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BEC > Real BEC > Flashcards

Real BEC Flashcards

1
Q

<p>Which IT personnel roles should always be segregated?</p>

A

<p>Operators

Programmers

Librarians</p>

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2
Q

<p>What are the duties of a systems analyst?</p>

A

<p>Designs or purchases IT system

Responsible for flowcharts

Liaison between Users and Programmers

Note: Think IT Manager</p>

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2
Q

<p>What is the primary duty of a Systems Administrator?</p>

A

<p>A Systems Administrator controls database access.</p>

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4
Q

<p>Which duties should a Systems Programmer NOT have?</p>

A

<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>

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5
Q

<p class=”large” style=”text-align:center”;>What are the duties of a Systems Programmer?</p>

A

<p class=”large” style=”text-align:center”;>Writes- Updates- Maintains- & Tests software- systems- and compilers

</p>

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5
Q

<p class=”large” style=”text-align:center”;>What measures are used under Value-Based Management?</p>

A 
<p class="large" style="text-align:center";>Return on Investment
Residual Income
Spread
Economic Value Added
Free Cash Flow</p>
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5
Q

<p class=”large” style=”text-align:center”;>When is the Present Value of an Annuity Due used?</p>

A

<p class=”large” style=”text-align:center”;>Multiple payments made over time- where the payments are made at the START of the period.</p>

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5
Q

<p class=”large” style=”text-align:center”;>What does the NYSE and NASDAQ require of the board of directors?</p>

A

<p class=”large” style=”text-align:center”;>They require the board to be independent.</p>

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6
Q

<p>What duties should a System Operator NOT have?</p>

A

<p>For internal control purposes- they should not be a Programmer on the system.</p>

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7
Q

<p class=”large” style=”text-align:center”;>What are the duties of a Systems Operator?</p>

A

<p class=”large” style=”text-align:center”;>Schedules and Monitors Jobs

Runs IT Help Desk
</p>

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7
Q

<p class=”large” style=”text-align:center”;>How is Residual Income calculated?</p>

A

<p class=”large” style=”text-align:center”;>Operating Income - (Required Rate of Return x Invested Capital) = Residual Income</p>

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8
Q

<p>What is the purpose of a Management Information System (MIS)?</p>

A

<p>To assist with decision making.</p>

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9
Q

<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>

A

<p class=”large” style=”text-align:center”;>Include Computer Logs.

Control Group should review the logs.</p>

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9
Q

<p class=”large” style=”text-align:center”;>What is Weighted Average Cost of Capital (WACC)? How is it calculated?</p>

A

<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>

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9
Q

<p class=”large” style=”text-align:center”;>How is NPV used to calculate future benefit?</p>

A

<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>

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10
Q

<p class=”large” style=”text-align:center”;>What is an Accounting Information System (AIS)?</p>

A

<p class=”large” style=”text-align:center”;>A type of Management Information System (MIS) that processes accounting transactions.</p>

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11
Q

<p>What are the characteristics of an Expert System (ES)?</p>

A

<p>Computer uses reasoning

Structured

No human interpretation needed</p>

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12
Q

<p class=”large” style=”text-align:center”;>What are the characteristics of an Executive Information System (EIS)?</p>

A

<p class=”large” style=”text-align:center”;>Specialized for Company Executive needs

Assists with Strategy Only

No Decision-Making Capabilities</p>

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12
Q

<p class=”large” style=”text-align:center”;>How is Free Cash Flow calculated?</p>

A 
<p class="large" style="text-align:center";>Operating Income After Tax
\+ Depreciation & Amortization
- Capital Expenditures
- Change in Net Working Capital
= Free Cash Flow</p>
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12
Q

<p class=”large” style=”text-align:center”;>What characteristics are promoted by the COSO framework on internal control?</p>

A

<p class=”large” style=”text-align:center”;>Reliable financial reporting

Effective and efficient operations

Compliance</p>

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13
Q

<p>What are the characteristics of an Ad Hoc computer report?</p>

A

<p>User initiates the report.

The report is created upon demand.</p>

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14
Q

<p class=”large” style=”text-align:center”;>What are the characteristics of a Decision Support System (DSS)?</p>

A

<p class=”large” style=”text-align:center”;>Computer provides data

Gives Interactive Support

Human interpretation needed</p>

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14
Q

<p class=”large” style=”text-align:center”;>What is the Asset Turnover Ratio?</p>

A

<p class=”large” style=”text-align:center”;>Sales / Average Assets</p>

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14
Q

<p class=”large” style=”text-align:center”;>How do Salvage Value and Depreciation affect Net Present Value?</p>

A

<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>

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15
Q

<p class=”large” style=”text-align:center”;>When are Exception reports generated?</p>

A

<p class=”large” style=”text-align:center”;>Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem</p>

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16
Q

<p>What is End-User Computing?</p>

A

<p>The User develops and executes their own application.</p>

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17
Q

<p class=”large” style=”text-align:center”;>What is a query?</p>

A

<p class=”large” style=”text-align:center”;>A type of Ad Hoc report- initiated by a user.</p>

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17
Q

<p class=”large” style=”text-align:center”;>What does the Debt to Total Assets ratio tell us? How is it calculated?</p>

A

<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>

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18
Q

<p>What are the risks of E-commerce?</p>

A

<p>Compromised data or theft.

