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CMA Part 2 > Not familiar > Flashcards

Not familiar Flashcards

1
Q

What is the formula to calculate the cost of not taking the discount?

A

{[Discount Percentage) / (100%- Discount %)] x (Days in the Year)]} / (Total Payment Period - Discount Period)

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2
Q

Name common types of risk

A 
Business
Hazard
Financial
Operational
Strategic
Legal
Compliance
Political
Inherent 
Residual
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3
Q

Regarding mitigation, how can a firm accept the risk?

A

The firm accepts the risk of loss by doing nothing except managing its operations around the possible loss

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4
Q

What is the general markup % formula?

A

Markup %= (Profit + total costs to be covered) / (Cost basis per unit x volume)

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5
Q

What is financial flexibility in capital investment analysis and how does the payback period affect it?

A

Financial flexibility is the freedom for a company to use its resources to explore and invest in other opportunities

By reducing Payback period, flexibility is increased, which effectively reduces the risk of missing out on desirable future events in which the organization may want to invest

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6
Q

What are two advantages that the traditional Payback method has compared to the NPV or IRR methods?

A
  1. The payback method address how long it takes to return the original investment
  2. The payback method allows managers to consider the exposure and flexibility of the investment
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7
Q

What are the six facets of a successful whistleblower framework?

A
  1. Training on whistleblowing
  2. Everyone needs to feel safe in a whistleblowing framework
  3. Anonymous helplines are then set up
  4. Employees should be encouraged to report both concerns and grievances
  5. An independent analysis is set up to distinguish serious grievances that must be addressed
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8
Q

List the four views of social responsibility depicted in Carroll’s CSR Pyramid starting at the base and working upward

A
  1. Economic Responsibility
  2. Legal Responsibility
  3. Ethical Responsibility
  4. Philanthropic Responsibility
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9
Q

what are three business processes that can be used to establish an internal control system around the ethical behavior in the org?

A
  1. Business process reengineering BPR
  2. Total quality management TQM
  3. Continual process improvement CPI
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10
Q

For most orgs, what are the three core operational processes to reengineer as describes by IMA’s Statement on Management Accounting, “Values and Ethics: From Inception to Practice” (Step 6)

A
  1. Research and development (R and D) processes
  2. Production processes
  3. Post-sale service processes
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11
Q

What are key assumptions of the Black-Scholes Model?

A
  • The stock pays no dividends during the options life
  • The option is a European Option
  • The stock is traded in an efficient market
  • There are no transaction costs, taxes, or commissions
  • The risk-free rate exists is constant across the life of the option and is the same for all maturity dates
  • The underlying stock’s returns are normally distributed
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12
Q

What are the three core HR processes in which to invest for the Operational Development of Ethical Practice phase of the framework based on IMA’s Statement on Management Accounting, “Values and Ethics: From Inception to Practice”

A
  • Carefully hiring employees who are personally committed to the professional ethics
  • Deploying solid training in professional ethics
  • Establishing effective incentives to practice professional ethics
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13
Q

What are the key assumptions of the Binominal Model?

A
  • Investor is risk-neutral
  • The underlying stock’s price can only either decrease or increase with time
  • The possibility of arbitrage is zero
  • The market is perfectly efficient
  • The duration of the option is shortened
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14
Q

The value of a business is estimated as the sum of what three factors?

A
  1. Present value of future cash flows over three to five years
  2. Prevent value of all future cash flows thereafter (terminal value)
  3. Present value of non-operating assets
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15
Q

What is a split up?

A

A split up is when one firm splits into two separately run firms Each firm is a standalone firm with independent management and boards of directors.

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15
Q

What is a split up?

A

A split up is when one firm splits into two separately run firms Each firm is a standalone firm with independent management and boards of directors.

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16
Q

What is an equity carve out?

A

An equity carve-out is similar to a spin-off but the firm sells only a minority interest in the new firm instead of selling the entire ownership stake. The new firm is its own entity but the parent firm retains a controlling interest.

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17
Q

What is a spin off?

