BEC - ALL Flashcards
(888 cards)
1
Q
What is the primary duty of the board of directors?
A
To monitor management behavior.
2
Q
What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?
A
Oversees the boardResponsible for hiring new CEO
3
Q
What is the responsibility of the audit committee of the board of directors?
A
The audit committee appoints and oversees the external auditor.
4
Q
What is the duty of the compensation committee of the board of directors?
A
The compensation committee handles the CEO’s compensation package.
5
Q
What does the NYSE and NASDAQ require of the board of directors?
A
They require the board to be independent.
6
Q
What is the main goal in an executive compensation package?
A
The package should ensure that the goals of management should match those of the shareholders.
7
Q
How can an executive compensation package ensure that goals of management align with those of shareholders?
A
Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.
8
Q
Which influences help mold the direction that management takes?
A
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
9
Q
What is shirking?
A
When management doesn’t act in the best interest of shareholders.It can be alleviated by tying compensation to stock performance or company profit.
10
Q
What requirements are imposed on a public company under Sarbanes-Oxley?
A
Management must submit a report on the effectiveness of Internal Control in the 10K.Management must disclose significant Internal Control deficiencies.CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.
11
Q
What characteristics are promoted by the COSO framework on Internal Control?
A
Reliable financial reportingEffective and efficient operationsCompliance
12
Q
What are the elements of the control environment?
A
Integrity & EthicsCompetenceThe Board of Directors & Audit CommitteeManagement’s Operating StyleOrganizational StructureAuthority & Roles of ResponsibilitiesHR Policies
13
Q
What are control activities?
A
A component of Internal Control that includes actions being taken to promote the control environment.
14
Q
What are the basic elements of Internal Control?
A
Control EnvironmentRisk AssessmentControl ActivitiesInformation and CommunicationMonitoring
15
Q
What is the significance of the Information and Communication aspect of Internal Control?
A
Management must have access to relevant and timely information to make good decisions.
16
Q
How does Monitoring affect Internal Control?
A
Internal Control activities must be constantly monitored and evaluated for effectiveness.
17
Q
What activities does the COSO framework for enterprise risk management include?
A
Identifies Risk FactorsPromotes Risk Response DecisionsCompares Management Risk vs. Shareholder GoalsAids in evaluating opportunitiesPromotes Quicker Capital movementDoes NOT eliminate all risk
18
Q
What are possible responses to risk under the COSO framework for enterprise risk management?
A
Avoid or ReduceShare or Accept
19
Q
What is Cost Accounting?
A
Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet foro Direct Materialso Direct Laboro Work in Processo Finished GoodsCost Accounting also records for the Income Statement
20
Q
What is the difference between Cost Accounting and Managerial Accounting?
A
Cost Accounting - External Focus- GAAPManagerial Accounting - Internal Focus- Not GAAP
21
Q
What are Product Costs (aka Inventory Costs)?
A
Prime CostsConversion Costs
22
Q
What are included in Prime Costs?
A
Direct Material USED - Have become part of the product or had a direct impact on the productDirect Labor Used - Employees who worked on product and had direct impact
23
Q
What is Factory Overhead?
A
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).
24
Q
What is included in Fixed Factory Overhead?
A
FFO : Estimated Costs / Normal CapacityUses Normal ActivityExamples of Fixed Factory OH: Depreciation (SL)- Utilities- TaxesUnder/Over-applied Fixed OH always goes to COGS
25
What is included in Variable Overhead?
VO : Estimated Activity / Actual ActivityUses Actual ActivityExamples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)
26
Where is Under/Over-applied Variable OH recorded?
If Immaterial - Goes to COGSIf Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance
27
Where is Under/Over-applied Fixed OH recorded?
It always goes to COGS
28
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
Under-applied overhead.If it's Fixed OH- under-applied goes to COGS.If it's Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.
29
What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
A credit balance indicates over-applied overhead.If Fixed overhead- it is corrected from COGS.If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.
30
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)
31
What variables are used to calculated Work in Process (WIP)?
Beginning Balance (End Bal of Previous WIP)DR Direct Materials UsedDR Direct Labor Used (Conversion Cost)CR COGMDR Factory Overhead Applied (Conversion Cost): Ending Balance (Goes to BS)
32
What variables are included in Finished Goods calculations?
Beginning BalanceDR COGM: COGAS (Cost of Goods Avail for Sale)CR COGS: Ending Balance (Goes to BS)
33
How does Freight In affect Cost Accounting calculations?
Inventory (Product) CostPart of DM Purchases
34
How does Freight Out affect Cost Accounting?
Selling (Period) CostNot part of inventory
35
When is Job-Order Costing used?
Used when costs are easily connected to a specific product or product line Can also be applied to servicesCalculation is the same as normal cost accounting - just use your T Accounts- DM to WIP to FG to COGS- You're likely going to be solving for the last job in the queue
36
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)
37
What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
38
Under process costing- how are the units shipped calculated?
Beginning Inventory+ Units Started- Ending Inventory: No. Units Shipped
39
Which two inventory methods are used under Process Costing?
FIFOWeighted Average
40
What is another name for Process Costing?
Equivalent Units of Production
41
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)
42
How are Direct Materials calculated under the Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
43
How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
44
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)
45
How are Equivalent Finished Units calculated for Conversion Costs?
Units Shipped+ EI x % Complete CC: EFU (Weighted Average)- Beginning Inventory x % Complete: EFU (FIFO)
46
How are Direct Materials calculated under the FIFO method?
Current Costs / EFU FIFONote: FIFO method uses Current Period costs only and ignores Beginning Inventory
47
How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFOFIFO method uses Current Period costs only and ignores Beginning Inventory
48
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
49
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
50
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 aboutInventory is expensive to store and storing something is not a value-added expenditureUses Cost Pools - Different departments can have different OH ratesUses Several OH rates based on Activity - Cost Pool / Cost Driver
51
How do Cost Pools and Allocations compare under ABC versus traditional costing system?
Cost Pools and Allocations increase compared to a traditional costing system
52
What is Backflush Costing?
Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)- Works backward to flush out COGS- Mostly GAAP
53
What are the characteristics of By-Products?
Usually immaterial and common costs aren't allocated to themLow Market ValueCan be valued at NRVCan be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against SalesRecognition rules are very flexible with valuing and classifying by-products
54
What are Cost Functions?
Measure how costs change relative to activity levelsHigh-Low MethodChange in Cost (High-Low pts) / Change in Activity (High-Low pts)
55
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
56
What is a supply curve shift?
When supply changes due to something other than price.
57
What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price pointHigher Equilibrium GDPNumber of sellers increases - market can get floodedExamples: Government subsidies or technology improvements that decrease costs for suppliers
58
What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price pointLower Equilibrium GDPCost 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
59
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
60
What is a Demand Curve Shift?
When demand changes due to something other than price.
61
What is a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price pointPrice of substitutes go up - price of beef rises- so people buy more chickenFuture price increase is expected - War in Middle East- people go out and buy gasMarket expands - i.e. people get new free health care plan- demand at clinic risesExpansion - more spending increases equilibrium GDP
62
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 ketchupBoycott - Company commits social blunder- consumers boycottConsumer income rises - Demand for inferior goods drops as people have more money to spendConsumer tastes changeContraction - less spending decreases equilibrium GDP
63
What is the Marginal Propensity to Consume?
How much you spend when your income increasesCalculate: Change in Spending / Change in Income
64
What is the Marginal Propensity to Save?
How much you save when income increasesCalculate: Change in Savings / Change in IncomeAlso equals 1 - Marginal Propensity to Consume
65
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
66
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).
67
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
68
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
69
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreasesPrice decreases- Revenue increases
70
What conditions would indicate Elastic Demand?
Many substitutes (luxury items)Considered elastic if elasticity is greater than 110% drop in demand / 8% increase in price : 1.25 (Elastic)Price increases- Revenue decreasesPrice decreases- Revenue increases
71
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increasesPrice decreases- Revenue decreases
72
What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline)Considered inelastic if coefficient of elasticity is less than 15% drop in demand / 10% increase in price : .5 (inelastic)Price increases- Revenue increasesPrice decreases- Revenue decreases
73
What is Unitary Demand?
Total revenue will remain the same if price is increasedConsidered unitary if coefficient of elasticity : 1
74
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in IncomeNormal goods greater than 1 (demand increases more than income)Inferior goods less than 1 (demand increases less than income)
75
What conditions occur under periods of inflation?
Interest rates increaseReduced demand for loansReduced demand for houses- autos- etc.Value of bonds and fixed income securities decreaseInferior good demand to increaseForeign goods more affordable than domesticDemand for domestic goods decrease
76
What happens under Demand-Pull inflation?
Overall spending increasesDemand increases (shifts right)Market equilibrium price increases
77
What happens under Cost-Push inflation?
Overall production costs increaseSupply decreases (shifts left)Market equilibrium price increasesNote: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
78
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
79
What is Optimal Production?
When Marginal Revenue : Marginal Cost
80
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
81
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 interestsIncluded: Foreign company has US FactoryNot included: US company has foreign factory
82
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp IncomePassive IncomeTaxesEmployee SalariesForeign Income AdjustmentsDepreciation
83
What is included under the Expenditure Approach for calculating GDP?
Individual ConsumptionPrivate InvestmentGovernment PurchasesNet Exports
84
What is Nominal GDP?
Measures goods/services in current prices.
85
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
86
What is Real GDP?
Nominal GDP / GDP Deflator x 100
87
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
88
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
89
How is disposable income calculated?
Personal Income - Personal Taxes
90
How is Return to Scale calculated?
% Increase in output / % Increase in inputGreater than 1 : Increasing returns to scaleLess than 1 : Decreasing returns to scale
91
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
92
What is a Depression?
A prolonged- severe recession with high unemployment ratesNo requisite period of time for the economy to officially be in a depression
93
What are the stages of the Economic Cycle?
