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Flashcards in BEC Deck (324):
1

What is Capital Budgeting? How is it used?

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

2

What is the primary focus of working capital management?

Managing inventory & receivables (current assets & liabilities)

3

What is a Static Budget?

Budget targeted for a specific segment of a company.

4

Which IT personnel roles should always be segregated?

Operators

Programmers

Librarians

4

What values are used in Capital Budgeting?

Capital Budgeting ONLY uses Present Value tables.

Capital Budgeting NEVER uses Fair Value.

5

What four perspectives are included in Balanced Scorecard?

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

6

Define Market Risk

The risk that a sluggish economy will affect the value of a debt instrument

7

What is the primary duty of the board of directors?

To monitor management behavior.

8

What is Cost Accounting?

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

9

How does a price increase affect supply?

When the prices of an item increases, supply increases, because more sellers are willing to sell.

10

How is Net Working Capital calculated?

NWC = Current Assets - Current Liabilities

11

What is a Maser Budget?

Budget targeted for the company as a whole

Includes budgets for Operations and Cash Flows

Includes set of budgeted Financial Statements

12

What are the duties of a systems analyst?

Designs or purchases IT system

Responsible for flowcharts

Liason between Users and Programmers

Note: Think IT Manager

13

Why was Balanced Scorecard created?

To measure Performance.

14

Define Sector Risk

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

15

What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?

Oversees the board

Responsible for hiring new CEO

16

What is the difference between Cost Accounting and Managerial Accounting?

Cost Acct - External Focus, GAAP

Managerial Acct - Internal Focus, Not GAAP

17

What is a supply curve shift?

When supply changes due to something other than price.

18

What are the characteristics of effective Working Capital Management?

Shorten the cash conversion cycle

Don’t negatively impact operations

19

How do Fixed Costs affect budgeting?

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

20

What is the primary duty of a Systems Administrator?

A Systems Administrator controls database access.

21

What are Strategy Maps?

Diagrams of Strategic Cause and Effect Relationships.

22

Define Credit/Default Risk

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

24

What is the responsibility of the audit committee of the board of directors?

The audit committee appoints and oversees the external auditor.

25

What are Product Costs (aka Inventory Costs)?

Prime Costs

Conversion Costs

26

What are the characteristics of a positive supply curve shift (shift right)?

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

27

What is the Inventory Conversion Period?

Avgerage time needed to convert materials into finished goods and sell them

Average Inventory = (BI + E) / 2

Inventory Conversion Period = Average Inventory / Sales Per Day

28

How do Variable Costs affect budgeting?

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

29

What are the duties of a Systems Programmer?

Writes- Updates- Maintains- & Tests software- systems- and compilers

30

What is a Strategic Initiative?

A plan to achieve goals.

31

Define Interest Rate Risk

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.

32

What is the duty of the compensation committee of the board of directors?

The compensation committee handles the CEO's compensation package.

33

What are included in Prime Costs?

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

34

What are the characteristics of a negative supply curve shift (shift left)?

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

35

What is the Receivables Collection Period?

Average time needed to collect A/R

RCP = Average Receivables / Credit Sales Per Day

36

How are Material Variances calculated?

SAM:

Standard Material Costs
- Actual Material Costs
= Material Variance

37

What measures are used under Value-Based Management?

Return on Investment
Residual Income
Spread
Economic Value Added
Free Cash Flow

38

What does Standard Deviation measure?

It measures the volatility of an investment.

39

What does the NYSE and NASDAQ require of the board of directors?

They require the board to be independent.

40

What is Factory Overhead?

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).

41

How does price affect the demand for an item?

When the prices of an item increases, demand for it decreases.

42

What is the Payables Deferral Period?

Average time between materials and labor purchase and their A/P payment

Average Payables = (BP + EP) / 2

Payables Deferral Period = Average Payables / (COGS/365)

43

How are Labor Variances calculated?

SAL

Standard Labor Costs
- Actual Labor Costs
= Labor Variance

44

Which duties should a Systems Programmer NOT have?

In order to maximize internal control- a Systems Programmer should NOT have application programming duties/abilities or be an Operator on the system.

45

How is Return on Investment (ROI) calculated?

ROI = Return / Investment

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

$60 / $100 = 60% ROI

46

What is Systematic Risk?

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

Example: Wars

47

When is the Present Value of $1 table used?