A

A spin-off takes place when a firm forms a new company out of a portion of its current divisions or product lines and ownership of the new company is dispersed through an IPO.

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18
Q

What is a divestiture?

A

A divestiture is when a company reduces or eliminates a portion of the company

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19
Q

What’s the different between a horizontal merger, a vertical merger, and a conglomerate merger?

A 
Horizontal= two firms in the same industry combine
Vertical= when two companies that make parts for a finished good combine
Conglomerate= when two companies combine from different industries
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20
Q

What is an example of a tax shield?

A

A tax shield is the reduction in income taxes companies can receive by deducting interest payments on the debt from their taxes. However, companies can not deduct dividend payments. This tax shield for interest payments reduces the cost of debt, thus resulting in a lower cost of capital to the firm.

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21
Q

What is the difference between a forward contract and a future contract?

A

A forward contract between two parties requires one party to buy or sell a specific asset on a specified day at a predetermined price. Delivery of the underlying asset occurs on the contract’s delivery date.

A future contract is an agreement actively traded on organized exchanges and usually does not carry the expectation of actual delivery of a physical asset, but rather the parties exchange the monetary value of the contract.

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22
Q

What is political risk?

A

Political risk is the risk that political influence and decisions may affect the profitability and effectiveness of an org

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23
Q

What is industry risk?

A

The industry is the risk associated with the factors specific to a given industry

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24
Q

What is foreign exchange risk or currency risk?

A

The risk that economic value will be lost due to fluctuations in exchange rates.

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25
Q

What is credit risk or default risk?

A

Credit risk or default risk is the risk that a borrower will not repay the investor as promised

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26
Q

What is systematic risk?

A

Systematic risk is the risk that arises from high-level economic cycles and political environments. Systematic risk is affected by macroeconomic factors

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27
Q

What is unsystematic risk?

A

Unsystematic risk is a broad term that encompasses any type of risk which may affect the returns of a company’s stock. It comes from company-specific factors

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28
Q

How is the volatility of a return measured?

A

The volatility of a return is measured as the standard deviation (range of potential outcomes for the return) A large SD means that the return could take place over a broad range of outcomes (more risky). A small SD means that the return outc ome is likely to take place closer to the expected value (less risky)

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29
Q

What is sustainable income?

A

Sustainable income starts with actual reported income and then excludes any unsusual intems or onetime events that were reported in revenues epenses gains and losses. Their exclusion brings reported income amount to a number that can now be used to predict future results

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30
Q

“Operational Development of Ethical Practices” (Step 6 in the framework based on IMA’s Statement on Management Accounting, “Values and Ethics: From Inception to Practice”) has three aspects to perform. What are they?

A

Investments in the three core HR processes to institute a focus on professional ethics
Careful review as necessary, a reengineering of the core operational processes in the org
Partnering with external suppliers to ensure that the supply chain process has clear ethical orientation

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31
Q

Based on IMA’s Statement on Management Accounting, “Values and Ethics: From Inception to Practice,” what is the difference between Step 3 “Develop a statement of values (principles) and Step 4, “Develop a code of conduct (standards)?

A

Principles as mentioned in Step 3, describe the value of the organization and essentially determine what the organization is expected to become. Standards, as mentioned in Step 4, describe the conduct of the organization and essentially determine what the organization is expected to do in every decision setting

Principles=values
Standards= Conduct

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32
Q

What are the eight steps in the framework to establish a system of ethical conduct based on IMA’s statement on Management Accounting, “Values and Ethics: From Inception to Practice”)

A
  1. Where are we today in ethical thinking?
  2. Where do we want to be?
  3. Develop a statement of value (principles)
  4. Develop a statement of conduct (standards)
  5. Leadership development of ethical practices
  6. Operational development of ethical practices
  7. Monitor ethical behavior and measure results
  8. Gather feedback and make improvements
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33
Q

What is a key characteristic of effective ERM?

A

The alignment of employee behavior with an ethical code of conduct

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34
Q

How is the U.K Bribery Act different from the U.S Foreign Corrupt Practices Act?

