10-2-15 Flashcards
(148 cards)
1
Q
The Board of Directors powers are:
A
- In charge of appointing an independent audit committee.
- Responsible for overseeing the daily operations of the company.
- Hiring/firing of the chief executive officer (CEO).
- Determine the mission of company.
- Decide the declaration/payment of dividends.
2
Q
The shareholders are the primary stakeholder of any corporation and they have certain rights like the following:
A
- Right to receive declared dividends.
- Right to inspect books and records.
- Right to keep their ownership level in the company the same if new shares are issued (pre-emptive right).
- Right to sue on company’s behalf if a violation of fiduciary duty occurs (officer not exercising care and due diligence).
- Right to possible cumulative voting rights (stock owner can vote once for each board seat for each share owned).
3
Q
Business judgment rule
A
Where a director can not be held liable as long as they exercised care and due diligence.
4
Q
Duty of loyalty
A
Where management of company puts the interest of the company ahead of their own.
5
Q
Articles of Incorporation of a company usually include the following:
A
- Proposed name and address
- Purpose
- Powers
- Name of registered agent
- Name and address of each incorporator
- Number of authorized shares
6
Q
Bylaws of a company usually state
A
When and how officers will be elected; what duties these officers will perform; how many mandatory meetings will take place; and what will be the agenda at these meetings.
7
Q
The Audit Committee must have at least one financial or accounting expert within its members and the committee does the following:
A
- Oversees the appointment
- Determines amount of compensation
- Oversee the work performed by the external auditor
- The external auditor must report directly to them and not an officer of the company.
- Audit committee members must all be independent
- Have no direct financial or direct family connections with employees of the company.
8
Q
The audit committee financial expert must have an understanding of:
A
- Functions of the audit committee.
- Internal control and procedures of financial reporting for organizations.
- Generally accepted accounting principles (GAAP).
If the audit committee does not have a financial expert then it must give an explanation as to why not.
9
Q
Dodd Frank Act of 2010 –
A
- Requires all members of the compensation committee of public companies must be independent.
- Requires public corporations to disclose why or why not the chairman of the board is also the chief executive officer.
- Requires a nonbinding vote by shareholders on extreme pay incentives to top executives at least every three years.
- Rewards may be paid to whistle blowers.
10
Q
New York Stock Exchange (NYSE) and NASDAQ requirements for corporations
A
- Majority of directors must be independent.
- Provide how each director independence level was determined to its stockholders.
- Must have an independent audit committee.
- Must have a code of conduct for all employees made public.
- Have regularly scheduled executive sessions.
11
Q
Internal control’s three objectives or definition–
A
Organization’s top management supervision and implementation of a plan that should provide reasonable assurance to the (1) reliability of the company’s financial statements; (2) compliance with all laws; and (3) effectiveness and efficiency of the company’s operations. To have an effective internal control process it is essential to implement and follow each of the above components.
12
Q
Limitations of Internal Control
A
- Human judgment can be faulty.
- Breakdowns can occur because of human failures such as simple errors or mistakes.
- Circumvention by collusion.
- Management override of internal control.
- Cost constraints (the cost-benefit analysis).
- There are no absolute deterrents to fraud.
13
Q
Internal control systems fail because controls
A
- Not designed/implemented properly.
2. Properly designed/ implemented but ineffective because of changes within the organization’s environment.
14
Q
Evaluators
A
Individuals who are competent and objective that monitor controls within an organization.
15
Q
Monitoring for change continuum within an organization
A
- Control Baseline – serves as the starting point.
- Change identification – identification of a change needed from monitoring.
- Change Management – Design and implementation of the changes needed.
- Control Revalidation/update – continually updating and revalidating controls.
16
Q
Control environment factors/components for a general organization
A
- Commitment to competence.
- Top management and their philosophy/operating style.
- Delegation of authority/responsibility.
- H/R policies and procedures.