Peak (highest)Recession (decreasing)Trough (lowest)Recover (increasing)Expansion (higher again)
94
What are leading indicators?
Conditions that occur before a recession or before a recoveryExample: Stock Market or New Housing Starts
95
What are lagging indicators?
Conditions that occur after a recession or after a recoveryExamples: Prime Interest Rates- Unemployment
96
What are coincident indicators?
Conditions that occur during a recession or during a recoveryExample: Manufacturing output
97
Which people are included in the calculation of unemployment?
Only people looking for jobs
98
What is Cyclical Unemployment?
GDP doesn't grow fast enough to employ all people who are looking for workExample: People are unemployed in 2010 because there aren't enough jobs available due to the economy
99
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
100
What is Structural Unemployment?
A worker's job skills do not match those necessary to get a job so they need education or trainingExample: A construction worker wants to work in an office- so they quit their job and get computer training
101
How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
102
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
103
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
104
What is the Real Interest Rate?
Inflation-adjusted interest rate
105
What is the Nominal Rate?
Rate that uses current prices
106
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.
107
What is included in the M1 money supply?
Currency- Coins- and Deposits
108
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
109
What is Deficit Spending?
Increased spending levels without increased tax revenue.Lower taxes without decrease in spendingGamble that the multiplier effect will take over and boost economy
110
How can the Fed control the money supply?
By buying and selling the government's securities.
111
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
112
What is a Tariff?
A tax on imported goods
113
What is a quota?
A limit on the number of goods that can be imported
114
How do international trade restrictions affect domestic producers?
They are good for domestic producers.Demand curve shifts rightFewer substitutesThey can charge higher prices
115
How to international trade restrictions affect foreign producers?
They are bad for foreign producersDemand curve shifts leftFewer buyersThey must charge lower prices
116
How do international trade restrictions affect foreign consumers?
They are good for foreign consumersSupply curve shifts rightGoods purchased at lower prices in the foreign markets
117
How do international trade restrictions affect domestic consumers?
They are bad for domestic consumersSupply curve shifts leftFewer goods bought due to higher prices
118
What is Accounting Cost?
Explicit (Actual) cost of operating a businessImplicit costs are opportunity costs
119
What is Accounting Profit?
Revenue - Accounting Cost
120
What is Economic Cost?
Explicit + Implicit Cost
121
What is Economic Profit?
Revenue - Economic Cost
122
What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
123
How is Net Working Capital calculated?
NWC : Current Assets - Current Liabilities
124
What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycleDon't negatively impact operations
125
What is the Inventory Conversion Period?
Average time needed to convert materials into finished goods and sell themAverage Inventory : (BI + E) / 2Inventory Conversion Period : Average Inventory / Sales Per Day
126
What is the Receivables Collection Period?
Average time needed to collect A/RRCP : Average Receivables / Credit Sales Per Day
127
What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P paymentAverage Payables : (BP + EP) / 2Payables Deferral Period : Average Payables / (COGS/365)
128
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)
129
What traits should Cash and Short-Term Investments have?
LiquidSafe
130
For what are Letters of Credit used?
Used for importing goods.Issued by importer's bank.
131
What is the advantage of using Trade Credit?
No interest cost if paid timely.
132
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)
133
What is float?
Time it takes to mail a payment and have it clear your bank accountMaximize float on cash paymentsMinimize float on cash receipts
134
What are Zero Balance Accounts?
Regional bank sends enough cash to cover daily checksAdvantages:Checks take longer to clear -more floatLow amounts of cash tied up for compensating (minimum) balances
135
What is the difference between Treasury Bills- Notes and Bonds?
Treasury Bills: Short term (less than one year) Think: $1 BillTreasury 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
136
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of GovernmentGreater than 9 Months MaturityUnsecuredIssued by large firms
137
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.
138
What is Economic Order Quantity?
The order quantity that minimizes inventory costs.EOQ : Square Root of (2DO/C)D : Unit Demand (Annual)O : Order CostC : Cost of Inventory
139
What is Carrying Cost?
The cost of keeping inventory.
140
What is Order Cost?
Cost of executing an order and starting product production.
141
What is inventory reorder point?
How low inventory should get before it should be re-ordered.IOP : Average Daily Demand x Average Lead Time
142
What is a Just In Time (JIT) system?
Orders inventory so that you get it just in time for when it's neededJIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
143
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
144
What is a Trade Discount?
Buyer saves if paid earlyExample: 1/10 Net 301% Discount if paid within 10 daysIf not- bill is still due in 30 days
145
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
146
What is the Prime Rate?
A benchmark used for lending only to the best customersMost customers will be charged Prime + 3%- for exampleIf the lending institution and the customer are not in the same country- the LIBOR rate is often used
147
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
148
How is Current Yield calculated?
CY : Interest Payment / Bond Price
149
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
150
What is a Zero Coupon Bond?
No interest payments madeBond sold at a discountInterest reflected when Bond matures
151
What are the characteristics of a Junk Bond?
High interest rateHigh default risk
152
What are debenture bonds?
Bonds unsecured by collateral
153
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
154
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
155
What is a Callable Bond?
Borrower can pay off debt early
156
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
157
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
158
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)
159
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
160
What is Weighted Average Cost of Capital?
A company uses this to determine the true cost of their capitalExample:Debt costs 5%; 40% of Cap.Equity costs 12%; 60% of Cap.(5% x 40%) + (12% x 60%)WACC : 9.2%
161
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.
162
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
163
What is a Static Budget?
Budget targeted for a specific segment of a company.
164
What is a Maser Budget?
Budget targeted for the company as a wholeIncludes budgets for Operations and Cash FlowsIncludes set of budgeted Financial Statements
165
How do Fixed Costs affect budgeting?
Costs independent of the level activity within the relevant rangeProperty Tax is the same whether you produce 100-000 units or zero unitsHowever - Fixed Costs per unit vary given the amount of activityIf 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
166
How do Variable Costs affect budgeting?
The more Direct Materials or Direct Labor used- the more Variable Costs per unitHowever - Variable Costs per unit don't change with the level of activity like Fixed Costs per unit
167
How are Material Variances calculated?
SAM:Standard Material Costs- Actual Material Costs= Material Variance
168
How are Labor Variances calculated?
SALStandard Labor Costs- Actual Labor Costs= Labor Variance
169
How are Overhead Variances calculated?
OATOverhead Applied- Actual Overhead Cost= Total Overhead Variance
170
How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&AVariable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
171
How is Contribution Margin calculated?
Sales Price (per unit)- Variable Cost (per unit)= Contribution Margin (per unit)
172
How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit)= Break-even Point Per UnitAssumption: Total Costs & Total Revenues are LINEAR
173
What is the focus in a Cost Center?
Management is concerned only with costs
174
What is the focus in a Profit Center?
Management is concerned with both costs and profits
175
What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
176
What is the Delphi technique?
Forecasting technique where Data is collected and analyzedRequires judgement/consensus
177
What is Regression Analysis?
A forecasting technique where Sales is the dependent variable.Simple Regression - One independent variableMultiple Regression - Multiple independent variables
178
What are Econometric Models?
Forecast sales using Economic Data
179
What are Naive Forecasting Models?
Very Simplistic- Eyeball past trends and make an estimate
180
How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periodsDifference: Exponential Smoothing weighs recent data more heavily
181
What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs OnlyIgnore Sunk CostsOpportunity Cost is a Must
182
Which IT personnel roles should always be segregated?
OperatorsProgrammersLibrarians
183
What are the duties of a systems analyst?
Designs or purchases IT systemResponsible for flowchartsLiaison between Users and ProgrammersNote: Think IT Manager
184
What is the primary duty of a Systems Administrator?
A Systems Administrator controls database access.
185
What are the duties of a Systems Programmer?
Writes- Updates- Maintains- & Tests software- systems- and compilers
186
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.
187
What are the duties of a Systems Operator?
Schedules and Monitors JobsRuns IT Help Desk
188
What duties should a System Operator NOT have?
For internal control purposes- they should not be a Programmer on the system.
189
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.
190
What is the purpose of a Management Information System (MIS)?
To assist with decision making.
191
What is an Accounting Information System (AIS)?
A type of Management Information System (MIS) that processes accounting transactions.
192
What are the characteristics of an Executive Information System (EIS)?
Specialized for Company Executive needsAssists with Strategy OnlyNo Decision-Making Capabilities
193
What are the characteristics of an Expert System (ES)?
Computer uses reasoningStructuredNo human interpretation needed
194
What are the characteristics of a Decision Support System (DSS)?
Computer provides dataGives Interactive SupportHuman interpretation needed
195
What are the characteristics of an Ad Hoc computer report?
User initiates the report.The report is created upon demand.
196
When are Exception reports generated?
Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem
197
What is a query?
A type of Ad Hoc report- initiated by a user.
198
What is End-User Computing?
The User develops and executes their own application.
199
What is the primary benefit of E-commerce?
E-commerce makes business transactions easier.
200
What are the risks of E-commerce?
Compromised data or theft.Less paper trail for auditors.
201
What are the benefits of Electronic Data Interchange?
Uses globally-accepted standardsEfficient
202
What is a File Server?
A file server stores shared programs and documents.
203
What is the purpose of a Database?
Located on a File Server- a Database allows users to share documents.
204
What is the purpose of a LAN (Local Area Network)?
It connects computers in close proximity.
205
What is the purpose of a WAN (Wide Area Network)?
It connects computers that are far apart.
206
What are the characteristics of a VAN (Value-Added Network)?
Privately-owned NetworkServes as 3rd Party Between 2 CompaniesRoutes EDI TransactionsAccepts wide range of ProtocolsVery Costly
207
What is the purpose of a Firewall?
Prevents unauthorized access to a network.
208
What are the characteristics of a virus?
Takes over a computerNeeds a host program to run
209
What are the characteristics of a computer worm?
