - Reasonable possibility that a material misstatement in Financial Statements would not be found- more than a remote chance of occurrence
What is a Material Weakness?
Reasonable possibility exists that a material misstatement in Financial Statements would not be found- and has more than a remote chance of occurrence.
What does Tracing test?
Tests Completeness
Starts with source document and traces forward to the journal entry.
What does Vouching test?
Tests Existence.
Starts with a journal entry and searches for a voucher or source document to support the entry.
What activities represent Segregation of Duties?
Non-compatible duties performed by separate individuals- such as
Authorization of asset disbursement vs. Recording of Assets vs. Custody of assets
If supporting audit evidence doesn’t exit - use Observation and Inquiry
Accounting should be segregated from Production
With respect to signing checks - how are duties segregated?
Employees who prepare vouchers/invoices should not also have the authority to SIGN CHECKS
Tip - Remember this as an underlying theme with Segregation of Duties. The authority to make a payment should not also lie in the hands of those creating invoices/vouchers. Why? People commit fraud by setting up fake companies and basically paying themselves
With respect to custody of assets - how should duties be segregated?
Employees who have custody of assets should not also RECORD those assets
Someone in charge of petty cash should not also control the petty cash records
Treasury Department (custodians) should NOT have record keeping duties
They control assets and should not be able to adjust any recording of those assets
What are the limitations on Control Activities?
Controls can’t stop collusion or bad judgment
Management can override controls
Cost vs. Benefit relationship of Internal Control
What is required if a Material Weakness is identified?
A written report to management is required.
Report declaring that no material weaknesses were found is allowed
Previous weaknesses reported that still exist should be reported again
Should be reported no later than 60 days after audit report release date
If one or more material weaknesses is uncorrected at year-end- an Adverse Opinion on Internal Control must be given
What is the effect of a Significant Deficiency? What is it?
A significant deficiency adversely affects a company’s ability to report in the financial statements according to GAAP.
A significant deficiency is a more than a remote likelihood of material misstatement by more than an inconsequential amount
What must occur if a Significant Deficiency is identified?
If a Significant Deficiency is identified- a written report to management required
Report declaring that no significant deficiencies exist is not allowed
Previous deficiencies reported that still exist should be reported again
Should be reported no later than 60 days after the audit report release date
What is a Control Deficiency?
A control is not operating as intended.
What must an auditor ask if using the work of third parties?
Are they competent?
Are they objective?
What must an auditor understand with respect to internal auditors?
Auditor needs to understand the role of Internal Auditors within the organization because their work affects the audit plan
Responsibility for judgments about materiality or appropriateness of entries or estimates cannot be shared with third parties like Internal Auditors
Internal Auditors should be asked to do some of the legwork like preparing schedules or running reports
They should not be asked to make any decisions or judgments
What is required in an examination of Internal Control under Sarbanes-Oxley?
CEO/CFO must disclose deficiencies
Management must provide assessment of Internal Controls
Management must certify Financial Statements
What is the relationship between Internal Control and Substantive Testing?
Has inverse relationship
Stronger Internal Control results in LESS substantive testing
Weaker Internal Control leads to MORE substantive testing
What are the three objectives of Internal Control?
Reliability of Financial Reporting
Operational Efficiency/Effectiveness
Compliance with Law and Regulations
What are the five components of Internal Control?
Control Activities
Risk Assessment
Information and Communications
Monitoring
Control Environment
What are the components of the Control Environment?
Integrity/Ethics of Management
Competence of Management
Organizational Structure
Human Resources Policies
Assignment of Authority/Responsibility
Management’s Style (riskier with a dominant/aggressive individual)
Board/Audit Committee involvement
What happens when Control Risk is below the maximum level?
Auditor tests Internal Controls.
Auditor evaluates Control Risk based on tests
Auditor adjusts substantive tests accordingly
Weaker Internal Control - More substantive tests
Stronger Internal Control - Less substantive tests
What should an auditor understand with respect to Information and Communication on an audit?
Understand Client’s
Major transaction classes
Transaction initiation
Support records/documents
Transaction processing
Financial Statement internal reporting process
Financial Statement external communication process
How must an auditor document understanding of Internal Control?
Auditor must document understanding of Internal Control via Memos - Flowcharts - Questionnaires
What is the purpose of testing Internal Controls?
