Real BEC Flashcards
<p>Which IT personnel roles should always be segregated?</p>
<p>Operators
Programmers
Librarians</p>
<p>What are the duties of a systems analyst?</p>
<p>Designs or purchases IT system
Responsible for flowcharts
Liaison between Users and Programmers
Note: Think IT Manager</p>
<p>What is the primary duty of a Systems Administrator?</p>
<p>A Systems Administrator controls database access.</p>
<p>Which duties should a Systems Programmer NOT have?</p>
<p>In order to maximize internal control- a Systems Programmer should NOT have application programming duties/abilities or be an Operator on the system.</p>
<p class=”large” style=”text-align:center”;>What are the duties of a Systems Programmer?</p>
<p class=”large” style=”text-align:center”;>Writes- Updates- Maintains- & Tests software- systems- and compilers
</p>
<p class=”large” style=”text-align:center”;>What measures are used under Value-Based Management?</p>
<p class="large" style="text-align:center";>Return on Investment Residual Income Spread Economic Value Added Free Cash Flow</p>
<p class=”large” style=”text-align:center”;>When is the Present Value of an Annuity Due used?</p>
<p class=”large” style=”text-align:center”;>Multiple payments made over time- where the payments are made at the START of the period.</p>
<p class=”large” style=”text-align:center”;>What does the NYSE and NASDAQ require of the board of directors?</p>
<p class=”large” style=”text-align:center”;>They require the board to be independent.</p>
<p>What duties should a System Operator NOT have?</p>
<p>For internal control purposes- they should not be a Programmer on the system.</p>
<p class=”large” style=”text-align:center”;>What are the duties of a Systems Operator?</p>
<p class=”large” style=”text-align:center”;>Schedules and Monitors Jobs
Runs IT Help Desk
</p>
<p class=”large” style=”text-align:center”;>How is Residual Income calculated?</p>
<p class=”large” style=”text-align:center”;>Operating Income - (Required Rate of Return x Invested Capital) = Residual Income</p>
<p>What is the purpose of a Management Information System (MIS)?</p>
<p>To assist with decision making.</p>
<p class=”large” style=”text-align:center”;>If it is not possible to segregate duties in an IT System- what actions should be taken to compensate for internal control purposes?</p>
<p class=”large” style=”text-align:center”;>Include Computer Logs.
Control Group should review the logs.</p>
<p class=”large” style=”text-align:center”;>What is Weighted Average Cost of Capital (WACC)? How is it calculated?</p>
<p class=”large” style=”text-align:center”;>Cost of Capital is the weighted average of the interest rates you pay for your Capital.
Includes Debt and the Rate of Return your Equity Shareholders expect
Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%
Your Cost of Capital is: (.45 x .09) + (.55 x .12) = 10.65%</p>
<p class=”large” style=”text-align:center”;>How is NPV used to calculate future benefit?</p>
<p class=”large” style=”text-align:center”;>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)</p>
<p class=”large” style=”text-align:center”;>What is an Accounting Information System (AIS)?</p>
<p class=”large” style=”text-align:center”;>A type of Management Information System (MIS) that processes accounting transactions.</p>
<p>What are the characteristics of an Expert System (ES)?</p>
<p>Computer uses reasoning
Structured
No human interpretation needed</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of an Executive Information System (EIS)?</p>
<p class=”large” style=”text-align:center”;>Specialized for Company Executive needs
Assists with Strategy Only
No Decision-Making Capabilities</p>
<p class=”large” style=”text-align:center”;>How is Free Cash Flow calculated?</p>
<p class="large" style="text-align:center";>Operating Income After Tax \+ Depreciation & Amortization - Capital Expenditures - Change in Net Working Capital = Free Cash Flow</p>
<p class=”large” style=”text-align:center”;>What characteristics are promoted by the COSO framework on internal control?</p>
<p class=”large” style=”text-align:center”;>Reliable financial reporting
Effective and efficient operations
Compliance</p>
<p>What are the characteristics of an Ad Hoc computer report?</p>
<p>User initiates the report.
The report is created upon demand.</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of a Decision Support System (DSS)?</p>
<p class=”large” style=”text-align:center”;>Computer provides data
Gives Interactive Support
Human interpretation needed</p>
<p class=”large” style=”text-align:center”;>What is the Asset Turnover Ratio?</p>
<p class=”large” style=”text-align:center”;>Sales / Average Assets</p>
<p class=”large” style=”text-align:center”;>How do Salvage Value and Depreciation affect Net Present Value?</p>
<p class=”large” style=”text-align:center”;>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.</p>
<p class=”large” style=”text-align:center”;>When are Exception reports generated?</p>
<p class=”large” style=”text-align:center”;>Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem</p>
<p>What is End-User Computing?</p>
<p>The User develops and executes their own application.</p>
<p class=”large” style=”text-align:center”;>What is a query?</p>
<p class=”large” style=”text-align:center”;>A type of Ad Hoc report- initiated by a user.</p>
<p class=”large” style=”text-align:center”;>What does the Debt to Total Assets ratio tell us? How is it calculated?</p>
<p class=”large” style=”text-align:center”;>What proportions of the company’s assets are encumbered with debt?
Debt to Total Assets = Total Liabilities / Total Assets</p>
<p>What are the risks of E-commerce?</p>
<p>Compromised data or theft.
Less paper trail for auditors.</p>
<p class=”large” style=”text-align:center”;>What is the primary benefit of E-commerce?</p>
<p class=”large” style=”text-align:center”;>E-commerce makes business transactions easier.</p>
<p class=”large” style=”text-align:center”;>What does Operating Profit Margin tell us? How is it calculated?</p>
<p class=”large” style=”text-align:center”;>How profitable is the product after all expenses (except interest and taxes)?