Takes over multiple computersDoesn't need a host program to run
210
What is the purpose of Automated Equipment Controls?
They prevent and detect hardware errors.
211
What is RAM?
Random Access Memory.Internal memory in the computer used during immediate processing.
212
What is a CPU?
Computer Processing UnitIt processes commands within a computer.
213
What is Job Control Language?
It schedules and allocates system resources.
214
What are examples of input devices?
KeyboardMouseScannerMagnetic Ink ReaderMagnetic Tape ReaderEDIPoint of Sale Scanner
215
What are examples of Output Devices?
SpeakersMonitorsPrinters
216
What are the characteristics of Magnetic Tape storage?
Sequential Access - Sorts data in orderSlower data retrievalHeader Label prevents Operator error by loading wrong tapeExternal Labels prevent accidental destruction by operator
217
What are the characteristics of Magnetic Disks?
Random Access - Finds data in random spotsFaster data retrievalUses Boundary Protection for data
218
What is a Gateway?
Connects one network to anotherNote: the Internet is connected by Gateways
219
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.
220
What is an Echo Check?
Transmitted data is returned to the sender for verification (it echoes back to the sender)
221
What is a Change Control?
It authorizes program changes and approves program test results.
222
What is security software?
Software that controls access to IT systems.Note: Don't confuse this with anti-virus software
223
What is the purpose of a Digital Signature?
It confirms a message has not been altered.
224
List the types of computers from smallest to largest
PDA/Smartphone/TabletMicrocomputer - PC- Laptop (cost-effective)Minicomputer - Like a Mainframe- but smallerMainframe - Large computer with terminals attachedSupercomputer - Very powerful and very big
225
What are the units of computer data from smallest to largest?
Bit - 1 (on) and 0 (off)Byte - 8 bits to a byte/characterField - 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)
226
What is the duty of a design engineer?
Determine language used for a specific computer- on a computer-to-computer basis
227
What are object programs?
Programs written in base computer language- not similar to English.
228
How can source programs be recognized?
They are written in a language close to English.
229
What is the purpose of a Compiler?
Takes Source language (English) and converts to Object (Computer) Language
230
How does Online Analytical Processing work?
It uses a Data Warehouse to support management decision making.
231
What is Data Mining?
Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.
232
What is the purpose of online transaction processing?
To process a company's routine transactions.
233
What are the characteristics of batch processing?
Data held- updates multiple files all at onceLeaves a better audit trailUses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)
234
What does an output control check for?
Checks to see if output data is valid- distributed and used in an authorized manner.
235
What does a processing control check?
Checks if data processing produced proper output
236
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.
237
What is a validity check?
Checks to see if data in existing tables or files belongs in the setFor example- is there a # in an alpha-only field or a letter in a numeric-only field
238
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.
239
What is a check digit?
An input control that adds an identification number to a set ofdigits - usually at the end
240
What is a field check?
An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field
241
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.
242
What is a Cold Site?
If a main system goes down- a Cold Site will take time to get set up and running.
243
What is the most common database language?
SQL - Structured Query Language
244
What is a Data Definition Language?
Defines SQL DatabaseControls SQL Tables
245
What is a Data Manipulation Language?
Queries SQL Database tables
246
What is a Data Control Language?
Controls Access to SQL Database
247
What are the characteristics of a Relational Database?
Logical structureUses rows and columns similar to spreadsheet
248
What are the characteristics of a Hierarchical Database?
Has various levelsUses trees to store data
249
What are the advantages of a database?
Data is more accessibleReduced redundancy
250
What are the disadvantages of a database?
Cost of installationSkilled personnel required to maintain
251
What are the components of a database?
Desktop clientApplication ServerDatabase ServerThink: Your desktop computer runs applications and saves to a database
252
What four perspectives are included in Balanced Scorecard?
Financial / Customer / Internal Business Processes / Learning and Growth
253
Why was Balanced Scorecard created?
To measure Performance.
254
What are Strategy Maps?
Diagrams of Strategic Cause and Effect Relationships.
255
What is a Strategic Initiative?
A plan to achieve goals.
256
What measures are used under Value-Based Management?
Return on InvestmentResidual IncomeSpreadEconomic Value AddedFree Cash Flow
257
How is Return on Investment (ROI) calculated?
ROI : Return / InvestmentExample: You Invest $100 to buy a machine that generates $60 in Operating Income$60 / $100 : 60% ROI
258
How is Residual Income calculated?
Operating Income - (Required Rate of Return x Invested Capital) : Residual Income
259
What is another name for Required Rate of Return (RROR)?
RROR is also called 'Cost of Capital'
260
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 expectExample: 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%
261
How is Spread calculated?
Spread : ROI - Cost of Capital
262
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)
263
How is Free Cash Flow calculated?
Operating Income After Tax+ Depreciation & Amortization- Capital Expenditures- Change in Net Working Capital: Free Cash Flow
264
What is measured by Six Sigma?
It measures a product versus its quality goal.
265
What is the Asset Turnover Ratio?
Sales / Average Assets
266
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
267
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
268
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
269
What does Gross Margin % tell us? How is it calculated?
How profitable is the product after COGS?Gross Margin : Gross Profit / Net Sales
270
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
271
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
272
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
273
How is Market/Book ratio calculated?
Market Value of Common Stock / Book Value of Common Stock
274
What is Inventory Turnover and how is it calculated?
How quickly does inventory get sold?Inventory Turnover : COGS / Average Inventory
275
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)Quick Ratio : (Current Assets - Inventory) / Current Liabilities
276
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
277
What is an Internal Failure?
Products have quality defects- but are caught BEFORE they leave the warehouse.
278
What is an External Failure?
Product reaches the customer- but they are not satisfied with the quality of the product.This includes recalls.
279
What is Appraisal Cost?
Quality control- testing & inspection costs.
280
Define Market Risk
The risk that a sluggish economy will affect the value of a debt instrument
281
Define Sector Risk
The risk that an event in the investment's business sector will harm the investmentFor example- the banking sector is sluggish- so even stocks of healthy banks suffer
282
Define Credit/Default Risk
The risk that a debtor will be unable to make loan payments or pay back the principal
283
Define Interest Rate Risk
The risk that a change in interest rates will adversely affect the value of the noteExample: 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.
284
What does Standard Deviation measure?
It measures the volatility of an investment.
285
What is Systematic Risk?
Risk that impacts the entire market and can't be avoided or reduced through diversificationExample: Wars
286
What is Unsystematic Risk?
Relates to a particular industry or companyExample: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest
287
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?
288
What is Variance?
It compares volatility of an investment to the market average.Factors include both Systematic and Unsystematic Risk.
289
What is a Derivative?
An asset whose value is DERIVED from the value of another asset.Derivatives are measured at Fair Value.
290
How is an Option used?
Gives the buyer the option to buy or sell a financial derivative at a certain priceTraders use them to speculate where they think the price will be at a certain point and make a profitHedgers use them to offset risk
291
What is a Future?
A Forward Contract with a future value.They are sold and traded on the futures market.
292
What is an Interest Rate Swap?
Forward Contract to swap payment agreementsThey 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
293
What is Legal Risk?
Risk that a law or regulation will void the derivative
294
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.
295
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.
296
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.
297
What is the primary duty of the board of directors?
To monitor management behavior.
298
What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?
Oversees the boardResponsible for hiring new CEO
299
What is the responsibility of the audit committee of the board of directors?
The audit committee appoints and oversees the external auditor.
300
What is the duty of the compensation committee of the board of directors?
The compensation committee handles the CEO's compensation package.
301
What does the NYSE and NASDAQ require of the board of directors?
They require the board to be independent.
302
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.
303
How can an executive compensation package ensure that goals of management align with those of shareholders?
Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn't sacrifice the long-term success of the enterprise for short-term gain.
304
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
305
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.
306
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 deficiencies.CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.
307
What characteristics are promoted by the COSO framework on Internal Control?
Reliable financial reportingEffective and efficient operationsCompliance
308
What are the elements of the control environment?
Integrity & EthicsCompetenceThe Board of Directors & Audit CommitteeManagement's Operating StyleOrganizational StructureAuthority & Roles of ResponsibilitiesHR Policies
309
What are control activities?
A component of Internal Control that includes actions being taken to promote the control environment.
310
What are the basic elements of Internal Control?
Control EnvironmentRisk AssessmentControl ActivitiesInformation and CommunicationMonitoring
311
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.
312
How does Monitoring affect Internal Control?
Internal Control activities must be constantly monitored and evaluated for effectiveness.
313
What activities does the COSO framework for enterprise risk management include?
Identifies Risk FactorsPromotes Risk Response DecisionsCompares Management Risk vs. Shareholder GoalsAids in evaluating opportunitiesPromotes Quicker Capital movementDoes NOT eliminate all risk
314
What are possible responses to risk under the COSO framework for enterprise risk management?
Avoid or ReduceShare or Accept
315
What is Cost Accounting?
Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet foro Direct Materialso Direct Laboro Work in Processo Finished GoodsCost Accounting also records for the Income Statement
316
What is the difference between Cost Accounting and Managerial Accounting?
Cost Accounting - External Focus- GAAPManagerial Accounting - Internal Focus- Not GAAP
317
What are Product Costs (aka Inventory Costs)?
Prime CostsConversion Costs
318
What are included in Prime Costs?
Direct Material USED - Have become part of the product or had a direct impact on the productDirect Labor Used - Employees who worked on product and had direct impact
319
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).
320
What is included in Fixed Factory Overhead?
FFO : Estimated Costs / Normal CapacityUses Normal ActivityExamples of Fixed Factory OH: Depreciation (SL)- Utilities- TaxesUnder/Over-applied Fixed OH always goes to COGS
321
What is included in Variable Overhead?
VO : Estimated Activity / Actual ActivityUses Actual ActivityExamples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)
322
Where is Under/Over-applied Variable OH recorded?