17
Q
Five components within internal control structure and they are:
A
- Control environment – the providing of appropriate surroundings to entice proper structure and policies that will lead to good internal control.
- Control activities – makes sure all policies and procedures of management are undertaken appropriately and are done according to the organizations guidelines.
- Information and Communication – makes sure all information and communication finds it way to the appropriate levels of the organizations employees in a timely manner.
- Monitoring the implemented Controls – continually checking to make sure controls are working properly.
- Risk Assessment – the process management uses to identify; analyze; and respond to internal or external risks
18
Q
Enterprise risk management (ERM) Committee of sponsoring organization (COSO) and its eight topics
A
Uses procedures to identify; access; control; and manages organizational governance by providing guidance. It also helps to align the stakeholders of the company risk appetite with that of management.
Eight topics within Enterprise Risk Management and they are:
1. Internal control environment–same as stated in internal control structure above.
2. Objective setting–mission statement stating the goals of the organization in terms of its internal control.
3. Event Identification–controls and potential risks of breaking controls can be identified.
4. Risk assessment–organizational employer can identify risks to internal control. Examples are inherent and residual.
5. Risk Responses–organizational employees know what to do when risks to internal control are present.
6. Control activities–same as stated in internal control structure above.
7. Flow of Information and Communication–same as stated in internal control structure above.
8. Monitoring– same as stated in internal control structure above.
19
Q
Risk appetite
A
The amount of risk that is acceptable and the company can still achieve its goals.
20
Q
Risk tolerance
A
The acceptable amount of change in a risk or risks that the company is willing to allow.
21
Q
Risk averse
A
Where an entity or person will choose between two investments the investment with the less risk.
22
Q
Risk response examples are
A
avoidance; reduction; sharing; acceptance
23
Q
Avoidance
A
The reduction of risk by avoiding the situation altogether or exiting the situation.
24
Q
Reduction
A
The reduction of risk by implementing safeguards to minimize the likelihood/effects of an adverse reaction.
25
Sharing
Where the reduction of risk by transferring or spreading out the risks.
26
Acceptance
Where the reduction of risk is not possible and the company accepts it.
27
The following are advantages of using the ERM framework:
1. Improves risk response decisions
2. Reduces the operational surprises and losses
3. Organization can seize opportunities more easily.
4. Deploy capital more easily.
28
Some limitations of the ERM framework are
The potential for management override; collusion among employees; and there always being an uncertain future for businesses.
29
Monitoring is the most important aspect of the COSO ERM Model and has three steps to ensure proper monitoring of internal control is performed and they are:
1. Structuring organization so employees are assigned job duties according to their capability; objectivity; and authority.
2. Design and Implement monitoring controls to get the most output from the controls with the least input.
3. Evaluate and Report monitoring controls to proper authorities so that needed actions can take place.
30
Demand Curve
As the price of a product increases; the quantity demanded by consumer’s decreases and vice versa. If some other variable besides price affects the quantity demanded then it will shift the entire demand curve(causes a change in demand; not quantity demanded) to either the right (if it is positive and increases demand) or to the left (if it is negative and decreases demand).
31
Factors or variables that may shift the demand curve are
1. Price of substitute goods
2. Price of complement goods
3. Consumer income and wealth
4. Consumer tastes change
5. The size of the market
32
Normal goods
Where goods are usually consumed during the course of normal business.
33
Substitute goods
Where one good can take the place of another without a loss of quality.
34
Inferior goods
Where one good can take the place of another but there would be a loss of quality.
35
Complement goods
Where one good is needed or usually consumed in conjunction with another good.
36
Marginal utility (or sometimes called Marginal Return)
The value or satisfaction to a consumer of the next dollar they would spend on a certain product.
37
Supply Curve
As the price of a certain product increases; the quantity supplied increases. If some other variable besides price affects the quantity supplied then it will shift the entire supply curve either to the right (if it is positive and increases supply) or to the left (if it is negative and decreases supply).Factors with a positive effect on supply curve: number of producers; government subsidies; price expectations. Factors with a negative effect on supply curve: changes in production costs and prices of other goods.