Auditor needs reasonable assurance that controls are functioning as designed and effective
Internal Control Testing should be strong as (IRON) so that nothing gets past them
Inquiry - Interview company personnel
Re-performance - Can it be replicated?
Observation - Watch the control be applied
INspection - Dig into the details/documents
If results are as expected - substantive procedures do not need to be adjusted
How are Available-For-Sale securities recorded on the Balance Sheet?
At Fair value as either Current or Non-current assets.
How are Available-For-Sale security Unrealized G/L treated?
Included in OCI (Other Comprehensive Income)
How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?
HTM - Stockholder’s Equity
/ Trading Securities - Current Period.
How are Held-to-Maturity securities recorded on the Balance Sheet?
Amortized cost as Current or Non-current assets.
If reclassified as AFS - Unrealized G/L go to Stockholder’s Equity
If reclassified as Trading Securities - Unrealized G/L recognized in Current Period
How are Held-to-Maturity securities Unrealized G/L treated?
Trick question - Unrealized gains or losses are not applicable because they are HTM
How are Trading Securities recorded on the Balance Sheet?
At Fair Value as a Current Asset
Unrealized gains/losses are recorded on the Income Statement
If they are reclassified as held-to-maturity or available-for-sale- there is no effect upon transfer.
How are Trading Securities Unrealized G/L treated?
Recorded on the Income Statement
If they are reclassified as HTM or AFS - there is no effect upon transfer.
Which financial statements are required for not - for - profit organizations?
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Statement of Functional Expense (Volunteer Health Organizations Only)
What are the major classifications found on a Statement of Financial Position?
Similar to Balance Sheet:
Assets
Liabilities
Net Assets
Unrestricted Assets
Permanently Restricted Assets
Temporarily Restricted Assets
What are the major classifications in a Statement of Activities?
Similar to an Income Statement - organization - wide:
Revenues
Expenses - ONLY deducted from Unrestricted Revenues
Gains and Losses
Changes in Net Asset classes
Unrestricted
Permanently Restricted
Temporarily Restricted
What are the characteristics of a Statement of Cash Flows for not - for - profits? What are the major classifications?
Both direct and indirect methods are OK
Operating Activities - Unrestricted Revenues and Unrestricted Expenses
Investing Activities
Financing Activities - Endowments and restricted contributions
Which organizations are required to present a Statement of Functional Expenses?
Volunteer Health Organizations
Which statements are required for non - governmental hospitals?
Balance Sheet
Statement of Operations
Statement of Changes in Net Assets
Statement of Cash Flows
Financial Statement Notes
Which basis of accounting is used for revenues and net assets?
Accrual basis of accounting is used
Only external parties can restrict the use of assets (permanent or temporary)
Assets earmarked internally by management are still classified as unrestricted
What are the characteristics of unrestricted assets or revenue?
No restrictions or conditions placed on entity in order to use the resources
Note: assets earmarked internally by management are still unrestricted
When are revenues on contributions recognized?
Revenues on contributions are recognized in the year received - not the year the contribution is spent and are recorded at Fair Value on the date received
When are services rendered considered contributions?
If the organization would have otherwise paid for them
or
They increase the value of a non - monetary asset
Is hospital charity care revenue?
NO.
It is disclosed in the notes to the financial statements only.
How are unconditional pledges to contribute recorded?
Classified as revenue in the current year only - multi - year future contributions fall under Temporarily Restricted.
Which revenues are expenses deducted from?
Expenses ONLY deducted from Unrestricted Revenues - not Temporary or Permanently Restricted Revenues/Assets
What are the characteristics of temporarily restricted assets/revenue?
Use is restricted to a future time - which could then convert to unrestricted - Class: Temp. Restricted Revenue
Unrestricted contributions promised (including multi - year contributions) - but not yet received are actually restricted by time and are therefore classified as Temporarily Restricted Assets - Multi - year contributions are recorded at the present value of the future contributions
What are the characteristics of an endowment?
Use of investment is restricted - but income from investment could be either restricted or unrestricted
Must be under control of receiving entity (Quasi Endowment) in order to be recorded in unrestricted net assets
Otherwise - a memo entry is recorded
When is the donation of an art collection recognized as a contribution or asset?
Not recognized as assets or contribution revenue if they are held of display or education’ or their sale results in the purchase of similar items
When both Temporarily Restricted Assets and Unrestricted Assets are available for use - which assets are used first?
Temporarily restricted assets are used before Unrestricted assets.