Less paper trail for auditors.</p>

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19
Q

<p class=”large” style=”text-align:center”;>What is the primary benefit of E-commerce?</p>

A

<p class=”large” style=”text-align:center”;>E-commerce makes business transactions easier.</p>

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19
Q

<p class=”large” style=”text-align:center”;>What does Operating Profit Margin tell us? How is it calculated?</p>

A

<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>

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19
Q

<p class=”large” style=”text-align:center”;>What are the strengths and weaknesses of the Internal Rate of Return system?</p>

A

<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>

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20
Q

<p class=”large” style=”text-align:center”;>What are the benefits of Electronic Data Interchange?</p>

A

<p class=”large” style=”text-align:center”;>Uses globally-accepted standards

Efficient</p>

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21
Q

<p>What is the purpose of a Database?</p>

A

<p>Located on a File Server- a Database allows users to share documents.</p>

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22
Q

<p class=”large” style=”text-align:center”;>What is a File Server?</p>

A

<p class=”large” style=”text-align:center”;>A file server stores shared programs and documents.</p>

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22
Q

<p class=”large” style=”text-align:center”;>How is Market/Book ratio calculated?</p>

A

<p class=”large” style=”text-align:center”;>Market Value of Common Stock / Book Value of Common Stock</p>

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22
Q

<p class=”large” style=”text-align:center”;>Which two inventory methods are used under Process Costing?</p>

A

<p class=”large” style=”text-align:center”;>FIFO

Weighted Average</p>

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23
Q

<p>What is the purpose of a WAN (Wide Area Network)?</p>

A

<p>It connects computers that are far apart.</p>

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24
Q

<p class=”large” style=”text-align:center”;>What is the purpose of a LAN (Local Area Network)?</p>

A

<p class=”large” style=”text-align:center”;>It connects computers in close proximity.</p>

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24
Q

<p class=”large” style=”text-align:center”;>What are the strengths of the Payback Method?</p>

A

<p class=”large” style=”text-align:center”;>Takes risk into consideration

2 year payback is less risky than a 5 year payback
</p>

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25
Q

<p class=”large” style=”text-align:center”;>What are the characteristics of a VAN (Value-Added Network)?</p>

A

<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>

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25
Q

<p class=”large” style=”text-align:center”;>What is Average Collection Period- and how is it calculated?</p>

A

<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>

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26
Q

<p>What are the characteristics of a virus?</p>

A

<p>Takes over a computer

Needs a host program to run</p>

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27
Q

<p class=”large” style=”text-align:center”;>What is the purpose of a Firewall?</p>

A

<p class=”large” style=”text-align:center”;>Prevents unauthorized access to a network.</p>

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28
Q

<p>What is the purpose of Automated Equipment Controls?</p>

A

<p>They prevent and detect hardware errors.</p>

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29
Q

<p class=”large” style=”text-align:center”;>What are the characteristics of a computer worm?</p>

A

<p class=”large” style=”text-align:center”;>Takes over multiple computers

Doesn’t need a host program to run</p>

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30
Q

<p>What is a CPU?</p>

A

<p>Computer Processing Unit

It processes commands within a computer.</p>

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31
Q

<p>What is Job Control Language?</p>

A

<p>It schedules and allocates system resources.</p>

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32
Q

<p class=”large” style=”text-align:center”;>What is RAM?</p>

A

<p class=”large” style=”text-align:center”;>Random Access Memory.

Internal memory in the computer used during immediate processing.</p>

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33
Q

<p class=”large” style=”text-align:center”;>What are examples of input devices?</p>

A 
<p class="large" style="text-align:center";>Keyboard
Mouse
Scanner
Magnetic Ink Reader
Magnetic Tape Reader
EDI
Point of Sale Scanner</p>
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34
Q

<p>What are the characteristics of Magnetic Tape storage?</p>

A

<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>

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35
Q

<p class=”large” style=”text-align:center”;>What are examples of Output Devices?</p>

A

<p class=”large” style=”text-align:center”;>Speakers

Monitors

Printers</p>

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35
Q

<p class=”large” style=”text-align:center”;>What are the characteristics of By-Products?</p>

A

<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>

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36
Q

<p>What is a Gateway?</p>

A

<p>Connects one network to another

Note: the Internet is connected by Gateways</p>

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37
Q

<p class=”large” style=”text-align:center”;>What are the characteristics of Magnetic Disks?</p>

A

<p class=”large” style=”text-align:center”;>Random Access - Finds data in random spots

Faster data retrieval

Uses Boundary Protection for data</p>

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38
Q

<p class=”large” style=”text-align:center”;>What are Parity Checks?</p>

A

<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>

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39
Q

<p>What is a Change Control?</p>

A

<p>It authorizes program changes and approves program test results.</p>

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40
Q

<p class=”large” style=”text-align:center”;>What is an Echo Check?</p>

A

<p class=”large” style=”text-align:center”;>Transmitted data is returned to the sender for verification (it echoes back to the sender)</p>

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41
Q

<p>What is the purpose of a Digital Signature?</p>

A

<p>It confirms a message has not been altered.</p>

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42
Q

<p class=”large” style=”text-align:center”;>What is security software?</p>

A

<p class=”large” style=”text-align:center”;>Software that controls access to IT systems.

Note: Don’t confuse this with anti-virus software</p>

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43
Q

<p class=”large” style=”text-align:center”;>List the types of computers from smallest to largest</p>

A

<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>

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44
Q

<p>What is the duty of a design engineer?</p>

A

<p>Determine language used for a specific computer- on a computer-to-computer basis</p>

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45
Q

<p class=”large” style=”text-align:center”;>What are the units of computer data from smallest to largest?</p>

A

<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>

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46
Q

<p>How can source programs be recognized?</p>

A

<p>They are written in a language close to English.</p>

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47
Q

<p class=”large” style=”text-align:center”;>What are object programs?</p>

A

<p class=”large” style=”text-align:center”;>Programs written in base computer language- not similar to English.</p>

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48
Q

<p>How does Online Analytical Processing work?</p>

A

<p>It uses a Data Warehouse to support management decision making.</p>

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49
Q

<p class=”large” style=”text-align:center”;>What is the purpose of a Compiler?</p>

A

<p class=”large” style=”text-align:center”;>Takes Source language (English) and converts to Object (Computer) Language</p>

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50
Q

<p class=”large” style=”text-align:center”;>What is Data Mining?</p>

A

<p class=”large” style=”text-align:center”;>Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.</p>

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51
Q

<p>What are the characteristics of batch processing?</p>

A

<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>

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52
Q

<p class=”large” style=”text-align:center”;>What is the purpose of online transaction processing?</p>

A

<p class=”large” style=”text-align:center”;>To process a company’s routine transactions.</p>

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53
Q

<p>What does a processing control check?</p>

A

<p>Checks if data processing produced proper output</p>

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54
Q

<p class=”large” style=”text-align:center”;>What does an output control check for?</p>

A

<p class=”large” style=”text-align:center”;>Checks to see if output data is valid- distributed and used in an authorized manner.</p>