Operating Profit Margin = Operating Profit / Net Sales</p>
<p class=”large” style=”text-align:center”;>What are the strengths and weaknesses of the Internal Rate of Return system?</p>
<p class=”large” style=”text-align:center”;>Strengths: Uses Time Value of Money- Cash Flow emphasis
Weakness: Uneven cash flows lead to varied IRR</p>
<p class=”large” style=”text-align:center”;>What are the benefits of Electronic Data Interchange?</p>
<p class=”large” style=”text-align:center”;>Uses globally-accepted standards
Efficient</p>
<p>What is the purpose of a Database?</p>
<p>Located on a File Server- a Database allows users to share documents.</p>
<p class=”large” style=”text-align:center”;>What is a File Server?</p>
<p class=”large” style=”text-align:center”;>A file server stores shared programs and documents.</p>
<p class=”large” style=”text-align:center”;>How is Market/Book ratio calculated?</p>
<p class=”large” style=”text-align:center”;>Market Value of Common Stock / Book Value of Common Stock</p>
<p class=”large” style=”text-align:center”;>Which two inventory methods are used under Process Costing?</p>
<p class=”large” style=”text-align:center”;>FIFO
Weighted Average</p>
<p>What is the purpose of a WAN (Wide Area Network)?</p>
<p>It connects computers that are far apart.</p>
<p class=”large” style=”text-align:center”;>What is the purpose of a LAN (Local Area Network)?</p>
<p class=”large” style=”text-align:center”;>It connects computers in close proximity.</p>
<p class=”large” style=”text-align:center”;>What are the strengths of the Payback Method?</p>
<p class=”large” style=”text-align:center”;>Takes risk into consideration
2 year payback is less risky than a 5 year payback
</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of a VAN (Value-Added Network)?</p>
<p class=”large” style=”text-align:center”;>Privately-owned Network
Serves as 3rd Party Between 2 Companies
Routes EDI Transactions
Accepts wide range of Protocols
Very Costly</p>
<p class=”large” style=”text-align:center”;>What is Average Collection Period- and how is it calculated?</p>
<p class=”large” style=”text-align:center”;>How many days does it take the company to collect payment on A/R?
Average Collection Period = Average AR / Average Sales Per Day</p>
<p>What are the characteristics of a virus?</p>
<p>Takes over a computer
Needs a host program to run</p>
<p class=”large” style=”text-align:center”;>What is the purpose of a Firewall?</p>
<p class=”large” style=”text-align:center”;>Prevents unauthorized access to a network.</p>
<p>What is the purpose of Automated Equipment Controls?</p>
<p>They prevent and detect hardware errors.</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of a computer worm?</p>
<p class=”large” style=”text-align:center”;>Takes over multiple computers
Doesn’t need a host program to run</p>
<p>What is a CPU?</p>
<p>Computer Processing Unit
It processes commands within a computer.</p>
<p>What is Job Control Language?</p>
<p>It schedules and allocates system resources.</p>
<p class=”large” style=”text-align:center”;>What is RAM?</p>
<p class=”large” style=”text-align:center”;>Random Access Memory.
Internal memory in the computer used during immediate processing.</p>
<p class=”large” style=”text-align:center”;>What are examples of input devices?</p>
<p class="large" style="text-align:center";>Keyboard Mouse Scanner Magnetic Ink Reader Magnetic Tape Reader EDI Point of Sale Scanner</p>
<p>What are the characteristics of Magnetic Tape storage?</p>
<p>Sequential Access – Sorts data in order
Slower data retrieval
Header Label prevents Operator error by loading wrong tape
External Labels prevent accidental destruction by operator</p>
<p class=”large” style=”text-align:center”;>What are examples of Output Devices?</p>
<p class=”large” style=”text-align:center”;>Speakers
Monitors
Printers</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of By-Products?</p>
<p class=”large” style=”text-align:center”;>Usually immaterial and common costs aren’t allocated to them
o Low Market Value
o Can be valued at NRV
o Can be treated as a contra expense and netted against COGS
o Can be treated as a contra sale and netted against Sales
o Recognition rules are very flexible with valuing and classifying by-products</p>
<p>What is a Gateway?</p>
<p>Connects one network to another
Note: the Internet is connected by Gateways</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of Magnetic Disks?</p>
<p class=”large” style=”text-align:center”;>Random Access - Finds data in random spots
Faster data retrieval
Uses Boundary Protection for data</p>
<p class=”large” style=”text-align:center”;>What are Parity Checks?</p>
<p class=”large” style=”text-align:center”;>A control that detects internal data errors.
A bit is added to each character- it checks to see if a bit was lost.</p>
<p>What is a Change Control?</p>
<p>It authorizes program changes and approves program test results.</p>
<p class=”large” style=”text-align:center”;>What is an Echo Check?</p>
<p class=”large” style=”text-align:center”;>Transmitted data is returned to the sender for verification (it echoes back to the sender)</p>
<p>What is the purpose of a Digital Signature?</p>
<p>It confirms a message has not been altered.</p>
<p class=”large” style=”text-align:center”;>What is security software?</p>
<p class=”large” style=”text-align:center”;>Software that controls access to IT systems.
Note: Don’t confuse this with anti-virus software</p>
<p class=”large” style=”text-align:center”;>List the types of computers from smallest to largest</p>
<p class=”large” style=”text-align:center”;>PDA/Smartphone/Tablet
Microcomputer - PC- Laptop (cost-effective)
Minicomputer - Like a Mainframe- but smaller
Mainframe - Large computer with terminals attached
Supercomputer - Very powerful and very big</p>
<p>What is the duty of a design engineer?</p>
<p>Determine language used for a specific computer- on a computer-to-computer basis</p>
<p class=”large” style=”text-align:center”;>What are the units of computer data from smallest to largest?</p>
<p class=”large” style=”text-align:center”;>Bit - 1 (on) and 0 (off)
Byte - 8 bits to a byte/character
Field - group of related characters/bytes (i.e. Name- Zip Code- Serial #)
Record - Group of related fields (i.e. Member name- address- phone number)
File - Group of related records (i.e. Membership directory)
</p>
<p>How can source programs be recognized?</p>
<p>They are written in a language close to English.</p>
<p class=”large” style=”text-align:center”;>What are object programs?</p>
<p class=”large” style=”text-align:center”;>Programs written in base computer language- not similar to English.</p>
<p>How does Online Analytical Processing work?</p>
<p>It uses a Data Warehouse to support management decision making.</p>
<p class=”large” style=”text-align:center”;>What is the purpose of a Compiler?</p>
<p class=”large” style=”text-align:center”;>Takes Source language (English) and converts to Object (Computer) Language</p>
<p class=”large” style=”text-align:center”;>What is Data Mining?</p>
<p class=”large” style=”text-align:center”;>Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.</p>
<p>What are the characteristics of batch processing?</p>
<p>Data held- updates multiple files all at once
Leaves a better audit trail
Uses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)</p>
<p class=”large” style=”text-align:center”;>What is the purpose of online transaction processing?</p>
<p class=”large” style=”text-align:center”;>To process a company’s routine transactions.</p>
<p>What does a processing control check?</p>
<p>Checks if data processing produced proper output</p>
<p class=”large” style=”text-align:center”;>What does an output control check for?</p>
<p class=”large” style=”text-align:center”;>Checks to see if output data is valid- distributed and used in an authorized manner.</p>
<p>What is a validity check?</p>
<p>Checks to see if data in existing tables or files belongs in the set
For example- is there a # in an alpha-only field or a letter in a numeric-only field</p>
<p class=”large” style=”text-align:center”;>What is a hash total?</p>
<p class=”large” style=”text-align:center”;>An input control number- a meaningless sum of values included in the input.