How is a refundable advance recorded by a not for profit?
Classified as a Liability
Promise to contribute assets pending on certain conditions being met
Becomes unconditional once the possibility that it won’t happen is remote
How are investments recorded and valued in not - for - profit accounting?
Fair Value is mostly used
Exception - Equity method used when significant influence exists
How are scholarships recorded?
As a reduction of revenue - netted against college’s tuition
How is depreciation expense recorded by a not - for - profit?
Depreciation expense is allocated proportionately to various functions
When does a security interest attach; or become legally enforceable?
Secured interest must be supported by consideration given. Debtor must actually own the rights to the collateral or have possession. Secured interest much be recorded
What are the characteristics of perfection of interest in a secured transaction?
Gets higher priority over others claiming rights to collateral after the perfection takes place
Attachment must take place BEFORE perfection
How does perfection occur in a secured transaction?
By filing a financing statement
By possessing the collateral
When does automatic perfection occur in a secured transaction?
Store sells a consumer good on credit - Store retains security interest
A bank finances the purchase of a consumer good - Bank retains security interest
What are the priority rules for payment in a secured transaction?
If two parties are perfected; then the first one to file wins
If neither party is perfected; then the first one to attach wins
What are the advantages of a creditor holding a lien in a secured transaction?
Creditor holds priority over claims to collateral vs. unperfected security interests
Beats perfected security interests filed after lien attachment
Exceptions: Purchase money security interest; which has a 20 day grace period to be filed
Buyers purchasing in the ordinary course of business are immune from security interests held by merchants
When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?
APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.
When is APIC recorded on a stock subscription?
APIC increases on date subscription is recorded - not on the date paid for or issued
To what extent is retained earnings restricted if legally restricted due to Treasury Stock?
It will be restricted to the extent of the balance in the Treasury Stock account.
When are dividends in arrear recorded for cumulative preferred stock?
They are not accrued until declared.
When are dividends in arrears included as a disclosure and not an accrual in the financial statements?
If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.
What is the gain or loss when a non-monetary asset is distributed to a shareholder?
The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company’s books
What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?
The effect on Retained Earnings is the Carrying Amount of the asset
RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount
Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash
The net effect of the entry is that RE will decrease by the CV of the asset
When is Retained Earnings debited for FMV of Stock for a stock dividend?
When Stock Dividend is less than 25% of Common Stock outstanding
When is Retained Earnings debited for Par Value for a stock dividend?
When Stock Dividend is greater than 25% of common stock outstanding
What is the effect of a stock dividend or a stock split on total shareholder equity?
Stock dividends and stock splits both have no effect on Total Shareholder Equity
What is the affect on APIC from a stock split?
Stock splits only affect par value - APIC remains the same.
When is compensation expense recorded at the time of grant for a stock option?
Compensation expense is recorded at the time of grant if options are exercisable immediately
They are based on past service.
Expense recognized : FV Stock Option x # of Shares
What interest rate is used to discount stock options?
The risk-free interest rate
What date is used as the measurement date for share-based payments classified as liabilities?
The settlement date.
How are compensation costs for share-based payments classified as liabilities measured?
Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period
What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?
Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance
What is the primary purpose of a quasi-reorganization?
To eliminate a deficit balance in RE by restating its assets to Fair Value
It does not directly protect a company from its creditors
How is return on Common Stockholder’s Equity calculated?
(Net Income - P/S Dividends) / Average Common Stockholders Equity
Note: Average CSE : Common Stock + RE
How is book value per share of common stock calculated?
Total Shareholder Equity
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value
Book Value per Share : Total Book Value / Shares outstanding
How is the dividend per share payout ratio calculated?
Dividends per share / earnings per share
How is basic Earnings Per Share (EPS) calculated?
(Net Income - Preferred Dividends) / Average C/S Outstanding
Note - If cumulative- subtract the P/S dividend regardless of whether or not they’re declared.
For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?
For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year
For which areas is EPS required to be shown?
EPS is only required to be shown for Income from Continuing Operations and Net Income.
All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes
When do stock options increase share outstanding?
Only if they are dilutive.
Their exercise price is LESS than the market value
If not- you ignore them in the calculation
How is EPS calculated when convertible bonds are taken into consideration?
[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)
Bond interest is added back because if converted- there would be no bond interest expense
Contingent Issue Agreements are included in Diluted EPS if contingency is met
