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Flashcards in BEC Ninja Flashcards Deck (972):
1

What is Capital Budgeting? How is it used?

Managerial Accounting technique used to evaluate different investment options

Helps management make decisions

Uses both accounting and non-accounting information

Internal focus

GAAP is not mandatory

2

What values are used in Capital Budgeting?

Capital Budgeting ONLY uses Present Value tables.

Capital Budgeting NEVER uses Fair Value.

3

When is the Present Value of $1 table used?

For ONE payment- ONE time.

4

When is the Present Value of an Annuity Due used?

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

5

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

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

Think A for Arrears.

6

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

1 / (( 1+i )^n)

i : interest rate
n : number of periods

7

What is Net Present Value (NPV)?

A preferred method of evaluating profitability.

One of two methods that use the Time Value of Money

: PV of Future Cash Flows - Investment

8

How is NPV used to calculate future benefit?

NPV : PV Future Cash Flows - Investment

If NPV is Negative- Cost is greater than benefits (bad investment)

If NPV is Positive- Cost is less than benefit (good investment)

If NPV : 0- Cost : Benefit (Management is indifferent)

9

What is the rate of return on an investment called?

The Discount Rate.

10

What does the Discount Rate represent?

The rate of return on an investment used.

It represents the minimum rate of return required.

11

What are the strengths of the Net Present Value system?

Uses the Time Value of Money

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

Takes risks into consideration

12

What are the weaknesses of the Net Present Value system?

Not as simple as the Accounting Rate of Return.

13

How do Salvage Value and Depreciation affect Net Present Value?

NPV includes Salvage Value because it is a future cash inflow.

NPV does NOT include depreciation because it is non-cash.

Exception - If a CPA Exam question says to include tax considerations- then you have to include depreciation because of income tax savings generated by depreciation.

14

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

The minimum rate of return is used.

15

What is the Internal Rate of Return (IRR)?

It calculates a project's actual rate of return through the project's expected cash flows.

IRR is the rate of return required for PV of future cash flows to EQUAL the investment.

Investment / After Tax Annual Cash Inflow : PV Factor

16

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

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

17

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

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

Rate of return for NPV is the minimum rate.

18

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

Strengths: Uses Time Value of Money- Cash Flow emphasis

Weakness: Uneven cash flows lead to varied IRR

19

When is NPV on an Investment positive?

When the benefits are greater than the costs.

IRR is greater than the Discount Rate

20

When is NPV on an Investment Negative?

When Costs are greater than Benefits

IRR is less than the Discount Rate

21

When is NPV Zero?

When benefits equal the Costs

IRR : Discount Rate

22

What is the Payback Method? How is it calculated?

It measures an investment in terms of how long it takes to recoup the initial investment via Annual Cash Inflow

Investment / Annual Cash Inflow : Payback Method

Compare to a targeted timeframe; if payback is shorter than target- it's a good investment. If payback is longer than target- it's a bad investment.

23

What are the strengths of the Payback Method?

Takes risk into consideration

2 year payback is less risky than a 5 year payback

24

What are the weaknesses of the payback method?

Ignores the Time Value of Money

Exception: Discount payback method

Ignores cash flow after the initial investment is paid back

25

What is the Accounting Rate of Return?

An approximate rate of return on assets

ARR : Net Income / Average Investment

Compare to a targeted return rate; if ARR greater than target- good investment. If ARR less than target- bad investment.

26

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

Simple to use

People understand easily

27

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

Can be skewed based on Depreciation method that is used.

Ignores the Time Value of Money.

28

What is an Expected Return?

An approximate rate of return on assets.

29

What is the primary duty of the board of directors?

To monitor management behavior.

30

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

Oversees the board

Responsible for hiring new CEO

31

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

The audit committee appoints and oversees the external auditor.

32

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

The compensation committee handles the CEO's compensation package.

33

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

They require the board to be independent.

34

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.

35

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.

36

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

37

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.

38

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.

39

What characteristics are promoted by the COSO framework on Internal Control?

Reliable financial reporting

Effective and efficient operations

Compliance

40

What are the elements of the control environment?

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

41

What are control activities?

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

42

What are the basic elements of Internal Control?

Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring

43

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.

44

How does Monitoring affect Internal Control?

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

45

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

Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement

Does NOT eliminate all risk

46

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

Avoid or Reduce

Share or Accept

47

What is Cost Accounting?

Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for
o Direct Materials
o Direct Labor
o Work in Process
o Finished Goods

Cost Accounting also records for the Income Statement

48

What is the difference between Cost Accounting and Managerial Accounting?

Cost Accounting - External Focus- GAAP

Managerial Accounting - Internal Focus- Not GAAP

49

What are Product Costs (aka Inventory Costs)?

Prime Costs

Conversion Costs

50

What are included in Prime Costs?

Direct Material USED - Have become part of the product or had a direct impact on the product

Direct Labor Used - Employees who worked on product and had direct impact

51

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).

52

What is included in Fixed Factory Overhead?

FFO : Estimated Costs / Normal Capacity

Uses Normal Activity

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

Under/Over-applied Fixed OH always goes to COGS

53

What is included in Variable Overhead?

VO : Estimated Activity / Actual Activity

Uses Actual Activity

Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)

54

Where is Under/Over-applied Variable OH recorded?

If Immaterial - Goes to COGS

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

55

Where is Under/Over-applied Fixed OH recorded?

It always goes to COGS

56

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.

57

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.

58

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)

59

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

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

60

What variables are included in Finished Goods calculations?

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

61

How does Freight In affect Cost Accounting calculations?

Inventory (Product) Cost

Part of DM Purchases

62

How does Freight Out affect Cost Accounting?

Selling (Period) Cost

Not part of inventory

63

When is Job-Order Costing used?

Used when costs are easily connected to a specific product or product line

Can also be applied to services

Calculation is the same as normal cost accounting - just use your T Accounts
- DM to WIP to FG to COGS
- You're likely going to be solving for the last job in the queue

64

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)

65

What is the Step Method for allocating service department costs?

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

66

Under process costing- how are the units shipped calculated?

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

67

Which two inventory methods are used under Process Costing?

FIFO

Weighted Average

68

What is another name for Process Costing?

Equivalent Units of Production

69

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)

70

How are Direct Materials calculated under the Weighted Average Method?

Beginning Inventory + Current Costs / EFU WA

71

How are Conversion Costs calculated under Weighted Average Method?

Beginning Inventory + Current Costs / EFU WA

72

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)

73

How are Equivalent Finished Units calculated for Conversion Costs?

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

- Beginning Inventory x % Complete
: EFU (FIFO)

74

How are Direct Materials calculated under the FIFO method?

Current Costs / EFU FIFO

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

75

How are Conversion Costs calculated under the FIFO method?

Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory

76

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

77

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

78

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

Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don't want or don't care about

Inventory is expensive to store and storing something is not a value-added expenditure

Uses Cost Pools - Different departments can have different OH rates

Uses Several OH rates based on Activity - Cost Pool / Cost Driver

79

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

Cost Pools and Allocations increase compared to a traditional costing system

80

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

81

What are the characteristics of By-Products?

Usually immaterial and common costs aren't allocated to them
Low Market Value
Can be valued at NRV
Can be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against Sales
Recognition rules are very flexible with valuing and classifying by-products

82

What are Cost Functions?

Measure how costs change relative to activity levels

High-Low Method

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

83

How does a price increase affect supply?

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

84

What is a supply curve shift?

When supply changes due to something other than price.

85

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

Supply increases at each price point

Higher Equilibrium GDP

Number of sellers increases - market can get flooded

Examples: Government subsidies or technology improvements that decrease costs for suppliers

86

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

Supply decreases at each price point

Lower Equilibrium GDP

Cost of producing item increases

Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market

87

How does price affect the demand for an item?

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

88

What is a Demand Curve Shift?

When demand changes due to something other than price.

89

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

When demand increases at each price point

Price of substitutes go up - price of beef rises- so people buy more chicken

Future price increase is expected - War in Middle East- people go out and buy gas

Market expands - i.e. people get new free health care plan- demand at clinic rises

Expansion - more spending increases equilibrium GDP

90

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

Demand decreases at each price point.

Price of complement goes up - price of beef goes up- less demand for ketchup

Boycott - Company commits social blunder- consumers boycott

Consumer income rises - Demand for inferior goods drops as people have more money to spend

Consumer tastes change

Contraction - less spending decreases equilibrium GDP

91

What is the Marginal Propensity to Consume?

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

92

What is the Marginal Propensity to Save?

How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume

93

How is the multiplier effect calculated?

(1 / 1-MPC) x Change in Spending

94

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).

95

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

96

How is Price Elasticity of Demand calculated?

% Change in Quantity Demand / % Change in Price

97

Under elastic demand- how does price affect revenues?

Price increases- Revenue decreases

Price decreases- Revenue increases

98

What conditions would indicate Elastic Demand?

Many substitutes (luxury items)
Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)

Price increases- Revenue decreases
Price decreases- Revenue increases

99

How does revenue react to price under Inelastic Demand?

Price increases- Revenue increases

Price decreases- Revenue decreases

100

What conditions would indicate Inelastic Demand?

Few substitutes (groceries- gasoline)
Considered inelastic if coefficient of elasticity is less than 1
5% drop in demand / 10% increase in price : .5 (inelastic)

Price increases- Revenue increases
Price decreases- Revenue decreases

101

What is Unitary Demand?

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

102

How is Income Elasticity of Demand calculated?

% Change Quantity Demanded / % Change in Income

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

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

103

What conditions occur under periods of inflation?

Interest rates increase
Reduced demand for loans
Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease

104

What happens under Demand-Pull inflation?

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases

105

What happens under Cost-Push inflation?

Overall production costs increase
Supply decreases (shifts left)
Market equilibrium price increases

Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

106

What is the Equilibrium Price?

The price where Quantity Supplied : Quantity Demanded

107

What is Optimal Production?