For ONE payment ONE time.

48

What is the main goal in an executive compensation package?

The package should ensure that the goals of management should match those of the shareholders.

49

What is included in Fixed Factory Overhead?

FFO = Estimated Costs / Normal Capacity

Uses Normal Activity

Examples of Fixed Factory OH: Depreciation (SL), Utilities, Taxes

Under/Overapplied Fixed OH always goes to COGS

50

What is a Demand Curve Shift?

When demand changes due to something other than price.

51

What is the Cash Conversion Cycle?

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)

52

How are Overhead Variances calculated?

OAT

Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance

53

What are the duties of a Systems Operator?

Schedules and Monitors Jobs
Runs IT Help Desk

54

How is Residual Income calculated?

Operating Income - (Required Rate of Return x Invested Capital) = Residual Income

55

What is Unsystematic Risk?

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

56

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

Executice 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.

57

What is included in Variable Overhead?

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)

58

What is a Positive Demand Curve Shift (Shift Right)?

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

59

What traits should Cash and Short-Term Investments have?

Liquid

Safe

60

How does Absorption Costing compare to Variable Costing?

Absorption Costing - External Use, Cost of Sales, Gross Profit, SG&A

Variable Costing - Internal Use, Variable Costs, Contribution Margin, Fixed Costs

61

What duties should a System Operator NOT have?

For internal control purposes- they should not be a Programmer on the system."

62

What is another name for Required Rate of Return (RROR)?

RROR is also called Cost of Capital

63

What does Beta measure?

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?

64

When is the Present Value of an Annuity Due used?

Multiple payments made over time where the payments are made at the START of the period.

65

Which influences help mold the direction that management takes?

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

66

Where is Under/Overappllied Variable OH recorded?

If Immaterial – Goes to COGS

If Material – Goes to WIP, Finished Goods, or COGS, based on their Ending Balance

67

What is a Negative Demand Curve Shift (Shift Left)?

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

68

For what are Letters of Credit used?

Used for importing goods.

Issued by importer's bank.

69

How is Contribution Margin calculated?

Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)

70

If it is not possible to segregate duties in an IT System- what actions should be taken to compensate for internal control purposes?

Include Computer Logs.

Control Group should review the logs.

71

What is Variance?

It compares volatility of an investment to the market average.

Factors include both Systematic and Unsystematic Risk.

72

What is shirking?

When management doesn't act in the best interest of shareholders.

It can be alleviated by tying compensation to stock performance or company profit.

73

Where is Under/Overapplied Fixed OH recorded?

It always goes to COGS

74

What is the Marginal Propensity to Consume?

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

75

What is the advantage of using Trade Credit?

No interest cost if paid timely.

76

How is Breakeven Point (per unit) calculated?

Total Fixed Costs / Contribution Margin (per unit)
= Breakeven Point Per Unit

Assumption: Total Costs & Total Revenues are LINEAR

77

What is the purpose of a Management Information System (MIS)?

To assist with decision making.

78

What is Weighted Average Cost of Capital (WACC)? How is it calculated?

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%

79

What is a Derivative?

An asset whose value is DERIVED from the value of another asset.

Derivatives are measured at Fair Value.

80

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

Multiple payments over time where payments are made at the END of the period. Think A for Arrears.

81

What requirements are imposed on a public company under Sarbanes-Oxley?

Management must submit a report on the effectiveness of Internal Control in the 10K.

Management must disclose significant Internal Control deficiences.

CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.

82

What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?

Underapplied overhead.

If it's Fixed OH, underapplied goes to COGS.

If it's Variable OH, underapplied goes to COGS if immaterial, but is allocated to WIP, FG or COGS based on ending balances.

83

What is the Marginal Propensity to Save?

How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume

84

What is a Lockbox System? What are the advantages?

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)

85

What is the focus in a Cost Center?

Management is concerned only with costs

86

What is an Accounting Information System (AIS)?

A type of Management Information System (MIS) that processes accounting transactions.

87

How is Spread calculated?

Spread = ROI - Cost of Capital

88

How is an Option used?

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

89

What characteristics are promoted by the COSO framework on internal control?

Reliable financial reporting

Effectice and efficient operations

Compliance

90

What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?

A credit balance indicates overapplied 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.

91

How is the multiplier effect calculated?

(1 / 1-MPC) x Change in Spending

92

What is float?