A
  • Expands the focus of bribes paid to any persons or orgs
  • Makes it illegal to both pay and accept bribes
  • Expands the control focus beyond accounting systems
  • Expands its scope to include any foreign org
  • Forbids facilitating payments even for routine operations
  • Allows prison terms as high as ten years and unlimited fines for both individuals and orgs
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35
Q

What the three conditions that create incentives for fraud as represented in the Fraud Triangle?

A

Financial pressure, opportunity, rationalization

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36
Q

When considering the Fraud Triangle, what is the difference between Negative and Positive Financial Pressure?

A

Negative financial pressure is taking place when a person or group is in a bad financial situation that does not appear to be resolvable using a legal route that isnt somehow humiliating

Positive financial pressure is taking place when an person or group is facing great financial opportunity that doesnt appear to be accessible using legal route available

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37
Q

When considering the Fraud Triangle, what are two examples of conditions that crease incentives for fraud through opportunity?

A
  • Lack of strong internal controls in the org

- When a person or group has extraordinary ability or is in an extraordinary position to commit fraud

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38
Q

Describe Rationalization when considering the Fraud Triangle?

A

When fraudsters rationalize the fraud with their own internal moral compass. Often the individual or group will see themselves as a “Victim”. Alternatively, the individual or group will strengthen the rationalization based on external “need” factors

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39
Q

What are the steps for dealing with an ethical dilemma or situation as described in IMA’s statement of ethical professional practice?

A
  1. Take action
  2. Evaluate personal risks to yourself
  3. Follow your orgs policies
  4. Discuss with your immediate supervisor
  5. If your supervisor is involved, go to the next manager level
  6. Don’t hesitate to use IMA’s Ethics Helpline to receive anonymous guidance
  7. Consult your attorney
  8. If needed, resign from your org
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40
Q

What is the U.S. Foreign Corrupt Practices Act?

A

The FCPA was established in 1977 to define and enforce against bribery of foreign officials. Essentially, it forbids any “American” to pay bribes to a foreign government or representative to obtain contracts or secure business.

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41
Q

What is the U.K bribery act?

A

Established in 2010, applies to businesses and individuals in the UK. Broader in scope than FCPA and imposes more severe penalites.

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42
Q

Describe how IMA members uphold the standard of Confidentiality as described in the IMA Statement of Ethical Professional Practice

A
  • Keep information confidential except when disclosure is authorized or legally required
  • Inform all relevant parties regarding appropriate use of confidential information. Monitor to ensure compliance
  • Refrain from using confidential information for unethical or illegal advantages
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43
Q

Describe how IMA Members uphold the standard of Integrity as described in the IMA Statement of Ethical Professional Practice

A
  1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts of interest.
  2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically
  3. Abstain from engaging in or supporting any activity that might discredit the profession
  4. Contribute to a positive ethical culture and place integrity of the profession above personal interests
44
Q

Describe how IMA members uphold the standard of Credibility as described in the IMA Statement of Ethical Professional Practice

A
  1. Communicate information fairly and objectively
  2. Provide all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations
  3. Report any delays or deficiencies in information, timeliness, processing, or internal controls in conformance with org policy/applicable law
  4. Communicate professional limitations or other constraints that would preclude judgment or successful performance of an activity
45
Q

Describe how IMA members uphold the standard of Competence as described in the IMA Statement of Ethical Professional Practice

A
  1. Maintain an appropriate level of professional leadership and expertise by enhancing knowledge and skills
  2. Perform professional duties in accordance with relevant laws, regulations, and technical standards
  3. Provide decision-support information and recommendations that are accurate, clear, concise, and timely. Recognize and help manage risk.
46
Q

Describe how IMA members uphold the principle of Responsibility as descried in the IMA Statement of Ethical Professional Practice

A

To uphold the principle of Responsibility, IMA members are responsible to comply with and uphold the standards of Competence, Confidentiality, Integrity, and Credibility

47
Q

Describe how IMA members uphold the principle of Objectivity as described in the IMA Statement of Ethical Professional Pracitce

A

IMA members’ analysis and decision-making should be reasoned, thorough, and dispassionate.