When Marginal Revenue : Marginal Cost

108

What is the result of a Price Floor?

Causes a surplus if above equilibrium price.

109

What is GDP (Gross Domestic Product)?

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests

Included: Foreign company has US Factory

Not included: US company has foreign factory

110

What is included under the income approach for calculating GDP?

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

111

What is included under the Expenditure Approach for calculating GDP?

Individual Consumption

Private Investment

Government Purchases

Net Exports

112

What is Nominal GDP?

Measures goods/services in current prices.

113

For what is a GDP Deflator used?

Used to convert GDP to Real GDP

114

What is Real GDP?

Nominal GDP / GDP Deflator x 100

115

What is Gross National Product (GNP)?

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

116

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

117

How is disposable income calculated?

Personal Income - Personal Taxes

118

How is Return to Scale calculated?

% Increase in output / % Increase in input

Greater than 1 : Increasing returns to scale

Less than 1 : Decreasing returns to scale

119

When is the economy in Recession?

When GDP growth is negative for two consecutive quarters.

120

What is a Depression?

A prolonged- severe recession with high unemployment rates

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

121

What are the stages of the Economic Cycle?

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

122

What are leading indicators?

Conditions that occur before a recession or before a recovery

Example: Stock Market or New Housing Starts

123

What are lagging indicators?

Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates- Unemployment

124

What are coincident indicators?

Conditions that occur during a recession or during a recovery

Example: Manufacturing output

125

Which people are included in the calculation of unemployment?

Only people looking for jobs

126

What is Cyclical Unemployment?

GDP doesn't grow fast enough to employ all people who are looking for work

Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy

127

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

128

What is Structural Unemployment?

A worker's job skills do not match those necessary to get a job so they need education or training

Example: A construction worker wants to work in an office- so they quit their job and get computer training

129

How does inflation relate to unemployment?

High Unemployment : Low Inflation (Vice Versa)

130

What is the Discount Rate?

The rate a bank pays to borrow from the Fed.

131

What is the Prime Rate?

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

132

What is the Real Interest Rate?

Inflation-adjusted interest rate

133

What is the Nominal Rate?

Rate that uses current prices

134

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.

135

What is included in the M1 money supply?

Currency- Coins- and Deposits

136

What is included in the M2 money supply?

Highly liquid assets other than currency- coins or deposits

137

What is Deficit Spending?

Increased spending levels without increased tax revenue.

Lower taxes without decrease in spending

Gamble that the multiplier effect will take over and boost economy

138

How can the Fed control the money supply?

By buying and selling the government's securities.

139

How does the Fed control economy-wide interest rates?

By adjusting the discount rate charged to banks

140

What is a Tariff?

A tax on imported goods

141

What is a quota?

A limit on the number of goods that can be imported

142

How do international trade restrictions affect domestic producers?

They are good for domestic producers.

Demand curve shifts right

Fewer substitutes

They can charge higher prices

143

How to international trade restrictions affect foreign producers?

They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices

144

How do international trade restrictions affect foreign consumers?

They are good for foreign consumers

Supply curve shifts right

Goods purchased at lower prices in the foreign markets

145

How do international trade restrictions affect domestic consumers?

They are bad for domestic consumers

Supply curve shifts left

Fewer goods bought due to higher prices

146

What is Accounting Cost?

Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs

147

What is Accounting Profit?

Revenue - Accounting Cost

148

What is Economic Cost?

Explicit + Implicit Cost

149

What is Economic Profit?

Revenue - Economic Cost

150

What is the primary focus of working capital management?

Managing inventory & receivables (current assets & liabilities)

151

How is Net Working Capital calculated?

NWC : Current Assets - Current Liabilities

152

What are the characteristics of effective Working Capital Management?

Shorten the cash conversion cycle

Don't negatively impact operations

153

What is the Inventory Conversion Period?

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

Average Inventory : (BI + E) / 2

Inventory Conversion Period : Average Inventory / Sales Per Day

154

What is the Receivables Collection Period?

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

155

What is the Payables Deferral Period?

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

Average Payables : (BP + EP) / 2

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

156

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)

157

What traits should Cash and Short-Term Investments have?

Liquid

Safe

158

For what are Letters of Credit used?

Used for importing goods.

Issued by importer's bank.

159

What is the advantage of using Trade Credit?

No interest cost if paid timely.

160

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)

161

What is float?

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

Maximize float on cash payments

Minimize float on cash receipts

162

What are Zero Balance Accounts?

Regional bank sends enough cash to cover daily checks

Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances

163

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

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

164

What is commercial paper?

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

Greater than 9 Months Maturity

Unsecured

Issued by large firms

165

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.

166

What is Economic Order Quantity?

The order quantity that minimizes inventory costs.

EOQ : Square Root of (2DO/C)

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

167

What is Carrying Cost?

The cost of keeping inventory.

168

What is Order Cost?

Cost of executing an order and starting product production.

169

What is inventory reorder point?

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

IOP : Average Daily Demand x Average Lead Time

170

What is a Just In Time (JIT) system?

Orders inventory so that you get it just in time for when it's needed

JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high

171

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

172

What is a Trade Discount?

Buyer saves if paid early

Example: 1/10 Net 30

1% Discount if paid within 10 days

If not- bill is still due in 30 days

173

What is the cost of forgoing a discount?

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

174

What is the Prime Rate?

A benchmark used for lending only to the best customers

Most customers will be charged Prime + 3%- for example

If the lending institution and the customer are not in the same country- the LIBOR rate is often used

175

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

Interest rate stated on the face of a bond.

176

How is Current Yield calculated?

CY : Interest Payment / Bond Price

177

What is the Effective (YTM- Market) Rate?

PV of Principle + Interest : Bond Price

178

What is a Zero Coupon Bond?

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

179

What are the characteristics of a Junk Bond?

High interest rate

High default risk

180

What are debenture bonds?

Bonds unsecured by collateral

181

What are subordinated debentures?

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

182

What are Redeemable Bonds?

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

183

What is a Callable Bond?

Borrower can pay off debt early

184

What is a Convertible Bond?

Lender can demand payment via company stock instead of money

185

What is a Sinking Fund?

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

186

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)

187

What is the advantage of Preferred Stock?

Hold dividend priority over common stock

188

What is Weighted Average Cost of Capital?

A company uses this to determine the true cost of their capital

Example:
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%

189

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.

190

How is Cost of Debt calculated?

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

191

What is a Static Budget?

Budget targeted for a specific segment of a company.

192

What is a Maser Budget?

Budget targeted for the company as a whole

Includes budgets for Operations and Cash Flows

Includes set of budgeted Financial Statements

193

How do Fixed Costs affect budgeting?

Costs independent of the level activity within the relevant range

Property Tax is the same whether you produce 100-000 units or zero units

However - Fixed Costs per unit vary given the amount of activity

If you produce fewer units- fixed costs per unit will be greater than if you produce more units - i.e. less units to spread the cost over

194

How do Variable Costs affect budgeting?

The more Direct Materials or Direct Labor used- the more Variable Costs per unit

However - Variable Costs per unit don't change with the level of activity like Fixed Costs per unit

195

How are Material Variances calculated?

SAM:

Standard Material Costs
- Actual Material Costs
= Material Variance

196

How are Labor Variances calculated?

SAL

Standard Labor Costs
- Actual Labor Costs
= Labor Variance

197

How are Overhead Variances calculated?

OAT

Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance

198

How does Absorption Costing compare to Variable Costing?

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

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

199

How is Contribution Margin calculated?

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

200

How is Break-even Point (per unit) calculated?

Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit

Assumption: Total Costs & Total Revenues are LINEAR

201

What is the focus in a Cost Center?

Management is concerned only with costs

202

What is the focus in a Profit Center?

Management is concerned with both costs and profits

203

What is the focus in an Investment Center?

Management is concerned with costs- profits- and assets

204

What is the Delphi technique?

Forecasting technique where Data is collected and analyzed

Requires judgement/consensus

205

What is Regression Analysis?

A forecasting technique where Sales is the dependent variable.

Simple Regression - One independent variable

Multiple Regression - Multiple independent variables

206

What are Econometric Models?

Forecast sales using Economic Data

207

What are Naive Forecasting Models?

Very Simplistic
- Eyeball past trends and make an estimate

208

How does a Moving Average compare to Exponential Smoothing?

Both project estimates using average trends from recent periods

Difference: Exponential Smoothing weighs recent data more heavily

209

What are the characteristics of Short-term Cost Analysis?

Uses Relevant Costs Only

Ignore Sunk Costs

Opportunity Cost is a Must

210

Which IT personnel roles should always be segregated?

Operators

Programmers

Librarians

211

What are the duties of a systems analyst?

Designs or purchases IT system

Responsible for flowcharts

Liaison between Users and Programmers

Note: Think IT Manager

212

What is the primary duty of a Systems Administrator?

A Systems Administrator controls database access.

213

What are the duties of a Systems Programmer?

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

214

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.

215

What are the duties of a Systems Operator?

Schedules and Monitors Jobs

Runs IT Help Desk

216

What duties should a System Operator NOT have?

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

217

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.

218

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

To assist with decision making.

219

What is an Accounting Information System (AIS)?

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

220

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

Specialized for Company Executive needs

Assists with Strategy Only

No Decision-Making Capabilities

221

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

Computer uses reasoning

Structured

No human interpretation needed

222

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

Computer provides data

Gives Interactive Support

Human interpretation needed

223

What are the characteristics of an Ad Hoc computer report?

User initiates the report.

The report is created upon demand.

224

When are Exception reports generated?

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

225

What is a query?

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

226

What is End-User Computing?

The User develops and executes their own application.

227

What is the primary benefit of E-commerce?

E-commerce makes business transactions easier.

228

What are the risks of E-commerce?

Compromised data or theft.

Less paper trail for auditors.

229

What are the benefits of Electronic Data Interchange?

