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Flashcards in BEC Deck (262):
1

COSO Internal Control Model - What? (5)

Control Environment, Risk Assessment, Control Activities, Information & Communication, Monitoring Activities

2

COSO Internal Control Model - Why? (3)

Operations, Reporting, Compliance

3

COSO Internal Control Model - Where? (4)

Entity, Division, Operating Unit, Function
Control Environment – the core/foundation of I/C

4

Control Environment - Principles

1. Integrity and ethical values, 2. Independence of mgmt, 3. Competence, 4. Achieve objectives, 5. Accountability

5

Risk Assessment - Principles

1. Objectives, 2. Assessment, 3. Fraud, 4. “Change” mgmt

6

Control Activities - Principles

1. Risk reduction, 2. Technology controls, 3. Policies

7

Information & Communication - Principles

1. Quality, 2. Internal, 3. External

8

Monitoring - Principles

1. Ongoing & Periodic, 2. Address deficiencies

9

COSO ERM Model - 8 Components

1. internal environment, 2. event identification, 3. risk assessment, 4. risk response, 5. control activities, 6. information & communication, 7. monitoring 8. objective setting

10

Segregation of Duties - Categories

1. authorizing, 2. recording, 3. safeguarding resources, 4. reconciling, overseeing and auditing

11

IIA Mandatory Guidance

1. Definition of internal audit, 2. Code of Ethics, 3. International Standards

12

IIA Code of Ethics

1. Integrity, 2. Objectivity, 3. Confidentiality, 4. Competency

13

How often are IIA External Assessments performed?

At least once every 5 years.

14

Attribute Standards - Categories

1000 – Purpose, Authority and Responsibility, 1100 – Independence and Objectivity, 1200 – Proficiency and Due Care, 1300 – Quality Assurance & Improvement Program

15

Performance Standards - Categories

Managing the Internal Audit Activity, 2100 – Nature of Work, 2200 – Engagement Planning, 2300 – Performing the Engagement, 2400 – Communicating Results, 2500 – Monitoring Progress, 2600 – Resolution of Senior Management’s Acceptance of Risks

16

Free Market Flow Model

(1) Economic Resources, (2) Payment for Resources, (3) Payment for Goods/Services, (4) Providing Goods/Services

Macro - additional sections include foreign sector, financial sector, and government.

17

Demand Changes - Micro

size of market, income or wealth of participants, preferences, changes in prices of other goods/services, substitute goods – move in the same direction, complementary goods – move in the opposite direction

18

Supply Changes - Micro

number of providers, cost of inputs, technological advances

19

Market Equilibrium Changes - Micro

change in demand, change in supply, or change in both supply and demand

20

Demand and supply curves only shift when there are changes other than _______ ?

Price.

21

Indifference Curve

Same satisfaction in receiving two different goods, or any combination of the two goods.

22

Law of Diminishing Returns

Short-term: marginal product falls as more units of variable input are added to fixed inputs, Long-term: returns to scale

23

Elastic - D or S > P

Price Increase = Total Rev. Decreases
Price Decrease = Total Rev. Increase

24

Unitary Elasticity - D or S = P

Price Increase = No Change
Price Decrease = No Change

25

Inelastic - D or S < P

Price Increase = Total Revenue Increases
Price Decrease = Total Revenue Decreases

26

Perfect Competition

large # buyers/sellers, no single person can affect market price, low barriers to entry, maximized when MC = MR, Demand is horizontally sloped, Price = MR

27

Perfect Monopoly

single seller, no close substitutes, restricted barriers to entry, maximized when MC=MR, Demand is downwardly sloped and increasingly moving away from MR, Natural monopolies have increasing returns to scale

28

Monopolistic Competition

large number of sellers, differentiated products/services, low barriers to entry, maximized when MC=MR, Demand is downward sloping and increasingly moving away from MR

29

Oligopoly

few sellers, differentiated product, high barriers to entry, maximized when MC=MR, Demand curve is “kinked”, Elastic-Kink-Inelastic

30

Tacit Collusion

firms copy a larger firm’s prices, not illegal in the U.S.