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55
Q

<p>What is a validity check?</p>

A

<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>

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56
Q

<p class=”large” style=”text-align:center”;>What is a hash total?</p>

A

<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>

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57
Q

<p>What is a check digit?</p>

A

<p>An input control that adds an identification number to a set of
digits – usually at the end</p>

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58
Q

<p class=”large” style=”text-align:center”;>What is a limit check?</p>

A

<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>

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59
Q

<p>What is a Hot Site?</p>

A

<p>A disaster recovery system where if the main system goes down- a Hot Site is ready to take over immediately.</p>

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60
Q

<p class=”large” style=”text-align:center”;>What is a field check?</p>

A

<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>

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61
Q

<p>What is the most common database language?</p>

A

<p>SQL - Standard Query Language</p>

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62
Q

<p class=”large” style=”text-align:center”;>What is a Cold Site?</p>

A

<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>

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63
Q

<p>What is a Data Manipulation Language?</p>

A

<p>Queries SQL Database tables</p>

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64
Q

<p class=”large” style=”text-align:center”;>What is a Data Definition Language?</p>

A

<p class=”large” style=”text-align:center”;>Defines SQL Database

Controls SQL Tables</p>

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65
Q

<p>What are the characteristics of a Relational Database?</p>

A

<p>Logical structure

Uses rows and columns similar to spreadsheet</p>

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66
Q

<p class=”large” style=”text-align:center”;>What is a Data Control Language?</p>

A

<p class=”large” style=”text-align:center”;>Controls Access to SQL Database</p>

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67
Q

<p>What are the advantages of a database?</p>

A

<p>Data is more accessible

Reduced redundancy</p>

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68
Q

<p class=”large” style=”text-align:center”;>What are the characteristics of a Hierarchical Database?</p>

A

<p class=”large” style=”text-align:center”;>Has various levels

Uses trees to store data</p>

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69
Q

<p>What are the components of a database?</p>

A

<p>Desktop client

Application Server

Database Server

Think: Your desktop computer runs applications and saves to a database</p>

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70
Q

<p class=”large” style=”text-align:center”;>What are the disadvantages of a database?</p>

A

<p class=”large” style=”text-align:center”;>Cost of installation

Skilled personnel required to maintain</p>

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71
Q

<p>What four perspectives are included in Balanced Scorecard?</p>

A

<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>

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72
Q

<p>Why was Balanced Scorecard created?</p>

A

<p>To measure Performance.</p>

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73
Q

<p>What are Strategy Maps?</p>

A

<p>Diagrams of Strategic Cause and Effect Relationships.</p>

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74
Q

<p>What is a Strategic Initiative?</p>

A

<p>A plan to achieve goals.</p>

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76
Q

<p>How is Return on Investment (ROI) calculated?</p>

A

<p>ROI = Return / Investment

Example: You Invest $100 to buy a machine that generates $60 in Operating Income

$60 / $100 = 60% ROI</p>

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78
Q

<p>What is another name for Required Rate of Return (RROR)?</p>

A

<p>RROR is also called 'Cost of Capital'

</p>

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80
Q

<p>How is Spread calculated?</p>

A

<p>Spread = ROI - Cost of Capital</p>

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81
Q

<p>What is the primary point of Economic Value Added? How is it calculated?</p>

A

<p>Investments should exceed costs- with an emphasis on stockholder value.

Economic Value Added = Operating Income After Tax - (Net Assets x WACC)</p>

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83
Q

<p>What is measured by Six Sigma?</p>

A

<p>It measures a product versus its quality goal.</p>

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85
Q

<p>What does the Current Ratio tell us? How is it calculated?</p>

A

<p>Can the company pay their short-term liabilities?

Current Ratio = Current Assets / Current Liabilities</p>

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86
Q

<p>What does the Debt to Equity Ratio tell us? How is it calculated?</p>

A

<p>How is the company financing its capital?

Debt to Equity Ratio = Total Debt / Total Equity</p>

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88
Q

<p>What does Gross Margin % tell us? How is it calculated?</p>

A

<p>How profitable is the product after COGS?

Gross Margin = Gross Profit / Net Sales</p>

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90
Q

<p>How is Times Interest Earned calculated and what does it mean?</p>

A

<p>Can the company make their interest payments?

Times Interest Earned = Earnings Before Tax & Interest / Interest Expense</p>

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91
Q

<p>What does Return on Assets tell us? How is it calculated?</p>

A

<p>What % return are the assets generating?

Return on Assets = Net Income (net of interest & taxes) / Average Total Assets</p>

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93
Q

<p>What is Inventory Turnover and how is it calculated?</p>

A

<p>How quickly does inventory get sold?

Inventory Turnover = COGS / Average Inventory</p>

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94
Q

<p>What is the Quick Ratio and how is it calculated?</p>

A

<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>

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96
Q

<p>What is an Internal Failure?</p>

A

<p>Products have quality defects- but are caught BEFORE they leave the warehouse.</p>

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97
Q

<p>What is an External Failure?</p>

A

<p>Product reaches the customer- but they are not satisfied with the quality of the product.

This includes recalls.</p>

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98
Q

<p>What is Appraisal Cost?</p>

A

<p>Quality control- testing & inspection costs.</p>

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99
Q

<p>What is Capital Budgeting? How is it used?</p>

A

<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>

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100
Q

<p>What values are used in Capital Budgeting?</p>

A

<p>Capital Budgeting ONLY uses Present Value tables.

Capital Budgeting NEVER uses Fair Value.</p>

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101
Q

<p>When is the Present Value of $1 table used?</p>

A

<p>For ONE payment- ONE time.</p>

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103
Q

<p>When is the Present Value of an Ordinary Annuity of $1 (PVOA) used?</p>

A

<p>Multiple payments over time- where payments are made at the END of the period.

Think A for Arrears.</p>

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104
Q

<p>What is the calculation for the Present Value of $1?</p>

A

<p>1 / (( 1+i )^n)

~~~
i = interest rate
n = number of periods</p>

~~~

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105
Q

<p>What is Net Present Value (NPV)?</p>

A

<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>

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107
Q

<p>What is the rate of return on an investment called?</p>

A

<p>The Discount Rate.</p>

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108
Q

<p>What does the Discount Rate represent?</p>

A

<p>The rate of return on an investment used.