If Immaterial - Goes to COGSIf Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance
323
Where is Under/Over-applied Fixed OH recorded?
It always goes to COGS
324
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
Under-applied overhead.If it's Fixed OH- under-applied goes to COGS.If it's Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.
325
What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
A credit balance indicates over-applied overhead.If Fixed overhead- it is corrected from COGS.If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.
326
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)
327
What variables are used to calculated Work in Process (WIP)?
Beginning Balance (End Bal of Previous WIP)DR Direct Materials UsedDR Direct Labor Used (Conversion Cost)CR COGMDR Factory Overhead Applied (Conversion Cost): Ending Balance (Goes to BS)
328
What variables are included in Finished Goods calculations?
Beginning BalanceDR COGM: COGAS (Cost of Goods Avail for Sale)CR COGS: Ending Balance (Goes to BS)
329
How does Freight In affect Cost Accounting calculations?
Inventory (Product) CostPart of DM Purchases
330
How does Freight Out affect Cost Accounting?
Selling (Period) CostNot part of inventory
331
When is Job-Order Costing used?
Used when costs are easily connected to a specific product or product line Can also be applied to servicesCalculation is the same as normal cost accounting - just use your T Accounts- DM to WIP to FG to COGS- You're likely going to be solving for the last job in the queue
332
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)
333
What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
334
Under process costing- how are the units shipped calculated?
Beginning Inventory+ Units Started- Ending Inventory: No. Units Shipped
335
Which two inventory methods are used under Process Costing?
FIFOWeighted Average
336
What is another name for Process Costing?
Equivalent Units of Production
337
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)
338
How are Direct Materials calculated under the Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
339
How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
340
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)
341
How are Equivalent Finished Units calculated for Conversion Costs?
Units Shipped+ EI x % Complete CC: EFU (Weighted Average)- Beginning Inventory x % Complete: EFU (FIFO)
342
How are Direct Materials calculated under the FIFO method?
Current Costs / EFU FIFONote: FIFO method uses Current Period costs only and ignores Beginning Inventory
343
How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFOFIFO method uses Current Period costs only and ignores Beginning Inventory
344
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
345
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
346
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 aboutInventory is expensive to store and storing something is not a value-added expenditureUses Cost Pools - Different departments can have different OH ratesUses Several OH rates based on Activity - Cost Pool / Cost Driver
347
How do Cost Pools and Allocations compare under ABC versus traditional costing system?
Cost Pools and Allocations increase compared to a traditional costing system
348
What is Backflush Costing?
Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)- Works backward to flush out COGS- Mostly GAAP
349
What are the characteristics of By-Products?
Usually immaterial and common costs aren't allocated to themLow Market ValueCan be valued at NRVCan be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against SalesRecognition rules are very flexible with valuing and classifying by-products
350
What are Cost Functions?
Measure how costs change relative to activity levelsHigh-Low MethodChange in Cost (High-Low pts) / Change in Activity (High-Low pts)
351
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
352
What is a supply curve shift?
When supply changes due to something other than price.
353
What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price pointHigher Equilibrium GDPNumber of sellers increases - market can get floodedExamples: Government subsidies or technology improvements that decrease costs for suppliers
354
What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price pointLower Equilibrium GDPCost 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
355
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
356
What is a Demand Curve Shift?
When demand changes due to something other than price.
357
What is a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price pointPrice of substitutes go up - price of beef rises- so people buy more chickenFuture price increase is expected - War in Middle East- people go out and buy gasMarket expands - i.e. people get new free health care plan- demand at clinic risesExpansion - more spending increases equilibrium GDP
358
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 ketchupBoycott - Company commits social blunder- consumers boycottConsumer income rises - Demand for inferior goods drops as people have more money to spendConsumer tastes changeContraction - less spending decreases equilibrium GDP
359
What is the Marginal Propensity to Consume?
How much you spend when your income increasesCalculate: Change in Spending / Change in Income
360
What is the Marginal Propensity to Save?
How much you save when income increasesCalculate: Change in Savings / Change in IncomeAlso equals 1 - Marginal Propensity to Consume
361
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
362
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).
363
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
364
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
365
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreasesPrice decreases- Revenue increases
366
What conditions would indicate Elastic Demand?
Many substitutes (luxury items)Considered elastic if elasticity is greater than 110% drop in demand / 8% increase in price : 1.25 (Elastic)Price increases- Revenue decreasesPrice decreases- Revenue increases
367
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increasesPrice decreases- Revenue decreases
368
What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline)Considered inelastic if coefficient of elasticity is less than 15% drop in demand / 10% increase in price : .5 (inelastic)Price increases- Revenue increasesPrice decreases- Revenue decreases
369
What is Unitary Demand?
Total revenue will remain the same if price is increasedConsidered unitary if coefficient of elasticity : 1
370
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in IncomeNormal goods greater than 1 (demand increases more than income)Inferior goods less than 1 (demand increases less than income)
371
What conditions occur under periods of inflation?
Interest rates increaseReduced demand for loansReduced demand for houses- autos- etc.Value of bonds and fixed income securities decreaseInferior good demand to increaseForeign goods more affordable than domesticDemand for domestic goods decrease
372
What happens under Demand-Pull inflation?
Overall spending increasesDemand increases (shifts right)Market equilibrium price increases
373
What happens under Cost-Push inflation?
Overall production costs increaseSupply decreases (shifts left)Market equilibrium price increasesNote: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
374
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
375
What is Optimal Production?
When Marginal Revenue : Marginal Cost
376
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
377
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 interestsIncluded: Foreign company has US FactoryNot included: US company has foreign factory
378
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp IncomePassive IncomeTaxesEmployee SalariesForeign Income AdjustmentsDepreciation
379
What is included under the Expenditure Approach for calculating GDP?
Individual ConsumptionPrivate InvestmentGovernment PurchasesNet Exports
380
What is Nominal GDP?
Measures goods/services in current prices.
381
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
382
What is Real GDP?
Nominal GDP / GDP Deflator x 100
383
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
384
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
385
How is disposable income calculated?
Personal Income - Personal Taxes
386
How is Return to Scale calculated?
% Increase in output / % Increase in inputGreater than 1 : Increasing returns to scaleLess than 1 : Decreasing returns to scale
387
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
388
What is a Depression?
A prolonged- severe recession with high unemployment ratesNo requisite period of time for the economy to officially be in a depression
389
What are the stages of the Economic Cycle?
Peak (highest)Recession (decreasing)Trough (lowest)Recover (increasing)Expansion (higher again)
390
What are leading indicators?
Conditions that occur before a recession or before a recoveryExample: Stock Market or New Housing Starts
391
What are lagging indicators?
Conditions that occur after a recession or after a recoveryExamples: Prime Interest Rates- Unemployment
392
What are coincident indicators?
Conditions that occur during a recession or during a recoveryExample: Manufacturing output
393
Which people are included in the calculation of unemployment?
Only people looking for jobs
394
What is Cyclical Unemployment?
GDP doesn't grow fast enough to employ all people who are looking for workExample: People are unemployed in 2010 because there aren't enough jobs available due to the economy
395
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
396
What is Structural Unemployment?
A worker's job skills do not match those necessary to get a job so they need education or trainingExample: A construction worker wants to work in an office- so they quit their job and get computer training
397
How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
398
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
399
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
400
What is the Real Interest Rate?
Inflation-adjusted interest rate
401
What is the Nominal Rate?
Rate that uses current prices
402
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.
403
What is included in the M1 money supply?
Currency- Coins- and Deposits
404
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
405
What is Deficit Spending?
Increased spending levels without increased tax revenue.Lower taxes without decrease in spendingGamble that the multiplier effect will take over and boost economy
406
How can the Fed control the money supply?
By buying and selling the government's securities.
407
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
408
What is a Tariff?
A tax on imported goods
409
What is a quota?
A limit on the number of goods that can be imported
410
How do international trade restrictions affect domestic producers?
They are good for domestic producers.Demand curve shifts rightFewer substitutesThey can charge higher prices
411
How to international trade restrictions affect foreign producers?
They are bad for foreign producersDemand curve shifts leftFewer buyersThey must charge lower prices
412
How do international trade restrictions affect foreign consumers?
They are good for foreign consumersSupply curve shifts rightGoods purchased at lower prices in the foreign markets
413
How do international trade restrictions affect domestic consumers?
They are bad for domestic consumersSupply curve shifts leftFewer goods bought due to higher prices
414
What is Accounting Cost?
Explicit (Actual) cost of operating a businessImplicit costs are opportunity costs
415
What is Accounting Profit?
Revenue - Accounting Cost
416
What is Economic Cost?
Explicit + Implicit Cost
417
What is Economic Profit?
Revenue - Economic Cost
418
What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
419
How is Net Working Capital calculated?
NWC : Current Assets - Current Liabilities
420
What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycleDon't negatively impact operations
421
What is the Inventory Conversion Period?
Average time needed to convert materials into finished goods and sell themAverage Inventory : (BI + E) / 2Inventory Conversion Period : Average Inventory / Sales Per Day
422
What is the Receivables Collection Period?
Average time needed to collect A/RRCP : Average Receivables / Credit Sales Per Day
423
What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P paymentAverage Payables : (BP + EP) / 2Payables Deferral Period : Average Payables / (COGS/365)
424
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)
425
What traits should Cash and Short-Term Investments have?
LiquidSafe
426
For what are Letters of Credit used?
Used for importing goods.Issued by importer's bank.
427
What is the advantage of using Trade Credit?
No interest cost if paid timely.
428
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)
429
What is float?
Time it takes to mail a payment and have it clear your bank accountMaximize float on cash paymentsMinimize float on cash receipts
430
What are Zero Balance Accounts?
Regional bank sends enough cash to cover daily checksAdvantages:Checks take longer to clear -more floatLow amounts of cash tied up for compensating (minimum) balances
431
What is the difference between Treasury Bills- Notes and Bonds?