48
Q

Describe how IMA members uphold the principle of Fairness as described in the IMA Statement of Ethical Professional Practice

A

Members should be fair and balanced without favoritism in their professional work and decisions involving other colleagues and stakeholders

49
Q

Describe how IMA members uphold the principle of Honesty as described in the IMA Statement of Ethical Professional Practice

A

Members should be honest and truthful in their professional communication and in their professional analysis and work

50
Q

What are the four specific standards of ethical conduct described in the IMA Statement of Ethical Professional Practice?

A

Competence
Confidentiality
Integrity
Credibility

51
Q

What are the four overarching ethical principles described in the IMA Statement of Ethical Professional Practice?

A

Honesty
Fairness
Objectivity
Responsibility

52
Q

What are two ways that accounting and finance professionals can improve their ability to act with good ethics?

A
  1. Recognizing and anticipating when ethics will be challenged in a particular situation
  2. Recognizing and describing exactly how ethics are being challenged in a particular situation
53
Q

List the different moral philosophies

A 
Teleology
Deontology
Virtue ethics
Utilitariamism
Relatvism
Justice
54
Q

Describe Teleological Ethics

A

Concerned with how choices will affect a particular desired moral outcome

55
Q

What is the role of qualitative analysis in capital budgeting?

A

Qualitative analysis in capital budgeting requires a cross-functional view of the investment and is usually how the final investment decision is made

56
Q

What are real options in capital budgeting?

A

Inherent characteristics in the actual capital asset that gives management flexibility to take action in the future as changing events affect the performance of the asset.

57
Q

What is a Monte Carlo simulation?

A

It runs random numbers into the probability distribution of each input factor across a thousand or more iterations. The financial result of each iteration is captured and plotted, and statistics are used to evaluate the average and variance of the total set of outcome results.

58
Q

What are two basic steps followed by sensitivity analysis in capital budgeting?

A
  1. For each input analysis, identify the point where the input generates an unacceptable investment outcome
  2. Identify the probability of the unacceptable event for each input and focus management attention on the most likely unacceptable event
59
Q

What is the basic approach with scenario analysis in capital budgeting?

A

Include several scenarios best, worst and then estimate the probability of these alternatives results. Then combine all to establish expected value.
Sum EV
Result x Probability

60
Q

What is the relationship between confidence and precision in the capital budgeting process?

A

When forecasting cash flows, confidence and precision move in opposite directions. That is, as demand for more precision in the range around the estimate increases, confidence in being correct diminishes.

61
Q

How are working capital investments treated in the calculation of cash flows of capital investments?

A

Increases in working capital due to the capital investment represent cash commitments that must be added to the initial capital investment

When the capital investment is disposed at the end of its operating life, the decrease in working capital that results represents a release of cash that is added to cash from disposal

Working capital investments ae not depreciated, nor do working capital cash flows have any effect on taxes

62
Q

What is the process for finding the after-tax cash received for an old asset being replaced in the capital investment?

A
  1. Determine the accounting book value of the old asset
  2. Compute the tax effect on the gain or loss on the old asset… If a gain, the tax cost is gain x tax rate…. if loss the tax shield (savings) is loss x tax rate
63
Q

What is the difference between accounting profit and economic profit?

A

Accounting profit uses accrual accounting based on GAAP

= Accounting revenues- Accounting expenses

Economic profit also includes opportunity costs (implicit costs)

Economic Profit= Accounting revenue - Accounting Expenses- opportunity costs

64
Q

What are examples of qualitative analysis tools?

A

Quality, Culture, Strategy, Brand, Environment, Ethics

65
Q

What are examples of risk analysis tools?

A

Scenario analysis
Sensitivity analysis
Monte Carlo analysis

66
Q

What happens to a firm not willing to accept any risk?

A

Firms not willing to accept any risk may survive, but they may not achieve maximum success compared to other firms willing to accept greater risk

67
Q

What is a functional currency?

A

A functional currency is the currency of the primary economic environment the subsidiary operates in

68
Q

What is the dividend yield ratio?