38
Price ceilings
Setting price below equilibrium (results in a shortage or quantity demanded exceeding quantity supplied or a shortage). Gives consumers a lower price than what they normally would receive from producers.
39
Price floors
Setting price above equilibrium (results in a surplus or quantity supplied exceeding quantity demanded). Gives producers a higher price than what they normally would receive for their products.
40
Perfect (Pure) Competition
Composed of a large number of sellers; the products of each seller are very similar or standardized; the products price must stay within the industry average; and there are very few barriers to entry/exit.
41
Perfect Monopoly
Usually only has one producer (seller); the product does not have any close substitutes and there are very few restrictions on entering the market. The Demand curve for a perfect monopoly has a negative slope and the only way to increase profits from where they are currently is to advertise more or decrease production costs. Usually not found in United States but can exist because of:
1. Increasing returns to scale
2. Control over the materials supply
3. Patents
4. Government franchises (e.g. Russia or China).
42
Monopolistic Competition
Usually includes lots of producers (sellers); products are differentiated but can be interchanged (substituted) and easy for a firm to enter or leave the market.
43
Oligopoly
Usually has only a few producers (sellers); products can be similar or non-similar and the market has high restrictions for entry and exit. Usually members of this economy try to avoid changing prices too much to avoid potential price wars between each other.
44
Gross domestic product (GDP)
The price of all goods and services produced by a domestic economy during the year for sale only in that country; not in another.
45
Gross national product (GNP)
Includes all goods and services; whether for sale or produced within its boundaries or in another country.
46
Leading indicator
Starts moving up months before an actual recovery begin. Examples are unemployment rate and housing starts.
47
Lagging indicator
Starts moving up months after a recovery has begun; and starts declining months after a recession has begun. Example is a consumer price index.
48
Frictional unemployment
Unemployed who are changing jobs or just entering the work force.
49
Structural unemployment
Unemployed whose job skills do not match the wants of employers.
50
Cyclical unemployment
Caused by changes in the business cycle or economy
51
Absolute advantage
When a country can produce a good or service at a lower cost than another country.
52
Comparative advantage
When the opportunity costs of producing a certain good or service relative to the opportunity cost of producing other goods is lower in one country than it is in another.
53
Monetary policy
Where the Federal Reserve central bank of the United States borrows money given to them to hold by depositors and loaned out to individuals and others for spending purposes.
The Federal Reserve can influence the interest rates or monetary policy of the country by
1. Increasing the reserve requirements of banks (decreases the money supply and increases the interest rates).
2. Decreasing the reserve requirements of banks (increases the money supply and decreases the interest rates).
3. Purchase more government securities (increases the money supply and decreases the interest rates).
4. Sell more government securities (decreases the money supply and increases the interest rates).
54
Fiscal policy
Where the federal government takes actions such as taxes levied; subsidies paid out; and other government spending programs to promote a stable economy.
The federal government can influence the economy and how strong it is by
1. Increasing taxes (decreases the money supply to the general public and generally contracts the economy).
2. Decreasing taxes (increases the money supply to the general public and generally expands the economy).
3. Increase spending (increases the money supply to the general public and generally expands the economy).
4. Decrease spending (decreases the money supply to the general public and generally contracts the economy).
55
Factors that affect foreign exchange rates:
Inflation – a nation’s currency with a higher inflation rate will decrease in value relative to a country with lower inflation.
Interest rate – a nation’s currency with higher interest rates will increase in value relative to a country with low interest.
Balance of payments – currency in a nation that buys more goods than it sells (net importer) will decrease in value because of less demand for its currency. Currency in a nation that sells more goods than it buys (net exporter) will increase in value because of more demand for its currency.
Government intervention – currency in nation buying its own currency will increase in value and currency in nation that is selling its own currency will decrease in value.