31

Leakages

expenses not on domestic production (i.e. savings, taxes, etc.)

32

Injections

added to domestic production (i.e. gov’t spending/subsidies, investment subsidies, exports)

33

Nominal GDP

total output of FINAL goods and services produced for exchange in the domestic market, not adjusted for changing prices

34

Real GDP

adjusted for changing prices

35

GDP "Gap"

Real GDP vs. Potential GDP, Real GDP > Potential – creates upward pressure on prices (i.e. inflation)

36

Expenditure Approach to GDP vs. Income Approach to GDP

Expenditure approach to GDP: uses final sales/purchases, Income approach to GDP: uses income/resources

37

Unemployment Rate vs. Natural Rate (Formulas)

Unemployment Rate = Unemployed/Size of Labor Force
Natural Rate = Frictional + Seasonal + Structural/Size of Labor Force

38

Frictional Unemployment

transition or imperfection information

39

Structural Unemployment

prior types of jobs have been reduced or eliminated

40

Seasonal Unemployment

work opportunity regularly and predictably varies by season

41

Cyclical Unemployment

downturn in business cycle/economic contraction

42

Net Exports are Positive – Aggregate Demand _________

Increases

43

Net Exports are Negative – Aggregate Demand _________

Decreases

44

Multiplier Effect

Multiplier Effect = Initial Change in Spending x (1/(1 - MPC))

45

Marginal Propensity to Consume

change in consumption as a % of disposable income

46

Marginal Propensity to Save

change in savings as a % of disposable income

47

Avg. Propensity to Consumer

% of disposable income spent on goods

48

Avg. Propensity to Save

% of disposable income saved

49

Aggregate Supply - Classical (Graph)

Vertical Supply

50

Aggregate Supply - Keynesian (Graph)

horizontal, then kinks upwards

51

Aggregate Supply - Conventional (Graph)

curved upwards

52

Causes of Inflation - Macro

demand-induced (demand pull) and supply-induced (cost push or supply push)

53

Consequences of Inflation

(1) lower current wealth and lower future real income, (2) higher interest rates, (3) uncertainty of economic measures

54

Monetary Policies

(1) reserve requirement changes, (2) open market operations, (3) discount rate

55

Principle of Comparative Advantage

output will be greatest when firms produce goods w/ lowest opportunity cost

56

Transaction Risk vs. Translation Risk

Transaction Risk: settled in a foreign currency; Translation Risk: settled in domestic currency

57

Economic Risk (International)

alters the value of future revenues/costs

58

Transfer Price Issue (International)

transfer of goods/services to affiliated entities to manipulate tax rates and profits (favorable)

59

Functions of World Bank

emerging countries/reconstruction

60

Functions of International Monetary Fund

currency crisis, banking crisis, financial debt crisis

61

Functions of GATT/World Trade Organization

police international trading system

62

Foreign Direct Investment

establishing production facilities (through financial investment) to carry out production needs.

63

U.S. - What % of Worldwide exports? % of World's GDP?

10% - exports, 25% - World's GDP

64

World's Largest Exporters? (2)

Germany and China

65

Largest Decline in output over past 40 yrs?

Europe

66

PEST Analysis

Political, Economic, Social and Technological; used for a specific region/environment

67

Five Forces Analysis

(1) threat of entry, (2) threat of substitute goods, (3) bargaining power of buyers, (4) bargaining power of suppliers, (5) intensity of rivalry; used for industry analysis

68

SWOT Analysis

Internal: Strengths & Weaknesses, External: Opportunities & Threats; used in entity analysis in comparison to environment

69

Generic Business Strategies

Cost Leadership, Differentiation, and Focus Strategy

70

Sunk Costs

costs of resources incurred in the past

71

Opportunity Costs

discounted dollar value of benefits lost from an opportunity as a result of choosing another opportunity

72

Differential Costs

costs that are different between two or more alternatives

73

Common Stock - Risk Level/Rate of Return

most risky, highest rate of return

74

Preferred Stock - Risk Level/Rate of Return

characteristics of both debt and equity, more risky than debt, less risky than equity

75

Debt - Risk Level/Rate of Return

least risky, lowest rate of return

76

Weighted Average Cost of Capital (WACC)

required rate of return on each source of capital weighted by the proportion of total capital provided by each source, summed for a total weighted average.

