Mixed Flashcards
Control environment Principles
The control (also called the internal) environment is the core or foundation of any system of internal control. Creating the control environment includes establishing and communicating baseline expectations for employee performance.
The foundation of internal control
Tone at the top
Management’s philosophy towards internal control and responsibility and operating style
1. Commitment to ethics and integrity (overall integrity)
2.Board independence and oversight
3. Organizational structure
4. Commitment to competence
5. Accountability
Risk assessment Principles
The process of identifying, analyzing and managing risk involved in achieving the organizations objectives.
International exposure, acquisition or execute transitions create risks
1. Specify objectives
2. Identify and analyze risks
3. Consider potential for fraud
4. Identify ans assess changes
Informatioon & Communication Principles
Allow a company’s employees to identify, capture and exchange information regarding controls and operations
Proper measurement of transactions
1. Obtain and use information
2. Internally communicate information
3. Communicate with external parties
Communication is the process of obtaining and sharing information to facilitate and enhance ERM. This function includes reporting on the organization’s risk, culture, and performance.
Monitoring Principles
Involves collecting information to determine the controls are working
Verify that the internal control system remains adequate to address changes in risk
Assessment overtime
Taking corrective actions
1. Ongoing/separate evaluations
2. Communication of deficiencies
Control Activities Principles
Ensures directives are performed
Detective and preventative
Performance review of the marketing plan
Primarily relate to risk reduction
1. Select and develop control activities
2. Select and develop technology controls
3. Deployment of policies and procedures
Corrective controls
Allow the user to recover from a problem once it has been identified
Governance and Culture (DOVES)
Defines desired culture
Exercises board oversight
Demonstrate commitment to core values
Attract, develops, and retains capable individuals
Establlishes operating structure
Strategy and Objective-setting (SOAR)
Evaluates alternative strategies
Formulates business objectives
Analyzes business context
Defines risk appetite
Performance (VAPIR)
Develops portfolio view
Assesses severity of risk
Prioritizes risk
Identifies risks
Implement risk response
Review and revision (SIR)
Assesses subtantial change
Pursues improvement in ERM
Review risk and performance
Market Equilibrium
Price ceiling below market equilibrium price will result in more demand and less supply
Elasticity
Elasticity = Percentage change in quantity demanded over
Percentage change in price
Less than 1 = inelastic: quantity percentage change is less than the percentage change in price.
Equal to 1 = unitary: quantity percentage change is the same as the percentage change in price.
Greater than 1 = elastic: quantity percentage change is more than the percentage change in price.
Elasticity is measured as the percentage change in quantity divided by the percentage change in price. An elastic product would have an absolute value coefficient greater than one meaning that the percentage change in quantity would be greater than the percentage change in price. Since both products have elasticity coefficients greater than one, then the percentage change in price will be less than the percentage change in demand, causing total revenue, quantity times price, to decrease for both products if there is a price increase.
WACC calculation with only debt-to-equity ratio information
Debt-to-equity in this example is 0.80. This measn that total debt/total equity = .8
We can use this ratio to determine the proportion of capital provided by debt and equity
if the ratio is .8, the we can say that debt is 8 and equity is 10
The proportion of debt will be 8/(10+8) = .444
The proportion of equity will be 10/(10+8) = .556
Equity = .556 * cost of capital
Debt = .444 * (cost of capital * tax rate)
Put option
A put option would give the company the option to sell the stock at a specified price in the future.
If the price of the stock declines, the value of the put option will increase by a like amount.
Issuing of preferred stock
Since preferred stock is not debt, there will be no effect on long-term debt.
Since preferred stock is equity, the debt-to-equity ratio will decrease
Return on Investment (ROI)
Return on investment can be increased by decreasing operating assets.
If operating assets decrease(the denominator in ROI) the ROI would increase
ROI is highly related to stock price and, therefore, shareholder value.
BV per share
Common stock + Retained eraning / Outstanding shares
Return on Equity
Net Income/Average owenr’s equity
Break-even point
Fixed cost divided by contribution margin per unit
Fiscal Policy
Fiscal policy is the use of government taxation, spending and transfer payments to achieve economic objectives.
Marginal propensity to consume
Marginal propensity to consume measures the change in consumption spending as the percentage change in disposable income.
GDP Deflactor
Nominal GDP/Real GDP * 100
Monopoly
- One firm with no close substitute
- No competition and no market forces on the setting prices.
3.Employ public relations and lobbying - Price discrimination
Discount Rate of the FED
The rate that the central bank charges for loans granted to commercial banks.
Shift in the supply curve
A shift in the supply curve may result from:
1. changes in production technology
2. changes or expected changes in resource prices
3. changes in the prices of other goods
4. changes in taxes or subsidies
5. changes in the number of sellers in the market
6. expectations about the future price of the product
Porter strategies
Cost leadership
Differentiation
Market focus
General Agreement on Tariffs and Trade (GATT)
Eliminating tariffs
Subsidies
Import quotas
Other trade barriers
Harmonize intellectual property laws
Reduce transportation costs
Prevent inflation (reducing demand)
Reduce government spending
increase taxes
reduce money supply
reduce interest rates
Recessionary phase
During the recessionary phase of a business cycle, actual national income is less than potential national income as a result of decreased demand
Federal deficit
decreased tax revenue
increased payments
Deflation
Is the general decline in prices of goods and services
Audit trail
An audit trail is a step-by-step record by which a financial transaction can be traced to its corresponding source documents. Such a system allows the tracing of a transaction back to its originating purchase order.
Frictional unemployment
Frictional unemployment measures the temporary unemployment that always exists as workers change jobs or new workers enter the workforce.
Risk appetite
Risk appetite is the amount of risk an organization accepts in pursuit of a strategy and value. Risk appetite is focused on strategy and goals.
Tolerance
Tolerance sets the boundaries of acceptable performance; it is related to strategy implementation and variation from plans.
price index
The price index measures the combined price of a selected group of goods and services for a specified period in comparison with the combined price of the same or similar goods for a base period.
The price of a basket of commodities at the point of the first commercial sale.
Average fixed cost (AFC) curve
by definition, fixed costs do not change with changes in output over the relevant range of production, the more units produced, the lower the average fixed cost. Simply put, more units are being produced for a fixed cost. Therefore, the average fixed cost decreases continuously over the relevant range of production. It is not “U-shaped
Profitability index
The profitability index is calculated by dividing the present value of the after-tax cash flows by the original cash invested.
economic value-added (EVA)
EVA is equal to net operating profit after taxes minus the after-tax weighted-average cost of capital multiplied by invested capital.
Beta coefficient
The beta coefficient of an individual stock is the correlation between the stock’s price and the price of the overall market.
Hedging
Hedging involves sharing the risk with another party.
processes and controls
help an entity create and maintain reliable data
data management architecture
include models, policies, rules, or standards that determine which data is collected and how it is stored, arranged, integrated, and used in systems and in the organization.
refers to the fundamental design of the technology and related data.