56
When $1.25 equals 1 Euro instead of it taking $1.30 to equal 1 Euro it means a stronger dollar and you are able to buy more with it.
When $1.50 equals1 Euro instead of it taking $1.45 to equal 1 Euro it means a weaker dollar and you will be able to buy less with it.
57
Sunk costs
Capital that has been spent and cannot be recovered.
58
Opportunity costs
Capital that is lost because of the choosing of one alternative over another.
59
Net present value advantages and disadvantages
Advantages include answer is in dollars and adjusted for the time value of money as well as it considers the total profits for the project. Disadvantages of net present value are that it can be cumbersome to solve for and it does not evaluate management’s decisions when undertaking a project.
60
Internal rate of return
Includes the time value of money which makes it more advantageous to use than the regular payback method. Some drawbacks are that some projects will have very uneven cash flows making it very hard to calculate the IRR and there could be instances where it is also hard to find a real discount rate.
61
Advantages of leasing -
1. Tax advantages.
2. Can require less initial investment than a loan (also less capital restrictions due to loan covenants).
3. Some leases are not capitalized (no debt recognized on balance sheet).
62
Un-systemic risk
Risks that can be eliminated from an investment.
63
Systemic risk
Risks that cannot be eliminated from an investment no matter what.
64
Lockbox system
Where payments are sent directly to a bank and stored in a locked box. Increases internal control over cash accounts and is cost effective in terms of interest savings due to more timely deposits of cash.
65
Concentration banking
Where payments are sent to local branch offices of bank instead of the main office.
66
Treasury Bills
Treasury Notes
Treasury Bonds
Commercial Paper
Treasury Bills – short term obligations that trade at a discount and have maturities less than one year.
Treasury Notes –obligations with maturities of 1 to 10 years with semiannual interest.
Treasury Bonds – obligations with maturities greater than 10 years with semiannual interest.
Commercial Paper – obligations from large and credit worthy corporations with maturities usually up to only 9 months.
67
Line of credit
| Letter of credit
Line of credit – bank states the maximum amount they will lend to a customer.
Letter of credit – bank states they will lend the agreed upon amount when the deal is finalized.
68
Just in Time inventory (JIT)
Where inventory is either produced or ordered just before the customer needs and purchases it. Advantages of JIT inventory systems are
1. Lowers investment in inventory and storage space that is needed.
2. Lowers inventory carrying and handling costs.
3. Less chance of defective and obsolete inventory carried past warranty/return date.
69
Debt financing advantages
1. Interest is tax deductible
2. Fixed interest and principal payments
3. No control of ownership is relinquished
4. Debt is less costly than equity (stock issued) and will maximize earnings per share.
70
Debt financing disadvantages
1. Interest and principal must be paid no matter how economically stable the firm is.
2. Restrains the company from possibly issuing future debt.
3. Excessive debt can increase the likelihood that stakeholders of the firm could lose their interest in it.
71
Capital vs. Operating leases
Capital leases are those that meet any one of the four conditions below while operating leases are any that do not.
1. Has clause where ownership of leased item transfers from lessee to lessor at end of lease term.
2. Has a bargain purchase option that can be exercise at end of lease term.
3. Lease term itself is equal to 75% or more of the estimated life of the leased item.
4. Present value of minimum payments equals 90% or more of the fair value of the leased item at lease commencement.
72
Common Stock
1. Less costly in the long run than borrowing but the initial issuance costs are expensive (in terms of additional capital).
2. Issuing common stock results in sharing more control and ownership with the new purchasers of the new shares.
3. Interest payments resulting from borrowing from a lender can be deducted.
4. Dividend payments to stock holders can not be deducted.
73
Preferred Stock
1. Usually have no voting rights but given first priority over common stockholders if a company files for bankruptcy.
2. Generally lower costs than a common stock issue
3. Dividends typically expected as they usually receive a certain pre-stated dividend amount.
4. There can be more than one class of stock.
74
System software
| Application software
System software – programs that run the computer system and support operations.
