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Flashcards in BEC Review Deck (128):
1

Audit documentation retention period and repercussions if not followed

7 years retention. Failure to do so could result in a fine, 10 years, or both.

2

Statute of limitations for securities fraud

The earlier of two years after discovery or 5 years after the violation

3

Securities fraud penalties

Fined, up to 25 years, or both

4

Failure of Corporate Officers to Certify Financial Reports

Certifies knowing it does not comply - Up to $1MM and/or 10 years
Willfully certifies knowing it does not comply - Up to $5MM and 20 years

5

Penalty for tampering with record or impeding an official proceeding

Up to 20 years

6

The COSO framework uses what kind of approach?

Principles based

7

3 COSO framework objectives

ORC
Operational
Reporting
Compliance

8

5 Components of Internal Control

CRIME
Control Environment
Risk Assessment by Management
Information and Communication Systems
Monitoring
Existing Control Activies

9

5 Principles of the Control Environment

BO ACE
Board Independence and Oversight
Org Structure
Accountability
Commitment to Competence
Ethics and Integrity

10

Principles of Risk Assessment

EAR
Event Identification
Assessment
Response

11

Principles of Information and Communication

OC
Obtain information
Communicate Internally and Externally

12

Principles of Monitoring Activities

1. Ongoing and/or Separate Evaluations
2. Communication of Deficiencies

13

Principles of Existing Control Activities

Select and develop control activities
Select and develop technology controls
Deploy though policies and procedures

14

An effective system of internal control requires:

All components and principles be present and functioning
All components operate together as an integrated system in order to reduce risk to an acceptable level

15

4 ERM Objectives

SORC
Strategic
Operations
Reporting
Compliance

16

Components of ERM

IS EAR AIM
Internal Environment (C in CRIME)
Setting Objectives
Event ID (R in CRIME)
Assessment of Risk (R in CRIME)
Risk Response (R in CRIME)
Control Activities (E in CRIME)
Information and Communication (I in CRIME)
Monitoring (M in CRIME)

17

Elements of the ERM Internal Environment

EBOCA HR
Ethics
Board Oversight
Org Structure
Commitment to Competence
Accountability
HR - Risk Management Philosophy, HR Standards, Risk Appetite

18

R in EAR - Possible Responses

Avoidance - terminate the risk
Reduction - mitigate the risk
Sharing - transferring the risk
Acceptance - take no action

19

When is ERM considered ineffective?

When there are material weaknesses

20

Total Factor vs Partial Productivity Ratios

Total Factor - reflect the quantity of all output produced relative to the costs of ALL inputs used
Partial - reflect the quantity of output produced relate to the quantity of INDIVIDUAL inputs used

21

Control Chart - Goalpost Conformance

Graph a comparison of actual results by batch or other suitable constant interval to an acceptable range. Determine "zero" defects.

22

Pareto Diagrams (Histogram)

Used to determine the quality control issues that are most frequent and often demand the greatest attention. Lists incidents in order of the most frequent (steps down like stairs), and lists a cumulative percentage of incidents across the chart.

23

Cause and Effect (Fishbone) Diagram

Traces a defect back to the source. Sources may include materials, machinery, method, or manpower.

24

Effective performance measures:

promote the achievement of goals.

25

Transaction marketing

Customers are looking for the lowest price

26

Interaction-based relationship marketing

Repeat business - loyalty discount

27

Database marketing

Customers are segmented into markets

28

E-marketing

The internet is used to accomplish marketing functions

29

Network Marketing

Sometimes referred to as multilevel marketing, focuses on relationships and referrals to accomplish marketing functions.

30

Prime Costs

DM + DL

31

Conversion Costs

DL + OH Applied

32

Product Costs

DM, DL, FOH which become WIP which beome Finished Goods which are sold as COGS

33

When are product costs expensed?

When the product is sold - matching principle

34

When are period costs expensed?