Example would be summing a list of SSNs to make sure the data is the same once entered as it was prior to input into the system. </p>
<p>What is a check digit?</p>
<p>An input control that adds an identification number to a set of
digits – usually at the end</p>
<p class=”large” style=”text-align:center”;>What is a limit check?</p>
<p class=”large” style=”text-align:center”;>Checks to see if numbers surpass a certain limit- i.e. in an age field is the number greater than 110.</p>
<p>What is a Hot Site?</p>
<p>A disaster recovery system where if the main system goes down- a Hot Site is ready to take over immediately.</p>
<p class=”large” style=”text-align:center”;>What is a field check?</p>
<p class=”large” style=”text-align:center”;>An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field</p>
<p>What is the most common database language?</p>
<p>SQL - Standard Query Language</p>
<p class=”large” style=”text-align:center”;>What is a Cold Site?</p>
<p class=”large” style=”text-align:center”;>If a main system goes down- a Cold Site will take time to get set up and running.</p>
<p>What is a Data Manipulation Language?</p>
<p>Queries SQL Database tables</p>
<p class=”large” style=”text-align:center”;>What is a Data Definition Language?</p>
<p class=”large” style=”text-align:center”;>Defines SQL Database
Controls SQL Tables</p>
<p>What are the characteristics of a Relational Database?</p>
<p>Logical structure
Uses rows and columns similar to spreadsheet</p>
<p class=”large” style=”text-align:center”;>What is a Data Control Language?</p>
<p class=”large” style=”text-align:center”;>Controls Access to SQL Database</p>
<p>What are the advantages of a database?</p>
<p>Data is more accessible
Reduced redundancy</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of a Hierarchical Database?</p>
<p class=”large” style=”text-align:center”;>Has various levels
Uses trees to store data</p>
<p>What are the components of a database?</p>
<p>Desktop client
Application Server
Database Server
Think: Your desktop computer runs applications and saves to a database</p>
<p class=”large” style=”text-align:center”;>What are the disadvantages of a database?</p>
<p class=”large” style=”text-align:center”;>Cost of installation
Skilled personnel required to maintain</p>
<p>What four perspectives are included in Balanced Scorecard?</p>
<p>Financial - ROI- Revenue Growth- Profitability
Customer - Increase Customers- Increase Satisfaction
Internal Business Processes - Efficient and Effective Operations- Improve Quality- Reduce Defects
Learning & Growth - Training- Personnel Development</p>
<p>Why was Balanced Scorecard created?</p>
<p>To measure Performance.</p>
<p>What are Strategy Maps?</p>
<p>Diagrams of Strategic Cause and Effect Relationships.</p>
<p>What is a Strategic Initiative?</p>
<p>A plan to achieve goals.</p>
<p>How is Return on Investment (ROI) calculated?</p>
<p>ROI = Return / Investment
Example: You Invest $100 to buy a machine that generates $60 in Operating Income
$60 / $100 = 60% ROI</p>
<p>What is another name for Required Rate of Return (RROR)?</p>
<p>RROR is also called 'Cost of Capital'
</p>
<p>How is Spread calculated?</p>
<p>Spread = ROI - Cost of Capital</p>
<p>What is the primary point of Economic Value Added? How is it calculated?</p>
<p>Investments should exceed costs- with an emphasis on stockholder value.
Economic Value Added = Operating Income After Tax - (Net Assets x WACC)</p>
<p>What is measured by Six Sigma?</p>
<p>It measures a product versus its quality goal.</p>
<p>What does the Current Ratio tell us? How is it calculated?</p>
<p>Can the company pay their short-term liabilities?
Current Ratio = Current Assets / Current Liabilities</p>
<p>What does the Debt to Equity Ratio tell us? How is it calculated?</p>
<p>How is the company financing its capital?
Debt to Equity Ratio = Total Debt / Total Equity</p>
<p>What does Gross Margin % tell us? How is it calculated?</p>
<p>How profitable is the product after COGS?
Gross Margin = Gross Profit / Net Sales</p>
<p>How is Times Interest Earned calculated and what does it mean?</p>
<p>Can the company make their interest payments?
Times Interest Earned = Earnings Before Tax & Interest / Interest Expense</p>
<p>What does Return on Assets tell us? How is it calculated?</p>
<p>What % return are the assets generating?
Return on Assets = Net Income (net of interest & taxes) / Average Total Assets</p>
<p>What is Inventory Turnover and how is it calculated?</p>
<p>How quickly does inventory get sold?
Inventory Turnover = COGS / Average Inventory</p>
<p>What is the Quick Ratio and how is it calculated?</p>
<p>It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)
Quick Ratio = (Current Assets - Inventory) / Current Liabilities</p>
<p>What is an Internal Failure?</p>
<p>Products have quality defects- but are caught BEFORE they leave the warehouse.</p>
<p>What is an External Failure?</p>
<p>Product reaches the customer- but they are not satisfied with the quality of the product.
This includes recalls.</p>
<p>What is Appraisal Cost?</p>
<p>Quality control- testing & inspection costs.</p>
<p>What is Capital Budgeting? How is it used?</p>
<p>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</p>
<p>What values are used in Capital Budgeting?</p>
<p>Capital Budgeting ONLY uses Present Value tables.
Capital Budgeting NEVER uses Fair Value.</p>
<p>When is the Present Value of $1 table used?</p>
<p>For ONE payment- ONE time.</p>
<p>When is the Present Value of an Ordinary Annuity of $1 (PVOA) used?</p>
<p>Multiple payments over time- where payments are made at the END of the period.
Think A for Arrears.</p>
<p>What is the calculation for the Present Value of $1?</p>
<p>1 / (( 1+i )^n)
~~~
i = interest rate
n = number of periods</p>
~~~
<p>What is Net Present Value (NPV)?</p>
<p>A preferred method of evaluating profitability.
One of two methods that use the Time Value of Money
= PV of Future Cash Flows - Investment</p>
<p>What is the rate of return on an investment called?</p>
<p>The Discount Rate.</p>
<p>What does the Discount Rate represent?</p>
<p>The rate of return on an investment used.
It represents the minimum rate of return required.</p>
<p>What are the strengths of the Net Present Value system?</p>
<p>Uses the Time Value of Money
Uses all cash flows- not just the cash flows to arrive at Payback
Takes risks into consideration</p>
<p>What are the weaknesses of the Net Present Value system?</p>
<p>Not as simple as the Accounting Rate of Return.</p>
<p>If multiple potential rates of return are available- which is used to calculate Net Present Value?</p>
<p>The minimum rate of return is used.</p>
<p>What is the Internal Rate of Return (IRR)?</p>
<p>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</p>
<p>Which rate of return is used to re-invest cash flows for Internal Rate of Return?</p>
<p>Cash flows are re-invested at the rate of return earned by the original investment.</p>
<p>How does the rate used for Internal Rate of Return (IRR) compare to that used for Net Present Value (NPV)?</p>
<p>Rate of return for IRR is the rate earned by the investment.