Uses globally-accepted standards

Efficient

230

What is a File Server?

A file server stores shared programs and documents.

231

What is the purpose of a Database?

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

232

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

It connects computers in close proximity.

233

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

It connects computers that are far apart.

234

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

Privately-owned Network

Serves as 3rd Party Between 2 Companies

Routes EDI Transactions

Accepts wide range of Protocols

Very Costly

235

What is the purpose of a Firewall?

Prevents unauthorized access to a network.

236

What are the characteristics of a virus?

Takes over a computer

Needs a host program to run

237

What are the characteristics of a computer worm?

Takes over multiple computers

Doesn't need a host program to run

238

What is the purpose of Automated Equipment Controls?

They prevent and detect hardware errors.

239

What is RAM?

Random Access Memory.

Internal memory in the computer used during immediate processing.

240

What is a CPU?

Computer Processing Unit

It processes commands within a computer.

241

What is Job Control Language?

It schedules and allocates system resources.

242

What are examples of input devices?

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

243

What are examples of Output Devices?

Speakers

Monitors

Printers

244

What are the characteristics of Magnetic Tape storage?

Sequential Access - Sorts data in order

Slower data retrieval

Header Label prevents Operator error by loading wrong tape

External Labels prevent accidental destruction by operator

245

What are the characteristics of Magnetic Disks?

Random Access - Finds data in random spots

Faster data retrieval

Uses Boundary Protection for data

246

What is a Gateway?

Connects one network to another

Note: the Internet is connected by Gateways

247

What are Parity Checks?

A control that detects internal data errors.

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

248

What is an Echo Check?

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

249

What is a Change Control?

It authorizes program changes and approves program test results.

250

What is security software?

Software that controls access to IT systems.

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

251

What is the purpose of a Digital Signature?

It confirms a message has not been altered.

252

List the types of computers from smallest to largest

PDA/Smartphone/Tablet

Microcomputer - PC- Laptop (cost-effective)

Minicomputer - Like a Mainframe- but smaller

Mainframe - Large computer with terminals attached

Supercomputer - Very powerful and very big

253

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

Bit - 1 (on) and 0 (off)
Byte - 8 bits to a byte/character
Field - group of related characters/bytes (i.e. Name- Zip Code- Serial #)
Record - Group of related fields (i.e. Member name- address- phone number)
File - Group of related records (i.e. Membership directory)

254

What is the duty of a design engineer?

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

255

What are object programs?

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

256

How can source programs be recognized?

They are written in a language close to English.

257

What is the purpose of a Compiler?

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

258

How does Online Analytical Processing work?

It uses a Data Warehouse to support management decision making.

259

What is Data Mining?

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

260

What is the purpose of online transaction processing?

To process a company's routine transactions.

261

What are the characteristics of batch processing?

Data held- updates multiple files all at once

Leaves a better audit trail

Uses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)

262

What does an output control check for?

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

263

What does a processing control check?

Checks if data processing produced proper output

264

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.

265

What is a validity check?

Checks to see if data in existing tables or files belongs in the set

For example- is there a # in an alpha-only field or a letter in a numeric-only field

266

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.

267

What is a check digit?

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

268

What is a field check?

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

269

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.

270

What is a Cold Site?

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

271

What is the most common database language?

SQL - Structured Query Language

272

What is a Data Definition Language?

Defines SQL Database

Controls SQL Tables

273

What is a Data Manipulation Language?

Queries SQL Database tables

274

What is a Data Control Language?

Controls Access to SQL Database

275

What are the characteristics of a Relational Database?

Logical structure

Uses rows and columns similar to spreadsheet

276

What are the characteristics of a Hierarchical Database?

Has various levels

Uses trees to store data

277

What are the advantages of a database?

Data is more accessible

Reduced redundancy

278

What are the disadvantages of a database?

Cost of installation

Skilled personnel required to maintain

279

What are the components of a database?

Desktop client

Application Server

Database Server

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

280

What four perspectives are included in Balanced Scorecard?

Financial / Customer / Internal Business Processes / Learning and Growth

281

Why was Balanced Scorecard created?

To measure Performance.

282

What are Strategy Maps?

Diagrams of Strategic Cause and Effect Relationships.

283

What is a Strategic Initiative?

A plan to achieve goals.

284

What measures are used under Value-Based Management?

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

285

How is Return on Investment (ROI) calculated?

ROI : Return / Investment

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

$60 / $100 : 60% ROI

286

How is Residual Income calculated?

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

287

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

RROR is also called 'Cost of Capital'

288

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

Cost of Capital is the weighted average of the interest rates you pay for your Capital.

Includes Debt and the Rate of Return your Equity Shareholders expect

Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%

Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%

289

How is Spread calculated?

Spread : ROI - Cost of Capital

290

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)

291

How is Free Cash Flow calculated?

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

292

What is measured by Six Sigma?

It measures a product versus its quality goal.

293

What is the Asset Turnover Ratio?

Sales / Average Assets

294

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

295

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

296

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

297

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

How profitable is the product after COGS?

Gross Margin : Gross Profit / Net Sales

298

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

299

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

300

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

301

How is Market/Book ratio calculated?

Market Value of Common Stock / Book Value of Common Stock

302

What is Inventory Turnover and how is it calculated?

How quickly does inventory get sold?

Inventory Turnover : COGS / Average Inventory

303

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

304

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

305

What is an Internal Failure?

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

306

What is an External Failure?

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

This includes recalls.

307

What is Appraisal Cost?

Quality control- testing & inspection costs.

308

Define Market Risk

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

309

Define Sector Risk

The risk that an event in the investment's business sector will harm the investment

For example- the banking sector is sluggish- so even stocks of healthy banks suffer

310

Define Credit/Default Risk

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

311

Define Interest Rate Risk

The risk that a change in interest rates will adversely affect the value of the note

Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.

312

What does Standard Deviation measure?

It measures the volatility of an investment.

313

What is Systematic Risk?

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

Example: Wars

314

What is Unsystematic Risk?

Relates to a particular industry or company

Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest

315

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?

316

What is Variance?

It compares volatility of an investment to the market average.

Factors include both Systematic and Unsystematic Risk.

317

What is a Derivative?

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

Derivatives are measured at Fair Value.

318

How is an Option used?

Gives the buyer the option to buy or sell a financial derivative at a certain price

Traders use them to speculate where they think the price will be at a certain point and make a profit

Hedgers use them to offset risk

319

What is a Future?

A Forward Contract with a future value.

They are sold and traded on the futures market.

320

What is an Interest Rate Swap?

Forward Contract to swap payment agreements

They are highly liquid and often valued using the Zero-Coupon method.

Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR

321

What is Legal Risk?

Risk that a law or regulation will void the derivative

322

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.

323

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.

324

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.

325

What is Capital Budgeting? How is it used?

Managerial Accounting technique used to evaluate different investment options

Helps management make decisions

Uses both accounting and non-accounting information

Internal focus

GAAP is not mandatory

326

What values are used in Capital Budgeting?

Capital Budgeting ONLY uses Present Value tables.

Capital Budgeting NEVER uses Fair Value.

327

When is the Present Value of $1 table used?

For ONE payment- ONE time.

328

When is the Present Value of an Annuity Due used?

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

329

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

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

Think A for Arrears.

330

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

1 / (( 1+i )^n)

i : interest rate
n : number of periods

331

What is Net Present Value (NPV)?

A preferred method of evaluating profitability.

One of two methods that use the Time Value of Money

: PV of Future Cash Flows - Investment

332

How is NPV used to calculate future benefit?

NPV : PV Future Cash Flows - Investment

If NPV is Negative- Cost is greater than benefits (bad investment)

If NPV is Positive- Cost is less than benefit (good investment)

If NPV : 0- Cost : Benefit (Management is indifferent)

333

What is the rate of return on an investment called?

The Discount Rate.

334

What does the Discount Rate represent?

The rate of return on an investment used.

It represents the minimum rate of return required.

335

What are the strengths of the Net Present Value system?

Uses the Time Value of Money

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

Takes risks into consideration

336

What are the weaknesses of the Net Present Value system?

Not as simple as the Accounting Rate of Return.

337

How do Salvage Value and Depreciation affect Net Present Value?

NPV includes Salvage Value because it is a future cash inflow.

NPV does NOT include depreciation because it is non-cash.

Exception - If a CPA Exam question says to include tax considerations- then you have to include depreciation because of income tax savings generated by depreciation.

338

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

The minimum rate of return is used.

339

What is the Internal Rate of Return (IRR)?

It calculates a project's actual rate of return through the project's expected cash flows.

IRR is the rate of return required for PV of future cash flows to EQUAL the investment.

Investment / After Tax Annual Cash Inflow : PV Factor

340

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

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

341

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

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

Rate of return for NPV is the minimum rate.

342

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

Strengths: Uses Time Value of Money- Cash Flow emphasis

Weakness: Uneven cash flows lead to varied IRR

343

When is NPV on an Investment positive?

When the benefits are greater than the costs.

IRR is greater than the Discount Rate

344

When is NPV on an Investment Negative?

When Costs are greater than Benefits

IRR is less than the Discount Rate

345

When is NPV Zero?

When benefits equal the Costs

IRR : Discount Rate

346

What is the Payback Method? How is it calculated?

It measures an investment in terms of how long it takes to recoup the initial investment via Annual Cash Inflow

Investment / Annual Cash Inflow : Payback Method

Compare to a targeted timeframe; if payback is shorter than target- it's a good investment. If payback is longer than target- it's a bad investment.

347

What are the strengths of the Payback Method?

Takes risk into consideration

2 year payback is less risky than a 5 year payback

348

What are the weaknesses of the payback method?

Ignores the Time Value of Money

Exception: Discount payback method

Ignores cash flow after the initial investment is paid back

349

What is the Accounting Rate of Return?

An approximate rate of return on assets

ARR : Net Income / Average Investment

Compare to a targeted return rate; if ARR greater than target- good investment. If ARR less than target- bad investment.