Time it takes to mail a payment and have it clear your bank account

Maximize float on cash payments

Minimize float on cash receipts

93

What is the focus in a Profit Center?

Management is concerned with both costs and profits

94

What are the characteristics of an Executive Information System (EIS)?

Specialized for Company Executive needs

Assists with Strategy Only

No Decision-Making Capabilities

95

What is the primary point of Economic Value Added? How is it calculated?

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

Economic Value Added = Operating Income After Tax - (Net Assets x WACC)

96

What is a Future?

A Forward Contract with a future value.

They are sold and traded on the futures market.

97

What is the calculation for the Present Value of $1?

1 / (( 1+i )^n)

i = interest rate
n = number of periods

98

What are the elements of the control environment?

Integrity & Ethics
Competence
The Board of Directors & Audit Committee
Management's Operating Style
Organizational Structure
Authority & Roles of Responsibilities
HR Policies

99

Which variables are used to calculate Direct Material balances?

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

100

How does increased spending by consumers and the government affect the demand curve?

As spending by consumers or the government increases, the demand curve increases (shifts right).

101

What are Zero Balance Accounts?

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

102

What is the focus in an Investment Center?

Management is concerned with costs, profits, and assets

103

What are the characteristics of an Expert System (ES)?

Computer uses reasoning

Structured

No human interpretation needed

104

What is an Interest Rate Swap?

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

105

What are control activities?

A component of internal control that includes actions being taken to promote the control environment.

106

What variables are used to calculated Work in Process (WIP)?

Beginning Balance (End Bal of Previous WIP)
DR Direct Materials Used
DR Direct Labor Used (Conversion Cost)
CR COGM
DR Factory Overhead Applied (Converstion Cost)
= Ending Balance (Goes to BS)

107

How does spending change due to the multiplier effect?

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

108

What is the difference between Treasury Bills, Notes and Bonds?

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

109

What is the Delphi technique?

Forecasting technique where Data is collected and analyzed

Requires judgement/consensus

110

What are the characteristics of a Decision Support System (DSS)?

Computer provides data

Gives Interactive Support

Human interpretation needed

111

How is Free Cash Flow calculated?

Operating Income After Tax
+ Depreciation & Amortization
- Capital Expenditures
- Change in Net Working Capital
= Free Cash Flow

112

What is Legal Risk?

Risk that a law or regulation will void the derivative

113

What is Net Present Value (NPV)?

A preferred method of evaluating profitability.

One of two methods that use the Time Value of Money

= PV of Future Cash Flows - Investment

114

What are the basic elements of internal control?

Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring

115

What variables are included in Finished Goods calculations?

Beginning Balance
DR COGM
= COGAS (Cost of Goods Avail for Sale)
CR COGS
= Ending Balance (Goes to BS)

116

How is Price Elasticity of Demand calculated?

% Change in Quantity Demand / % Change in Price

117

What is commercial paper?

Similar to T-Bill, but issued by corporations instead of Government

Greater than 9 Months Maturity

Unsecured

Issued by large firms

118

What is Regression Analysis?

A forecasting technique where Sales is the dependent variable.

Simple Regression - One independent variable

Multiple Regression - Multiple independent variables

119

What are the characteristics of an Ad Hoc computer report?

User initiates the report.

The report is created upon demand.

120

What is a Fair Value Hedge?

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

Changes in value are reported in earnings.

121

What is the significance of the Information and Communication aspect of internal control?

Management must have access to relevant and timely information to make good decisions.

122

How does Freight In affect Cost Acct calculations?

Inventory (Product) Cost

Part of DM Purchases

123

Under elastic demand, how does price affect revenues?

Price increases, Revenue decreases

Price decreases, Revenue increases

124

What are the advantages and disadvantages of Commercial Paper?

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.

125

What are Econometric Models?

Forecast sales using Economic Data

126

When are Exception reports generated?

Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem

127

What is measured by Six Sigma?

It measures a product versus its quality goal.

128

What is a Cash Flow Hedge?

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

Changes in value are reported in OCI.

129

How is NPV used to calculate future benefit?

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)

130

How does Monitoring affect internal control?

Internal Control activities must be constantly monitored and evaluated for effectiveness.

131

How does Freight Out affect Cost Accounting?

Selling (Period) Cost

Not part of inventory

132

What conditions would indicate Elastic Demand?