It represents the minimum rate of return required.</p>

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109
Q

<p>What are the strengths of the Net Present Value system?</p>

A

<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>

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110
Q

<p>What are the weaknesses of the Net Present Value system?</p>

A

<p>Not as simple as the Accounting Rate of Return.</p>

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112
Q

<p>If multiple potential rates of return are available- which is used to calculate Net Present Value?</p>

A

<p>The minimum rate of return is used.</p>

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113
Q

<p>What is the Internal Rate of Return (IRR)?</p>

A

<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>

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114
Q

<p>Which rate of return is used to re-invest cash flows for Internal Rate of Return?</p>

A

<p>Cash flows are re-invested at the rate of return earned by the original investment.</p>

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115
Q

<p>How does the rate used for Internal Rate of Return (IRR) compare to that used for Net Present Value (NPV)?</p>

A

<p>Rate of return for IRR is the rate earned by the investment.

Rate of return for NPV is the minimum rate.</p>

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117
Q

<p>When is NPV on an Investment positive?</p>

A

<p>When the benefits are greater than the costs.

IRR is greater than the Discount Rate</p>

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118
Q

<p>When is NPV on an Investment Negative?</p>

A

<p>When Costs are greater than Benefits

IRR is less than the Discount Rate</p>

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119
Q

<p>When is NPV Zero?</p>

A

<p>When benefits equal the Costs

IRR = Discount Rate</p>

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120
Q

<p>What is the Payback Method? How is it calculated?</p>

A

<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>

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122
Q

<p>What are the weaknesses of the payback method?</p>

A

<p>Ignores the Time Value of Money

Exception: Discount payback method

Ignores cash flow after the initial investment is paid back</p>

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123
Q

<p>What is the Accounting Rate of Return?</p>

A

<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>

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124
Q

<p>What are the strengths of the Accounting Rate of Return (ARR)?</p>

A

<p>Simple to use

People understand easily</p>

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125
Q

<p>What are the weaknesses of the Accounting Rate of Return (ARR)?</p>

A

<p>Can be skewed based on Depreciation method that is used.

Ignores the Time Value of Money.</p>

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126
Q

<p>What is an Expected Return?</p>

A

<p>An approximate rate of return on assets.</p>

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127
Q

<p>What is the primary duty of the board of directors?</p>

A

<p>To monitor management behavior.</p>

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128
Q

<p>What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?</p>

A

<p>Oversees the board

Responsible for hiring new CEO</p>

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129
Q

<p>What is the responsibility of the audit committee of the board of directors?</p>

A

<p>The audit committee appoints and oversees the external auditor.</p>

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130
Q

<p>What is the duty of the compensation committee of the board of directors?</p>

A

<p>The compensation committee handles the CEO's compensation package.</p>

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131
Q

<p>What does the NYSE and NASDAQ require of the board of directors?</p>

A

<p>They require the board to be independent.</p>

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132
Q

<p>What is the main goal in an executive compensation package?</p>

A

<p>The package should ensure that the goals of management should match those of the shareholders.</p>

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133
Q

<p>How can an executive compensation package ensure that goals of management align with those of shareholders?</p>

A

<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>

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134
Q

<p>Which influences help mold the direction that management takes?</p>

A

<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>

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135
Q

<p>What is shirking?</p>

A

<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>

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136
Q

<p>What requirements are imposed on a public company under Sarbanes-Oxley?</p>

A

<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>

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137
Q

<p>What characteristics are promoted by the COSO framework on internal control?</p>

A

<p>Reliable financial reporting

Effective and efficient operations

Compliance</p>

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138
Q

<p>What are the elements of the control environment?</p>

A 
<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>
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139
Q

<p>What are control activities?</p>

A

<p>A component of internal control that includes actions being taken to promote the control environment.</p>

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140
Q

<p>What are the basic elements of internal control?</p>

A 
<p class="large" style="text-align: center;">Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring</p>
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141
Q

<p>What is the significance of the Information and Communication aspect of internal control?</p>

A

<p>Management must have access to relevant and timely information to make good decisions.</p>

142
Q

<p>How does Monitoring affect internal control?</p>

A

<p>Internal Control activities must be constantly monitored and evaluated for effectiveness.</p>

143
Q

<p>What activities does the COSO framework for enterprise risk management include?</p>

A

<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>

144
Q

<p>What are possible responses to risk under the COSO framework for enterprise risk management?</p>

A

<p>Avoid or Reduce

Share or Accept</p>

145
Q

<p>What is the primary duty of the board of directors?</p>

A

<p>To monitor management behavior.</p>

146
Q

<p>What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?</p>

A

<p>Oversees the board

Responsible for hiring new CEO</p>

147
Q

<p>What is the responsibility of the audit committee of the board of directors?</p>

A

<p>The audit committee appoints and oversees the external auditor.</p>

148
Q

<p>What is the duty of the compensation committee of the board of directors?</p>

A

<p>The compensation committee handles the CEO's compensation package.</p>

150
Q

<p>What is the main goal in an executive compensation package?</p>

A

<p>The package should ensure that the goals of management should match those of the shareholders.</p>

151
Q

<p>How can an executive compensation package ensure that goals of management align with those of shareholders?</p>

A

<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>

152
Q

<p>Which influences help mold the direction that management takes?</p>

A

<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>

153
Q

<p>What is shirking?</p>

A

<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>

154
Q

<p>What requirements are imposed on a public company under Sarbanes-Oxley?</p>

A

<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>

156
Q

<p>What are the elements of the control environment?</p>

A 
<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>
157
Q

<p>What are control activities?</p>

A

<p>A component of internal control that includes actions being taken to promote the control environment.</p>

158
Q

<p>What are the basic elements of internal control?</p>

A 
<p class="large" style="text-align: center;">Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring</p>
159
Q

<p>What is the significance of the Information and Communication aspect of internal control?</p>

A

<p>Management must have access to relevant and timely information to make good decisions.</p>

160
Q

<p>How does Monitoring affect internal control?</p>

A

<p>Internal Control activities must be constantly monitored and evaluated for effectiveness.</p>

