Test bank 09/18/2015 Flashcards
1
Q
Ending Inventory
A
Beg Inv + Production Cost - COGS
2
Q
Dodd-Frank Act of 2010 requires
A
All members of BOD compensation committee must be independent
3
Q
Fiscal policy
A
Govt uses taxes and spending to stimulate / depress economy
4
Q
Accounting Rate of Return
A
Expected increase net income / Investment
5
Q
Residual Income
A
operating income – (investment * Rate of Return)
6
Q
Asset Turnover Ratio
A
Sales / Average invested capital
7
Q
Life-cycle budget
A
A budget tool or process where estimates of revenues are prepared for each product beginning with the product’s R&D phase and traced through the customer support phase
8
Q
Project has positive net present value
A
The NPV is less than the project’s internal rate of return
9
Q
Ineffective hedging of short-term interest rates
A
Entering into a forward contract to purchase Treasury bills at a future date
10
Q
Return on Investment
A
operating profit (income) / investment
11
Q
Prime Costs
A
Direct Materials + Direct Labor
12
Q
Computer operation unit
A
Assists users with systems problems and obtaining technical support / vendor assistance
13
Q
Internal Control (objectives of COSO)
A
Objectives of financial reports
Compliance of laws and regulations
Effectiveness & efficiency of operations
14
Q
Dividend Growth Model [Estimate cost of equity capital]
A
(Dividend / Stock Price) + Expected Growth (%)
15
Q
Most important stakeholder in a corporation
A
Shareholder
16
Q
Average Gross - Receivable Balance
A
Average daily sales * Average collection period
17
Q
Reciprocal Agreement [DRP]
A
A disaster recovery strategy where 2 organizations agree to help each other if disaster strikes
18
Q
Average collection period
A
Average account receivable / Average Sales per day
19
Q
Law of diminishing marginal utility
A
Marginal utility will decline as a consumer acquires additional units of a specific product
20
Q
Responses to Risk
A
Avoid - Reduce - Share - Accept
21
Q
Depreciation is used for NPV because…
A
Depreciation increases cash flows by reducing income taxes
22
Q
How does inflation distort reported income?
A
Depreciation is not reflective of current fixed-asset replacement cost
23
Q
Non-value added costs
A
Moving, handling, and storage of products
24
Q
Factors that suppliers are most able to influence or control buyers
A
The supplier does not face threat of substitute products
25
Interest rate swaps are valued?
By Zero-coupon Method
26
SOX requires financial expert on audit committee
1. Have an understanding of GAAP and financial statements
2. Experience in preparing or auditing financial statements of similar companies
3. Experience with internal audit controls
27
CEO and CFO must certify that the financial statements...
1. Reviewed
2. Does not contain any materially wrong statements
3. Responsible for establishing and maintaining her company's internal controls
28
Internal audit can improve [org objectives]
1. Risk Management
2. Control
3. Governance
29
Attribute Standards
Used to describe the characteristics associated with organizations and individuals who provide internal audit services
30
Performance Standards
Used to measure the quality of internal auditor's conduct of internal audit functions
31
Difference between NPV & IRR
NPV assumes the cash inflows from the project will be reinvested at the cost of capital; IRR assumes that cash flows from each project is reinvested at the IRR for that particular project
32
Serial Bonds
Bonds issued with scheduled maturities at specific various dates
33
Focus of managerial accounting
The needs of the organization's internal parties by providing information for decision making by management
34
Optimal capital structure
Lowest total WACC
| Companies strive to minimize WACC
35
Trojan Horse
a computer program that appears to be legitimate but performs an illicit activity when it is run
36
Capital Asset Pricing Model (CAPM)
=Risk free rate + (market rate - Risk free rate)*(Beta)
Investors value common shares more highly if they have a lower required return because then they apply a lower discount rate to the expected future dividend stream of the company.
37
Profitability Index
A ranking system that ranks capital budgeting projects on a scale of profitability
(NPV / Initial investment)
38
vertical financial statement analysis
1) involves presenting everything within a financial statement as a percentage of a base.
2) common-size income statement all items would be presented as a percentage of net sales.
39
high degree of financial leverage and significant losses
When the firm performs poorly, common stockholders are better off with less financial leverage
40
Pure Competition
Stresses Supply Chain Management
41
Echo Check (control)
consists of transmitting data back to the source unit for comparison with the original data that was transmitted
42
Discontinued LOB
1) Operating income increase - (contribution margin - Avoidable costs)
2) Unavoidable costs are ignored
43
Economic Value Added (EVA)
Net operating income
- (Invested capital * WACC)
= EVA
44
maturity models
model for evaluating the sophistication of IT processes rated from a maturity level of nonexistent (0) to optimized (5).