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

133

What is Economic Order Quantity?

The order quantity that minimizes inventory costs.

EOQ = Square Root of (2DO/C)

D = Unit Demand (Annual)
O = Order Cost
C = Cost of Inventory

134

What are Naive Forecasting Models?

Very Simplistic

“Eyeball” past trends and make an estimate

135

What is a query?

A type of Ad Hoc report- initiated by a user.

136

What is a Foreign Currency Hedge?

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.

137

What activities does the COSO framework for enterprise risk management include?

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

138

When is Job-Order Costing used?

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

139

How does revenue react to price under Inelastic Demand?

Price increases, Revenue increases

Price decreases, Revenue decreases

140

What is Carrying Cost?

The cost of keeping inventory.

141

How does a Moving Average compare to Exponential Smoothing?

Both project estimates using average trends from recent periods

Difference: Exponential Smoothing weighs recent data more heavily

142

What is End-User Computing?

The User develops and executes their own application.

143

What is the Asset Turnover Ratio?

Sales / Average Assets

144

What is the rate of return on an investment called?

The Discount Rate.

145

What are possible responses to risk under the COSO framework for enterprise risk management?

Avoid or Reduce

Share or Accept

146

What is the Direct Method for allocating service department costs?

No services allocated between service departments, even if they serve each other. Only allocate to product(s)

147

What conditions would indicate Inelastic Demand?

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

148

What is Order Cost?

Cost of executing an order and starting product production.

149

What are the characteristics of Short-term Cost Analysis?

Uses Relevant Costs Only

Ignore Sunk Costs

Opportunity Cost is a Must

150

What is the primary benefit of E-commerce?

E-commerce makes business transactions easier.

151

What is the Step Method for allocating service department costs?

Services can be allocated to both other service departments and the product(s)

152

What is Unitary Demand?

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity = 1

153

What is inventory reorder point?

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

IOP = Average Daily Demand x Average Lead Time

154

What are the risks of E-commerce?

Compromised data or theft.

Less paper trail for auditors.

155

What does the Current Ratio tell us? How is it calculated?

Can the company pay their short-term liabilities?

Current Ratio = Current Assets / Current Liabilities

156

What does the Discount Rate represent?

The rate of return on an investment used.

It represents the minimum rate of return required.

157

Under process costing, how are the units shipped calculated?

Beginning Inventory
+ Units Started
- Ending Inventory
= No. Units Shipped

158

How is Income Elasticity of Demand calculated?

% Change Quanitity Demanded / % Change in Income

Normal goods greater than 1 (demand increases more than income)

Inferior goods less than 1 (demand increases less than income)

159

What is a Just In Time (JIT) system?

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

160

What are the benefits of Electronic Data Interchange?

Uses globally-accepted standards

Efficient

161

Which two inventory methods are used under Process Costing?

FIFO

Weighted Average

162

What conditions occur under periods of inflation?

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

163

What is Factoring of receivables?

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

164

What is a File Server?

A file server stores shared programs and documents.

165

What does the Debt to Equity Ratio tell us? How is it calculated?

How is the company financing its capital?

Debt to Equity Ratio = Total Debt / Total Equity

166

What are the strengths of the Net Present Value system?

Uses the Time Value of Money

Uses all cash flows- not just the cash flows to arrive at Payback

Takes risks into consideration

167

What is another name for Process Costing?

Equivalent Units of Production

168

What happens under Demand-Pull inflation?

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases

169

What is a Trade Discount?

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

170

What is the purpose of a Database?

Located on a File Server- a Database allows users to share documents.

171

How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?

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

172

What happens under Cost-Push inflation?

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

173

What is the cost of forgoing a discount?

(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))

174

What is the purpose of a LAN (Local Area Network)?

It connects computers in close proximity.

175

What does the Debt to Total Assets ratio tell us? How is it calculated?

What proportions of the company's assets are encumbered with debt?

Debt to Total Assets = Total Liabilities / Total Assets

176

What are the weaknesses of the Net Present Value system?

Not as simple as the Accounting Rate of Return.

177

How are Direct Materials calculated under the Weighted Average Method?

Beginning Inventory + Current Costs / EFU WA

178

What is the Equilibrium Price?

The price where Quanitity Supplied = Quantity Demanded

179

What is the Prime Rate?