A

Dividend yield= dividend per share/ market price per share

69
Q

What is the Earnings Yield Ratio?

A

Earnings Yield Ratio= EPS / Market price per share

70
Q

What is enterprise risk management? ERM

A

The identification and management of events and circumstances that can affect the ability of a firm to achieve its objectives and is the process of coordinated, organization-wide risk management.

71
Q

What are the six goals of risk management according to COSO ERM?

A
  1. Increasing the range of opportunities
  2. Identifying and managing risk entity-wide
  3. Increasing positive outcomes and advantages while reducing negative surprises
  4. Reducing performance variability
  5. Improving resource deployment
  6. Enhancing enterprise resilience
72
Q

What is the rate of return formula?

A

Return= (Capital appreciation + Income) / Investment
or
(Investment t+1 - investment t) + Income)/ Investment

73
Q

What is a fixed foreign currency exchange rate?

A

A fixed foreign currency exchange rate requires each country to maintain its currency at or near benchmark value

74
Q

What is a flexible or floating foreign currency exchange rate?

A

Flexible or floating exchange rates are set by market supply and demand for currencies. Most of the world’s major currencies are floating.

75
Q

What are currency futures?

A

Contracts to fix a currency exchange rate at a given date
Different than options because they require a company to buy or sell foreign currency at the contractually obligated price

76
Q

What are currency swaps?

A

Occur when two orgs contract to exchange or swap currencies and assume the foreign exchange risk associated with the other party’s home currency

77
Q

What are currency options?

A

Give orgs the right but not the obligation to buy or sell foreign currency at a contractually obligated price during the option period
Different than future because options give the right to execute the transaction but the company is not required to execute the transaction

78
Q

Why is the determination of cash flows more complicated internationally?

A
  • Foreign countries have different tax codes and financial reporting standards
  • Foreign governments place restrictions on the amount of cash that can be moved out of a country
  • Estimating future cash flows in a foreign currency requires an estimate of future exchange rates
  • The stability of a country’s political environment is often unknown
79
Q

In comparing Gross Margin and Contribution Margin Income statements, which financial reporting approach is used in compliance with GAAP and IFRS?

A

Gross Margin income statements are the reporting format required for GAAP and IFRS. Contribution Margin income statements are used for management accounting analysis.

80
Q

What is the basis of the customer-based approach to setting prices?

A

Customer-based methods require the org to understand the value its customers want to receive when they make the decision to purchase the orgs product or service. Then org the needs to determine what the value is worth to the customer.

81
Q

What is the basis of the competition-based approach to setting prices?

A

Requires a careful assessment of the orgs market. The market can be a highly competitive with many competitors, complex with competitors providing alternative products or services or isolated with few or no competitors.

82
Q

What is the basis of the cost-based approach to setting prices?

A

Cost-based methods are based on the costs to produce the product or service. It is important to take into account the nature of direct material costs, direct labor costs, and overhead costs. Some of these costs are variable, some ae fixed and subsequently allocated to the product or service.

83
Q

What is the Target Price formula? i.e. Cost Markup

A

Targeted Price= Cost x (1 + Markup %)

84
Q

How are the Markup % formulas different when the price base changes between variable costs, absorption costs, or total costs?

A

Variable Cost: Markup% = (Profit + Total FC) / (VC Rate x Volume)

Absorption Cost (COGS): Markup % = (Profit + Total Sales and Admin Costs) / (COGS Rate x Volume)

Total Cost: Markup%= Profit / (Total cost rate x volume)

85
Q

What is the price death sprial?

A

When increasing prices tend to drive down sales volume in the orgs marketplace, which then causes the markup formula to mark up prices even more, driving down sales volume further.

86
Q

How is customer-based pricing different than cost-based pricing and competition-based pricing?

A

Customer-based pricing is primarily focused on strategy and explores specific tactics to achieve a particular pricing strategy. Conversely, cost-based pricing involved formulas and competition-based pricing is centered on economic models.

87
Q

What are four basic customer-focused tactics for the setting prices?