45
Coefficient of correlation
In portfolio analysis it is a measure that is used to express the extent of the relationship among a set of investments
46
Controllable costs
Costs that the manager can influence in the current time period.
47
budgeted gross margin
This answer is correct because cost of sales is equal to $350,000 ($300,000 payments to supplier − $100,000 beginning accounts payable + $150,000 ending accounts payable + $0 change in inventory), and 20% of $350,000 (cost of sales) is equal to $70,000.
48
Job order costing
The requirement is to calculate the amount of direct materials charged to Job No. 101. To calculate the direct materials, you must first calculate the total costs charged to Job No. 101. Since it is the only job in process at the end of the month, its cost is equal to the amount of cost left in work in process (WIP) at year-end, or $9,000 ($12,000 beginning WIP + $40,000 direct materials + $30,000 direct labor + $27,000 overhead applied – $100,000 transferred out). If the amount of overhead applied to the job is $2,250 and overhead is applied at a rate of 90% of direct labor, direct labor charged to the job should be $2,500 ($2,250 ÷ 90%). Therefore, the direct materials charged to Job No. 101 must be $4,250 ($9,000 – $2,250 – $2,500).
49
detective control
Comparison of data entry totals to batch control totals.
| Review of the audit (also called transaction) log
50
Quality Assurance Improvement Program
Such a program must include both internal and external assessments.
51
Chief Audit Executive.
IIA's International Standards identify the person responsible for managing an organization's internal audit activity
52
Risk assessment
process of identifying, analyzing, and managing the risks involved in achieving the organization's objectives
53
Information and communication.t
this component of internal control enables an organization's people to identify, process, and exchange the information needed to manage and control operations.
54
Monitoring
internal control concerns testing the system and its data
55
Control activities.
internal control concerns the policies and procedures that ensure that actions are taken to address the risks related to the achievement of management's objectives.
56
Control environment.
fundamental component of internal control is the core or foundation of any system of internal control.
57
Managing change in the system of internal control.
Recognizing potential impediments to communication between system user and system designer can be useful
58
Independently verify the transactions
control activities should be taken to reduce the risk of incorrect processing in a newly installed computerized accounting system
59
Internal audit staff who report to the board of directors.
large public corporation, evaluating internal control procedures should be the responsibility of
60
Change identification
the use of ongoing and separate evaluations to identify and address changes in internal control effectiveness can best be accomplished in which of the following stages of the monitoring-for-change continuum?
61
Managing the Internal Audit Activity
These standards primarily address the chief audit executive's responsibilities for overseeing the internal audit activity and for adding value to the organization
62
demand curve for a product reflects
The impact that price has on the amount of a product purchased.
63
monopolistic firm produces at the quantity that maximizes revenue
use resources inefficiently and will have a higher price than a firm in perfect competition
64
Monopoly: relationship between the marginal revenue curve and the demand curve
marginal revenue curve is below the demand curve and the curves diverge as the quantity increases. The basic reason for the relationship is that, facing a downward-sloping demand curve, the firm must continuously lower its selling price in order to sell more units
65
natural monopoly?
A firm has increasing returns to scale
66
Collusive pricing
occurs when the few firms in an oligopolistic market (or industry) conspire to set the price at which a good or service will be provided
67
Leakages
result when income is used for purposes other than domestic consumption and payments for imports
68
gross domestic product (GDP)
The market value of all final goods and services produced for exchange in the domestic economy during a year.
Expenditure approach:
Consumption by individuals/households
Investment by businesses
Government purchases
Net exports (net purchases by foreign buyers)
69
indicators of economic recession
Potential national income exceeds actual national income.
70
Productive-possibility curve
measures the maximum amount of various goods and services an economy can produce at a given time with available technology and efficient use of all available resources.
71
aggregate demand
Total spending of individuals, businesses, governmental entities, and net foreign spending on goods and services at different prices at the macroeconomic (economy) level.
72
Average propensity to consume
Percent of disposable income spent on consumption goods;
73
marginal propensity to consume
Change in consumption as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be spent).
74
Govt Multiplier Effect
Initial Change in Spending x (1/(1 - MPC))
75
Classical Aggregate Supply Curve
This curve is completely vertical, reflecting no relationship between aggregate supply and price level.
76
Keynesian Aggregate Supply Curve
This curve is horizontal up to the (assumed) level of output at full employment, then slopes upward, reflecting that output is not associated with price level until full employment is reached, at which point increased output is associated with higher price levels.
77
Conventional Aggregate Supply Curve
This curve has a continuously positive slope with a steeper slope beginning at the (assumed) level of output at full employment, reflecting that at full employment increased output is associated with proportionately higher increases in price levels.