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

180

What is the purpose of a WAN (Wide Area Network)?

It connects computers that are far apart.

181

How are Conversion Costs calculated under Weighted Average Method?

Beginning Inventory + Current Costs / EFU WA

182

What is Optimal Production?

When Marginal Revenue = Marginal Cost

183

What is the Nominal (Face, Coupon, Stated) Rate?

Interest rate stated on the face of a bond.

184

What are the characteristics of a VAN (Value-Added Network)?

Privately-owned Network

Serves as 3rd Party Between 2 Companies

Routes EDI Transactions

Accepts wide range of Protocols

Very Costly

185

What does Gross Margin % tell us? How is it calculated?

How profitable is the product after COGS?

Gross Margin = Gross Profit / Net Sales

186

How do Salvage Value and Depreciation affect Net Present Value?

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.

187

How are Equivalent Finished Units calculated for Direct Materials?

Units Shipped
+ EI x % Complete DM
= EFU (Weighted Average Method)

- Beginning Inventory x % Complete
= EFU (FIFO)

188

What is the result of a Price Floor?

Causes a surplus if above equilibrium price.

189

How is Current Yield calculated?

CY = Interest Payment / Bond Price

190

What is the purpose of a Firewall?

Prevents unauthorized access to a network.

191

How are Equivalent Finished Units calculated for Conversion Costs?

Units Shipped
+ EI x % Complete CC
= EFU (Weighted Average)

- Beginning Inv x % Complete
= EFU (FIFO)

192

What is GDP (Gross Domestic Product)?

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

193

What is the Effective (YTM, Market) Rate?

PV of Principle + Interest = Bond Price

194

What are the characteristics of a virus?

Takes over a computer

Needs a host program to run

195

What does Operating Profit Margin tell us? How is it calculated?

How profitable is the product after all expenses (except interest and taxes)?

Operating Profit Margin = Operating Profit / Net Sales

196

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

The minimum rate of return is used.

197

How are Direct Materials calculated under the FIFO method?

Current Costs / EFU FIFO

Note: FIFO method uses Current Period costs only and ignores Beginning Inventory

198

What is included under the income approach for calculating GDP?

Sole Proprietor and Corp Income
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments
Depreciation

199

What is a Zero Coupon Bond?

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

200

What are the characteristics of a computer worm?

Takes over multiple computers

Doesn't need a host program to run

201

How are Conversion Costs calculated under the FIFO method?

Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory

202

What is included under the Expenditure Approach for calculating GDP?

Individual Consumption

Private Investment

Government Purchases

Net Exports

203

What are the characteristics of a Junk Bond?

High interest rate

High default risk

204

What is the purpose of Automated Equipment Controls?

They prevent and detect hardware errors.

205

How is Times Interest Earned calculated and what does it mean?

Can the company make their interest payments?

Times Interest Earned = Earnings Before Tax & Interest / Interest Expense

206

What is the Internal Rate of Return (IRR)?

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

207

How is WIP calculated?

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

208

What is Nominal GDP?

Measures goods/services in current prices.

209

What are debenture bonds?

Bonds unsecured by collateral

210

What is RAM?

Random Access Memory.

Internal memory in the computer used during immediate processing.

211

How do period costs and product costs relate to net sales, gross margin and operating income?

Net Sales
- Product Costs
= Gross Margin
- Period Costs
= Operating Income

212

For what is a GDP Deflator used?

Used to convert GDP to Real GDP

213

What are subordinated debentures?

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

214

What is a CPU?

Computer Processing Unit

It processes commands within a computer.

215

What does Return on Assets tell us? How is it calculated?

What % return are the assets generating?

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

216

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

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

217

What is the focus of Activity Based Costing (ABC)?

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

218

What is Real GDP?

Nominal GDP / GDP Deflator x 100

219

What are Redeemable Bonds?

Provision in Bond contract allows demand of Bond payment under certain circumstances

220

What is Job Control Language?

It schedules and allocates system resources.

221

How do Cost Pools and Allocations compare under ABC versus traditional costing system?

Cost Pools and Allocations increase compared to a traditional costing system

222

What is Gross National Product (GNP)?

Like GDP; Swaps foreign production. US Firms overseas are included, Foreign firms domestically are not included

223

What is a Callable Bond?

Borrower can pay off debt early

224

What are examples of input devices?