161
Q

<p>What activities does the COSO framework for enterprise risk management include?</p>

A

<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>

162
Q

<p>What are possible responses to risk under the COSO framework for enterprise risk management?</p>

A

<p>Avoid or Reduce

Share or Accept</p>

163
Q

<p>What is Cost Accounting?</p>

A 
<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>

164
Q

<p>What is the difference between Cost Accounting and Managerial Accounting?</p>

A

<p>Cost Accounting - External Focus- GAAP

Managerial Accounting - Internal Focus- Not GAAP</p>

165
Q

<p>What are Product Costs (aka Inventory Costs)?</p>

A

<p>Prime Costs

Conversion Costs</p>

166
Q

<p>What are included in Prime Costs?</p>

A

<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>

167
Q

<p>What is Factory Overhead?</p>

A

<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>

168
Q

<p>What is included in Fixed Factory Overhead?</p>

A

<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>

169
Q

<p>What is included in Variable Overhead?</p>

A

<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>

170
Q

<p>Where is Under/Over-applied Variable OH recorded?</p>

A

<p>If Immaterial – Goes to COGS

If Material – Goes to WIP- Finished Goods- or COGS- based on their Ending Balance</p>

171
Q

<p>Where is Under/Over-applied Fixed OH recorded?</p>

A

<p>It always goes to COGS</p>

172
Q

<p>What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?</p>

A

<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>

173
Q

<p>What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?</p>

A

<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>

174
Q

<p>Which variables are used to calculate Direct Material balances?</p>

A

<p>Beginning Balance
DR Net purchases (plus freight-in)
CR Direct Materials Used
= Ending balance (goes to BS)</p>

175
Q

<p>What variables are used to calculated Work in Process (WIP)?</p>

A

<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>

176
Q

<p>What variables are included in Finished Goods calculations?</p>

A 
<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>
177
Q

<p>How does Freight In affect Cost Accounting calculations?</p>

A

<p>Inventory (Product) Cost

Part of DM Purchases</p>

178
Q

<p>How does Freight Out affect Cost Accounting?</p>

A

<p>Selling (Period) Cost

Not part of inventory</p>

179
Q

<p>When is Job-Order Costing used?</p>

A

<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>

180
Q

<p>What is the Direct Method for allocating service department costs?</p>

A

<p>No services allocated between service departments- even if they serve each other. Only allocate to product(s)</p>

181
Q

<p>What is the Step Method for allocating service department costs?</p>

A

<p>Services can be allocated to both other service departments and the product(s)</p>

182
Q

<p>Under process costing- how are the units shipped calculated?</p>

A

<p>Beginning Inventory
\+ Units Started
- Ending Inventory
= No. Units Shipped</p>

184
Q

<p>What is another name for Process Costing?</p>

A

<p>Equivalent Units of Production</p>

185
Q

<p>How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?</p>

A

<p>EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)</p>

186
Q

<p>How are Direct Materials calculated under the Weighted Average Method?</p>

A

<p>Beginning Inventory + Current Costs / EFU WA</p>

187
Q

<p>How are Conversion Costs calculated under Weighted Average Method?</p>

A

<p>Beginning Inventory + Current Costs / EFU WA</p>

188
Q

<p>How are Equivalent Finished Units calculated for Direct Materials?</p>

A

<p>Units Shipped
\+ EI x % Complete DM
= EFU (Weighted Average Method)

- Beginning Inventory x % Complete
= EFU (FIFO)</p>

189
Q

<p>How are Equivalent Finished Units calculated for Conversion Costs?</p>

A

<p>Units Shipped
\+ EI x % Complete CC
= EFU (Weighted Average)

- Beginning Inventory x % Complete
= EFU (FIFO)</p>

190
Q

<p>How are Direct Materials calculated under the FIFO method?</p>

A

<p>Current Costs / EFU FIFO

Note: FIFO method uses Current Period costs only and ignores Beginning Inventory</p>

191
Q

<p>How are Conversion Costs calculated under the FIFO method?</p>

A

<p>Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory</p>

192
Q

<p>How is WIP calculated?</p>

A 
<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>
193
Q

<p>How do period costs and product costs relate to net sales- gross margin and operating income?</p>

A 
<p class="large" style="text-align: center;">Net Sales 
- Product Costs
= Gross Margin
- Period Costs
= Operating Income</p>
194
Q

<p>What is the focus of Activity Based Costing (ABC)?</p>

A

<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>

195
Q

<p>How do Cost Pools and Allocations compare under ABC versus traditional costing system?</p>

A

<p>Cost Pools and Allocations increase compared to a traditional costing system</p>

196
Q

<p>What is Backflush Costing?</p>

A

<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>

198
Q

<p>What are Cost Functions?</p>

A

<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>

199
Q

<p>How does a price increase affect supply?</p>

A

<p>When the prices of an item increases supply increases- because more sellers are willing to sell.</p>

200
Q

<p>What is a supply curve shift?</p>

A

<p>When supply changes due to something other than price.</p>

201
Q

<p>What are the characteristics of a positive supply curve shift (shift right)?</p>

A

<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>

202
Q

<p>What are the characteristics of a negative supply curve shift (shift left)?</p>

A

<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>

203
Q

<p>How does price affect the demand for an item?</p>

A

<p>When the prices of an item increases- demand for it decreases.