Rate of return for NPV is the minimum rate.</p>
<p>When is NPV on an Investment positive?</p>
<p>When the benefits are greater than the costs.
IRR is greater than the Discount Rate</p>
<p>When is NPV on an Investment Negative?</p>
<p>When Costs are greater than Benefits
IRR is less than the Discount Rate</p>
<p>When is NPV Zero?</p>
<p>When benefits equal the Costs
IRR = Discount Rate</p>
<p>What is the Payback Method? How is it calculated?</p>
<p>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.</p>
<p>What are the weaknesses of the payback method?</p>
<p>Ignores the Time Value of Money
Exception: Discount payback method
Ignores cash flow after the initial investment is paid back</p>
<p>What is the Accounting Rate of Return?</p>
<p>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.</p>
<p>What are the strengths of the Accounting Rate of Return (ARR)?</p>
<p>Simple to use
People understand easily</p>
<p>What are the weaknesses of the Accounting Rate of Return (ARR)?</p>
<p>Can be skewed based on Depreciation method that is used.
Ignores the Time Value of Money.</p>
<p>What is an Expected Return?</p>
<p>An approximate rate of return on assets.</p>
<p>What is the primary duty of the board of directors?</p>
<p>To monitor management behavior.</p>
<p>What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?</p>
<p>Oversees the board
Responsible for hiring new CEO</p>
<p>What is the responsibility of the audit committee of the board of directors?</p>
<p>The audit committee appoints and oversees the external auditor.</p>
<p>What is the duty of the compensation committee of the board of directors?</p>
<p>The compensation committee handles the CEO's compensation package.</p>
<p>What does the NYSE and NASDAQ require of the board of directors?</p>
<p>They require the board to be independent.</p>
<p>What is the main goal in an executive compensation package?</p>
<p>The package should ensure that the goals of management should match those of the shareholders.</p>
<p>How can an executive compensation package ensure that goals of management align with those of shareholders?</p>
<p>Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.</p>
<p>Which influences help mold the direction that management takes?</p>
<p>They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS)
These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties</p>
<p>What is shirking?</p>
<p>When management doesn't act in the best interest of shareholders.
It can be alleviated by tying compensation to stock performance or company profit.</p>
<p>What requirements are imposed on a public company under Sarbanes-Oxley?</p>
<p>Management must submit a report on the effectiveness of Internal Control in the 10K.
Management must disclose significant Internal Control deficiencies.
CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.</p>
<p>What characteristics are promoted by the COSO framework on internal control?</p>
<p>Reliable financial reporting
Effective and efficient operations
Compliance</p>
<p>What are the elements of the control environment?</p>
<p class="large" style="text-align: center;">Integrity & Ethics Competence The Board of Directors & Audit Committee Management's Operating Style Organizational Structure Authority & Roles of Responsibilities HR Policies</p>
<p>What are control activities?</p>
<p>A component of internal control that includes actions being taken to promote the control environment.</p>
<p>What are the basic elements of internal control?</p>
<p class="large" style="text-align: center;">Control Environment Risk Assessment Control Activities Information and Communication Monitoring</p>
<p>What is the significance of the Information and Communication aspect of internal control?</p>
<p>Management must have access to relevant and timely information to make good decisions.</p>
<p>How does Monitoring affect internal control?</p>
<p>Internal Control activities must be constantly monitored and evaluated for effectiveness.</p>
<p>What activities does the COSO framework for enterprise risk management include?</p>
<p>Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement
Does NOT eliminate all risk</p>
<p>What are possible responses to risk under the COSO framework for enterprise risk management?</p>
<p>Avoid or Reduce
Share or Accept</p>
<p>What is the primary duty of the board of directors?</p>
<p>To monitor management behavior.</p>
<p>What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?</p>
<p>Oversees the board
Responsible for hiring new CEO</p>
<p>What is the responsibility of the audit committee of the board of directors?</p>
<p>The audit committee appoints and oversees the external auditor.</p>
<p>What is the duty of the compensation committee of the board of directors?</p>
<p>The compensation committee handles the CEO's compensation package.</p>
<p>What is the main goal in an executive compensation package?</p>
<p>The package should ensure that the goals of management should match those of the shareholders.</p>
<p>How can an executive compensation package ensure that goals of management align with those of shareholders?</p>
<p>Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.</p>
<p>Which influences help mold the direction that management takes?</p>
<p>They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS)
These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties</p>
<p>What is shirking?</p>
<p>When management doesn't act in the best interest of shareholders.
It can be alleviated by tying compensation to stock performance or company profit.</p>
<p>What requirements are imposed on a public company under Sarbanes-Oxley?</p>
<p>Management must submit a report on the effectiveness of Internal Control in the 10K.
Management must disclose significant Internal Control deficiencies.
CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.</p>
<p>What are the elements of the control environment?</p>
<p class="large" style="text-align: center;">Integrity & Ethics Competence The Board of Directors & Audit Committee Management's Operating Style Organizational Structure Authority & Roles of Responsibilities HR Policies</p>
<p>What are control activities?</p>
<p>A component of internal control that includes actions being taken to promote the control environment.</p>
<p>What are the basic elements of internal control?</p>
<p class="large" style="text-align: center;">Control Environment Risk Assessment Control Activities Information and Communication Monitoring</p>
<p>What is the significance of the Information and Communication aspect of internal control?</p>
<p>Management must have access to relevant and timely information to make good decisions.</p>
<p>How does Monitoring affect internal control?</p>
<p>Internal Control activities must be constantly monitored and evaluated for effectiveness.</p>
<p>What activities does the COSO framework for enterprise risk management include?</p>
<p>Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement
Does NOT eliminate all risk</p>
<p>What are possible responses to risk under the COSO framework for enterprise risk management?</p>
<p>Avoid or Reduce
Share or Accept</p>
<p>What is Cost Accounting?</p>
<p class="large" style="text-align: center;">Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for o Direct Materials o Direct Labor o Work in Process o Finished Goods
Cost Accounting also records for the Income Statement</p>
<p>What is the difference between Cost Accounting and Managerial Accounting?</p>
<p>Cost Accounting - External Focus- GAAP
Managerial Accounting - Internal Focus- Not GAAP</p>
<p>What are Product Costs (aka Inventory Costs)?</p>
<p>Prime Costs
Conversion Costs</p>
<p>What are included in Prime Costs?</p>
<p>Direct Material USED - Have become part of the product or had a direct impact on the product
Direct Labor Used - Employees who worked on product and had direct impact</p>
<p>What is Factory Overhead?</p>
<p>All factory costs except for DM and DL used in production- including Spoilage (except for abnormal spoilage- which is a period cost and not included in OH).</p>
<p>What is included in Fixed Factory Overhead?</p>
<p>FFO = Estimated Costs / Normal Capacity
Uses Normal Activity
Examples of Fixed Factory OH: Depreciation (SL)- Utilities- Taxes
Under/Over-applied Fixed OH always goes to COGS</p>
<p>What is included in Variable Overhead?</p>
<p>VO = Estimated Activity / Actual Activity
Uses Actual Activity
Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)
</p>
<p>Where is Under/Over-applied Variable OH recorded?</p>
<p>If Immaterial – Goes to COGS
If Material – Goes to WIP- Finished Goods- or COGS- based on their Ending Balance</p>
<p>Where is Under/Over-applied Fixed OH recorded?</p>
<p>It always goes to COGS</p>
<p>What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?</p>
<p>Under-applied overhead.