77

Ordinary Annuity vs. Annuity Due

Ordinary Annuity – end of the period
Annuity Due – beginning of the period

78

PV of a Single Amount

PV now of an amount to be received/paid at a single date

79

FV of a Single Amount

FV of a single amount invested now

80

PV of an Ordinary Annuity

PV now of an ordinary annuity to be received over some future time period

81

FV of an Ordinary Annuity

FV at a future time invested over some future time period

82

Effective Interest Rate (Formula)

Net Cost of Borrowing / Net Proceeds (deduct for bank restrictions)

83

GAAP FV Valuation Levels

Level 1: external, observable inputs, Level 2: similar observable inputs, Level 3: unobservable inputs

84

GAAP FV Valuation Approaches

Market Approach, Cost Approach, Income Approach

85

CAPM Model (Formula)

RoR = Risk Free RoR + beta (Expected RoR – Risk Free RoR)

86

Beta is a measure of what?

Volatility

87

Meaning of Beta (>1, =1, <1)

1 more volatile than benchmark

88

Business Valuation Approaches

market, income and asset approach

89

Types of Qualitative Forecasting

executive opinion, market research, Delphi Method

90

Types of Quantitative Forecasting

Time series, causal models

91

Capital Budgeting - Evaluation Techniques

(1) Payback period approach, (2) discounted payback period, (3) accounting rate of return, (4) net present value, (5) Internal rate of return, (6) Profitability index

92

Payback Period Approach

# of years to recover the initial cash investment, compared to a max number of acceptable years, ignores time value of money.

93

Discounted Payback Period Approach

uses discounted cash flows, considers time value of money, # of years to recover will be higher than traditional method.

94

Accounting Rate of Return Approach

(Avg. Incremental Revs – Avg. Incremental Exp. (Annual)) / Initial (or Avg.) Investment; Uses accrual-basis of accounting (i.e. account for depreciation in expenses), ignores time value of money.

95

Net Present Value Approach

Inflows – Outflows = NPV, recognizes time value of money, considers entire life, relates to cost of capital.

96

Internal Rate of Return Approach

PV Factor = Investment Cost/Future Annual Cash Inflow
**Depreciation is not included!

97

Profitability Index Approach

PV of Cash Inflows/Project Cost = PI
NPV/Project Cost = PI
Higher Percentage = Higher Rank, used when limited funds are available

98

Financial structure includes?

All debt and equity

99

Capital structure includes?

only L/T debt and equity

100

Trade A/P Advantages/Disadvantages

no collateral, specific use (trade accounts only)

101

Accrued A/P Advantages/Disadvantages

no collateral, specific use (i.e. salaries payable)

102

S/T Notes Payable Advantages/Disadvantages

no collateral, requires compensating balance

103

Spontaneous Financing

occurs automatically through day-to-day operations, (i.e. general S/T payables)

104

Line of Credit

informal agreement to extend credit to a borrower

105

Revolving Credit

legal agreement to extend credit to a borrower

106

Letter of Credit

conditional commitment to pay a third party, has specified terms and commitments

107

Credit Advantages/Disadvantages

flexible, no collateral, poor credit rating results in high interest, requires compensating balance

108

Commercial Paper

S/T unsecured promissory note sold by large, creditworthy firms

109

Pledging A/R

uses a current asset, trade A/R, as security for S/T borrowings

110

Pledging A/R Advantages/Disadvantages

flexible, costs may be greater than other sources of S/T financing

111

Factoring A/R

sale of A/R to a commercial bank or other financial institution (with or w/o recourse)

112

Factoring A/R Advantages/Disadvantages

buyer assumes billing/collection responsibilities (except w/ recourse), cost may be greater than other sources of S/T financing

113

Inventory Advantages/Disadvantages

commonly available, pledged inventory may not be available when needed, costs can be greater than other sources, not available for all inventory

114

Types of Inventory Secured Loans

floating lien - lien all inventory, retain control
chattel mortgage - lien specific inventory, retain control
field warehouse - collateral remains at firm's warehouse, placed under control of 3rd party
terminal warehouse - collateral moved to public warehouse

115

L/T Notes, Restrictive Covenants

(1) maintaining certain working capital conditions, (2) additional incurrence of debt, (3) Frequency and nature of financial information, (4) management changes

116

Net Lease

Lessee assumes the cost associated with ownership (executory costs - maintenance, taxes, insurance, etc.)