350

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

Simple to use

People understand easily

351

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

Can be skewed based on Depreciation method that is used.

Ignores the Time Value of Money.

352

What is an Expected Return?

An approximate rate of return on assets.

353

What is the primary duty of the board of directors?

To monitor management behavior.

354

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

Oversees the board

Responsible for hiring new CEO

355

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

The audit committee appoints and oversees the external auditor.

356

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

The compensation committee handles the CEO's compensation package.

357

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

They require the board to be independent.

358

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.

359

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.

360

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

361

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.

362

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.

363

What characteristics are promoted by the COSO framework on Internal Control?

Reliable financial reporting

Effective and efficient operations

Compliance

364

What are the elements of the control environment?

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

365

What are control activities?

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

366

What are the basic elements of Internal Control?

Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring

367

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.

368

How does Monitoring affect Internal Control?

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

369

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

Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement

Does NOT eliminate all risk

370

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

Avoid or Reduce

Share or Accept

371

What is Cost Accounting?

Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for
o Direct Materials
o Direct Labor
o Work in Process
o Finished Goods

Cost Accounting also records for the Income Statement

372

What is the difference between Cost Accounting and Managerial Accounting?

Cost Accounting - External Focus- GAAP

Managerial Accounting - Internal Focus- Not GAAP

373

What are Product Costs (aka Inventory Costs)?

Prime Costs

Conversion Costs

374

What are included in Prime Costs?

Direct Material USED - Have become part of the product or had a direct impact on the product

Direct Labor Used - Employees who worked on product and had direct impact

375

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).

376

What is included in Fixed Factory Overhead?

FFO : Estimated Costs / Normal Capacity

Uses Normal Activity

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

Under/Over-applied Fixed OH always goes to COGS

377

What is included in Variable Overhead?

VO : Estimated Activity / Actual Activity

Uses Actual Activity

Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)

378

Where is Under/Over-applied Variable OH recorded?

If Immaterial - Goes to COGS

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

379

Where is Under/Over-applied Fixed OH recorded?

It always goes to COGS

380

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.

381

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.

382

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)

383

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

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

384

What variables are included in Finished Goods calculations?

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

385

How does Freight In affect Cost Accounting calculations?

Inventory (Product) Cost

Part of DM Purchases

386

How does Freight Out affect Cost Accounting?

Selling (Period) Cost

Not part of inventory

387

When is Job-Order Costing used?

Used when costs are easily connected to a specific product or product line

Can also be applied to services

Calculation is the same as normal cost accounting - just use your T Accounts
- DM to WIP to FG to COGS
- You're likely going to be solving for the last job in the queue

388

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)

389

What is the Step Method for allocating service department costs?

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

390

Under process costing- how are the units shipped calculated?

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

391

Which two inventory methods are used under Process Costing?

FIFO

Weighted Average

392

What is another name for Process Costing?

Equivalent Units of Production

393

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)

394

How are Direct Materials calculated under the Weighted Average Method?

Beginning Inventory + Current Costs / EFU WA

395

How are Conversion Costs calculated under Weighted Average Method?

Beginning Inventory + Current Costs / EFU WA

396

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)

397

How are Equivalent Finished Units calculated for Conversion Costs?

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

- Beginning Inventory x % Complete
: EFU (FIFO)

398

How are Direct Materials calculated under the FIFO method?

Current Costs / EFU FIFO

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

399

How are Conversion Costs calculated under the FIFO method?

Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory

400

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

401

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

402

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

Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don't want or don't care about

Inventory is expensive to store and storing something is not a value-added expenditure

Uses Cost Pools - Different departments can have different OH rates

Uses Several OH rates based on Activity - Cost Pool / Cost Driver

403

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

Cost Pools and Allocations increase compared to a traditional costing system

404

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

405

What are the characteristics of By-Products?

Usually immaterial and common costs aren't allocated to them
Low Market Value
Can be valued at NRV
Can be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against Sales
Recognition rules are very flexible with valuing and classifying by-products

406

What are Cost Functions?

Measure how costs change relative to activity levels

High-Low Method

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

407

How does a price increase affect supply?

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

408

What is a supply curve shift?

When supply changes due to something other than price.

409

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

Supply increases at each price point

Higher Equilibrium GDP

Number of sellers increases - market can get flooded

Examples: Government subsidies or technology improvements that decrease costs for suppliers

410

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

Supply decreases at each price point

Lower Equilibrium GDP

Cost of producing item increases

Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market

411

How does price affect the demand for an item?

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

412

What is a Demand Curve Shift?

When demand changes due to something other than price.

413

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

When demand increases at each price point

Price of substitutes go up - price of beef rises- so people buy more chicken

Future price increase is expected - War in Middle East- people go out and buy gas

Market expands - i.e. people get new free health care plan- demand at clinic rises

Expansion - more spending increases equilibrium GDP

414

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

Demand decreases at each price point.

Price of complement goes up - price of beef goes up- less demand for ketchup

Boycott - Company commits social blunder- consumers boycott

Consumer income rises - Demand for inferior goods drops as people have more money to spend

Consumer tastes change

Contraction - less spending decreases equilibrium GDP

415

What is the Marginal Propensity to Consume?

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

416

What is the Marginal Propensity to Save?

How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume

417

How is the multiplier effect calculated?

(1 / 1-MPC) x Change in Spending

418

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).

419

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

420

How is Price Elasticity of Demand calculated?

% Change in Quantity Demand / % Change in Price

421

Under elastic demand- how does price affect revenues?

Price increases- Revenue decreases

Price decreases- Revenue increases

422

What conditions would indicate Elastic Demand?

Many substitutes (luxury items)
Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)

Price increases- Revenue decreases
Price decreases- Revenue increases

423

How does revenue react to price under Inelastic Demand?

Price increases- Revenue increases

Price decreases- Revenue decreases

424

What conditions would indicate Inelastic Demand?

Few substitutes (groceries- gasoline)
Considered inelastic if coefficient of elasticity is less than 1
5% drop in demand / 10% increase in price : .5 (inelastic)

Price increases- Revenue increases
Price decreases- Revenue decreases

425

What is Unitary Demand?

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

426

How is Income Elasticity of Demand calculated?

% Change Quantity Demanded / % Change in Income

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

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

427

What conditions occur under periods of inflation?

Interest rates increase
Reduced demand for loans
Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease

428

What happens under Demand-Pull inflation?

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases

429

What happens under Cost-Push inflation?

Overall production costs increase
Supply decreases (shifts left)
Market equilibrium price increases

Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

430

What is the Equilibrium Price?

The price where Quantity Supplied : Quantity Demanded

431

What is Optimal Production?

When Marginal Revenue : Marginal Cost

432

What is the result of a Price Floor?

Causes a surplus if above equilibrium price.

433

What is GDP (Gross Domestic Product)?

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests

Included: Foreign company has US Factory

Not included: US company has foreign factory

434

What is included under the income approach for calculating GDP?

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

435

What is included under the Expenditure Approach for calculating GDP?

Individual Consumption

Private Investment

Government Purchases

Net Exports

436

What is Nominal GDP?

Measures goods/services in current prices.

437

For what is a GDP Deflator used?

Used to convert GDP to Real GDP

438

What is Real GDP?

Nominal GDP / GDP Deflator x 100

439

What is Gross National Product (GNP)?

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

440

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

441

How is disposable income calculated?

Personal Income - Personal Taxes

442

How is Return to Scale calculated?

% Increase in output / % Increase in input

Greater than 1 : Increasing returns to scale

Less than 1 : Decreasing returns to scale

443

When is the economy in Recession?

When GDP growth is negative for two consecutive quarters.

444

What is a Depression?

A prolonged- severe recession with high unemployment rates

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

445

What are the stages of the Economic Cycle?

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

446

What are leading indicators?

Conditions that occur before a recession or before a recovery

Example: Stock Market or New Housing Starts

447

What are lagging indicators?

Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates- Unemployment

448

What are coincident indicators?

Conditions that occur during a recession or during a recovery

Example: Manufacturing output

449

Which people are included in the calculation of unemployment?

Only people looking for jobs

450

What is Cyclical Unemployment?

GDP doesn't grow fast enough to employ all people who are looking for work

Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy

451

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

452

What is Structural Unemployment?

A worker's job skills do not match those necessary to get a job so they need education or training

Example: A construction worker wants to work in an office- so they quit their job and get computer training

453

How does inflation relate to unemployment?

High Unemployment : Low Inflation (Vice Versa)

454

What is the Discount Rate?

The rate a bank pays to borrow from the Fed.

455

What is the Prime Rate?

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

456

What is the Real Interest Rate?

Inflation-adjusted interest rate

457

What is the Nominal Rate?

Rate that uses current prices

458

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.

459

What is included in the M1 money supply?

Currency- Coins- and Deposits

460

What is included in the M2 money supply?

Highly liquid assets other than currency- coins or deposits

461

What is Deficit Spending?

Increased spending levels without increased tax revenue.

Lower taxes without decrease in spending

Gamble that the multiplier effect will take over and boost economy

462

How can the Fed control the money supply?

By buying and selling the government's securities.

463

How does the Fed control economy-wide interest rates?

By adjusting the discount rate charged to banks

464

What is a Tariff?

A tax on imported goods

465

What is a quota?

A limit on the number of goods that can be imported

466

How do international trade restrictions affect domestic producers?

They are good for domestic producers.

Demand curve shifts right

Fewer substitutes

They can charge higher prices

467

How to international trade restrictions affect foreign producers?

They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices

468

How do international trade restrictions affect foreign consumers?

They are good for foreign consumers

Supply curve shifts right

Goods purchased at lower prices in the foreign markets

469

How do international trade restrictions affect domestic consumers?

They are bad for domestic consumers

Supply curve shifts left

Fewer goods bought due to higher prices

470

What is Accounting Cost?

Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs

471

What is Accounting Profit?