Application software – user programs such as word processors and spreadsheets.
75
Electronic data interchange
The transmission of data using computer systems from one company’s computer to another company’s computer; no paper is used; and where controls being in place are essential.
76
Benefits of EDI
1. Quick reaction/access to information
2. Costs reduced (due to reduced paperwork; errors and error-correction costs).
3. More efficient communications and customer service
4. Can become necessary in some technology laden fields for entity to remain competitive
77
Weaknesses of EDI
1. Dependence on computer systems.
2. Dependence on third parties.
3. Increased chance of loss of sensitive data.
4. Increased chance for theft/fraud.
5. More potential for errors.
78
Data Manipulation Language (DML) –
Data Definition Language (DDL) –
Decision Support System (DSS) –
Data Manipulation Language (DML) – used to change records by adding; updating; or deleting.
Data Definition Language (DDL) – used to add; update; or delete tables; fields; or databases.
Decision Support System (DSS) – uses models and data to assist in management decisions.
79
Extensible Markup Language (XBRL) –
Hypertext Markup Language (HTML) –
Hypertext Transfer Protocol (HTTP) –
Extensible Markup Language (XBRL) – encodes and tags business information such as account information for a customer. Another example is Extensive Markup Language (XML).
Hypertext Markup Language (HTML) – used primarily for creating webpages.
Hypertext Transfer Protocol (HTTP) – language used to connect different computers by the internet over the internet.
80
Local Area Networks (LAN)
Virtual Private Network (VPN)
Wide Area Network (WAN)
Value Added Network (VAN)
Local Area Networks (LAN) – used where computers are all centrally located close together.
Virtual Private Network (VPN) – secured way of connecting from an offsite location to a LAN network.
Wide Area Network (WAN) – used where computers are going to be connected from long distances by the use of fiber optic cables or satellites.
Value Added Network (VAN) – privately owned network that transmits EDI information between business partners.
81
Advantages of VAN include
1. Reduces scheduling problems.
2. Provides more security than normal transaction channels.
3. Business to business partners have direct communication lines open at all times (thereby reducing problems).
82
Disadvantages of VAN include
1. Can be costly.
2. Entity can become dependent on the security that VAN offers.
3. Can be a loss of confidential data.
83
Server
| Client
Server – computer sending data.
| Client – computer receiving data.
84
Upload
| Download
Upload – data sent from the client to the server.
| Download – data sent from the server to the client.
85
Data is organized in the following order so that all computers can process and read it.
Remember the acronym BBC FRF
Bit – either a (1) or (0).
Byte – group of bits; usually 8 representing a character.
Character – letter; number; or special character.
Field – group of characters representing a number or word.
Record – group of fields representing such things as a list of certain businesses in a segment of an industry.
File – group of records representing such things as the whole list of businesses in an industry.
86
Data warehouse
Collection of data needed to make management decisions (data mart is like this but smaller in scope).
87
Data mining
Manipulating data.
88
Digital Signature
Where a sender of data encrypts its own data by it not being altered in transmission.
89
Digital Certificate
Where a third party encrypts the senders’ data and certifies its authenticity.
90
System analyst
Designs the information system environment.
91
Application programmer
Writes; tests; and debugs programs such as payroll or accounts receivable applications.
92
Database administrator
Overlooks database to assure appropriate users have access to the database’s information.
93
Systems Programmer
Updates and maintains the computer system such as the operating system.
94
System Administrator
Secures and oversees the computer system as a whole
95
Librarians
Maintains custody of removable media items and for maintenance of program/system documentation.