Treasury Bills: Short term (less than one year) Think: $1 BillTreasury 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
432
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of GovernmentGreater than 9 Months MaturityUnsecuredIssued by large firms
433
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.
434
What is Economic Order Quantity?
The order quantity that minimizes inventory costs.EOQ : Square Root of (2DO/C)D : Unit Demand (Annual)O : Order CostC : Cost of Inventory
435
What is Carrying Cost?
The cost of keeping inventory.
436
What is Order Cost?
Cost of executing an order and starting product production.
437
What is inventory reorder point?
How low inventory should get before it should be re-ordered.IOP : Average Daily Demand x Average Lead Time
438
What is a Just In Time (JIT) system?
Orders inventory so that you get it just in time for when it's neededJIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
439
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
440
What is a Trade Discount?
Buyer saves if paid earlyExample: 1/10 Net 301% Discount if paid within 10 daysIf not- bill is still due in 30 days
441
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
442
What is the Prime Rate?
A benchmark used for lending only to the best customersMost customers will be charged Prime + 3%- for exampleIf the lending institution and the customer are not in the same country- the LIBOR rate is often used
443
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
444
How is Current Yield calculated?
CY : Interest Payment / Bond Price
445
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
446
What is a Zero Coupon Bond?
No interest payments madeBond sold at a discountInterest reflected when Bond matures
447
What are the characteristics of a Junk Bond?
High interest rateHigh default risk
448
What are debenture bonds?
Bonds unsecured by collateral
449
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
450
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
451
What is a Callable Bond?
Borrower can pay off debt early
452
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
453
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
454
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)
455
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
456
What is Weighted Average Cost of Capital?
A company uses this to determine the true cost of their capitalExample:Debt costs 5%; 40% of Cap.Equity costs 12%; 60% of Cap.(5% x 40%) + (12% x 60%)WACC : 9.2%
457
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.
458
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
459
What is a Static Budget?
Budget targeted for a specific segment of a company.
460
What is a Maser Budget?
Budget targeted for the company as a wholeIncludes budgets for Operations and Cash FlowsIncludes set of budgeted Financial Statements
461
How do Fixed Costs affect budgeting?
Costs independent of the level activity within the relevant rangeProperty Tax is the same whether you produce 100-000 units or zero unitsHowever - Fixed Costs per unit vary given the amount of activityIf 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
462
How do Variable Costs affect budgeting?
The more Direct Materials or Direct Labor used- the more Variable Costs per unitHowever - Variable Costs per unit don't change with the level of activity like Fixed Costs per unit
463
How are Material Variances calculated?
SAM:Standard Material Costs- Actual Material Costs= Material Variance
464
How are Labor Variances calculated?
SALStandard Labor Costs- Actual Labor Costs= Labor Variance
465
How are Overhead Variances calculated?
OATOverhead Applied- Actual Overhead Cost= Total Overhead Variance
466
How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&AVariable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
467
How is Contribution Margin calculated?
Sales Price (per unit)- Variable Cost (per unit)= Contribution Margin (per unit)
468
How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit)= Break-even Point Per UnitAssumption: Total Costs & Total Revenues are LINEAR
469
What is the focus in a Cost Center?
Management is concerned only with costs
470
What is the focus in a Profit Center?
Management is concerned with both costs and profits
471
What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
472
What is the Delphi technique?
Forecasting technique where Data is collected and analyzedRequires judgement/consensus
473
What is Regression Analysis?
A forecasting technique where Sales is the dependent variable.Simple Regression - One independent variableMultiple Regression - Multiple independent variables
474
What are Econometric Models?
Forecast sales using Economic Data
475
What are Naive Forecasting Models?
Very Simplistic- Eyeball past trends and make an estimate
476
How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periodsDifference: Exponential Smoothing weighs recent data more heavily
477
What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs OnlyIgnore Sunk CostsOpportunity Cost is a Must
478
Which IT personnel roles should always be segregated?
OperatorsProgrammersLibrarians
479
What are the duties of a systems analyst?
Designs or purchases IT systemResponsible for flowchartsLiaison between Users and ProgrammersNote: Think IT Manager
480
What is the primary duty of a Systems Administrator?
A Systems Administrator controls database access.
481
What are the duties of a Systems Programmer?
Writes- Updates- Maintains- & Tests software- systems- and compilers
482
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.
483
What are the duties of a Systems Operator?
Schedules and Monitors JobsRuns IT Help Desk
484
What duties should a System Operator NOT have?
For internal control purposes- they should not be a Programmer on the system.
485
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.
486
What is the purpose of a Management Information System (MIS)?
To assist with decision making.
487
What is an Accounting Information System (AIS)?
A type of Management Information System (MIS) that processes accounting transactions.
488
What are the characteristics of an Executive Information System (EIS)?
Specialized for Company Executive needsAssists with Strategy OnlyNo Decision-Making Capabilities
489
What are the characteristics of an Expert System (ES)?
Computer uses reasoningStructuredNo human interpretation needed
490
What are the characteristics of a Decision Support System (DSS)?
Computer provides dataGives Interactive SupportHuman interpretation needed
491
What are the characteristics of an Ad Hoc computer report?
User initiates the report.The report is created upon demand.
492
When are Exception reports generated?
Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem
493
What is a query?
A type of Ad Hoc report- initiated by a user.
494
What is End-User Computing?
The User develops and executes their own application.
495
What is the primary benefit of E-commerce?
E-commerce makes business transactions easier.
496
What are the risks of E-commerce?
Compromised data or theft.Less paper trail for auditors.
497
What are the benefits of Electronic Data Interchange?
Uses globally-accepted standardsEfficient
498
What is a File Server?
A file server stores shared programs and documents.
499
What is the purpose of a Database?
Located on a File Server- a Database allows users to share documents.
500
What is the purpose of a LAN (Local Area Network)?
It connects computers in close proximity.
501
What is the purpose of a WAN (Wide Area Network)?
It connects computers that are far apart.
502
What are the characteristics of a VAN (Value-Added Network)?
Privately-owned NetworkServes as 3rd Party Between 2 CompaniesRoutes EDI TransactionsAccepts wide range of ProtocolsVery Costly
503
What is the purpose of a Firewall?
Prevents unauthorized access to a network.
504
What are the characteristics of a virus?
Takes over a computerNeeds a host program to run
505
What are the characteristics of a computer worm?
Takes over multiple computersDoesn't need a host program to run
506
What is the purpose of Automated Equipment Controls?
They prevent and detect hardware errors.
507
What is RAM?
Random Access Memory.Internal memory in the computer used during immediate processing.
508
What is a CPU?
Computer Processing UnitIt processes commands within a computer.
509
What is Job Control Language?
It schedules and allocates system resources.
510
What are examples of input devices?
KeyboardMouseScannerMagnetic Ink ReaderMagnetic Tape ReaderEDIPoint of Sale Scanner
511
What are examples of Output Devices?
SpeakersMonitorsPrinters
512
What are the characteristics of Magnetic Tape storage?
Sequential Access - Sorts data in orderSlower data retrievalHeader Label prevents Operator error by loading wrong tapeExternal Labels prevent accidental destruction by operator
513
What are the characteristics of Magnetic Disks?
Random Access - Finds data in random spotsFaster data retrievalUses Boundary Protection for data
514
What is a Gateway?
Connects one network to anotherNote: the Internet is connected by Gateways
515
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.
516
What is an Echo Check?
Transmitted data is returned to the sender for verification (it echoes back to the sender)
517
What is a Change Control?
It authorizes program changes and approves program test results.
518
What is security software?
Software that controls access to IT systems.Note: Don't confuse this with anti-virus software
519
What is the purpose of a Digital Signature?
It confirms a message has not been altered.
520
List the types of computers from smallest to largest
PDA/Smartphone/TabletMicrocomputer - PC- Laptop (cost-effective)Minicomputer - Like a Mainframe- but smallerMainframe - Large computer with terminals attachedSupercomputer - Very powerful and very big
521
What are the units of computer data from smallest to largest?
Bit - 1 (on) and 0 (off)Byte - 8 bits to a byte/characterField - 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)
522
What is the duty of a design engineer?
Determine language used for a specific computer- on a computer-to-computer basis
523
What are object programs?
Programs written in base computer language- not similar to English.
524
How can source programs be recognized?
They are written in a language close to English.
525
What is the purpose of a Compiler?
Takes Source language (English) and converts to Object (Computer) Language
526
How does Online Analytical Processing work?
It uses a Data Warehouse to support management decision making.
527
What is Data Mining?
Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.
528
What is the purpose of online transaction processing?
To process a company's routine transactions.
529
What are the characteristics of batch processing?
Data held- updates multiple files all at onceLeaves a better audit trailUses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)
530
What does an output control check for?
Checks to see if output data is valid- distributed and used in an authorized manner.
531
What does a processing control check?
Checks if data processing produced proper output
532
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.
533
What is a validity check?
Checks to see if data in existing tables or files belongs in the setFor example- is there a # in an alpha-only field or a letter in a numeric-only field
534
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.
535
What is a check digit?
An input control that adds an identification number to a set ofdigits - usually at the end
536
What is a field check?
An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field
537
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.
538
What is a Cold Site?
If a main system goes down- a Cold Site will take time to get set up and running.
539
What is the most common database language?
SQL - Structured Query Language
540
What is a Data Definition Language?
Defines SQL DatabaseControls SQL Tables
541
What is a Data Manipulation Language?
Queries SQL Database tables
542
What is a Data Control Language?
Controls Access to SQL Database
543
What are the characteristics of a Relational Database?
Logical structureUses rows and columns similar to spreadsheet
544
What are the characteristics of a Hierarchical Database?
Has various levelsUses trees to store data
545
What are the advantages of a database?
Data is more accessibleReduced redundancy
546
What are the disadvantages of a database?
Cost of installationSkilled personnel required to maintain
547
What are the components of a database?