A
  1. Economy
  2. Premium
  3. Penetration
  4. Price skimming
88
Q

How can cheap pricing psychology and premium pricing psychology be used to emphasize different parts of the price?

A

The cheap pricing psychology (ex: economy/penetratiion) can be underscored with an emphasis on the left digit of the product (the 9 factors). The left digit in the front of the 9 is the “charm digit) ex 3.99 9/10

On the other hand, premium pricing psychology (premium pricing/skimming) is focused on the right digit which customers would prefer to be a round digit ex. 100

89
Q

What are the three steps for evaluating a price for differentiated value?

A
  1. Identify the product or service characteristics that are different compared to the next best alternative for the customer
  2. Determine the price customers would be willing to pay for the collective set of differential product features provided by the product
  3. Combine the acceptable price of the differential product features with the current price of the next best alternative
90
Q

What are the three essential components of risk?

A
  1. Materialization of an event is not guaranteed
  2. The event will affect firm value
  3. The effect of the event could be positive or negative
91
Q

How do volatility and time horizon affect risk?

A

When an outcome is more volatile, it increases the uncertainty of an event taking place and thereby is considered riskier.

The further away an event or outcome is ( on the time horizon) the more difficult it is to anticipate, which increases risk.

92
Q

Give some examples of operational risk

A 
Inexperienced or unethical employees
Internal control failures
Product issues
External events
Inadequate backup in computer systems
Lack of segregation of duties
Natural disasters
 Failure to comply with laws and regulations
93
Q

What are the five interrelated components of the COSO ERM model?

A
  1. Governance and Culture
  2. Strategy and Objective Setting
  3. Performance
  4. Review and Revision
  5. Information, communication, and reporting
94
Q

What are examples of external risk?

A 
Natural disasters
External computer hacking
Tech change
Competitive pressure
Relationships with key suppliers
Risk of political issues disrupting operations
95
Q

What are examples of internal risk?

A

Fraud and collusion by employees
Management departures
Employee morale
Liquidity and solvency concerns

96
Q

What does risk ranking require an org to do?

A

Risk ranking requires the org to assign a relative ranking to prioritize risks and assign resources to address the risks in order of importance

97
Q

What do risk maps allow orgs to do?

A

To classify events into a variety of risk levels

98
Q

What are methods to assess quantitative risk?

A

Earnings distributions
Earnings at risk
Sensitivity analysis

99
Q

What is Value at Risk? (VaR)

A

Indicates the potential loss by a firm due to its trading activities. The potential for loss is accumulated across all trading positions at a particular confidence interval.

100
Q

How can firms use probabilities?

A

Firms can use probabilities to help identify, quantify, and asses the risks facing an org

101
Q

Describe the probability risk assessment technique Expected Loss

A

Probabilities are assigned to a loss outcome and the weighted-average probability of the amount of loss is the Expected Loss.

102
Q

Regarding risk mitigation, how can a firm retain the risk?

A

The firm can retain the risk by developing internal activities to manage risk

103
Q

Regarding risk mitigation, how can a firm reduce the risk?

A

The firm can engage in actions that will reduce risk associated with a particulate situation

104
Q

Regarding risk mitigation, how can a firm transfer the risk?

A

The firm can enter into agreements that transfer the risk to another party. Insurance is an example.

105
Q

What are the 5 key steps in a risk management process?

A
  1. Identify the risk
  2. Analyze the risk
  3. Evaluate the risk
  4. Manage the risk
  5. Monitor and review the risk
106
Q

How can firms manage operational risk?

A
  1. Segregating key duties so employees are not able to misappropriate assets or create fictitious accounting entries to misstate financial record
  2. Ensuring key information systems and data are backed up
  3. Training employees through education and training programs that can help firms comply with legal and regulatory issues
107
Q

How can firms manage financial risk?

A
  1. Insurance
  2. Contracts to fix prices and reduce the risk associated with currency or commodity fluctuation
  3. Purchase more inventory at low prices to protect against later potential increases

CMA Part 2 (2 decks)

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