78
Factors that may change the position of the supply curve include:
Resource availability
Resource cost
Labor Cost (Minimum Wage Rate)
Technological advances
79
Leading Indicators
| of recession
1. Consumer expectations
2. Initial claims for unemployment
3. Weekly manufacturing hours
4. Stock prices
5. Building permits
6. New orders for consumer goods
7. Real money supply
80
Lagging indicators
| of recession
1. Changes in labor cost per unit of output
2. Ratio of inventories to sales
3. Duration of unemployment
4. Commercial loans outstanding
5. Ratio of consumer installment credit to personal income
81
segments of the economy will be least affected by the business cycle?
Healthcare industry.
82
The cyclical behavior of the U.S. economy (i.e., the business cycle) is reflected in the cumulative fluctuations in aggregate output as measured by the
real gross domestic product (GDP).
83
Fundamental causes of inflation
Demand-induced (demand-pull) inflation -- Results when levels of aggregate spending for goods and services exceeds the productive capacity of the economy at full employment.
Supply-induced (cost-push or supply-push) inflation -- Results from increases in the cost of inputs to the production process—raw materials, labor, taxes, etc.—which are passed on to the final buyer in the form of higher prices
Both result in higher Equilibrium price
84
Major consequences of inflation
Lower current wealth and lower future real income
Higher interest rates
Uncertainty of economic measures
Depreciation is NOT reflective of current fixed-asset replacement costs.
85
percentage changes for account balances
(Current balance - prior balance) / prior balance
86
most effective way to dampen the economy
Reduce government spending, increase taxes, reduce money supply, and increase interest rates.
87
Opportunity cost
Is the money value of benefits lost from the next best opportunity as the result of choosing another opportunity. If you choose to do one thing, the opportunity cost is the value of the benefit lost by not doing another thing that would have provided the next best benefit.
88
Issues at National Level
Sociopolitical Issues
Exchange Rate Issue (Imports/Exports)
Dumping Issue
Balance of Payments Issues
89
Dumping Issue
international price discrimination by which the price charged for a product exported and sold in (imported into) a foreign country is less than the price of the identical product in the market of the exporting country.
90
Balance of Payments Issues
Current account
Capital account
Financial account
91
Factors Affecting Costs of International Trade
Transaction costs
Transportation costs
Tariff or other restrictive costs
Time cost
92
Sharing of information.
critical to effective supply chain management?
93
Stock dividends.
involve issuing stock in the form of the firm’s own shares They do not reduce shareholder equity in corporation
94
Identification of critical applications.
following procedures should be included in the disaster recovery plan for an Information Technology department
95
Coding for different operating systems
the machine language must be designed for the specific computer and, therefore, is determined by the engineers who design the computer.
96
Relative sales value at split-off.
he sales price at point of sale reduced by cost to complete after split-off is assumed to be equal to the
97
Transaction risk
risk that a change in interest rates will have unfavorable impact on transactions and balances denominated in foreign currency
98
Translation risk
Risk that change in exchange rate will have unfavorable impact on converting financial statements from one currency to another
99
Economic Risk
Risk that changes in exchange rate will have unfavorable impact on future activity
100
Transfer price
the amount at which an entity transfers goods or services between affiliated units or subsidiaries
Objective: recognize more profit in low tax jurisdictions
ex. highest revenue should be made in lowest tax jurisdictions (Prices should be higher when sending high tax jurisdictions)
101
increased capital investment results in higher levels of output of goods, What will be the likely effect on aggregate equilibrium quantity
Quantity increases
Price decreases
Shift to the right
102
Rise in a country's exports
The aggregate demand curve would shift outward because GDP = exports - imports
103
Freely fluctuating exchange rates
automatically correct a lack of equilibrium in the balance of payments.
104
statement expressed in the form of "1 euro = $1.20" expresses
direct exchange rate
105
statements regarding international transfer pricing
I. Firms with operations in multiple nations can manipulate earnings through transfer pricing.
II. The transfer price preferred by a foreign subsidiary manager may be different than the transfer price that maximizes consolidated profits.
106
forms of international business that gives a firm greatest control over an international business activity
Foreign subsidiary.
107
Regarding importing and exporting, these statements are correct
I. Goods with a low value-to-weight ratio are less likely to be suitable for importing than goods with a high value-to-weight ratio.
II. In the exporting of goods, one may encounter import restrictions imposed by the country of destination.
108
five forces analysis
to assess the competitive nature of the industry
analysis identifies factors that determine the operating attractiveness and likely long-run profitability of an industry by looking at five specific areas that impact industry competitiveness.
109
SWOT analysis is directly concerned
relationship between an entity (its strengths and weaknesses) and its environment (the opportunities and threats).