If it's Fixed OH- under-applied goes to COGS.
If it's Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.</p>
<p>What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?</p>
<p>A credit balance indicates over-applied overhead.
If Fixed overhead- it is corrected from COGS.
If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.</p>
<p>Which variables are used to calculate Direct Material balances?</p>
<p>Beginning Balance
DR Net purchases (plus freight-in)
CR Direct Materials Used
= Ending balance (goes to BS)</p>
<p>What variables are used to calculated Work in Process (WIP)?</p>
<p>Beginning Balance (End Bal of Previous WIP)
DR Direct Materials Used
DR Direct Labor Used (Conversion Cost)
CR COGM
DR Factory Overhead Applied (Conversion Cost)
= Ending Balance (Goes to BS)</p>
<p>What variables are included in Finished Goods calculations?</p>
<p class="large" style="text-align: center;">Beginning Balance DR COGM = COGAS (Cost of Goods Avail for Sale) CR COGS = Ending Balance (Goes to BS)</p>
<p>How does Freight In affect Cost Accounting calculations?</p>
<p>Inventory (Product) Cost
Part of DM Purchases</p>
<p>How does Freight Out affect Cost Accounting?</p>
<p>Selling (Period) Cost
Not part of inventory</p>
<p>When is Job-Order Costing used?</p>
<p>Used when costs are easily connected to a specific product or product line
Can also be applied to services
Calculation is the same as normal cost accounting – just use your T Accounts
o DM to WIP to FG to COGS
o You’re likely going to be solving for the last job in the queue</p>
<p>What is the Direct Method for allocating service department costs?</p>
<p>No services allocated between service departments- even if they serve each other. Only allocate to product(s)</p>
<p>What is the Step Method for allocating service department costs?</p>
<p>Services can be allocated to both other service departments and the product(s)</p>
<p>Under process costing- how are the units shipped calculated?</p>
<p>Beginning Inventory
\+ Units Started
- Ending Inventory
= No. Units Shipped</p>
<p>What is another name for Process Costing?</p>
<p>Equivalent Units of Production</p>
<p>How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?</p>
<p>EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)</p>
<p>How are Direct Materials calculated under the Weighted Average Method?</p>
<p>Beginning Inventory + Current Costs / EFU WA</p>
<p>How are Conversion Costs calculated under Weighted Average Method?</p>
<p>Beginning Inventory + Current Costs / EFU WA</p>
<p>How are Equivalent Finished Units calculated for Direct Materials?</p>
<p>Units Shipped
\+ EI x % Complete DM
= EFU (Weighted Average Method)
- Beginning Inventory x % Complete
= EFU (FIFO)</p>
<p>How are Equivalent Finished Units calculated for Conversion Costs?</p>
<p>Units Shipped
\+ EI x % Complete CC
= EFU (Weighted Average)
- Beginning Inventory x % Complete
= EFU (FIFO)</p>
<p>How are Direct Materials calculated under the FIFO method?</p>
<p>Current Costs / EFU FIFO
Note: FIFO method uses Current Period costs only and ignores Beginning Inventory</p>
<p>How are Conversion Costs calculated under the FIFO method?</p>
<p>Current Costs / EFU FIFO
FIFO method uses Current Period costs only and ignores Beginning Inventory</p>
<p>How is WIP calculated?</p>
<p class="large" style="text-align: center;">Beginning balance (DM- DL- OH) \+ Current Costs (DM- DL- OH) - COGM (Goes to Finished Goods) \+ DM EFU x Cost per DM EFU \+ CC EFU x Cost per CC EFU = Ending WIP</p>
<p>How do period costs and product costs relate to net sales- gross margin and operating income?</p>
<p class="large" style="text-align: center;">Net Sales - Product Costs = Gross Margin - Period Costs = Operating Income</p>
<p>What is the focus of Activity Based Costing (ABC)?</p>
<p>Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don’t want or don’t care about
Inventory is expensive to store and storing something is not a value-added expenditure
Uses Cost Pools - Different departments can have different OH rates
Uses Several OH rates based on Activity - Cost Pool / Cost Driver</p>
<p>How do Cost Pools and Allocations compare under ABC versus traditional costing system?</p>
<p>Cost Pools and Allocations increase compared to a traditional costing system</p>
<p>What is Backflush Costing?</p>
<p>Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)
o Works backward to “flush out” COGS
o ‘Mostly’ GAAP</p>
<p>What are Cost Functions?</p>
<p>Measure how costs change relative to activity levels
High-Low Method
Change in Cost (High-Low pts) / Change in Activity (High-Low pts)</p>
<p>How does a price increase affect supply?</p>
<p>When the prices of an item increases supply increases- because more sellers are willing to sell.</p>
<p>What is a supply curve shift?</p>
<p>When supply changes due to something other than price.</p>
<p>What are the characteristics of a positive supply curve shift (shift right)?</p>
<p>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</p>
<p>What are the characteristics of a negative supply curve shift (shift left)?</p>
<p>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
</p>
<p>How does price affect the demand for an item?</p>
<p>When the prices of an item increases- demand for it decreases.