117

Net Net Lease

Lessee assumes the cost associated with ownership and is responsible for a residual value at the end of the lease

118

Debenture bonds vs. Secured bonds

Debenture bonds: unsecured, no specific asset is designated as collateral, Secured bonds: have specific assets designated as collateral

119

What bonds are most likely to maintain a constant market value?

Floating rate bonds

120

Indenture

contract that states the terms of a bond issued by a corporation

121

Preferred Stock Characteristics

cumulative/noncumulative, participating/nonparticipating, protective provisions, convertible/nonconvertible, call provisions

122

Preferred Stock Value (PSV) Formula

Preferred Stock Value (PSV) = Annual Dividend / Required Rate of Return

123

Preferred Stock Expected Rate (PSER) Formula

Preferred Stock Expected Rate (PSER) = Annual Dividend / Market Price

124

Common Stock Characteristics

limited liability, residual claim to income and assets, right to vote, preemptive right

125

Common Stock Value (CSV) Formula

Common Stock Value (CSV) = Dividend in 1st Year / (Required RoR – Growth Rate)

126

Common Stock Expected Return (CSER) Formula

Common Stock Expected Return (CSER) = (Dividend in 1st Year / Market Price) + Growth Rate

127

Financing Strategies (S/T & L/T)

(1) hedging principle of financing, (2) optimum capital structure, (3) business risk constraint, (4) tax rate benefit effect

128

Cost of Capital Relationships

(1) macroeconomic conditions, (2) past performance of the firm, (3) amount of financing, (4) relative level of debt financing, (5) debt maturity, (6) debt security

129

Zero Balance Accounts

overdrafts are covered automatically by the bank, no real money in the account (i.e. monthly payroll)

130

Lock box System

customer’s payments are accessed directly by the company’s bank

131

Increase or Decrease - Receipt Float vs. Disbursement Float?

Decrease Receipt Float – receives cash sooner, Increase Disbursement float – cash paying is available longer.

132

Cash Conversion Cycle

cash for inventory and collection of cash from the sale of products made with inventory.

133

S/T Investment Opportunities

U.S. Treasury bills (safest), Federal agency securities, negotiable Certificates of Deposit, Bankers’ acceptances, commercial paper, repurchase agreements

134

Sharpe Ratio (Formula)

Sharpe Ratio = (Avg. RoR – Risk-Free RoR) /St. Dev.

135

S/T Investment Concerns

safety of principal, price stability, marketability/liquidity

136

Primary goal of A/R Management is to.... ?

Maximize profits

137

Approaches to Inventory Management

(1) Traditional Materials Requirement Planning system (MRP) – Supply Push (2) Just –In-Time (JIT) System – Demand Pull

138

Economic Order Quantity (EOQ) Formula

Total Inventory Cost (EOQ) = (T/Q) x O + (Q/2) x C or the square root of – (2TO/C)

139

Reorder Point Formula

Reorder Point = Delivery time stock + safety stock

140

Hedging Principle of Finance

finance S/T assets with S/T liabilities

141

B/S vs. I/S Ratios

must find average for B/S item (Beginning + Ending)/2

142

Types of Ratio Measures

liquidity/solvency, operational activity, profitability, equity/investment leverage

143

Working Capital vs. Working Capital Ratio

Working Capital = CA – CL
Working Capital Ratio = CA/CL

144

Acid Test/Quick Ratio

(Cash + Net Receivables + Marketable Securities) / Current Liabilities (Excludes Inventory!)