Desktop clientApplication ServerDatabase ServerThink: Your desktop computer runs applications and saves to a database
548
What four perspectives are included in Balanced Scorecard?
Financial / Customer / Internal Business Processes / Learning and Growth
549
Why was Balanced Scorecard created?
To measure Performance.
550
What are Strategy Maps?
Diagrams of Strategic Cause and Effect Relationships.
551
What is a Strategic Initiative?
A plan to achieve goals.
552
What measures are used under Value-Based Management?
Return on InvestmentResidual IncomeSpreadEconomic Value AddedFree Cash Flow
553
How is Return on Investment (ROI) calculated?
ROI : Return / InvestmentExample: You Invest $100 to buy a machine that generates $60 in Operating Income$60 / $100 : 60% ROI
554
How is Residual Income calculated?
Operating Income - (Required Rate of Return x Invested Capital) : Residual Income
555
What is another name for Required Rate of Return (RROR)?
RROR is also called 'Cost of Capital'
556
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 expectExample: 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%
557
How is Spread calculated?
Spread : ROI - Cost of Capital
558
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)
559
How is Free Cash Flow calculated?
Operating Income After Tax+ Depreciation & Amortization- Capital Expenditures- Change in Net Working Capital: Free Cash Flow
560
What is measured by Six Sigma?
It measures a product versus its quality goal.
561
What is the Asset Turnover Ratio?
Sales / Average Assets
562
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
563
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
564
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
565
What does Gross Margin % tell us? How is it calculated?
How profitable is the product after COGS?Gross Margin : Gross Profit / Net Sales
566
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
567
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
568
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
569
How is Market/Book ratio calculated?
Market Value of Common Stock / Book Value of Common Stock
570
What is Inventory Turnover and how is it calculated?
How quickly does inventory get sold?Inventory Turnover : COGS / Average Inventory
571
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)Quick Ratio : (Current Assets - Inventory) / Current Liabilities
572
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
573
What is an Internal Failure?
Products have quality defects- but are caught BEFORE they leave the warehouse.
574
What is an External Failure?
Product reaches the customer- but they are not satisfied with the quality of the product.This includes recalls.
575
What is Appraisal Cost?
Quality control- testing & inspection costs.
576
Define Market Risk
The risk that a sluggish economy will affect the value of a debt instrument
577
Define Sector Risk
The risk that an event in the investment's business sector will harm the investmentFor example- the banking sector is sluggish- so even stocks of healthy banks suffer
578
Define Credit/Default Risk
The risk that a debtor will be unable to make loan payments or pay back the principal
579
Define Interest Rate Risk
The risk that a change in interest rates will adversely affect the value of the noteExample: 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.
580
What does Standard Deviation measure?
It measures the volatility of an investment.
581
What is Systematic Risk?
Risk that impacts the entire market and can't be avoided or reduced through diversificationExample: Wars
582
What is Unsystematic Risk?
Relates to a particular industry or companyExample: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest
583
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?
584
What is Variance?
It compares volatility of an investment to the market average.Factors include both Systematic and Unsystematic Risk.
585
What is a Derivative?
An asset whose value is DERIVED from the value of another asset.Derivatives are measured at Fair Value.
586
How is an Option used?
Gives the buyer the option to buy or sell a financial derivative at a certain priceTraders use them to speculate where they think the price will be at a certain point and make a profitHedgers use them to offset risk
587
What is a Future?
A Forward Contract with a future value.They are sold and traded on the futures market.
588
What is an Interest Rate Swap?
Forward Contract to swap payment agreementsThey 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
589
What is Legal Risk?
Risk that a law or regulation will void the derivative
590
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.
591
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.
592
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.
593
What is the primary duty of the board of directors?
To monitor management behavior.
594
What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?
Oversees the boardResponsible for hiring new CEO
595
What is the responsibility of the audit committee of the board of directors?
The audit committee appoints and oversees the external auditor.
596
What is the duty of the compensation committee of the board of directors?
The compensation committee handles the CEO's compensation package.
597
What does the NYSE and NASDAQ require of the board of directors?
They require the board to be independent.
598
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.
599
How can an executive compensation package ensure that goals of management align with those of shareholders?
Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn't sacrifice the long-term success of the enterprise for short-term gain.
600
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
601
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.
602
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 deficiencies.CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.
603
What characteristics are promoted by the COSO framework on Internal Control?
Reliable financial reportingEffective and efficient operationsCompliance
604
What are the elements of the control environment?
Integrity & EthicsCompetenceThe Board of Directors & Audit CommitteeManagement's Operating StyleOrganizational StructureAuthority & Roles of ResponsibilitiesHR Policies
605
What are control activities?
A component of Internal Control that includes actions being taken to promote the control environment.
606
What are the basic elements of Internal Control?
Control EnvironmentRisk AssessmentControl ActivitiesInformation and CommunicationMonitoring
607
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.
608
How does Monitoring affect Internal Control?
Internal Control activities must be constantly monitored and evaluated for effectiveness.
609
What activities does the COSO framework for enterprise risk management include?
Identifies Risk FactorsPromotes Risk Response DecisionsCompares Management Risk vs. Shareholder GoalsAids in evaluating opportunitiesPromotes Quicker Capital movementDoes NOT eliminate all risk
610
What are possible responses to risk under the COSO framework for enterprise risk management?
Avoid or ReduceShare or Accept
611
What is Cost Accounting?
Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet foro Direct Materialso Direct Laboro Work in Processo Finished GoodsCost Accounting also records for the Income Statement
612
What is the difference between Cost Accounting and Managerial Accounting?
Cost Accounting - External Focus- GAAPManagerial Accounting - Internal Focus- Not GAAP
613
What are Product Costs (aka Inventory Costs)?
Prime CostsConversion Costs
614
What are included in Prime Costs?
Direct Material USED - Have become part of the product or had a direct impact on the productDirect Labor Used - Employees who worked on product and had direct impact
615
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).
616
What is included in Fixed Factory Overhead?
FFO : Estimated Costs / Normal CapacityUses Normal ActivityExamples of Fixed Factory OH: Depreciation (SL)- Utilities- TaxesUnder/Over-applied Fixed OH always goes to COGS
617
What is included in Variable Overhead?
VO : Estimated Activity / Actual ActivityUses Actual ActivityExamples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)
618
Where is Under/Over-applied Variable OH recorded?
If Immaterial - Goes to COGSIf Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance
619
Where is Under/Over-applied Fixed OH recorded?
It always goes to COGS
620
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
Under-applied overhead.If it's Fixed OH- under-applied goes to COGS.If it's Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.
621
What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
A credit balance indicates over-applied overhead.If Fixed overhead- it is corrected from COGS.If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.
622
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)
623
What variables are used to calculated Work in Process (WIP)?
Beginning Balance (End Bal of Previous WIP)DR Direct Materials UsedDR Direct Labor Used (Conversion Cost)CR COGMDR Factory Overhead Applied (Conversion Cost): Ending Balance (Goes to BS)
624
What variables are included in Finished Goods calculations?
Beginning BalanceDR COGM: COGAS (Cost of Goods Avail for Sale)CR COGS: Ending Balance (Goes to BS)
625
How does Freight In affect Cost Accounting calculations?
Inventory (Product) CostPart of DM Purchases
626
How does Freight Out affect Cost Accounting?
Selling (Period) CostNot part of inventory
627
When is Job-Order Costing used?
Used when costs are easily connected to a specific product or product line Can also be applied to servicesCalculation is the same as normal cost accounting - just use your T Accounts- DM to WIP to FG to COGS- You're likely going to be solving for the last job in the queue
628
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)
629
What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
630
Under process costing- how are the units shipped calculated?
Beginning Inventory+ Units Started- Ending Inventory: No. Units Shipped
631
Which two inventory methods are used under Process Costing?
FIFOWeighted Average
632
What is another name for Process Costing?
Equivalent Units of Production
633
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)
634
How are Direct Materials calculated under the Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
635
How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
636
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)
637
How are Equivalent Finished Units calculated for Conversion Costs?
Units Shipped+ EI x % Complete CC: EFU (Weighted Average)- Beginning Inventory x % Complete: EFU (FIFO)
638
How are Direct Materials calculated under the FIFO method?
Current Costs / EFU FIFONote: FIFO method uses Current Period costs only and ignores Beginning Inventory
639
How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFOFIFO method uses Current Period costs only and ignores Beginning Inventory
640
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
641
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
642
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 aboutInventory is expensive to store and storing something is not a value-added expenditureUses Cost Pools - Different departments can have different OH ratesUses Several OH rates based on Activity - Cost Pool / Cost Driver
643
How do Cost Pools and Allocations compare under ABC versus traditional costing system?
Cost Pools and Allocations increase compared to a traditional costing system
644
What is Backflush Costing?
Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)- Works backward to flush out COGS- Mostly GAAP
645
What are the characteristics of By-Products?
Usually immaterial and common costs aren't allocated to themLow Market ValueCan be valued at NRVCan be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against SalesRecognition rules are very flexible with valuing and classifying by-products
646
What are Cost Functions?
Measure how costs change relative to activity levelsHigh-Low MethodChange in Cost (High-Low pts) / Change in Activity (High-Low pts)
647
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
648
What is a supply curve shift?
When supply changes due to something other than price.
649
What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price pointHigher Equilibrium GDPNumber of sellers increases - market can get floodedExamples: Government subsidies or technology improvements that decrease costs for suppliers
650
What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price pointLower Equilibrium GDPCost 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
651
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
652
What is a Demand Curve Shift?
When demand changes due to something other than price.
653
What is a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price pointPrice of substitutes go up - price of beef rises- so people buy more chickenFuture price increase is expected - War in Middle East- people go out and buy gasMarket expands - i.e. people get new free health care plan- demand at clinic risesExpansion - more spending increases equilibrium GDP
654
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 ketchupBoycott - Company commits social blunder- consumers boycottConsumer income rises - Demand for inferior goods drops as people have more money to spendConsumer tastes changeContraction - less spending decreases equilibrium GDP
655
What is the Marginal Propensity to Consume?