96
Advantages of database systems
1. Data independence
2. Minimal duplication of data
3. Data sharing performed easier
4. Reduces system maintenance
97
Disadvantages of database systems
1. Need for expert personnel.
2. Installation/Conversion costs
3. Continuous backup/recovery measures are necessary.
98
Disaster recovery plan
Helps management to prepare for possibility of a long term effecting disaster and minimize its costs and effects. It should do the following:
1. Minimize the disaster effects.
2. Have an alternate information processing system
3. Provide for normal operations to begin again as quick as possible.
4. Provide disaster recovery training so everyone employee can be as knowledgeable as possible.
99
Input controls
Checks for validity; accuracy and completeness of data entered into the computer system.
100
Processing Controls
Ensure data used appropriately to provide the most benefit.
101
Output Controls
Checks to make sure data is produced accurately and given to the right employees.
102
End-User Computing
End user is responsible for the advancement and execution of computer applications and the data generated.
103
Control Implications of End-User computing are
1. Physical access controls
2. User passwords and ID’s;
3. Record all database information accessed by each user.
4. Use of incorrect versions of data files or programs.
5. File backup or recovery system.
6. Applications controls
104
Virus
Worm
Trojan Horse
Virus – unwanted program that attaches itself to the user’s files and usually will cause them damage.
Worm – usually function like a virus but can replicate each other easily and spread throughout without needing a host.
Trojan Horse – harmful program/file that enters the user’s network unknowingly and secretively to the users attention.
105
Strategic planning
The identification of a company’s goals and objectives and then determining the best approaches on how to achieve them.
106
Product differentiation business strategy
The process of making a company’s products different from all competitors’ products to make consumers purchase it instead of the competition. Can be done by changing the physical; perceived; and support service differences. Usually more of a custom order business.
107
Cost Leadership business strategy
Focus on lowest cost instead of quality; must be able to produce at a very low unit cost to succeed. Usually involves process reengineering; lean manufacturing; supply chain management; strategic alliances; or outsourcing.
108
Assumptions of CVP Analysis (breakeven analysis).
1. There are fixed and variable costs.
2. Variable costs remain constant.
3. Total fixed costs remain constant as well.
4. Efficiency remains constant.
5. Productivity remains constant and equals the number of units sold.
6. Selling price is not tied to activity level changes.
7. Sales mix remains constant.
109
Preparing a budget – 4 step process
1. Develop a sales forecast
2. Develop a production schedule (Calculating production costs and costs of goods sold).
3. Estimate any other potential expenses or revenues
4. Prepare the pro forma financial statements and budgets.
110
Financial Budgets consist of the following:
Capital expenditures budget; cash budget; budgeted balance sheet; and the budgeted statement of cash flows. Best way to remember this is to know components of financial budgets and then know that everything else is a component of operating budgets.
111
Direct materials
| Indirect materials
Direct materials – all material costs that can be traced to the production of a finished product.
Indirect materials – all material costs that can not be traced to the production of a finished product and is grouped within factory overhead.
112
Direct labor
| Indirect labor
Direct labor – all labor costs that can be traced to the production of a finished product.
Indirect labor – all labor costs that can not be traced to the production of a finished product. Grouped in factory overhead.
113
Cost of Quality - 4 types of costs associated with this and they are:
Remember acronym IPED.
1. Internal failure
2. Prevention
3. External failure
4. Detection
114
Cost centers
Profit Center
Investment Center
Cost centers – does not add profits to the company but only costs them money.
Profit Center – adds profits and costs to the company.
Investment Center – adds profits; costs; and investments to the company.
115
Regression Analysis
Measures a dependent variable and at least one independent variable.
Where y = mx +b and
y = the dependent variable
m = slope of regression line (sometimes referred to as letter b).
x = the independent variable
b = the y intercept or constant value (sometimes referred to as letter a).
116
Normal spoilage
| Abnormal spoilage
Normal spoilage – a product cost – spoilage that usually cannot be avoided.
Abnormal spoilage – a period cost – spoilage that can be avoided.
117
Activity Based Costing
Method that assigns only the costs of each activity to all products and services according to actual costs incurred. Usually used to allocate overhead costs to appropriate products by breaking down the costs from a very involved process into smaller process and assigning the costs to each of them individually.