</p>

204
Q

<p>What is a Demand Curve Shift?</p>

A

<p>When demand changes due to something other than price.</p>

205
Q

<p>What is a Positive Demand Curve Shift (Shift Right)?</p>

A

<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>

206
Q

<p>What is a Negative Demand Curve Shift (Shift Left)?</p>

A

<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>

207
Q

<p>What is the Marginal Propensity to Consume?</p>

A

<p>How much you spend when your income increases

Calculate: Change in Spending / Change in Income
</p>

208
Q

<p>What is the Marginal Propensity to Save?</p>

A

<p>How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume</p>

209
Q

<p>How is the multiplier effect calculated?</p>

A

<p>(1 / 1-MPC) x Change in Spending</p>

210
Q

<p>How does increased spending by consumers and the government affect the demand curve?</p>

A

<p>As spending by consumers or the government increases- the demand curve increases (shifts right).</p>

211
Q

<p>How does spending change due to the multiplier effect?</p>

A

<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>

212
Q

<p>How is Price Elasticity of Demand calculated?</p>

A

<p>% Change in Quantity Demand / % Change in Price</p>

213
Q

<p>Under elastic demand- how does price affect revenues?</p>

A

<p>Price increases- Revenue decreases

Price decreases- Revenue increases

</p>

214
Q

<p>What conditions would indicate Elastic Demand?</p>

A

<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>

215
Q

<p>How does revenue react to price under Inelastic Demand?</p>

A

<p>Price increases- Revenue increases

Price decreases- Revenue decreases</p>

216
Q

<p>What conditions would indicate Inelastic Demand?</p>

A

<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>

217
Q

<p>What is Unitary Demand?</p>

A

<p>Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity = 1</p>

218
Q

<p>How is Income Elasticity of Demand calculated?</p>

A

<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>

219
Q

<p>What conditions occur under periods of inflation?</p>

A

<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>

220
Q

<p>What happens under Demand-Pull inflation?</p>

A

<p>Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases</p>

221
Q

<p>What happens under Cost-Push inflation?</p>

A 
<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>

222
Q

<p>What is the Equilibrium Price?</p>

A

<p>The price where Quantity Supplied = Quantity Demanded</p>

223
Q

<p>What is Optimal Production?</p>

A

<p>When Marginal Revenue = Marginal Cost</p>

224
Q

<p>What is the result of a Price Floor?</p>

A

<p>Causes a surplus if above equilibrium price.</p>

225
Q

<p>What is GDP (Gross Domestic Product)?</p>

A

<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>

226
Q

<p>What is included under the income approach for calculating GDP?</p>

A 
<p class="large" style="text-align: center;">Sole Proprietor and Corp Income
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments
Depreciation</p>
227
Q

<p>What is included under the Expenditure Approach for calculating GDP?</p>

A

<p>Individual Consumption

Private Investment

Government Purchases

Net Exports</p>

228
Q

<p>What is Nominal GDP?</p>

A

<p>Measures goods/services in current prices.</p>

229
Q

<p>For what is a GDP Deflator used?</p>

A

<p>Used to convert GDP to Real GDP</p>

230
Q

<p>What is Real GDP?</p>

A

<p>Nominal GDP / GDP Deflator x 100</p>

231
Q

<p>What is Gross National Product (GNP)?</p>

A

<p>Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included</p>

232
Q

<p>What is the Consumer Price Index (CPI)? How is it applied?</p>

A

<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>

233
Q

<p>How is disposable income calculated?</p>

A

<p>Personal Income - Personal Taxes</p>

234
Q

<p>How is Return to Scale calculated?</p>

A

<p>% Increase in output / % Increase in input

Greater than 1 = Increasing returns to scale

Less than 1 = Decreasing returns to scale</p>

235
Q

<p>When is the economy in Recession?</p>

A

<p>When GDP growth is negative for two consecutive quarters.</p>

236
Q

<p>What is a Depression?</p>

A

<p>A prolonged- severe recession with high unemployment rates

No requisite period of time for the economy to officially be in a depression</p>

237
Q

<p>What are the stages of the Economic Cycle?</p>

A 
<p class="large" style="text-align: center;">Peak (highest)
Recession (decreasing)
Trough (lowest)
Recover (increasing)
Expansion (higher again)</p>
238
Q

<p>What are leading indicators?</p>

A

<p>Conditions that occur before a recession or before a recovery

Example: Stock Market or New Housing Starts</p>

239
Q

<p>What are lagging indicators?</p>

A

<p>Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates- Unemployment

</p>

240
Q

<p>What are coincident indicators?</p>

A

<p>Conditions that occur during a recession or during a recovery

Example: Manufacturing output</p>

241
Q

<p>Which people are included in the calculation of unemployment?</p>

A

<p>Only people looking for jobs</p>

242
Q

<p>What is Cyclical Unemployment?</p>

A

<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>

243
Q

<p>What is Frictional Unemployment?</p>

A

<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>

244
Q

<p>What is Structural Unemployment?</p>

A

<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>

245
Q

<p>How does inflation relate to unemployment?</p>

A

<p>High Unemployment = Low Inflation (Vice Versa)</p>

246
Q

<p>What is the Discount Rate?</p>

A

<p>The rate a bank pays to borrow from the Fed.</p>

247
Q

<p>What is the Prime Rate?</p>

A

<p>The rate a bank charges their best customers on short-term borrowings.</p>

248
Q

<p>What is the Real Interest Rate?</p>

A

<p>Inflation-adjusted interest rate</p>

249
Q

<p>What is the Nominal Rate?</p>

A

<p>Rate that uses current prices</p>

250
Q

<p>What is the Risk-Free Rate?</p>

A

<p>Rate for a loan with 100% certainty of payback.

Usually results in a lower rate.

US Treasuries are an example.</p>

251
Q

<p>What is included in the M1 money supply?</p>

A

<p>Currency- Coins- and Deposits</p>

252
Q

<p>What is included in the M2 money supply?</p>

A

<p>Highly liquid assets other than currency- coins or deposits</p>

253
Q

<p>What is Deficit Spending?</p>

A

<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>

254
Q

<p>How can the Fed control the money supply?</p>

A

<p>By buying and selling the government's securities.</p>

255
Q

<p>How does the Fed control economy-wide interest rates?</p>

A

<p>By adjusting the discount rate charged to banks</p>

256
Q

<p>What is a Tariff?</p>

A

<p>A tax on imported goods</p>

257
Q

<p>What is a quota?</p>

A

<p>A limit on the number of goods that can be imported</p>

258
Q

<p>How do international trade restrictions affect domestic producers?</p>

A

<p>They are good for domestic producers.