Revenue - Accounting Cost

472

What is Economic Cost?

Explicit + Implicit Cost

473

What is Economic Profit?

Revenue - Economic Cost

474

What is the primary focus of working capital management?

Managing inventory & receivables (current assets & liabilities)

475

How is Net Working Capital calculated?

NWC : Current Assets - Current Liabilities

476

What are the characteristics of effective Working Capital Management?

Shorten the cash conversion cycle

Don't negatively impact operations

477

What is the Inventory Conversion Period?

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

Average Inventory : (BI + E) / 2

Inventory Conversion Period : Average Inventory / Sales Per Day

478

What is the Receivables Collection Period?

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

479

What is the Payables Deferral Period?

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

Average Payables : (BP + EP) / 2

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

480

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)

481

What traits should Cash and Short-Term Investments have?

Liquid

Safe

482

For what are Letters of Credit used?

Used for importing goods.

Issued by importer's bank.

483

What is the advantage of using Trade Credit?

No interest cost if paid timely.

484

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)

485

What is float?

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

Maximize float on cash payments

Minimize float on cash receipts

486

What are Zero Balance Accounts?

Regional bank sends enough cash to cover daily checks

Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances

487

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

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

488

What is commercial paper?

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

Greater than 9 Months Maturity

Unsecured

Issued by large firms

489

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.

490

What is Economic Order Quantity?

The order quantity that minimizes inventory costs.

EOQ : Square Root of (2DO/C)

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

491

What is Carrying Cost?

The cost of keeping inventory.

492

What is Order Cost?

Cost of executing an order and starting product production.

493

What is inventory reorder point?

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

IOP : Average Daily Demand x Average Lead Time

494

What is a Just In Time (JIT) system?

Orders inventory so that you get it just in time for when it's needed

JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high

495

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

496

What is a Trade Discount?

Buyer saves if paid early

Example: 1/10 Net 30

1% Discount if paid within 10 days

If not- bill is still due in 30 days

497

What is the cost of forgoing a discount?

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

498

What is the Prime Rate?

A benchmark used for lending only to the best customers

Most customers will be charged Prime + 3%- for example

If the lending institution and the customer are not in the same country- the LIBOR rate is often used

499

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

Interest rate stated on the face of a bond.

500

How is Current Yield calculated?

CY : Interest Payment / Bond Price

501

What is the Effective (YTM- Market) Rate?

PV of Principle + Interest : Bond Price

502

What is a Zero Coupon Bond?

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

503

What are the characteristics of a Junk Bond?

High interest rate

High default risk

504

What are debenture bonds?

Bonds unsecured by collateral

505

What are subordinated debentures?

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

506

What are Redeemable Bonds?

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

507

What is a Callable Bond?

Borrower can pay off debt early

508

What is a Convertible Bond?

Lender can demand payment via company stock instead of money

509

What is a Sinking Fund?

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

510

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)

511

What is the advantage of Preferred Stock?

Hold dividend priority over common stock

512

What is Weighted Average Cost of Capital?

A company uses this to determine the true cost of their capital

Example:
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%

513

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.

514

How is Cost of Debt calculated?

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

515

What is a Static Budget?

Budget targeted for a specific segment of a company.

516

What is a Maser Budget?

Budget targeted for the company as a whole

Includes budgets for Operations and Cash Flows

Includes set of budgeted Financial Statements

517

How do Fixed Costs affect budgeting?

Costs independent of the level activity within the relevant range

Property Tax is the same whether you produce 100-000 units or zero units

However - Fixed Costs per unit vary given the amount of activity

If you produce fewer units- fixed costs per unit will be greater than if you produce more units - i.e. less units to spread the cost over

518

How do Variable Costs affect budgeting?

The more Direct Materials or Direct Labor used- the more Variable Costs per unit

However - Variable Costs per unit don't change with the level of activity like Fixed Costs per unit

519

How are Material Variances calculated?

SAM:

Standard Material Costs
- Actual Material Costs
= Material Variance

520

How are Labor Variances calculated?

SAL

Standard Labor Costs
- Actual Labor Costs
= Labor Variance

521

How are Overhead Variances calculated?

OAT

Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance

522

How does Absorption Costing compare to Variable Costing?

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

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

523

How is Contribution Margin calculated?

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

524

How is Break-even Point (per unit) calculated?

Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit

Assumption: Total Costs & Total Revenues are LINEAR

525

What is the focus in a Cost Center?

Management is concerned only with costs

526

What is the focus in a Profit Center?

Management is concerned with both costs and profits

527

What is the focus in an Investment Center?

Management is concerned with costs- profits- and assets

528

What is the Delphi technique?

Forecasting technique where Data is collected and analyzed

Requires judgement/consensus

529

What is Regression Analysis?

A forecasting technique where Sales is the dependent variable.

Simple Regression - One independent variable

Multiple Regression - Multiple independent variables

530

What are Econometric Models?

Forecast sales using Economic Data

531

What are Naive Forecasting Models?

Very Simplistic
- Eyeball past trends and make an estimate

532

How does a Moving Average compare to Exponential Smoothing?

Both project estimates using average trends from recent periods

Difference: Exponential Smoothing weighs recent data more heavily

533

What are the characteristics of Short-term Cost Analysis?

Uses Relevant Costs Only

Ignore Sunk Costs

Opportunity Cost is a Must

534

Which IT personnel roles should always be segregated?

Operators

Programmers

Librarians

535

What are the duties of a systems analyst?

Designs or purchases IT system

Responsible for flowcharts

Liaison between Users and Programmers

Note: Think IT Manager

536

What is the primary duty of a Systems Administrator?

A Systems Administrator controls database access.

537

What are the duties of a Systems Programmer?

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

538

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.

539

What are the duties of a Systems Operator?

Schedules and Monitors Jobs

Runs IT Help Desk

540

What duties should a System Operator NOT have?

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

541

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.

542

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

To assist with decision making.

543

What is an Accounting Information System (AIS)?

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

544

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

Specialized for Company Executive needs

Assists with Strategy Only

No Decision-Making Capabilities

545

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

Computer uses reasoning

Structured

No human interpretation needed

546

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

Computer provides data

Gives Interactive Support

Human interpretation needed

547

What are the characteristics of an Ad Hoc computer report?

User initiates the report.

The report is created upon demand.

548

When are Exception reports generated?

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

549

What is a query?

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

550

What is End-User Computing?

The User develops and executes their own application.

551

What is the primary benefit of E-commerce?

E-commerce makes business transactions easier.

552

What are the risks of E-commerce?

Compromised data or theft.

Less paper trail for auditors.

553

What are the benefits of Electronic Data Interchange?

Uses globally-accepted standards

Efficient

554

What is a File Server?

A file server stores shared programs and documents.

555

What is the purpose of a Database?

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

556

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

It connects computers in close proximity.

557

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

It connects computers that are far apart.

558

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

Privately-owned Network

Serves as 3rd Party Between 2 Companies

Routes EDI Transactions

Accepts wide range of Protocols

Very Costly

559

What is the purpose of a Firewall?

Prevents unauthorized access to a network.

560

What are the characteristics of a virus?

Takes over a computer

Needs a host program to run

561

What are the characteristics of a computer worm?

Takes over multiple computers

Doesn't need a host program to run

562

What is the purpose of Automated Equipment Controls?

They prevent and detect hardware errors.

563

What is RAM?

Random Access Memory.

Internal memory in the computer used during immediate processing.

564

What is a CPU?

Computer Processing Unit

It processes commands within a computer.

565

What is Job Control Language?

It schedules and allocates system resources.

566

What are examples of input devices?

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

567

What are examples of Output Devices?

Speakers

Monitors

Printers

568

What are the characteristics of Magnetic Tape storage?

Sequential Access - Sorts data in order

Slower data retrieval

Header Label prevents Operator error by loading wrong tape

External Labels prevent accidental destruction by operator

569

What are the characteristics of Magnetic Disks?

Random Access - Finds data in random spots

Faster data retrieval

Uses Boundary Protection for data

570

What is a Gateway?

Connects one network to another

Note: the Internet is connected by Gateways

571

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.

572

What is an Echo Check?

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

573

What is a Change Control?

It authorizes program changes and approves program test results.

574

What is security software?

Software that controls access to IT systems.

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

575

What is the purpose of a Digital Signature?

It confirms a message has not been altered.

576

List the types of computers from smallest to largest

PDA/Smartphone/Tablet

Microcomputer - PC- Laptop (cost-effective)

Minicomputer - Like a Mainframe- but smaller

Mainframe - Large computer with terminals attached

Supercomputer - Very powerful and very big

577

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

Bit - 1 (on) and 0 (off)
Byte - 8 bits to a byte/character
Field - group of related characters/bytes (i.e. Name- Zip Code- Serial #)
Record - Group of related fields (i.e. Member name- address- phone number)
File - Group of related records (i.e. Membership directory)

578

What is the duty of a design engineer?

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

579

What are object programs?

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

580

How can source programs be recognized?

They are written in a language close to English.

581

What is the purpose of a Compiler?

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

582

How does Online Analytical Processing work?

It uses a Data Warehouse to support management decision making.

583

What is Data Mining?

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

584

What is the purpose of online transaction processing?

To process a company's routine transactions.

585

What are the characteristics of batch processing?

Data held- updates multiple files all at once

Leaves a better audit trail

Uses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)

586

What does an output control check for?

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

587

What does a processing control check?

Checks if data processing produced proper output

588

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.

589

What is a validity check?

Checks to see if data in existing tables or files belongs in the set

For example- is there a # in an alpha-only field or a letter in a numeric-only field

590

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.

591

What is a check digit?

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

592

What is a field check?

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

593

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.

594

What is a Cold Site?

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

595

What is the most common database language?

SQL - Structured Query Language

596

What is a Data Definition Language?

Defines SQL Database

Controls SQL Tables

597

What is a Data Manipulation Language?