How much you spend when your income increasesCalculate: Change in Spending / Change in Income
656
What is the Marginal Propensity to Save?
How much you save when income increasesCalculate: Change in Savings / Change in IncomeAlso equals 1 - Marginal Propensity to Consume
657
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
658
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).
659
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
660
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
661
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreasesPrice decreases- Revenue increases
662
What conditions would indicate Elastic Demand?
Many substitutes (luxury items)Considered elastic if elasticity is greater than 110% drop in demand / 8% increase in price : 1.25 (Elastic)Price increases- Revenue decreasesPrice decreases- Revenue increases
663
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increasesPrice decreases- Revenue decreases
664
What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline)Considered inelastic if coefficient of elasticity is less than 15% drop in demand / 10% increase in price : .5 (inelastic)Price increases- Revenue increasesPrice decreases- Revenue decreases
665
What is Unitary Demand?
Total revenue will remain the same if price is increasedConsidered unitary if coefficient of elasticity : 1
666
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in IncomeNormal goods greater than 1 (demand increases more than income)Inferior goods less than 1 (demand increases less than income)
667
What conditions occur under periods of inflation?
Interest rates increaseReduced demand for loansReduced demand for houses- autos- etc.Value of bonds and fixed income securities decreaseInferior good demand to increaseForeign goods more affordable than domesticDemand for domestic goods decrease
668
What happens under Demand-Pull inflation?
Overall spending increasesDemand increases (shifts right)Market equilibrium price increases
669
What happens under Cost-Push inflation?
Overall production costs increaseSupply decreases (shifts left)Market equilibrium price increasesNote: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
670
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
671
What is Optimal Production?
When Marginal Revenue : Marginal Cost
672
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
673
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 interestsIncluded: Foreign company has US FactoryNot included: US company has foreign factory
674
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp IncomePassive IncomeTaxesEmployee SalariesForeign Income AdjustmentsDepreciation
675
What is included under the Expenditure Approach for calculating GDP?
Individual ConsumptionPrivate InvestmentGovernment PurchasesNet Exports
676
What is Nominal GDP?
Measures goods/services in current prices.
677
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
678
What is Real GDP?
Nominal GDP / GDP Deflator x 100
679
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
680
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
681
How is disposable income calculated?
Personal Income - Personal Taxes
682
How is Return to Scale calculated?
% Increase in output / % Increase in inputGreater than 1 : Increasing returns to scaleLess than 1 : Decreasing returns to scale
683
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
684
What is a Depression?
A prolonged- severe recession with high unemployment ratesNo requisite period of time for the economy to officially be in a depression
685
What are the stages of the Economic Cycle?
Peak (highest)Recession (decreasing)Trough (lowest)Recover (increasing)Expansion (higher again)
686
What are leading indicators?
Conditions that occur before a recession or before a recoveryExample: Stock Market or New Housing Starts
687
What are lagging indicators?
Conditions that occur after a recession or after a recoveryExamples: Prime Interest Rates- Unemployment
688
What are coincident indicators?
Conditions that occur during a recession or during a recoveryExample: Manufacturing output
689
Which people are included in the calculation of unemployment?
Only people looking for jobs
690
What is Cyclical Unemployment?
GDP doesn't grow fast enough to employ all people who are looking for workExample: People are unemployed in 2010 because there aren't enough jobs available due to the economy
691
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
692
What is Structural Unemployment?
A worker's job skills do not match those necessary to get a job so they need education or trainingExample: A construction worker wants to work in an office- so they quit their job and get computer training
693
How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
694
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
695
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
696
What is the Real Interest Rate?
Inflation-adjusted interest rate
697
What is the Nominal Rate?
Rate that uses current prices
698
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.
699
What is included in the M1 money supply?
Currency- Coins- and Deposits
700
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
701
What is Deficit Spending?
Increased spending levels without increased tax revenue.Lower taxes without decrease in spendingGamble that the multiplier effect will take over and boost economy
702
How can the Fed control the money supply?
By buying and selling the government's securities.
703
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
704
What is a Tariff?
A tax on imported goods
705
What is a quota?
A limit on the number of goods that can be imported
706
How do international trade restrictions affect domestic producers?
They are good for domestic producers.Demand curve shifts rightFewer substitutesThey can charge higher prices
707
How to international trade restrictions affect foreign producers?
They are bad for foreign producersDemand curve shifts leftFewer buyersThey must charge lower prices
708
How do international trade restrictions affect foreign consumers?
They are good for foreign consumersSupply curve shifts rightGoods purchased at lower prices in the foreign markets
709
How do international trade restrictions affect domestic consumers?
They are bad for domestic consumersSupply curve shifts leftFewer goods bought due to higher prices
710
What is Accounting Cost?
Explicit (Actual) cost of operating a businessImplicit costs are opportunity costs
711
What is Accounting Profit?
Revenue - Accounting Cost
712
What is Economic Cost?
Explicit + Implicit Cost
713
What is Economic Profit?
Revenue - Economic Cost
714
What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
715
How is Net Working Capital calculated?
NWC : Current Assets - Current Liabilities
716
What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycleDon't negatively impact operations
717
What is the Inventory Conversion Period?
Average time needed to convert materials into finished goods and sell themAverage Inventory : (BI + E) / 2Inventory Conversion Period : Average Inventory / Sales Per Day
718
What is the Receivables Collection Period?
Average time needed to collect A/RRCP : Average Receivables / Credit Sales Per Day
719
What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P paymentAverage Payables : (BP + EP) / 2Payables Deferral Period : Average Payables / (COGS/365)
720
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)
721
What traits should Cash and Short-Term Investments have?
LiquidSafe
722
For what are Letters of Credit used?
Used for importing goods.Issued by importer's bank.
723
What is the advantage of using Trade Credit?
No interest cost if paid timely.
724
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)
725
What is float?
Time it takes to mail a payment and have it clear your bank accountMaximize float on cash paymentsMinimize float on cash receipts
726
What are Zero Balance Accounts?
Regional bank sends enough cash to cover daily checksAdvantages:Checks take longer to clear -more floatLow amounts of cash tied up for compensating (minimum) balances
727
What is the difference between Treasury Bills- Notes and Bonds?
Treasury Bills: Short term (less than one year) Think: $1 BillTreasury 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
728
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of GovernmentGreater than 9 Months MaturityUnsecuredIssued by large firms
729
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.
730
What is Economic Order Quantity?
The order quantity that minimizes inventory costs.EOQ : Square Root of (2DO/C)D : Unit Demand (Annual)O : Order CostC : Cost of Inventory
731
What is Carrying Cost?
The cost of keeping inventory.
732
What is Order Cost?
Cost of executing an order and starting product production.
733
What is inventory reorder point?
How low inventory should get before it should be re-ordered.IOP : Average Daily Demand x Average Lead Time
734
What is a Just In Time (JIT) system?
Orders inventory so that you get it just in time for when it's neededJIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
735
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
736
What is a Trade Discount?
Buyer saves if paid earlyExample: 1/10 Net 301% Discount if paid within 10 daysIf not- bill is still due in 30 days
737
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
738
What is the Prime Rate?
A benchmark used for lending only to the best customersMost customers will be charged Prime + 3%- for exampleIf the lending institution and the customer are not in the same country- the LIBOR rate is often used
739
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
740
How is Current Yield calculated?
CY : Interest Payment / Bond Price
741
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
742
What is a Zero Coupon Bond?
No interest payments madeBond sold at a discountInterest reflected when Bond matures
743
What are the characteristics of a Junk Bond?
High interest rateHigh default risk
744
What are debenture bonds?
Bonds unsecured by collateral
745
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
746
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
747
What is a Callable Bond?
Borrower can pay off debt early
748
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
749
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
750
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)
751
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
752
What is Weighted Average Cost of Capital?
A company uses this to determine the true cost of their capitalExample:Debt costs 5%; 40% of Cap.Equity costs 12%; 60% of Cap.(5% x 40%) + (12% x 60%)WACC : 9.2%
753
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.
754
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
755
What is a Static Budget?
Budget targeted for a specific segment of a company.
756
What is a Maser Budget?
Budget targeted for the company as a wholeIncludes budgets for Operations and Cash FlowsIncludes set of budgeted Financial Statements
757
How do Fixed Costs affect budgeting?
Costs independent of the level activity within the relevant rangeProperty Tax is the same whether you produce 100-000 units or zero unitsHowever - Fixed Costs per unit vary given the amount of activityIf 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
758
How do Variable Costs affect budgeting?
The more Direct Materials or Direct Labor used- the more Variable Costs per unitHowever - Variable Costs per unit don't change with the level of activity like Fixed Costs per unit
759
How are Material Variances calculated?
SAM:Standard Material Costs- Actual Material Costs= Material Variance
760
How are Labor Variances calculated?
SALStandard Labor Costs- Actual Labor Costs= Labor Variance
761
How are Overhead Variances calculated?
OATOverhead Applied- Actual Overhead Cost= Total Overhead Variance
762
How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&AVariable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
763
How is Contribution Margin calculated?
Sales Price (per unit)- Variable Cost (per unit)= Contribution Margin (per unit)
764
How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit)= Break-even Point Per UnitAssumption: Total Costs & Total Revenues are LINEAR
765
What is the focus in a Cost Center?
Management is concerned only with costs
766
What is the focus in a Profit Center?
Management is concerned with both costs and profits
767
What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
768
What is the Delphi technique?
Forecasting technique where Data is collected and analyzedRequires judgement/consensus
769
What is Regression Analysis?
A forecasting technique where Sales is the dependent variable.Simple Regression - One independent variableMultiple Regression - Multiple independent variables
770
What are Econometric Models?
Forecast sales using Economic Data
771
What are Naive Forecasting Models?