145

Defensive-Interval Ratio

(Cash + Net Receivables + Marketable Securities) / Avg. Daily Cash Expenditures

146

Average Collection Period

(Days in Year x Avg. A/R) / Credit Sale for Period

147

Times Interest Earned Ratio

(N/I + Interest Expense + Income Tax Expense) / Interest Expense

148

Times Preferred Dividends Earned Ratio

N/I / Annual Preferred Dividend Obligation

149

A/R Turnover

Net Credit Sales / Average Accounts Receivable

150

Avg. Number of Days Sales in Receivables

365 / A/R Turnover

151

Inventory Turnover

COGS / Avg. Inventory

152

Number of Days Supply in Inventory

365 / Inventory Turnover

153

A/P Turnover

Credit Purchases (or COGS + Ending – Begin Inventory) / Avg. Accounts Payable

154

Number of Days Purchases in Payables

365 / Accounts Payable Turnover

155

Capital Turnover

Annual Sales (or Revenue) / Avg. Owner’s Equity

156

Cash Conversion Cycle

Cash Conversion Cycle = Inventory Conversion + A/R Conversion – A/P Conversion

157

Operating Cycle

Inventory Conversion + A/R Conversion

158

Gross Profit vs. Gross Profit Margin

Gross Profit = Sales (or Revenue) – COGS
Gross Profit Margin = Gross Profit / Net Sales

159

Net Profit Margin

Net Profit Margin = Net Income / Net Sales

160

Return on Total Assets/Investments

Net Income + Interest Expense / Avg. Total Assets or Avg. Total Investments

161

Return on Owner's Equity

Net Income / Avg. Stockholder’s Equity

162

Return on C/S Equity

Net Income – Preferred Dividends / Avg. Common Stockholder’s Equity

163

Residual Income

Residual Income = Net Income – Required Dollar Return

164

Economic Value Added

Earnings before interest – ((Opportunity Cost) x (L/T Debt + Stockholder’s Equity)

165

EPS (Basic)

Net Income – Preferred Dividends / Weighted Avg. Number of Shares Outstanding

166

Price to Earnings Ratio

Market Price for a Common Share / Earnings Per Share

167

Debt to Equity Ratio

Total Liabilities/Total Shareholder’s Equity

168

Owner's Equity Ratio

Shareholder’s Equity / Total Assets

169

Debt Ratio

Total Liabilities / Total Assets

170

Diversifiable Risk

Unsystematic, Firm-Specific, or Company-Unique

171

Non-diversifiable Risk

Systematic, Market-Related

172

Computer Data Structures, Smallest to Largest?

bit, byte, field, record, file, database

173

Data Definition Language (DDL)

definition of tables/fields and relationships

174

Data Manipulation Language (DML)

add new records, delete old records, update existing records

175

Data Query Language (DQL)

extract information from the database

176

Database Management System

“middle-ware” between application and OS, includes DDL, DML and DQL

177

3 types of Software

includes (1) systems software, (2) programming languages, (3) application software

178

CPU Components

Control Unit, Arithmetic Logic Unit, Primary Storage (RAM & ROM)

179

Batch vs. Online, Real-Time (OLRT) Processing

Batch processing: group transactions for processing
Online, Real-Time (OLRT) processing: continuous, immediate

180

Master file equivalent to what in manual environment? Transaction file?

Master - Subsidiary Ledgers
Transaction - Journals

181

Twisted Pair

least expensive media for phone connections, slowest and least secure.

182

TCP/IP

two core network protocols that underlie the Internet

183

Extensible Business Reporting Language (XBRL)

used for encoding and tagging business information (i.e. F/S’s, taxation, regulation)

184

Operational/Transactional Processing System

general day-to-day activities (cash collection, payroll, sales, etc.)

185

Management Information Systems (MIS)

lower level management, summary reports, variance reports, exception reports, solving routine problems

186

Decision Support Systems (DSS)

non-routine problems, data-driven, large amounts of data to find relationships and patterns

187

Flat file vs. Database Systems

Flat file - "bad"
Database - "good"

188

Data mart vs. Data Warehouse

Mart - specialized for function
Warehouse - larger scale data
Both use patterns to organize data.