Keyboard
Mouse
Scanner
Magnetic Ink Reader
Magnetic Tape Reader
EDI
Point of Sale Scanner

225

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

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

Rate of return for NPV is the minimum rate.

226

What is Backflush Costing?

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

227

What is the Consumer Price Index (CPI)? How is it applied?

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

228

What is a Convertible Bond?

Lender can demand payment via company stock instead of money

229

What are examples of Output Devices?

Speakers

Monitors

Printers

230

How is Market/Book ratio calculated?

Market Value of Common Stock / Book Value of Common Stock

231

What are the characteristics of By-Products?

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

232

How is disposable income calculated?

Personal Income - Personal Taxes

233

What is a Sinking Fund?

Borrower deposits regular sums into an account that will eventually pay off the debt

234

What are the characteristics of Magnetic Tape storage?

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

235

What are the strengths and weaknesses of the Internal Rate of Return system?

Strengths: Uses Time Value of Money- Cash Flow emphasis

Weakness: Uneven cash flows lead to varied IRR

236

What are Cost Functions?

Measure how costs change relative to activity levels

High-Low Method

Change in Cost (High-Low pts) / Change in Activity (High-Low pts)

237

How is Return to Scale calculated?

% Increase in output / % Increase in input

Greater than 1 = Increasing returns to scale

Less than 1 = Decreasing returns to scale

238

What is the disadvantage of Common Stock in comparison to bonds?

Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)

239

What are the characteristics of Magnetic Disks?

Random Access - Finds data in random spots

Faster data retrieval

Uses Boundary Protection for data

240

What is Inventory Turnover and how is it calculated?

How quickly does inventory get sold?

Inventory Turnover = COGS / Average Inventory

241

When is the economy in Recession?

When GDP growth is negative for two consecutive quarters.

242

What is the advantage of Preferred Stock?

Hold dividend priority over common stock

243

What is a Gateway?

Connects one network to another

Note: the Internet is connected by Gateways

244

When is NPV on an Investment positive?

When the benefits are greater than the costs.

IRR is greater than the Discount Rate

245

What is a Depression?

A prolonged, severe recession with high unemployment rates

No requisite period of time for the economy to officially be in a depression

246

What is Weighted Average Cost of Capital?

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%

247

What are Parity Checks?

A control that detects internal data errors.

A bit is added to each character- it checks to see if a bit was lost.

248

What is the Quick Ratio and how is it calculated?

It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)

249

What are the stages of the Economic Cycle?

Peak (highest)
Recession (decreasing)
Trough (lowest)
Recover (increasing)
Expansion (higher again)

250

What is CAPM?

A stock’s expected performance is based on its beta (risk) compared to that of the stock market.

More risk = more expected return.

251

What is an Echo Check?

Transmitted data is returned to the sender for verification (it echoes back to the sender)

252

When is NPV on an Investment Negative?

When Costs are greater than Benefits

IRR is less than the Discount Rate

253

What are leading indicators?

Conditions that occur before a recession or before a recovery

Example: Stock Market or New Housing Starts

254

How is Cost of Debt calculated?

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

255

What is a Change Control?

It authorizes program changes and approves program test results.

256

What is Average Collection Period- and how is it calculated?

How many days does it take the company to collect payment on A/R?

Average Collection Period = Average AR / Average Sales Per Day

257

What are lagging indicators?

Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates, Unemployment

258

What is security software?

Software that controls access to IT systems.

Note: Don't confuse this with anti-virus software

259

What is an Internal Failure?

Products have quality defects- but are caught BEFORE they leave the warehouse.

260

When is NPV Zero?

When benefits equal the Costs

IRR = Discount Rate

261

What are coincident indicators?

Conditions that occur during a recession or during a recovery

Example: Manufacturing output

262

What is the purpose of a Digital Signature?

It confirms a message has not been altered.

263

What is an External Failure?

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

This includes recalls.

264

What is the Payback Method? How is it calculated?

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.

265

Which people are included in the calculation of unemployment?

Only people looking for jobs

266

List the types of computers from smallest to largest

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

267

What is Cyclical Unemployment?

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

268

What are the units of computer data from smallest to largest?

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)

269

What is Appraisal Cost?

Quality control- testing & inspection costs.

270

What are the strengths of the Payback Method?

Takes risk into consideration

2 year payback is less risky than a 5 year payback

271

What is Frictional Unemployment?