</p>
<p>What is a Demand Curve Shift?</p>
<p>When demand changes due to something other than price.</p>
<p>What is a Positive Demand Curve Shift (Shift Right)?</p>
<p>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</p>
<p>What is a Negative Demand Curve Shift (Shift Left)?</p>
<p>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</p>
<p>What is the Marginal Propensity to Consume?</p>
<p>How much you spend when your income increases
Calculate: Change in Spending / Change in Income
</p>
<p>What is the Marginal Propensity to Save?</p>
<p>How much you save when income increases
Calculate: Change in Savings / Change in Income
Also equals 1 - Marginal Propensity to Consume</p>
<p>How is the multiplier effect calculated?</p>
<p>(1 / 1-MPC) x Change in Spending</p>
<p>How does increased spending by consumers and the government affect the demand curve?</p>
<p>As spending by consumers or the government increases- the demand curve increases (shifts right).</p>
<p>How does spending change due to the multiplier effect?</p>
<p>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</p>
<p>How is Price Elasticity of Demand calculated?</p>
<p>% Change in Quantity Demand / % Change in Price</p>
<p>Under elastic demand- how does price affect revenues?</p>
<p>Price increases- Revenue decreases
Price decreases- Revenue increases
</p>
<p>What conditions would indicate Elastic Demand?</p>
<p>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</p>
<p>How does revenue react to price under Inelastic Demand?</p>
<p>Price increases- Revenue increases
Price decreases- Revenue decreases</p>
<p>What conditions would indicate Inelastic Demand?</p>
<p>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</p>
<p>What is Unitary Demand?</p>
<p>Total revenue will remain the same if price is increased
Considered unitary if coefficient of elasticity = 1</p>
<p>How is Income Elasticity of Demand calculated?</p>
<p>% 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)</p>
<p>What conditions occur under periods of inflation?</p>
<p>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</p>
<p>What happens under Demand-Pull inflation?</p>
<p>Overall spending increases
Demand increases (shifts right)
Market equilibrium price increases</p>
<p>What happens under Cost-Push inflation?</p>
<p class="large" style="text-align: center;">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</p>
<p>What is the Equilibrium Price?</p>
<p>The price where Quantity Supplied = Quantity Demanded</p>
<p>What is Optimal Production?</p>
<p>When Marginal Revenue = Marginal Cost</p>
<p>What is the result of a Price Floor?</p>
<p>Causes a surplus if above equilibrium price.</p>
<p>What is GDP (Gross Domestic Product)?</p>
<p>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</p>
<p>What is included under the income approach for calculating GDP?</p>
<p class="large" style="text-align: center;">Sole Proprietor and Corp Income Passive Income Taxes Employee Salaries Foreign Income Adjustments Depreciation</p>
<p>What is included under the Expenditure Approach for calculating GDP?</p>
<p>Individual Consumption
Private Investment
Government Purchases
Net Exports</p>
<p>What is Nominal GDP?</p>
<p>Measures goods/services in current prices.</p>
<p>For what is a GDP Deflator used?</p>
<p>Used to convert GDP to Real GDP</p>
<p>What is Real GDP?</p>
<p>Nominal GDP / GDP Deflator x 100</p>
<p>What is Gross National Product (GNP)?</p>
<p>Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included</p>
<p>What is the Consumer Price Index (CPI)? How is it applied?</p>
<p>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</p>
<p>How is disposable income calculated?</p>
<p>Personal Income - Personal Taxes</p>
<p>How is Return to Scale calculated?</p>
<p>% Increase in output / % Increase in input
Greater than 1 = Increasing returns to scale
Less than 1 = Decreasing returns to scale</p>
<p>When is the economy in Recession?</p>
<p>When GDP growth is negative for two consecutive quarters.</p>
<p>What is a Depression?</p>
<p>A prolonged- severe recession with high unemployment rates
No requisite period of time for the economy to officially be in a depression</p>
<p>What are the stages of the Economic Cycle?</p>
<p class="large" style="text-align: center;">Peak (highest) Recession (decreasing) Trough (lowest) Recover (increasing) Expansion (higher again)</p>
<p>What are leading indicators?</p>
<p>Conditions that occur before a recession or before a recovery
Example: Stock Market or New Housing Starts</p>
<p>What are lagging indicators?</p>
<p>Conditions that occur after a recession or after a recovery
Examples: Prime Interest Rates- Unemployment
</p>
<p>What are coincident indicators?</p>
<p>Conditions that occur during a recession or during a recovery
Example: Manufacturing output</p>
<p>Which people are included in the calculation of unemployment?</p>
<p>Only people looking for jobs</p>
<p>What is Cyclical Unemployment?</p>
<p>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</p>
<p>What is Frictional Unemployment?</p>
<p>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</p>
<p>What is Structural Unemployment?</p>
<p>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</p>
<p>How does inflation relate to unemployment?</p>
<p>High Unemployment = Low Inflation (Vice Versa)</p>
<p>What is the Discount Rate?</p>
<p>The rate a bank pays to borrow from the Fed.</p>
<p>What is the Prime Rate?</p>
<p>The rate a bank charges their best customers on short-term borrowings.</p>
<p>What is the Real Interest Rate?</p>
<p>Inflation-adjusted interest rate</p>
<p>What is the Nominal Rate?</p>
<p>Rate that uses current prices</p>
<p>What is the Risk-Free Rate?</p>
<p>Rate for a loan with 100% certainty of payback.
Usually results in a lower rate.
US Treasuries are an example.</p>
<p>What is included in the M1 money supply?</p>
<p>Currency- Coins- and Deposits</p>
<p>What is included in the M2 money supply?</p>
<p>Highly liquid assets other than currency- coins or deposits</p>
<p>What is Deficit Spending?</p>
<p>Increased spending levels without increased tax revenue.
Lower taxes without decrease in spending
Gamble that the multiplier effect will take over and boost economy</p>
<p>How can the Fed control the money supply?</p>
<p>By buying and selling the government's securities.</p>
<p>How does the Fed control economy-wide interest rates?</p>
<p>By adjusting the discount rate charged to banks</p>
<p>What is a Tariff?</p>
<p>A tax on imported goods</p>
<p>What is a quota?</p>
<p>A limit on the number of goods that can be imported</p>
<p>How do international trade restrictions affect domestic producers?</p>
<p>They are good for domestic producers.