189

IaaS, PaaS, and SaaS

IaaS – Infrastructure (access hardware, storage), PaaS – Platform (create software and programs), SaaS – Software (remote access to software programs)`

190

Online Transaction Processing vs. Online Analytical Processing

Online Transaction Processing (OLTP): core business functions, sales, production; Online Analytical Processing (OLAP): incorporates data warehouse and data mining capabilities

191

System Development/Implementation Steps

(1) Planning & Feasibility, (2) Analysis, (3) Design, (4) Development, (5) Testing, (6) Implementation, (7) Maintenance

192

IT Segregation of Duties

(1) Development, (2) Administration & Programming, (3) Operations

193

Batch Back-up use ?

Checkpoint/restart controls

194

Online Real Time Back up use ?

rollback and recovery

195

E-Commerce Back-up use ?

mirrored server

196

IT Controls are... (general, corrective, detective, etc.)

general, some are corrective, some preventative

197

EDI transactions are made through a ?

value-added network (VAN)

198

Recovery Point vs. Time Objectivve

Recovery Point Objective – acceptable amount of data loss
Recovery Time Objective – acceptable downtime

199

Types of backup facilities

cold site (no actual equipment/files), warm site (already stocked w computer hardware), hot site (immediate take over)

200

Business Continuity Planning - Order of Importance

(1) Task Critical, (2) Business Critical, (3) Mission Critical

201

Application Controls for Batch Systems

(1) Financial total, (2) Hash totals, (3) Record counts

202

Application - Input Controls

missing data check, field check, limit test (i.e. range tests & sign tests)

203

Application Control - Processing Objectives

validity, completeness, accuracy

204

Application - Processing Controls

run-to-run controls, internal labels, audit trail controls

205

Application - Output Controls

spooling controls, disposal of aborted print jobs, distribution of reports, end user controls

206

Digital Certificate

most secure encryption technique

207

Digital Signature

used to ensure the message is not altered after being sent

208

Prime/Direct Costs

Direct Materials & Direct Labor, flows to WIP

209

Conversion Costs

Direct Labor & Overhead

210

Indirect Costs

Overhead, does not flow to WIP, “Factory Overhead Control”

211

Factory Overhead - Applied

flows to “WIP Inventory Control”

212

Actual Costing

Actual Q x Actual P; simplest, waits until all costs are known and then is recorded in accounts

213

Normal Costing

Actual Quantity x Predetermined Overhead; DM & DL traced to work in process when the costs become known

214

Standard Costing

Standard Quantity x Standard Price; predetermined estimated quantities and prices

215

High -Low Method (definition)

calculate change in costs between two production volume cost extremes (high and low)

216

High-Low Method (formula)

Difference in Costs/Difference in Units = VC per Unit
Total Cost = FC + (VC per unit x # units)

217

Value-added Activities

processes that contribute to the product’s ultimate value

218

Absorption Costing

assigns the 3 factors of production (DM, DL, and OH) to inventory.
Selling & Administrative Expenses are always period costs.

219

Direct/Variable Costing

assigns only variable costs (DM, DL, VOH) to inventory. Fixed overhead costs are period costs.
Selling & Administrative Expenses are always period costs.

220

Difference (Absorption and Direct Costing) (Formula)

Change in Inventory Level x Fixed Manufacturing OH per unit

221

Production > Sales, Effect on Absorption vs. Variable Costing Income?

Production > Sales, Absorption Costing Income > Variable Costing Income

222

Absorption vs. Direct Costing I/S

Absorption Costing I/S: Gross Margin, Direct Costing I/S: Contribution Margin

223

Job Costing vs. Process Costing

Job Costing: large, expensive, custom-order
Process Costing: mass-produced, small, inexpensive

224

Applied Overhead (Formula)

Applied Overhead = (bud. FOH/bud. volume) X (actual volume)

225

Process Costing Process

(1) Equivalent Units (2) Cost per Equivalent Unit (3) CGTO and Ending WIP Inventory

226

Cost/Equivalent Unit Formula

Cost/Equivalent Unit = Cost to be Allocated / Equivalent Units

227

Cost Allocation of Joint Products

(1) Relative Physical Volume (2) Relative Sales Value (3) Net Realizable Value

228

Last budget created during budgeting process?