Demand curve shifts right

Fewer substitutes

They can charge higher prices</p>

259
Q

<p>How to international trade restrictions affect foreign producers?</p>

A

<p>They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices
</p>

260
Q

<p>How do international trade restrictions affect foreign consumers?</p>

A

<p>They are good for foreign consumers

Supply curve shifts right

Goods purchased at lower prices in the foreign markets</p>

261
Q

<p>How do international trade restrictions affect domestic consumers?</p>

A

<p>They are bad for domestic consumers

Supply curve shifts left

Fewer goods bought due to higher prices</p>

262
Q

<p>What is Accounting Cost?</p>

A

<p>Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs</p>

263
Q

<p>What is Accounting Profit?</p>

A

<p>Revenue - Accounting Cost</p>

264
Q

<p>What is Economic Cost?</p>

A

<p>Explicit + Implicit Cost</p>

265
Q

<p>What is Economic Profit?</p>

A

<p>Revenue - Economic Cost</p>

266
Q

<p>What is the primary focus of working capital management?</p>

A

<p>Managing inventory & receivables (current assets & liabilities)</p>

267
Q

<p>How is Net Working Capital calculated?</p>

A

<p>NWC = Current Assets - Current Liabilities</p>

268
Q

<p>What are the characteristics of effective Working Capital Management?</p>

A

<p>Shorten the cash conversion cycle

Don’t negatively impact operations</p>

269
Q

<p>What is the Inventory Conversion Period?</p>

A

<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>

270
Q

<p>What is the Receivables Collection Period?</p>

A

<p>Average time needed to collect A/R

RCP = Average Receivables / Credit Sales Per Day</p>

271
Q

<p>What is the Payables Deferral Period?</p>

A

<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>

272
Q

<p>What is the Cash Conversion Cycle?</p>

A

<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>

273
Q

<p>What traits should Cash and Short-Term Investments have?</p>

A

<p>Liquid

Safe</p>

274
Q

<p>For what are Letters of Credit used?</p>

A

<p>Used for importing goods.

Issued by importer's bank.</p>

275
Q

<p>What is the advantage of using Trade Credit?</p>

A

<p>No interest cost if paid timely.</p>

276
Q

<p>What is a Lockbox System? What are the advantages?</p>

A

<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>

277
Q

<p>What is float?</p>

A

<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>

278
Q

<p>What are Zero Balance Accounts?</p>

A

<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>

279
Q

<p>What is the difference between Treasury Bills- Notes and Bonds?</p>

A

<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>

280
Q

<p>What is commercial paper?</p>

A

<p>Similar to T-Bill- but issued by corporations instead of Government

Greater than 9 Months Maturity

Unsecured

Issued by large firms</p>

281
Q

<p>What are the advantages and disadvantages of Commercial Paper?</p>

A

<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>

282
Q

<p>What is Economic Order Quantity?</p>

A

<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>

~~~

283
Q

<p>What is Carrying Cost?</p>

A

<p>The cost of keeping inventory.</p>

284
Q

<p>What is Order Cost?</p>

A

<p>Cost of executing an order and starting product production.</p>

285
Q

<p>What is inventory reorder point?</p>

A

<p>How low inventory should get before it should be re-ordered.

IOP = Average Daily Demand x Average Lead Time</p>

286
Q

<p>What is a Just In Time (JIT) system?</p>

A

<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>

287
Q

<p>What is Factoring of receivables?</p>

A

<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>

288
Q

<p>What is a Trade Discount?</p>

A

<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>

289
Q

<p>What is the cost of forgoing a discount?</p>

A

<p>(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))</p>

290
Q

<p>What is the Prime Rate?</p>

A

<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>

291
Q

<p>What is the Nominal (Face- Coupon- Stated) Rate?</p>

A

<p>Interest rate stated on the face of a bond.</p>

292
Q

<p>How is Current Yield calculated?</p>

A

<p>CY = Interest Payment / Bond Price</p>

293
Q

<p>What is the Effective (YTM- Market) Rate?</p>

A

<p>PV of Principle + Interest = Bond Price</p>

294
Q

<p>What is a Zero Coupon Bond?</p>

A

<p>No interest payments made

Bond sold at a discount

Interest reflected when Bond matures</p>

295
Q

<p>What are the characteristics of a Junk Bond?</p>

A

<p>High interest rate

High default risk</p>

296
Q

<p>What are debenture bonds?</p>

A

<p>Bonds unsecured by collateral</p>

297
Q

<p>What are subordinated debentures?</p>

A

<p>Debenture Bonds that will be repaid if any assets are left after liquidation of a company</p>

298
Q

<p>What are Redeemable Bonds?</p>

A

<p>Provision in Bond contract allows demand of Bond payment under certain circumstances</p>

299
Q

<p>What is a Callable Bond?</p>

A

<p>Borrower can pay off debt early</p>

300
Q

<p>What is a Convertible Bond?</p>

A

<p>Lender can demand payment via company stock instead of money</p>

301
Q

<p>What is a Sinking Fund?</p>

A

<p>Borrower deposits regular sums into an account that will eventually pay off the debt</p>

302
Q

<p>What is the disadvantage of Common Stock in comparison to bonds?</p>

A

<p>Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)</p>

303
Q

<p>What is the advantage of Preferred Stock?</p>

A

<p>Hold dividend priority over common stock</p>

304
Q

<p>What is Weighted Average Cost of Capital?</p>

A

<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>

~~~

305
Q

<p>What is CAPM?</p>

A

<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>

306
Q

<p>How is Cost of Debt calculated?</p>

A

<p>(Interest Expense - Tax Benefit) / Carrying Value of Debt</p>

307
Q

<p>What is a Static Budget?</p>

A

<p>Budget targeted for a specific segment of a company.</p>

308
Q

<p>What is a Maser Budget?</p>

A

<p>Budget targeted for the company as a whole

Includes budgets for Operations and Cash Flows

Includes set of budgeted Financial Statements</p>

309
Q

<p>How do Fixed Costs affect budgeting?</p>

A

<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>

310
Q

<p>How do Variable Costs affect budgeting?</p>

A

<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>

311
Q

<p>How are Material Variances calculated?</p>

A

<p>SAM:

Standard Material Costs
- Actual Material Costs
= Material Variance</p>

312
Q

<p>How are Labor Variances calculated?</p>

A

<p>SAL

Standard Labor Costs
- Actual Labor Costs
= Labor Variance</p>

313
Q

<p>How are Overhead Variances calculated?</p>

A

<p>OAT

Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance</p>

314
Q

<p>How does Absorption Costing compare to Variable Costing?</p>

A

<p>Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A

Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs</p>

315
Q

<p>How is Contribution Margin calculated?</p>

A

<p>Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)</p>

316
Q

<p>How is Break-even Point (per unit) calculated?</p>

A

<p>Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit

Assumption: Total Costs & Total Revenues are LINEAR</p>

317
Q

<p>What is the focus in a Cost Center?</p>

A

<p>Management is concerned only with costs</p>

318
Q

<p>What is the focus in a Profit Center?</p>

A

<p>Management is concerned with both costs and profits</p>

319
Q

<p>What is the focus in an Investment Center?</p>

A

<p>Management is concerned with costs- profits- and assets</p>

320
Q

<p>What is the Delphi technique?</p>

A

<p>Forecasting technique where Data is collected and analyzed

Requires judgement/consensus</p>

321
Q

<p>What is Regression Analysis?</p>

A

<p>A forecasting technique where Sales is the dependent variable.