Demand curve shifts right
Fewer substitutes
They can charge higher prices</p>
<p>How to international trade restrictions affect foreign producers?</p>
<p>They are bad for foreign producers
Demand curve shifts left
Fewer buyers
They must charge lower prices
</p>
<p>How do international trade restrictions affect foreign consumers?</p>
<p>They are good for foreign consumers
Supply curve shifts right
Goods purchased at lower prices in the foreign markets</p>
<p>How do international trade restrictions affect domestic consumers?</p>
<p>They are bad for domestic consumers
Supply curve shifts left
Fewer goods bought due to higher prices</p>
<p>What is Accounting Cost?</p>
<p>Explicit (Actual) cost of operating a business
Implicit costs are opportunity costs</p>
<p>What is Accounting Profit?</p>
<p>Revenue - Accounting Cost</p>
<p>What is Economic Cost?</p>
<p>Explicit + Implicit Cost</p>
<p>What is Economic Profit?</p>
<p>Revenue - Economic Cost</p>
<p>What is the primary focus of working capital management?</p>
<p>Managing inventory & receivables (current assets & liabilities)</p>
<p>How is Net Working Capital calculated?</p>
<p>NWC = Current Assets - Current Liabilities</p>
<p>What are the characteristics of effective Working Capital Management?</p>
<p>Shorten the cash conversion cycle
Don’t negatively impact operations</p>
<p>What is the Inventory Conversion Period?</p>
<p>Average time needed to convert materials into finished goods and sell them
Average Inventory = (BI + E) / 2
Inventory Conversion Period = Average Inventory / Sales Per Day</p>
<p>What is the Receivables Collection Period?</p>
<p>Average time needed to collect A/R
RCP = Average Receivables / Credit Sales Per Day</p>
<p>What is the Payables Deferral Period?</p>
<p>Average time between materials and labor purchase and their A/P payment
Average Payables = (BP + EP) / 2
Payables Deferral Period = Average Payables / (COGS/365)</p>
<p>What is the Cash Conversion Cycle?</p>
<p>Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)
Inventory Conversion Period
\+ Receivables Collection Period
– Payables Deferral Period
= Cash Conversion Cycle
(Inventory Really (-Pays) Cash)</p>
<p>What traits should Cash and Short-Term Investments have?</p>
<p>Liquid
Safe</p>
<p>For what are Letters of Credit used?</p>
<p>Used for importing goods.
Issued by importer's bank.</p>
<p>What is the advantage of using Trade Credit?</p>
<p>No interest cost if paid timely.</p>
<p>What is a Lockbox System? What are the advantages?</p>
<p>Customer Payments are sent to a bank-managed PO box.
Employees don't have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don't- lockbox is not beneficial)
</p>
<p>What is float?</p>
<p>Time it takes to mail a payment and have it clear your bank account
Maximize float on cash payments
Minimize float on cash receipts</p>
<p>What are Zero Balance Accounts?</p>
<p>Regional bank sends enough cash to cover daily checks
Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances</p>
<p>What is the difference between Treasury Bills- Notes and Bonds?</p>
<p>Treasury Bills: Short term (less than one year) Think: $1 Bill
Treasury Notes: Medium term (less than 10 years- more than 1)
Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money</p>
<p>What is commercial paper?</p>
<p>Similar to T-Bill- but issued by corporations instead of Government
Greater than 9 Months Maturity
Unsecured
Issued by large firms</p>
<p>What are the advantages and disadvantages of Commercial Paper?</p>
<p>Advantages: Financing at less than Prime. No compensating balances required.
Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.</p>
<p>What is Economic Order Quantity?</p>
<p>The order quantity that minimizes inventory costs.
EOQ = Square Root of (2DO/C)
~~~
D = Unit Demand (Annual)
O = Order Cost
C = Cost of Inventory</p>
~~~
<p>What is Carrying Cost?</p>
<p>The cost of keeping inventory.</p>
<p>What is Order Cost?</p>
<p>Cost of executing an order and starting product production.</p>
<p>What is inventory reorder point?</p>
<p>How low inventory should get before it should be re-ordered.
IOP = Average Daily Demand x Average Lead Time</p>
<p>What is a Just In Time (JIT) system?</p>
<p>Orders inventory so that you get it just in time for when it’s needed
JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high</p>
<p>What is Factoring of receivables?</p>
<p>Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection</p>
<p>What is a Trade Discount?</p>
<p>Buyer saves if paid early
Example: 1/10 Net 30
1% Discount if paid within 10 days
If not- bill is still due in 30 days</p>
<p>What is the cost of forgoing a discount?</p>
<p>(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))</p>
<p>What is the Prime Rate?</p>
<p>A benchmark used for lending only to the best customers
Most customers will be charged Prime + 3%- for example
If the lending institution and the customer are not in the same country- the LIBOR rate is often used </p>
<p>What is the Nominal (Face- Coupon- Stated) Rate?</p>
<p>Interest rate stated on the face of a bond.</p>
<p>How is Current Yield calculated?</p>
<p>CY = Interest Payment / Bond Price</p>
<p>What is the Effective (YTM- Market) Rate?</p>
<p>PV of Principle + Interest = Bond Price</p>
<p>What is a Zero Coupon Bond?</p>
<p>No interest payments made
Bond sold at a discount
Interest reflected when Bond matures</p>
<p>What are the characteristics of a Junk Bond?</p>
<p>High interest rate
High default risk</p>
<p>What are debenture bonds?</p>
<p>Bonds unsecured by collateral</p>
<p>What are subordinated debentures?</p>
<p>Debenture Bonds that will be repaid if any assets are left after liquidation of a company</p>
<p>What are Redeemable Bonds?</p>
<p>Provision in Bond contract allows demand of Bond payment under certain circumstances</p>
<p>What is a Callable Bond?</p>
<p>Borrower can pay off debt early</p>
<p>What is a Convertible Bond?</p>
<p>Lender can demand payment via company stock instead of money</p>
<p>What is a Sinking Fund?</p>
<p>Borrower deposits regular sums into an account that will eventually pay off the debt</p>
<p>What is the disadvantage of Common Stock in comparison to bonds?</p>
<p>Common Stock is more expensive to issue than debt.
Why? Investors demand a greater ROI than debtors (bondholders)</p>
<p>What is the advantage of Preferred Stock?</p>
<p>Hold dividend priority over common stock</p>
<p>What is Weighted Average Cost of Capital?</p>
<p>A company uses this to determine the true cost of their capital
~~~
Example:
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC = 9.2%</p>
~~~
<p>What is CAPM?</p>
<p>A stock’s expected performance is based on its beta (risk) compared to that of the stock market.
More risk = more expected return.</p>
<p>How is Cost of Debt calculated?</p>
<p>(Interest Expense - Tax Benefit) / Carrying Value of Debt</p>
<p>What is a Static Budget?</p>
<p>Budget targeted for a specific segment of a company.</p>
<p>What is a Maser Budget?</p>
<p>Budget targeted for the company as a whole
Includes budgets for Operations and Cash Flows
Includes set of budgeted Financial Statements</p>
<p>How do Fixed Costs affect budgeting?</p>
<p>Costs independent of the level activity within the relevant range
Property Tax is the same whether you produce 100-000 units or zero units
However – Fixed Costs per unit vary given the amount of activity
If you produce fewer units- fixed costs per unit will be greater than if you produce more units – i.e. less units to spread the cost over</p>
<p>How do Variable Costs affect budgeting?</p>
<p>The more Direct Materials or Direct Labor used- the more Variable Costs per unit
However – Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit</p>
<p>How are Material Variances calculated?</p>
<p>SAM:
Standard Material Costs
- Actual Material Costs
= Material Variance</p>
<p>How are Labor Variances calculated?</p>
<p>SAL
Standard Labor Costs
- Actual Labor Costs
= Labor Variance</p>
<p>How are Overhead Variances calculated?</p>
<p>OAT
Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance</p>
<p>How does Absorption Costing compare to Variable Costing?</p>
<p>Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A
Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs</p>
<p>How is Contribution Margin calculated?</p>
<p>Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)</p>
<p>How is Break-even Point (per unit) calculated?</p>
<p>Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit
Assumption: Total Costs & Total Revenues are LINEAR</p>
<p>What is the focus in a Cost Center?</p>
<p>Management is concerned only with costs</p>
<p>What is the focus in a Profit Center?</p>
<p>Management is concerned with both costs and profits</p>
<p>What is the focus in an Investment Center?</p>
<p>Management is concerned with costs- profits- and assets</p>
<p>What is the Delphi technique?</p>
<p>Forecasting technique where Data is collected and analyzed
Requires judgement/consensus</p>
<p>What is Regression Analysis?</p>
<p>A forecasting technique where Sales is the dependent variable.