Cash

229

Receivables - Dec/Incr, Effect on Cash

Decrease - Cash Increases
Increase - Cash Decreases

230

Payables - Dec/Incr., effect on Cash

Decrease - Cash Decreases
Increase - Cash Increases

231

Static Budget

budgeted costs for budgeted output

232

R squared

coefficient of determination, indicates the degree to which the behavior of the independent variable predicts the behavior of the dependent variable.

233

Y = A + Bx

A – y-intercept, B – slope, x – independent variable, Y – dependent variable

234

Effect on income vs. Effect on Break-even

Effect on income is the opposite of the effect on the break-even point.

235

Basic Breakeven Formula

(Quantity x Sales Price) = FC + (Quantity x VC per unit)

236

Break even in units vs. Break even in dollars

Breakeven in units = Fixed Costs/Contribution Margin
Breakeven in dollars = Total FC/Contribution Margin Ratio

237

Contribution Margin vs. Contribution Margin Ratio

Contribution Margin = Sales Revenue – Variable Costs
Contribution Margin Ratio = Contribution Margin/Sales Revenue

238

Operating Income Formula (in terms of Contribution Margin)

Contribution Margin – Fixed Costs = Operating Income

239

Assumptions in Cost-Volume-Profit Analysis

Price, Variable Cost/Unit, and Fixed Costs behave as constants.
Volume is the only driver of costs and revenues.

240

Sales in Units based on a Target Profit (Formula)

Sales in Units (for Profits) = (FC + Target Profit) / CM per Unit

241

Margin of Safety

difference between the current sales level and the breakeven point.

242

Price/Rate Variance

Price/Rate Variance = Difference in Rates (Standard – Actual) x Actual Quantity

243

Usage/Efficiency Variance

Usage/Efficiency Variance = Difference in Quantities (Standard – Actual) x Standard Rate

244

Total Variance

Total Variance = (AQ x AP) – (SQ x SP), Rate & Efficiency Variance netted together.

245

What kind of costs are not considered in a special order situation?

Fixed Costs.

246

Transfer Pricing Methods

1. Market based, 2. Cost based, 3. Negotiated price

247

Transfer Minimum vs. Maximum Price

Transfer minimum: 1. Direct cost if it has excess capacity, or 2. its market price if it does not have excess capacity
Transfer maximum: market selling price

248

Just in Time Production Characteristics

“pull” process, schedule is determined by the actual sale of goods, L/T contracts w small number of suppliers, high quality raw materials, suppliers paid on periodic basis instead of each time there is an order

249

Backflush costing

costing is delayed until finished goods or COGS

250

Quality of Design vs. Quality of Conformance

Quality of Design: meeting or exceeding the needs and wants of customers
Quality of Conformance: conforming to the design specifications

251

Prevention of Defects

Prevention of defects is cheaper than the cost of failure and increases the quality of conformance.

252

Costs of Quality

Costs of Quality: (1) Conformance costs - prevention costs, appraisal costs, (2) Non-Conformance costs - internal failure costs, external failure costs

253

Balance Scorecard

provides a comprehensive view of overall performance using both financial and non-financial measures. 4 categories: Financial, Customer, Internal Business Processes, Learning/Innovation/Growth

254

ROI (Normal and DuPont Approach)

ROI = Net Income / Total Assets
ROI = Return on Sales: (NI/Sales) x Asset Turnover or Capital (DuPont Approach)

255

Residual income (Formula)

Residual Income = Operating Income – (Required RoR x Invested Capital)

256

Economic Value Added

Net Operating Profit after Tax – WACC (Total Assets – Current Liabilities)

257

Operating Profit Margin vs. Profit Margin

Operating Profit Margin = Operating Income / Sales
Profit Margin = Net Income / Net Sales

258

PERT vs. CPM

PERT: program evaluation and review technique
CPM: Critical Path Method

259

Operating Leverage

A measurement of the degree to which a firm or project incurs a combination of fixed and variable costs.

260

Coupon or Stated Interest Rate

determines cash interest paid

261

Effective Interest or Yield Rate

used for interest expense and bond price

262

Bond Price (formula)

present value of future cash payments discounted at the yield rate at issuance