Queries SQL Database tables

598

What is a Data Control Language?

Controls Access to SQL Database

599

What are the characteristics of a Relational Database?

Logical structure

Uses rows and columns similar to spreadsheet

600

What are the characteristics of a Hierarchical Database?

Has various levels

Uses trees to store data

601

What are the advantages of a database?

Data is more accessible

Reduced redundancy

602

What are the disadvantages of a database?

Cost of installation

Skilled personnel required to maintain

603

What are the components of a database?

Desktop client

Application Server

Database Server

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

604

What four perspectives are included in Balanced Scorecard?

Financial / Customer / Internal Business Processes / Learning and Growth

605

Why was Balanced Scorecard created?

To measure Performance.

606

What are Strategy Maps?

Diagrams of Strategic Cause and Effect Relationships.

607

What is a Strategic Initiative?

A plan to achieve goals.

608

What measures are used under Value-Based Management?

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

609

How is Return on Investment (ROI) calculated?

ROI : Return / Investment

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

$60 / $100 : 60% ROI

610

How is Residual Income calculated?

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

611

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

RROR is also called 'Cost of Capital'

612

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

Cost of Capital is the weighted average of the interest rates you pay for your Capital.

Includes Debt and the Rate of Return your Equity Shareholders expect

Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%

Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%

613

How is Spread calculated?

Spread : ROI - Cost of Capital

614

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)

615

How is Free Cash Flow calculated?

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

616

What is measured by Six Sigma?

It measures a product versus its quality goal.

617

What is the Asset Turnover Ratio?

Sales / Average Assets

618

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

619

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

620

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

621

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

How profitable is the product after COGS?

Gross Margin : Gross Profit / Net Sales

622

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

623

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

624

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

625

How is Market/Book ratio calculated?

Market Value of Common Stock / Book Value of Common Stock

626

What is Inventory Turnover and how is it calculated?

How quickly does inventory get sold?

Inventory Turnover : COGS / Average Inventory

627

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

628

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

629

What is an Internal Failure?

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

630

What is an External Failure?

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

This includes recalls.

631

What is Appraisal Cost?

Quality control- testing & inspection costs.

632

Define Market Risk

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

633

Define Sector Risk

The risk that an event in the investment's business sector will harm the investment

For example- the banking sector is sluggish- so even stocks of healthy banks suffer

634

Define Credit/Default Risk

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

635

Define Interest Rate Risk

The risk that a change in interest rates will adversely affect the value of the note

Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.

636

What does Standard Deviation measure?

It measures the volatility of an investment.

637

What is Systematic Risk?

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

Example: Wars

638

What is Unsystematic Risk?

Relates to a particular industry or company

Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest

639

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?

640

What is Variance?

It compares volatility of an investment to the market average.

Factors include both Systematic and Unsystematic Risk.

641

What is a Derivative?

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

Derivatives are measured at Fair Value.

642

How is an Option used?

Gives the buyer the option to buy or sell a financial derivative at a certain price

Traders use them to speculate where they think the price will be at a certain point and make a profit

Hedgers use them to offset risk

643

What is a Future?

A Forward Contract with a future value.

They are sold and traded on the futures market.

644

What is an Interest Rate Swap?

Forward Contract to swap payment agreements

They are highly liquid and often valued using the Zero-Coupon method.

Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR

645

What is Legal Risk?

Risk that a law or regulation will void the derivative

646

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.

647

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.

648

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.

649

What is Capital Budgeting? How is it used?

Managerial Accounting technique used to evaluate different investment options

Helps management make decisions

Uses both accounting and non-accounting information

Internal focus

GAAP is not mandatory

650

What values are used in Capital Budgeting?

Capital Budgeting ONLY uses Present Value tables.

Capital Budgeting NEVER uses Fair Value.

651

When is the Present Value of $1 table used?

For ONE payment- ONE time.

652

When is the Present Value of an Annuity Due used?

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

653

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

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

Think A for Arrears.

654

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

1 / (( 1+i )^n)

i : interest rate
n : number of periods

655

What is Net Present Value (NPV)?

A preferred method of evaluating profitability.

One of two methods that use the Time Value of Money

: PV of Future Cash Flows - Investment

656

How is NPV used to calculate future benefit?

NPV : PV Future Cash Flows - Investment

If NPV is Negative- Cost is greater than benefits (bad investment)

If NPV is Positive- Cost is less than benefit (good investment)

If NPV : 0- Cost : Benefit (Management is indifferent)

657

What is the rate of return on an investment called?

The Discount Rate.

658

What does the Discount Rate represent?

The rate of return on an investment used.

It represents the minimum rate of return required.

659

What are the strengths of the Net Present Value system?

Uses the Time Value of Money

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

Takes risks into consideration

660

What are the weaknesses of the Net Present Value system?

Not as simple as the Accounting Rate of Return.

661

How do Salvage Value and Depreciation affect Net Present Value?

NPV includes Salvage Value because it is a future cash inflow.

NPV does NOT include depreciation because it is non-cash.

Exception - If a CPA Exam question says to include tax considerations- then you have to include depreciation because of income tax savings generated by depreciation.

662

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

The minimum rate of return is used.

663

What is the Internal Rate of Return (IRR)?

It calculates a project's actual rate of return through the project's expected cash flows.

IRR is the rate of return required for PV of future cash flows to EQUAL the investment.

Investment / After Tax Annual Cash Inflow : PV Factor

664

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

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

665

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

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

Rate of return for NPV is the minimum rate.

666

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

Strengths: Uses Time Value of Money- Cash Flow emphasis

Weakness: Uneven cash flows lead to varied IRR

667

When is NPV on an Investment positive?

When the benefits are greater than the costs.

IRR is greater than the Discount Rate

668

When is NPV on an Investment Negative?

When Costs are greater than Benefits

IRR is less than the Discount Rate

669

When is NPV Zero?

When benefits equal the Costs

IRR : Discount Rate

670

What is the Payback Method? How is it calculated?

It measures an investment in terms of how long it takes to recoup the initial investment via Annual Cash Inflow

Investment / Annual Cash Inflow : Payback Method

Compare to a targeted timeframe; if payback is shorter than target- it's a good investment. If payback is longer than target- it's a bad investment.

671

What are the strengths of the Payback Method?

Takes risk into consideration

2 year payback is less risky than a 5 year payback

672

What are the weaknesses of the payback method?

Ignores the Time Value of Money

Exception: Discount payback method

Ignores cash flow after the initial investment is paid back

673

What is the Accounting Rate of Return?

An approximate rate of return on assets

ARR : Net Income / Average Investment

Compare to a targeted return rate; if ARR greater than target- good investment. If ARR less than target- bad investment.

674

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

Simple to use

People understand easily

675

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

Can be skewed based on Depreciation method that is used.

Ignores the Time Value of Money.

676

What is an Expected Return?

An approximate rate of return on assets.

677

What is the primary duty of the board of directors?

To monitor management behavior.

678

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

Oversees the board

Responsible for hiring new CEO

679

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

The audit committee appoints and oversees the external auditor.

680

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

The compensation committee handles the CEO's compensation package.

681

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

They require the board to be independent.

682

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.

683

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.

684

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

685

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.

686

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.

687

What characteristics are promoted by the COSO framework on Internal Control?

Reliable financial reporting

Effective and efficient operations

Compliance

688

What are the elements of the control environment?

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

689

What are control activities?

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

690

What are the basic elements of Internal Control?

Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring

691

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.

692

How does Monitoring affect Internal Control?

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

693

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

Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement

Does NOT eliminate all risk

694

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

Avoid or Reduce

Share or Accept

695

What is Cost Accounting?

Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for
o Direct Materials
o Direct Labor
o Work in Process
o Finished Goods

Cost Accounting also records for the Income Statement

696

What is the difference between Cost Accounting and Managerial Accounting?

Cost Accounting - External Focus- GAAP

Managerial Accounting - Internal Focus- Not GAAP

697

What are Product Costs (aka Inventory Costs)?

Prime Costs

Conversion Costs

698

What are included in Prime Costs?

Direct Material USED - Have become part of the product or had a direct impact on the product

Direct Labor Used - Employees who worked on product and had direct impact

699

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).

700

What is included in Fixed Factory Overhead?

FFO : Estimated Costs / Normal Capacity

Uses Normal Activity

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

Under/Over-applied Fixed OH always goes to COGS

701

What is included in Variable Overhead?

VO : Estimated Activity / Actual Activity

Uses Actual Activity

Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)

702

Where is Under/Over-applied Variable OH recorded?

If Immaterial - Goes to COGS

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

703

Where is Under/Over-applied Fixed OH recorded?

It always goes to COGS

704

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.

705

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.

706

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)

707

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

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

708

What variables are included in Finished Goods calculations?

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

709

How does Freight In affect Cost Accounting calculations?

Inventory (Product) Cost

Part of DM Purchases

710

How does Freight Out affect Cost Accounting?

Selling (Period) Cost

Not part of inventory

711

When is Job-Order Costing used?

Used when costs are easily connected to a specific product or product line

Can also be applied to services

Calculation is the same as normal cost accounting - just use your T Accounts
- DM to WIP to FG to COGS
- You're likely going to be solving for the last job in the queue

712

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)

713

What is the Step Method for allocating service department costs?

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

714

Under process costing- how are the units shipped calculated?

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

715

Which two inventory methods are used under Process Costing?

FIFO

Weighted Average

716

What is another name for Process Costing?

Equivalent Units of Production

717

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)

718

How are Direct Materials calculated under the Weighted Average Method?

Beginning Inventory + Current Costs / EFU WA

719

How are Conversion Costs calculated under Weighted Average Method?

Beginning Inventory + Current Costs / EFU WA

720

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)

721

How are Equivalent Finished Units calculated for Conversion Costs?

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

- Beginning Inventory x % Complete
: EFU (FIFO)

722

How are Direct Materials calculated under the FIFO method?