Simple Regression - One independent variable
Multiple Regression - Multiple independent variables</p>
<p>What are Econometric Models?</p>
<p>Forecast sales using Economic Data</p>
<p>What are Naive Forecasting Models?</p>
<p>Very Simplistic
“Eyeball” past trends and make an estimate</p>
<p>How does a Moving Average compare to Exponential Smoothing?</p>
<p>Both project estimates using average trends from recent periods
Difference: Exponential Smoothing weighs recent data more heavily</p>
<p>What are the characteristics of Short-term Cost Analysis?</p>
<p>Uses Relevant Costs Only
Ignore Sunk Costs
Opportunity Cost is a Must</p>
<p>What is a Static Budget?</p>
<p>Budget targeted for a specific segment of a company.</p>
<p>What is a Maser Budget?</p>
<p>Budget targeted for the company as a whole
Includes budgets for Operations and Cash Flows
Includes set of budgeted Financial Statements</p>
<p>How do Fixed Costs affect budgeting?</p>
<p>Costs independent of the level activity within the relevant range
Property Tax is the same whether you produce 100-000 units or zero units
However – Fixed Costs per unit vary given the amount of activity
If you produce fewer units- fixed costs per unit will be greater than if you produce more units – i.e. less units to spread the cost over</p>
<p>How do Variable Costs affect budgeting?</p>
<p>The more Direct Materials or Direct Labor used- the more Variable Costs per unit
However – Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit</p>
<p>How are Material Variances calculated?</p>
<p>SAM:
Standard Material Costs
- Actual Material Costs
= Material Variance</p>
<p>How are Labor Variances calculated?</p>
<p>SAL
Standard Labor Costs
- Actual Labor Costs
= Labor Variance</p>
<p>How are Overhead Variances calculated?</p>
<p>OAT
Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance</p>
<p>How does Absorption Costing compare to Variable Costing?</p>
<p>Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A
Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs</p>
<p>How is Contribution Margin calculated?</p>
<p>Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)</p>
<p>How is Break-even Point (per unit) calculated?</p>
<p>Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit
Assumption: Total Costs & Total Revenues are LINEAR</p>
<p>What is the focus in a Cost Center?</p>
<p>Management is concerned only with costs</p>
<p>What is the focus in a Profit Center?</p>
<p>Management is concerned with both costs and profits</p>
<p>What is the focus in an Investment Center?</p>
<p>Management is concerned with costs- profits- and assets</p>
<p>What is the Delphi technique?</p>
<p>Forecasting technique where Data is collected and analyzed
Requires judgement/consensus</p>
<p>What is Regression Analysis?</p>
<p>A forecasting technique where Sales is the dependent variable.
Simple Regression - One independent variable
Multiple Regression - Multiple independent variables</p>
<p>What are Econometric Models?</p>
<p>Forecast sales using Economic Data</p>
<p>What are Naive Forecasting Models?</p>
<p>Very Simplistic
“Eyeball” past trends and make an estimate</p>
<p>How does a Moving Average compare to Exponential Smoothing?</p>
<p>Both project estimates using average trends from recent periods
Difference: Exponential Smoothing weighs recent data more heavily</p>
<p>What are the characteristics of Short-term Cost Analysis?</p>
<p>Uses Relevant Costs Only
Ignore Sunk Costs
Opportunity Cost is a Must</p>
<p>Define Market Risk</p>
<p>The risk that a sluggish economy will affect the value of a debt instrument</p>
<p>Define Sector Risk</p>
<p>The risk that an event in the investment’s business sector will harm the investment
For example- the banking sector is sluggish- so even stocks of healthy banks suffer</p>
<p>Define Credit/Default Risk</p>
<p>The risk that a debtor will be unable to make loan payments or pay back the principal</p>
<p>Define Interest Rate Risk</p>
<p>The risk that a change in interest rates will adversely affect the value of the note
Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.</p>
<p>What does Standard Deviation measure?</p>
<p>It measures the volatility of an investment.</p>
<p>What is Systematic Risk?</p>
<p>Risk that impacts the entire market and can’t be avoided or reduced through diversification
Example: Wars</p>
<p>What is Unsystematic Risk?</p>
<p>Relates to a particular industry or company
Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest</p>
<p>What does Beta measure?</p>
<p>Beta measures how volatile the investment is relative to the rest of the market.
In other words- how quickly (and in what amount) does the value of the stock change when the market sways?</p>
<p>What is Variance?</p>
<p>It compares volatility of an investment to the market average.
Factors include both Systematic and Unsystematic Risk.</p>
<p>What is a Derivative?</p>
<p>An asset whose value is DERIVED from the value of another asset.
Derivatives are measured at Fair Value.</p>
<p>How is an Option used?</p>
<p>Gives the buyer the option to buy or sell a financial derivative at a certain price
Traders use them to speculate where they think the price will be at a certain point and make a profit
Hedgers use them to offset risk</p>
<p>What is a Future?</p>
<p>A Forward Contract with a future value.
They are sold and traded on the futures market.</p>
<p>What is an Interest Rate Swap?</p>
<p>Forward Contract to swap payment agreements
They are highly liquid and often valued using the Zero-Coupon method.
Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR</p>
<p>What is Legal Risk?</p>
<p>Risk that a law or regulation will void the derivative</p>
<p>What is a Fair Value Hedge?</p>
<p>Hedge that protects against the value of an asset or liability changing.
Changes in value are reported in earnings.</p>
<p>What is a Cash Flow Hedge?</p>
<p>A hedge that protects against a set of future cash flows changing.
Changes in value are reported in OCI.</p>
<p>What is a Foreign Currency Hedge?</p>
<p>A hedge that protects against the value of a foreign currency changing.
For example- a foreign currency hedge might be used to protect against the following: If you have receivables denominated in a foreign currency and that currency dips in value – your receivables are worth less than before.
</p>