Involves two principles and they are that activities consume resources and these resources are then consumed by products or services the firm offers. It can also help managers to identify non value adding activities.
118
Balance Scorecard
1. Financial –performance ratings relating to the financial performance of the company.
2. Customer –performance ratings relating to the customer and the market as a whole.
3. Internal Business Processes –performance ratings relating to the internal operations.
4. Learning and Growth –performance ratings relating to skills; training; and work environment of entity’s employees.
119
SWOT analysis
1. Strengths
2. Weaknesses
3. Opportunities
4. Threats
120
Porter’s Five Forces analysis
1. Threat of new entries
2. Threat of substitute goods
3. Bargaining power of suppliers
4. Competition
5. Bargaining power of consumers.
121
System Costs flows thru an organization in the following order:
1. Materials Inventory
2. Work in Process
3. Finished Goods
4. Cost of Goods Sold
122
APR (annual percentage return) =
Effective Interest Rate * # of periods in year
123
Asset turnover =
Sales / Total Assets
124
Breakeven Point in terms of units =
Fixed costs / Contribution Margin
125
Breakeven Point in terms of dollars =
fixed costs / contribution margin ratio
126
Bond valuations
divide the current market interest rate by the number of payments per year and multiply by corresponding present value factor of (number of years times number of periods in a year). Then take the corresponding bond value amount and multiply it by the corresponding present value factor of ordinary annuity.
127
Capital Asset Pricing Model (CAPM) =
[( Beta * (expected rate of return – risk free rate of return)] + risk free rate of return
Includes both time value of money and risk.
128
Current ratio =
current assets / current liabilities
129
Contribution Margin =
revenue – variable costs
| or = sales – variable costs
130
Cost of Goods Sold =
Beg. Inventory + Inv. Purchases – End. Inventory
131
Dividend Payout Ratio =
cash dividend per share / Earnings per share
132
Economic Value Added =
net operating profit after taxes (NOPAT) – cost of financing
133
Effective Interest Rate =
(principle * rate * time) / principle
(Principle includes only usable portion; in case of compensating balances)
(Time is = 1 year is 1; less would be .5 for 6 months or so on)
134
Gross Margin =
revenue – cost of goods sold (or gross profit)
135
Inventory conversion period = Average inventory =
Inventory conversion period = Average Inventory / Cost of sales per day
Average inventory = (Beginning inventory + Ending inventory) / 2
Make sure to use 365 days per year unless stated otherwise
136
Inventory Turnover =
cost of goods sold / average inventory
137
Marginal propensity to consume =
change in spending / change in disposable income
138
Marginal propensity to save =
change in savings / change in income
139
Number of Days Sales in Inventory =
of days in year (usually 365 or 360) / Inventory Turnover
140
Price Elasticity =
% change in quantity demanded / % change in price.
Elasticity > 1 = demand is elastic and total demand (revenue) will decline if the price is increased.
Elasticity = 1 = demand is unitary and total demand (revenue) will remain the same if price is increased.
Elasticity
141
Quick Ratio =
Quick assets (cash; marketable securities; and A/R) / current liabilities
142
Residual Income (RI) =
operating profit – interest on investment (or required rate of return)
143
Times interest Earned Ratio =
earning before interest and taxes / interest expense
144
Labor Efficiency –
SR * (SH – AH). Actual Quantity Purchased/Consumed *(standard price per unit – actual price per unit)
145
Labor Rate
AH * (SR – AR). Standard price per unit * (standard quantity used – actual quantity used)
146
Material Price
AQ * (SP – AP). Actual Quantity Purchased/Consumed *(standard price per unit – actual price per unit)
147
Material Efficiency
SP * (SQ – AQ). Standard price per unit * (standard quantity used – actual quantity used)
148
Weighted Average Cost of Capital =
[(cost of capital A / Total Amount)(rate of cost)(1-Tax Rate)] + [(cost of capital B / Total cost amount)(rate of cost)]