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

272

What is the duty of a design engineer?

Determine language used for a specific computer- on a computer-to-computer basis

273

What are the weaknesses of the payback method?

Ignores the Time Value of Money

Exception: Discount payback method

Ignores cash flow after the initial investment is paid back

274

What is Structural Unemployment?

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

275

What are object programs?

Programs written in base computer language- not similar to English.

276

What is the Accounting Rate of Return?

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.

277

How does inflation relate to unemployment?

High Unemployment = Low Inflation (Vice Versa)

278

How can source programs be recognized?

They are written in a language close to English.

279

What are the strengths of the Accounting Rate of Return (ARR)?

Simple to use

People understand easily

280

What is the Discount Rate?

The rate a bank pays to borrow from the Fed.

281

What is the purpose of a Compiler?

Takes Source language (English) and converts to Object (Computer) Language

282

What are the weaknesses of the Accounting Rate of Return (ARR)?

Can be skewed based on Depreciation method that is used.

Ignores the Time Value of Money.

283

What is the Prime Rate?

The rate a bank charges their best customers on short-term borrowings.

284

How does Online Analytical Processing work?

It uses a Data Warehouse to support management decision making.

285

What is an Expected Return?

An approximate rate of return on assets.

286

What is the Real Interest Rate?

Inflation-adjusted interest rate

287

What is Data Mining?

Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.

288

What is the Nominal Rate?

Rate that uses current prices

289

What is the purpose of online transaction processing?

To process a company's routine transactions.

290

What is the Risk-Free Rate?

Rate for a loan with 100% certainty of payback.

Usually results in a lower rate.

US Treasuries are an example.

291

What are the characteristics of batch processing?

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)

292

What is included in the M1 money supply?

Currency, Coins, and Deposits

293

What does an output control check for?

Checks to see if output data is valid- distributed and used in an authorized manner.

294

What is included in the M2 money supply?

Highly liquid assets other than currency, coins or deposits

295

What does a processing control check?

Checks if data processing produced proper output

296

What is Deficit Spending?

Increased spending levels without increased tax revenue.

Lower taxes without decrease in spending

Gamble that the multiplier effect will take over and boost economy

297

What is a hash total?

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.

298

How can the Fed control the money supply?

By buying and selling the government's securities.

299

What is a validity check?

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

300

How does the Fed control economy-wide interest rates?

By adjusting the discount rate charged to banks

301

What is a limit check?

Checks to see if numbers surpass a certain limit- i.e. in an age field is the number greater than 110.

302

What is a Tariff?

A tax on imported goods

303

What is a check digit?

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

304

What is a quota?

A limit on the number of goods that can be imported

305

What is a field check?

An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field

306

How do international trade restrictions affect domestic producers?

They are good for domestic producers.

Demand curve shifts right

Fewer substitutes

They can charge higher prices

307

What is a Hot Site?

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

308

How to international trade restrictions affect foreign producers?

They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices

309

What is a Cold Site?

If a main system goes down- a Cold Site will take time to get set up and running.

310

How do international trade restrictions affect foreign consumers?

They are good for foreign consumers

Supply curve shifts right

Goods purchased at lower prices in the foreign markets

311

What is the most common database language?

SQL - Standard Query Language

312

How do international trade restrictions affect domestic consumers?

They are bad for domestic consumers

Supply curve shifts left

Fewer goods bought due to higher prices

313

What is a Data Definition Language?

Defines SQL Database

Controls SQL Tables

314

What is Accounting Cost?

Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs

315

What is a Data Manipulation Language?

Queries SQL Database tables

316

What is Accounting Profit?

Revenue - Accounting Cost

317

What is a Data Control Language?

Controls Access to SQL Database

318

What is Economic Cost?

Explicit + Implicit Cost

319

What are the characteristics of a Relational Database?

Logical structure

Uses rows and columns similar to spreadsheet

320

What is Economic Profit?

Revenue - Economic Cost

321

What are the characteristics of a Hierarchical Database?

Has various levels

Uses trees to store data

322

What are the advantages of a database?

Data is more accessible

Reduced redundancy

323

What are the disadvantages of a database?

Cost of installation

Skilled personnel required to maintain

324

What are the components of a database?

Desktop client

Application Server

Database Server

Think: Your desktop computer runs applications and saves to a database