Very Simplistic- Eyeball past trends and make an estimate
772
How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periodsDifference: Exponential Smoothing weighs recent data more heavily
773
What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs OnlyIgnore Sunk CostsOpportunity Cost is a Must
774
Which IT personnel roles should always be segregated?
OperatorsProgrammersLibrarians
775
What are the duties of a systems analyst?
Designs or purchases IT systemResponsible for flowchartsLiaison between Users and ProgrammersNote: Think IT Manager
776
What is the primary duty of a Systems Administrator?
A Systems Administrator controls database access.
777
What are the duties of a Systems Programmer?
Writes- Updates- Maintains- & Tests software- systems- and compilers
778
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.
779
What are the duties of a Systems Operator?
Schedules and Monitors JobsRuns IT Help Desk
780
What duties should a System Operator NOT have?
For internal control purposes- they should not be a Programmer on the system.
781
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.
782
What is the purpose of a Management Information System (MIS)?
To assist with decision making.
783
What is an Accounting Information System (AIS)?
A type of Management Information System (MIS) that processes accounting transactions.
784
What are the characteristics of an Executive Information System (EIS)?
Specialized for Company Executive needsAssists with Strategy OnlyNo Decision-Making Capabilities
785
What are the characteristics of an Expert System (ES)?
Computer uses reasoningStructuredNo human interpretation needed
786
What are the characteristics of a Decision Support System (DSS)?
Computer provides dataGives Interactive SupportHuman interpretation needed
787
What are the characteristics of an Ad Hoc computer report?
User initiates the report.The report is created upon demand.
788
When are Exception reports generated?
Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem
789
What is a query?
A type of Ad Hoc report- initiated by a user.
790
What is End-User Computing?
The User develops and executes their own application.
791
What is the primary benefit of E-commerce?
E-commerce makes business transactions easier.
792
What are the risks of E-commerce?
Compromised data or theft.Less paper trail for auditors.
793
What are the benefits of Electronic Data Interchange?
Uses globally-accepted standardsEfficient
794
What is a File Server?
A file server stores shared programs and documents.
795
What is the purpose of a Database?
Located on a File Server- a Database allows users to share documents.
796
What is the purpose of a LAN (Local Area Network)?
It connects computers in close proximity.
797
What is the purpose of a WAN (Wide Area Network)?
It connects computers that are far apart.
798
What are the characteristics of a VAN (Value-Added Network)?
Privately-owned NetworkServes as 3rd Party Between 2 CompaniesRoutes EDI TransactionsAccepts wide range of ProtocolsVery Costly
799
What is the purpose of a Firewall?
Prevents unauthorized access to a network.
800
What are the characteristics of a virus?
Takes over a computerNeeds a host program to run
801
What are the characteristics of a computer worm?
Takes over multiple computersDoesn't need a host program to run
802
What is the purpose of Automated Equipment Controls?
They prevent and detect hardware errors.
803
What is RAM?
Random Access Memory.Internal memory in the computer used during immediate processing.
804
What is a CPU?
Computer Processing UnitIt processes commands within a computer.
805
What is Job Control Language?
It schedules and allocates system resources.
806
What are examples of input devices?
KeyboardMouseScannerMagnetic Ink ReaderMagnetic Tape ReaderEDIPoint of Sale Scanner
807
What are examples of Output Devices?
SpeakersMonitorsPrinters
808
What are the characteristics of Magnetic Tape storage?
Sequential Access - Sorts data in orderSlower data retrievalHeader Label prevents Operator error by loading wrong tapeExternal Labels prevent accidental destruction by operator
809
What are the characteristics of Magnetic Disks?
Random Access - Finds data in random spotsFaster data retrievalUses Boundary Protection for data
810
What is a Gateway?
Connects one network to anotherNote: the Internet is connected by Gateways
811
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.
812
What is an Echo Check?
Transmitted data is returned to the sender for verification (it echoes back to the sender)
813
What is a Change Control?
It authorizes program changes and approves program test results.
814
What is security software?
Software that controls access to IT systems.Note: Don't confuse this with anti-virus software
815
What is the purpose of a Digital Signature?
It confirms a message has not been altered.
816
List the types of computers from smallest to largest
PDA/Smartphone/TabletMicrocomputer - PC- Laptop (cost-effective)Minicomputer - Like a Mainframe- but smallerMainframe - Large computer with terminals attachedSupercomputer - Very powerful and very big
817
What are the units of computer data from smallest to largest?
Bit - 1 (on) and 0 (off)Byte - 8 bits to a byte/characterField - 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)
818
What is the duty of a design engineer?
Determine language used for a specific computer- on a computer-to-computer basis
819
What are object programs?
Programs written in base computer language- not similar to English.
820
How can source programs be recognized?
They are written in a language close to English.
821
What is the purpose of a Compiler?
Takes Source language (English) and converts to Object (Computer) Language
822
How does Online Analytical Processing work?
It uses a Data Warehouse to support management decision making.
823
What is Data Mining?
Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.
824
What is the purpose of online transaction processing?
To process a company's routine transactions.
825
What are the characteristics of batch processing?
Data held- updates multiple files all at onceLeaves a better audit trailUses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)
826
What does an output control check for?
Checks to see if output data is valid- distributed and used in an authorized manner.
827
What does a processing control check?
Checks if data processing produced proper output
828
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.
829
What is a validity check?
Checks to see if data in existing tables or files belongs in the setFor example- is there a # in an alpha-only field or a letter in a numeric-only field
830
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.
831
What is a check digit?
An input control that adds an identification number to a set ofdigits - usually at the end
832
What is a field check?
An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field
833
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.
834
What is a Cold Site?
If a main system goes down- a Cold Site will take time to get set up and running.
835
What is the most common database language?
SQL - Structured Query Language
836
What is a Data Definition Language?
Defines SQL DatabaseControls SQL Tables
837
What is a Data Manipulation Language?
Queries SQL Database tables
838
What is a Data Control Language?
Controls Access to SQL Database
839
What are the characteristics of a Relational Database?
Logical structureUses rows and columns similar to spreadsheet
840
What are the characteristics of a Hierarchical Database?
Has various levelsUses trees to store data
841
What are the advantages of a database?
Data is more accessibleReduced redundancy
842
What are the disadvantages of a database?
Cost of installationSkilled personnel required to maintain
843
What are the components of a database?
Desktop clientApplication ServerDatabase ServerThink: Your desktop computer runs applications and saves to a database
844
What four perspectives are included in Balanced Scorecard?
Financial / Customer / Internal Business Processes / Learning and Growth
845
Why was Balanced Scorecard created?
To measure Performance.
846
What are Strategy Maps?
Diagrams of Strategic Cause and Effect Relationships.
847
What is a Strategic Initiative?
A plan to achieve goals.
848
What measures are used under Value-Based Management?
Return on InvestmentResidual IncomeSpreadEconomic Value AddedFree Cash Flow
849
How is Return on Investment (ROI) calculated?
ROI : Return / InvestmentExample: You Invest $100 to buy a machine that generates $60 in Operating Income$60 / $100 : 60% ROI
850
How is Residual Income calculated?
Operating Income - (Required Rate of Return x Invested Capital) : Residual Income
851
What is another name for Required Rate of Return (RROR)?
RROR is also called 'Cost of Capital'
852
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 expectExample: 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%
853
How is Spread calculated?
Spread : ROI - Cost of Capital
854
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)
855
How is Free Cash Flow calculated?
Operating Income After Tax+ Depreciation & Amortization- Capital Expenditures- Change in Net Working Capital: Free Cash Flow
856
What is measured by Six Sigma?
It measures a product versus its quality goal.
857
What is the Asset Turnover Ratio?
Sales / Average Assets
858
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
859
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
860
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
861
What does Gross Margin % tell us? How is it calculated?
How profitable is the product after COGS?Gross Margin : Gross Profit / Net Sales
862
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
863
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
864
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
865
How is Market/Book ratio calculated?
Market Value of Common Stock / Book Value of Common Stock
866
What is Inventory Turnover and how is it calculated?
How quickly does inventory get sold?Inventory Turnover : COGS / Average Inventory
867
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)Quick Ratio : (Current Assets - Inventory) / Current Liabilities
868
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
869
What is an Internal Failure?
Products have quality defects- but are caught BEFORE they leave the warehouse.
870
What is an External Failure?
Product reaches the customer- but they are not satisfied with the quality of the product.This includes recalls.
871
What is Appraisal Cost?
Quality control- testing & inspection costs.
872
Define Market Risk
The risk that a sluggish economy will affect the value of a debt instrument
873
Define Sector Risk
The risk that an event in the investment's business sector will harm the investmentFor example- the banking sector is sluggish- so even stocks of healthy banks suffer
874
Define Credit/Default Risk
The risk that a debtor will be unable to make loan payments or pay back the principal
875
Define Interest Rate Risk
The risk that a change in interest rates will adversely affect the value of the noteExample: 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.
876
What does Standard Deviation measure?
It measures the volatility of an investment.
877
What is Systematic Risk?
Risk that impacts the entire market and can't be avoided or reduced through diversificationExample: Wars
878
What is Unsystematic Risk?
Relates to a particular industry or companyExample: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest
879
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?
880
What is Variance?
It compares volatility of an investment to the market average.Factors include both Systematic and Unsystematic Risk.
881
What is a Derivative?
An asset whose value is DERIVED from the value of another asset.Derivatives are measured at Fair Value.
882
How is an Option used?
Gives the buyer the option to buy or sell a financial derivative at a certain priceTraders use them to speculate where they think the price will be at a certain point and make a profitHedgers use them to offset risk
883
What is a Future?
A Forward Contract with a future value.They are sold and traded on the futures market.
884
What is an Interest Rate Swap?
Forward Contract to swap payment agreementsThey 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
885
What is Legal Risk?
Risk that a law or regulation will void the derivative
886
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.
887
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.
888
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.