Current Costs / EFU FIFO

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

723

How are Conversion Costs calculated under the FIFO method?

Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory

724

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

725

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

726

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

Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don't want or don't care about

Inventory is expensive to store and storing something is not a value-added expenditure

Uses Cost Pools - Different departments can have different OH rates

Uses Several OH rates based on Activity - Cost Pool / Cost Driver

727

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

Cost Pools and Allocations increase compared to a traditional costing system

728

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

729

What are the characteristics of By-Products?

Usually immaterial and common costs aren't allocated to them
Low Market Value
Can be valued at NRV
Can be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against Sales
Recognition rules are very flexible with valuing and classifying by-products

730

What are Cost Functions?

Measure how costs change relative to activity levels

High-Low Method

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

731

How does a price increase affect supply?

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

732

What is a supply curve shift?

When supply changes due to something other than price.

733

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

Supply increases at each price point

Higher Equilibrium GDP

Number of sellers increases - market can get flooded

Examples: Government subsidies or technology improvements that decrease costs for suppliers

734

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

Supply decreases at each price point

Lower Equilibrium GDP

Cost of producing item increases

Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market

735

How does price affect the demand for an item?

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

736

What is a Demand Curve Shift?

When demand changes due to something other than price.

737

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

When demand increases at each price point

Price of substitutes go up - price of beef rises- so people buy more chicken

Future price increase is expected - War in Middle East- people go out and buy gas

Market expands - i.e. people get new free health care plan- demand at clinic rises

Expansion - more spending increases equilibrium GDP

738

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

Demand decreases at each price point.

Price of complement goes up - price of beef goes up- less demand for ketchup

Boycott - Company commits social blunder- consumers boycott

Consumer income rises - Demand for inferior goods drops as people have more money to spend

Consumer tastes change

Contraction - less spending decreases equilibrium GDP

739

What is the Marginal Propensity to Consume?

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

740

What is the Marginal Propensity to Save?

How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume

741

How is the multiplier effect calculated?

(1 / 1-MPC) x Change in Spending

742

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).

743

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

744

How is Price Elasticity of Demand calculated?

% Change in Quantity Demand / % Change in Price

745

Under elastic demand- how does price affect revenues?

Price increases- Revenue decreases

Price decreases- Revenue increases

746

What conditions would indicate Elastic Demand?

Many substitutes (luxury items)
Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)

Price increases- Revenue decreases
Price decreases- Revenue increases

747

How does revenue react to price under Inelastic Demand?

Price increases- Revenue increases

Price decreases- Revenue decreases

748

What conditions would indicate Inelastic Demand?

Few substitutes (groceries- gasoline)
Considered inelastic if coefficient of elasticity is less than 1
5% drop in demand / 10% increase in price : .5 (inelastic)

Price increases- Revenue increases
Price decreases- Revenue decreases

749

What is Unitary Demand?

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

750

How is Income Elasticity of Demand calculated?

% Change Quantity Demanded / % Change in Income

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

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

751

What conditions occur under periods of inflation?

Interest rates increase
Reduced demand for loans
Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease

752

What happens under Demand-Pull inflation?

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases

753

What happens under Cost-Push inflation?

Overall production costs increase
Supply decreases (shifts left)
Market equilibrium price increases

Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

754

What is the Equilibrium Price?

The price where Quantity Supplied : Quantity Demanded

755

What is Optimal Production?

When Marginal Revenue : Marginal Cost

756

What is the result of a Price Floor?

Causes a surplus if above equilibrium price.

757

What is GDP (Gross Domestic Product)?

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests

Included: Foreign company has US Factory

Not included: US company has foreign factory

758

What is included under the income approach for calculating GDP?

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

759

What is included under the Expenditure Approach for calculating GDP?

Individual Consumption

Private Investment

Government Purchases

Net Exports

760

What is Nominal GDP?

Measures goods/services in current prices.

761

For what is a GDP Deflator used?

Used to convert GDP to Real GDP

762

What is Real GDP?

Nominal GDP / GDP Deflator x 100

763

What is Gross National Product (GNP)?

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

764

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

765

How is disposable income calculated?

Personal Income - Personal Taxes

766

How is Return to Scale calculated?

% Increase in output / % Increase in input

Greater than 1 : Increasing returns to scale

Less than 1 : Decreasing returns to scale

767

When is the economy in Recession?

When GDP growth is negative for two consecutive quarters.

768

What is a Depression?

A prolonged- severe recession with high unemployment rates

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

769

What are the stages of the Economic Cycle?

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

770

What are leading indicators?

Conditions that occur before a recession or before a recovery

Example: Stock Market or New Housing Starts

771

What are lagging indicators?

Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates- Unemployment

772

What are coincident indicators?

Conditions that occur during a recession or during a recovery

Example: Manufacturing output

773

Which people are included in the calculation of unemployment?

Only people looking for jobs

774

What is Cyclical Unemployment?

GDP doesn't grow fast enough to employ all people who are looking for work

Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy

775

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

776

What is Structural Unemployment?

A worker's job skills do not match those necessary to get a job so they need education or training

Example: A construction worker wants to work in an office- so they quit their job and get computer training

777

How does inflation relate to unemployment?

High Unemployment : Low Inflation (Vice Versa)

778

What is the Discount Rate?

The rate a bank pays to borrow from the Fed.

779

What is the Prime Rate?

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

780

What is the Real Interest Rate?

Inflation-adjusted interest rate

781

What is the Nominal Rate?

Rate that uses current prices

782

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.

783

What is included in the M1 money supply?

Currency- Coins- and Deposits

784

What is included in the M2 money supply?

Highly liquid assets other than currency- coins or deposits

785

What is Deficit Spending?

Increased spending levels without increased tax revenue.

Lower taxes without decrease in spending

Gamble that the multiplier effect will take over and boost economy

786

How can the Fed control the money supply?

By buying and selling the government's securities.

787

How does the Fed control economy-wide interest rates?

By adjusting the discount rate charged to banks

788

What is a Tariff?

A tax on imported goods

789

What is a quota?

A limit on the number of goods that can be imported

790

How do international trade restrictions affect domestic producers?

They are good for domestic producers.

Demand curve shifts right

Fewer substitutes

They can charge higher prices

791

How to international trade restrictions affect foreign producers?

They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices

792

How do international trade restrictions affect foreign consumers?

They are good for foreign consumers

Supply curve shifts right

Goods purchased at lower prices in the foreign markets

793

How do international trade restrictions affect domestic consumers?

They are bad for domestic consumers

Supply curve shifts left

Fewer goods bought due to higher prices

794

What is Accounting Cost?

Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs

795

What is Accounting Profit?

Revenue - Accounting Cost

796

What is Economic Cost?

Explicit + Implicit Cost

797

What is Economic Profit?

Revenue - Economic Cost

798

What is the primary focus of working capital management?

Managing inventory & receivables (current assets & liabilities)

799

How is Net Working Capital calculated?

NWC : Current Assets - Current Liabilities

800

What are the characteristics of effective Working Capital Management?

Shorten the cash conversion cycle

Don't negatively impact operations

801

What is the Inventory Conversion Period?

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

Average Inventory : (BI + E) / 2

Inventory Conversion Period : Average Inventory / Sales Per Day

802

What is the Receivables Collection Period?

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

803

What is the Payables Deferral Period?

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

Average Payables : (BP + EP) / 2

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

804

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)

805

What traits should Cash and Short-Term Investments have?

Liquid

Safe

806

For what are Letters of Credit used?

Used for importing goods.

Issued by importer's bank.

807

What is the advantage of using Trade Credit?

No interest cost if paid timely.

808

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)

809

What is float?

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

Maximize float on cash payments

Minimize float on cash receipts

810

What are Zero Balance Accounts?

Regional bank sends enough cash to cover daily checks

Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances

811

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

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

812

What is commercial paper?

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

Greater than 9 Months Maturity

Unsecured

Issued by large firms

813

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.

814

What is Economic Order Quantity?

The order quantity that minimizes inventory costs.

EOQ : Square Root of (2DO/C)

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

815

What is Carrying Cost?

The cost of keeping inventory.

816

What is Order Cost?

Cost of executing an order and starting product production.

817

What is inventory reorder point?

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

IOP : Average Daily Demand x Average Lead Time

818

What is a Just In Time (JIT) system?

Orders inventory so that you get it just in time for when it's needed

JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high

819

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

820

What is a Trade Discount?

Buyer saves if paid early

Example: 1/10 Net 30

1% Discount if paid within 10 days

If not- bill is still due in 30 days

821

What is the cost of forgoing a discount?

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

822

What is the Prime Rate?

A benchmark used for lending only to the best customers

Most customers will be charged Prime + 3%- for example

If the lending institution and the customer are not in the same country- the LIBOR rate is often used

823

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

Interest rate stated on the face of a bond.

824

How is Current Yield calculated?

CY : Interest Payment / Bond Price

825

What is the Effective (YTM- Market) Rate?

PV of Principle + Interest : Bond Price

826

What is a Zero Coupon Bond?

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

827

What are the characteristics of a Junk Bond?

High interest rate

High default risk

828

What are debenture bonds?

Bonds unsecured by collateral

829

What are subordinated debentures?

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

830

What are Redeemable Bonds?

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

831

What is a Callable Bond?

Borrower can pay off debt early

832

What is a Convertible Bond?

Lender can demand payment via company stock instead of money

833

What is a Sinking Fund?

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

834

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)

835

What is the advantage of Preferred Stock?

Hold dividend priority over common stock

836

What is Weighted Average Cost of Capital?

A company uses this to determine the true cost of their capital

Example:
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%

837

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.

838

How is Cost of Debt calculated?

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

839

What is a Static Budget?

Budget targeted for a specific segment of a company.

840

What is a Maser Budget?

Budget targeted for the company as a whole

Includes budgets for Operations and Cash Flows

Includes set of budgeted Financial Statements

841

How do Fixed Costs affect budgeting?