110
CAPITALIZATION OF EARNINGS
A method of determining the value of an organization by calculating the net present value (NPV) of expected future profits or cash flows. The capitalization of earnings estimate is done by taking the entity's future earnings and dividing them by the capitalization rate (cap rate).
Value = Earnings of future years / (discount rate - growth rate)
111
Earnings Multiple Approach
price-to-earnings ratio (P/E)
The earnings multiple is the stock price divided by earnings per share (EPS), and the units are expressed in years- how many years of those earnings it would take to equal that stock price.
112
price-to-earnings ratio (P/E)
Market Value per Share / Earnings per Share
113
Cost of preferred stock
current dividend / current stock price
114
Cost of common stock
(Dividend Year 1 / market price) + Growth Rate
115
Cost of Retained Earnings (RE)
cost of common stock:
| (Dividend Year 1 / market price) + Growth Rate
116
Financing goals
Firms should seek to secure mix of debt and equity that minimizes composite cost of financing
117
Hedging Principle (principle of self-liquidating debt)
Fund long term projects with long term financing and short term projects with short term financing
118
Higher variability of operating earnings
greater risk of debt financing
119
Higher tax rate
Greater tax shield from debt
120
A/R Turnover
[Sales / Account Receivable (or average)]
121
financial management is concerned with the efficiency and effectiveness
Acquisition of Financial Resources & Use of Financial Resources as well as long term + short term matters
122
company-wide cost of capital to evaluate new capital investments
High-risk divisions will over-invest in new projects and low-risk divisions will under-invest in new projects
123
Product cost
cost assigned to goods that were either purchased or manufactured for resale or "inventoriable cost."
124
Compound interest.
interest earned on both an initial principal and the unpaid accrued interest that accumulated on that principal from prior periods
125
rate of interest on a one-year U.S. Treasury bill
risk-free rate of interest + Inflation premium
126
graph that plots beta
Asset return and benchmark return.
127
U.S. Treasury Bonds
risk-free rate of return
128
Trend
Data patterns that reflect an upward movement over a long period of time
129
difference between the simple moving average and the weighted moving average
The simple moving average uses unadjusted raw prior period values, whereas the weighted moving average uses prior data adjusted by assigning different weights (or emphasis) to some or all prior values.
130
basic approach used to capitalize earnings
Annual earnings/Required rate of return.
131
Risk-free rate.
identifies the rate of return required by investors to compensate them for deferring current consumption when making an investment
132
Payback period with depreciation
Since the payback period is given, that period multiplied by the annual net cash inflow will result the cost of the new machine. The annual revenue is $35,000 and the annual cash expenses are $3,000, which is determined as the total operating expenses less the amount of depreciation expense included (since it is a non-cash expense). Thus, the annual net cash flow is $35,000 - $3,000 = $32,000 x 5.2 = $166,400, the correct answer.
133
Accounting rate of return approach.
methods of evaluating potential capital projects would take into account depreciation expense that was non-deductible for tax purposes
134
Average Accounting rate of return
The (average) accounting rate of return is determined by dividing the average annual after-tax net income by the average cost of the investment. The after-tax income would be $7,200 x .70 = $5,040. The average cost of the investment would be beginning book value ($66,000) + ending book value of ($16,000), or $82,000/2 = $41,000. Therefore, the accounting rate of return is: $5,040/$41,000 = 12.29%.
135
Net Lease and Net-Net lease
Under a net lease, the lessee assumes the executory costs associated with the asset during the lease, including such elements as maintenance, taxes and insurance. In a net-net lease, the lessee assumes responsibility for the executory costs during the life of the lease, as well as for a residual value at the end of the lease.
136
Cost of issuing preferred stocks
The current cost of capital for newly issued preferred stock is computed as the net proceeds per share divided into the annual cost (dividends) of the newly issued shares. In this question, the net proceeds per share is given as $40 sales price less $5 per share issue cost, or $35 per share net proceeds. The annual cost of the newly issued shares is the par value, $20, multiplied by the preferred dividend rate, 9%, or $20 x .09 = $1.80 annual dividend per share. Therefore, the cost of capital for the newly issued preferred stock is $1.80/$35.00 = 5.1%.
137
is the dollar amount of net benefit or cost that Moe would obtain if the proposed 2% discount plan is implemented?
The benefits obtained would be the reduction in working capital required for carrying average accounts receivable of $30,000 multiplied by the opportunity cost of .15 = $4,500. The cost of the plan would be the reduced cash collected on accounts receivable of .02 times the 40% expected to take advantage of the discount (.02 x .40 = .008) times the credit sales, or .008 x $1,000,000 = $8,000. So, the net results would be an increase in cost of $4,500 - $8,000 = - $3,500. Although not clearly stated in the problem "facts," the decrease is intended to be average accounts receivable.