Simple Regression - One independent variable

Multiple Regression - Multiple independent variables</p>

322
Q

<p>What are Econometric Models?</p>

A

<p>Forecast sales using Economic Data</p>

323
Q

<p>What are Naive Forecasting Models?</p>

A

<p>Very Simplistic

“Eyeball” past trends and make an estimate</p>

324
Q

<p>How does a Moving Average compare to Exponential Smoothing?</p>

A

<p>Both project estimates using average trends from recent periods

Difference: Exponential Smoothing weighs recent data more heavily</p>

325
Q

<p>What are the characteristics of Short-term Cost Analysis?</p>

A

<p>Uses Relevant Costs Only

Ignore Sunk Costs

Opportunity Cost is a Must</p>

326
Q

<p>What is a Static Budget?</p>

A

<p>Budget targeted for a specific segment of a company.</p>

327
Q

<p>What is a Maser Budget?</p>

A

<p>Budget targeted for the company as a whole

Includes budgets for Operations and Cash Flows

Includes set of budgeted Financial Statements</p>

328
Q

<p>How do Fixed Costs affect budgeting?</p>

A

<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>

329
Q

<p>How do Variable Costs affect budgeting?</p>

A

<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>

330
Q

<p>How are Material Variances calculated?</p>

A

<p>SAM:

Standard Material Costs
- Actual Material Costs
= Material Variance</p>

331
Q

<p>How are Labor Variances calculated?</p>

A

<p>SAL

Standard Labor Costs
- Actual Labor Costs
= Labor Variance</p>

332
Q

<p>How are Overhead Variances calculated?</p>

A

<p>OAT

Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance</p>

333
Q

<p>How does Absorption Costing compare to Variable Costing?</p>

A

<p>Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A

Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs</p>

334
Q

<p>How is Contribution Margin calculated?</p>

A

<p>Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)</p>

335
Q

<p>How is Break-even Point (per unit) calculated?</p>

A

<p>Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit

Assumption: Total Costs & Total Revenues are LINEAR</p>

336
Q

<p>What is the focus in a Cost Center?</p>

A

<p>Management is concerned only with costs</p>

337
Q

<p>What is the focus in a Profit Center?</p>

A

<p>Management is concerned with both costs and profits</p>

338
Q

<p>What is the focus in an Investment Center?</p>

A

<p>Management is concerned with costs- profits- and assets</p>

339
Q

<p>What is the Delphi technique?</p>

A

<p>Forecasting technique where Data is collected and analyzed

Requires judgement/consensus</p>

340
Q

<p>What is Regression Analysis?</p>

A

<p>A forecasting technique where Sales is the dependent variable.

Simple Regression - One independent variable

Multiple Regression - Multiple independent variables</p>

341
Q

<p>What are Econometric Models?</p>

A

<p>Forecast sales using Economic Data</p>

342
Q

<p>What are Naive Forecasting Models?</p>

A

<p>Very Simplistic

“Eyeball” past trends and make an estimate</p>

343
Q

<p>How does a Moving Average compare to Exponential Smoothing?</p>

A

<p>Both project estimates using average trends from recent periods

Difference: Exponential Smoothing weighs recent data more heavily</p>

344
Q

<p>What are the characteristics of Short-term Cost Analysis?</p>

A

<p>Uses Relevant Costs Only

Ignore Sunk Costs

Opportunity Cost is a Must</p>

345
Q

<p>Define Market Risk</p>

A

<p>The risk that a sluggish economy will affect the value of a debt instrument</p>

346
Q

<p>Define Sector Risk</p>

A

<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>

347
Q

<p>Define Credit/Default Risk</p>

A

<p>The risk that a debtor will be unable to make loan payments or pay back the principal</p>

348
Q

<p>Define Interest Rate Risk</p>

A

<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>

349
Q

<p>What does Standard Deviation measure?</p>

A

<p>It measures the volatility of an investment.</p>

350
Q

<p>What is Systematic Risk?</p>

A

<p>Risk that impacts the entire market and can’t be avoided or reduced through diversification

Example: Wars</p>

351
Q

<p>What is Unsystematic Risk?</p>

A

<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>

352
Q

<p>What does Beta measure?</p>

A

<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>

353
Q

<p>What is Variance?</p>

A

<p>It compares volatility of an investment to the market average.

Factors include both Systematic and Unsystematic Risk.</p>

354
Q

<p>What is a Derivative?</p>

A

<p>An asset whose value is DERIVED from the value of another asset.

Derivatives are measured at Fair Value.</p>

355
Q

<p>How is an Option used?</p>

A

<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>

356
Q

<p>What is a Future?</p>

A

<p>A Forward Contract with a future value.

They are sold and traded on the futures market.</p>

357
Q

<p>What is an Interest Rate Swap?</p>

A

<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>

358
Q

<p>What is Legal Risk?</p>

A

<p>Risk that a law or regulation will void the derivative</p>

359
Q

<p>What is a Fair Value Hedge?</p>

A

<p>Hedge that protects against the value of an asset or liability changing.

Changes in value are reported in earnings.</p>

360
Q

<p>What is a Cash Flow Hedge?</p>

A

<p>A hedge that protects against a set of future cash flows changing.

Changes in value are reported in OCI.</p>

361
Q

<p>What is a Foreign Currency Hedge?</p>

A

<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>

BEC (2 decks)

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