Costs independent of the level activity within the relevant range

Property Tax is the same whether you produce 100-000 units or zero units

However - Fixed Costs per unit vary given the amount of activity

If you produce fewer units- fixed costs per unit will be greater than if you produce more units - i.e. less units to spread the cost over

842

How do Variable Costs affect budgeting?

The more Direct Materials or Direct Labor used- the more Variable Costs per unit

However - Variable Costs per unit don't change with the level of activity like Fixed Costs per unit

843

How are Material Variances calculated?

SAM:

Standard Material Costs
- Actual Material Costs
= Material Variance

844

How are Labor Variances calculated?

SAL

Standard Labor Costs
- Actual Labor Costs
= Labor Variance

845

How are Overhead Variances calculated?

OAT

Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance

846

How does Absorption Costing compare to Variable Costing?

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

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

847

How is Contribution Margin calculated?

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

848

How is Break-even Point (per unit) calculated?

Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit

Assumption: Total Costs & Total Revenues are LINEAR

849

What is the focus in a Cost Center?

Management is concerned only with costs

850

What is the focus in a Profit Center?

Management is concerned with both costs and profits

851

What is the focus in an Investment Center?

Management is concerned with costs- profits- and assets

852

What is the Delphi technique?

Forecasting technique where Data is collected and analyzed

Requires judgement/consensus

853

What is Regression Analysis?

A forecasting technique where Sales is the dependent variable.

Simple Regression - One independent variable

Multiple Regression - Multiple independent variables

854

What are Econometric Models?

Forecast sales using Economic Data

855

What are Naive Forecasting Models?

Very Simplistic
- Eyeball past trends and make an estimate

856

How does a Moving Average compare to Exponential Smoothing?

Both project estimates using average trends from recent periods

Difference: Exponential Smoothing weighs recent data more heavily

857

What are the characteristics of Short-term Cost Analysis?

Uses Relevant Costs Only

Ignore Sunk Costs

Opportunity Cost is a Must

858

Which IT personnel roles should always be segregated?

Operators

Programmers

Librarians

859

What are the duties of a systems analyst?

Designs or purchases IT system

Responsible for flowcharts

Liaison between Users and Programmers

Note: Think IT Manager

860

What is the primary duty of a Systems Administrator?

A Systems Administrator controls database access.

861

What are the duties of a Systems Programmer?

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

862

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.

863

What are the duties of a Systems Operator?

Schedules and Monitors Jobs

Runs IT Help Desk

864

What duties should a System Operator NOT have?

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

865

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.

866

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

To assist with decision making.

867

What is an Accounting Information System (AIS)?

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

868

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

Specialized for Company Executive needs

Assists with Strategy Only

No Decision-Making Capabilities

869

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

Computer uses reasoning

Structured

No human interpretation needed

870

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

Computer provides data

Gives Interactive Support

Human interpretation needed

871

What are the characteristics of an Ad Hoc computer report?

User initiates the report.

The report is created upon demand.

872

When are Exception reports generated?

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

873

What is a query?

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

874

What is End-User Computing?

The User develops and executes their own application.

875

What is the primary benefit of E-commerce?

E-commerce makes business transactions easier.

876

What are the risks of E-commerce?

Compromised data or theft.

Less paper trail for auditors.

877

What are the benefits of Electronic Data Interchange?

Uses globally-accepted standards

Efficient

878

What is a File Server?

A file server stores shared programs and documents.

879

What is the purpose of a Database?

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

880

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

It connects computers in close proximity.

881

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

It connects computers that are far apart.

882

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

Privately-owned Network

Serves as 3rd Party Between 2 Companies

Routes EDI Transactions

Accepts wide range of Protocols

Very Costly

883

What is the purpose of a Firewall?

Prevents unauthorized access to a network.

884

What are the characteristics of a virus?

Takes over a computer

Needs a host program to run

885

What are the characteristics of a computer worm?

Takes over multiple computers

Doesn't need a host program to run

886

What is the purpose of Automated Equipment Controls?

They prevent and detect hardware errors.

887

What is RAM?

Random Access Memory.

Internal memory in the computer used during immediate processing.

888

What is a CPU?

Computer Processing Unit

It processes commands within a computer.

889

What is Job Control Language?

It schedules and allocates system resources.

890

What are examples of input devices?

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

891

What are examples of Output Devices?

Speakers

Monitors

Printers

892

What are the characteristics of Magnetic Tape storage?

Sequential Access - Sorts data in order

Slower data retrieval

Header Label prevents Operator error by loading wrong tape

External Labels prevent accidental destruction by operator

893

What are the characteristics of Magnetic Disks?

Random Access - Finds data in random spots

Faster data retrieval

Uses Boundary Protection for data

894

What is a Gateway?

Connects one network to another

Note: the Internet is connected by Gateways

895

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.

896

What is an Echo Check?

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

897

What is a Change Control?

It authorizes program changes and approves program test results.

898

What is security software?

Software that controls access to IT systems.

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

899

What is the purpose of a Digital Signature?

It confirms a message has not been altered.

900

List the types of computers from smallest to largest

PDA/Smartphone/Tablet

Microcomputer - PC- Laptop (cost-effective)

Minicomputer - Like a Mainframe- but smaller

Mainframe - Large computer with terminals attached

Supercomputer - Very powerful and very big

901

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

Bit - 1 (on) and 0 (off)
Byte - 8 bits to a byte/character
Field - group of related characters/bytes (i.e. Name- Zip Code- Serial #)
Record - Group of related fields (i.e. Member name- address- phone number)
File - Group of related records (i.e. Membership directory)

902

What is the duty of a design engineer?

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

903

What are object programs?

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

904

How can source programs be recognized?

They are written in a language close to English.

905

What is the purpose of a Compiler?

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

906

How does Online Analytical Processing work?

It uses a Data Warehouse to support management decision making.

907

What is Data Mining?

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

908

What is the purpose of online transaction processing?

To process a company's routine transactions.

909

What are the characteristics of batch processing?

Data held- updates multiple files all at once

Leaves a better audit trail

Uses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)

910

What does an output control check for?

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

911

What does a processing control check?

Checks if data processing produced proper output

912

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.

913

What is a validity check?

Checks to see if data in existing tables or files belongs in the set

For example- is there a # in an alpha-only field or a letter in a numeric-only field

914

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.

915

What is a check digit?

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

916

What is a field check?

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

917

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.

918

What is a Cold Site?

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

919

What is the most common database language?

SQL - Structured Query Language

920

What is a Data Definition Language?

Defines SQL Database

Controls SQL Tables

921

What is a Data Manipulation Language?

Queries SQL Database tables

922

What is a Data Control Language?

Controls Access to SQL Database

923

What are the characteristics of a Relational Database?

Logical structure

Uses rows and columns similar to spreadsheet

924

What are the characteristics of a Hierarchical Database?

Has various levels

Uses trees to store data

925

What are the advantages of a database?

Data is more accessible

Reduced redundancy

926

What are the disadvantages of a database?

Cost of installation

Skilled personnel required to maintain

927

What are the components of a database?

Desktop client

Application Server

Database Server

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

928

What four perspectives are included in Balanced Scorecard?

Financial / Customer / Internal Business Processes / Learning and Growth

929

Why was Balanced Scorecard created?

To measure Performance.

930

What are Strategy Maps?

Diagrams of Strategic Cause and Effect Relationships.

931

What is a Strategic Initiative?

A plan to achieve goals.

932

What measures are used under Value-Based Management?

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

933

How is Return on Investment (ROI) calculated?

ROI : Return / Investment

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

$60 / $100 : 60% ROI

934

How is Residual Income calculated?

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

935

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

RROR is also called 'Cost of Capital'

936

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

Cost of Capital is the weighted average of the interest rates you pay for your Capital.

Includes Debt and the Rate of Return your Equity Shareholders expect

Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%

Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%

937

How is Spread calculated?

Spread : ROI - Cost of Capital

938

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)

939

How is Free Cash Flow calculated?

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

940

What is measured by Six Sigma?

It measures a product versus its quality goal.

941

What is the Asset Turnover Ratio?

Sales / Average Assets

942

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

943

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

944

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

945

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

How profitable is the product after COGS?

Gross Margin : Gross Profit / Net Sales

946

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

947

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

948

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

949

How is Market/Book ratio calculated?

Market Value of Common Stock / Book Value of Common Stock

950

What is Inventory Turnover and how is it calculated?

How quickly does inventory get sold?

Inventory Turnover : COGS / Average Inventory

951

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

952

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

953

What is an Internal Failure?

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

954

What is an External Failure?

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

This includes recalls.

955

What is Appraisal Cost?

Quality control- testing & inspection costs.

956

Define Market Risk

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

957

Define Sector Risk

The risk that an event in the investment's business sector will harm the investment

For example- the banking sector is sluggish- so even stocks of healthy banks suffer

958

Define Credit/Default Risk

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

959

Define Interest Rate Risk

The risk that a change in interest rates will adversely affect the value of the note

Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.

960

What does Standard Deviation measure?

It measures the volatility of an investment.

961

What is Systematic Risk?

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

Example: Wars

962

What is Unsystematic Risk?

Relates to a particular industry or company

Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest

963

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?

964

What is Variance?

It compares volatility of an investment to the market average.

Factors include both Systematic and Unsystematic Risk.

965

What is a Derivative?

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

Derivatives are measured at Fair Value.

966

How is an Option used?

Gives the buyer the option to buy or sell a financial derivative at a certain price

Traders use them to speculate where they think the price will be at a certain point and make a profit

Hedgers use them to offset risk

967

What is a Future?

A Forward Contract with a future value.

They are sold and traded on the futures market.

968

What is an Interest Rate Swap?

Forward Contract to swap payment agreements

They are highly liquid and often valued using the Zero-Coupon method.

Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR

969

What is Legal Risk?

Risk that a law or regulation will void the derivative

970

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.

971

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.

972

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.