In the period incurred. These costs are not inventoriable.

35

Most frequent cost objectives

PIE
Product costing
Income determination (profitability)
Efficiency measurements (comparison to standards)

36

What makes costs variable?

Volume of production. Variable costs change in total according to production, by remain constant per unit.

37

Fixed cost in total and per unit

Fixed costs are fixed in total but can vary per unit. For example, fixed rent can be allocated over the number of units produced. NOTE, all fixed costs can be considered variable given enough time.

38

What are semi-variable (mixed) costs?

Semi-variable costs contain both fixed and variable costs. E.g., manufacturing overhead

39

Job costing

Cost accumulation system for custom orders

40

Process costing

Cost accumulation system for mass-produced homogeneous products
Averages costs and applies them to a large number of homogeneous items.

41

Operations costing

Cost accumulation system which uses both job order costing and process costing

42

Backflush costing

Cost accumulation system that accounts for costs at the end of the process in circumstances where there is little need for in-process inventory valuation

43

COGM calculation

B WIP
+ DM used
+ Direct labor
+ MOH Applied
= Total manufacturing costs incurred
Add to B WIP to get total manufacturing costs available. Subtract E WIP.

44

Direct materials used calculation

B RM
+Net purchase
=Mat available
- E RM
= RM Used

45

Equivalent units

An equivalent unit of DM, dl, or conversion costs (dl + foh) is equal to the amount of DM, dl, or conversion costs necessary to complete one unit of production.

46

FIFO EU - 3 steps

BWIP x % to be completed
+ Units completed - BWIP
+ EWIP x % completed

47

WA EU - 2 steps

Units completed
+ EWIP x % completed

48

Cost per EU -WA

Beginning cost + Current cost/WA EU

49

Cost per EU FIFO

Current cost only/ FIFO EU

50

Normal Spoilage (Shrinkage)

Capitalized as part of inventory cost

51

Abnormal Spoilage

Accounted for as a period expense included in COGS

52

Is ABC GAAP?

No. ABC can be used for internal, but not external purposes.

53

What is the focus of ABC (transaction based costing)

The cost/benefit of activities. Value added activities increase the product value or service, whereas non value added activities (e.g., warehousing) should be targeted for elimination.

54

Accounting options for by products in joint costing

1. Proceeds reduce the common costs for joint product costing
2. Credit misc. Income

55

Breakeven analysis (Cost volume profit (CVP) analysis)

Used by managers to forecast profits at different levels of sales and production volume.

56

Breakeven (CVP) analysis contribution (variable) approach

The contribution approach to the income statement uses variable costing (direct costing).
Not GAAP
Equation:
Revenue
-Variable costs
=Contribution Margin
- Fixed costs
= Net income

57

CVP Absorption Approach

Required per GAAP
Does not segregate fixed and variable costs
Revenue
-COGS
=GM
-Operating expenses
=Net Income

58

What is the difference between the contribution approach and the absorption approach to Cost Volume Profit Analysis?

Fixed Factory Overhead - SG&A are period costs under both methods.
Contribution - Fixed FOH = Period Cost
Absorption - Fixed FOH = Product Cost

59

How to calculate the difference between contribution (variable) costing net income and absorption net income.

1. Compute fixed cost per units (FOH/Units Produced)
2. Multiply by the increase in inventory.
Because under the absorption method, FOH is a product cost, the increase in inventory will increase net income for the absorption method.
No change in inventory: Absorption net income = variable net income
Increase in inventory: Absorption net income > Variable net income
Decrease in inventory: Absorption net income < Variable net income

60

Breakeven point (BEP) occurs when:

sales equals total cost (variable + fixed)

61

BEP in units

Total fixed costs/Contribution margin per unit

62

BEP in sales dollars using contribution margin per unit

Unit price x BEP (in units) = BEP (in dollars)
OR
Total fixed costs/contribution margin ratio

63

Required sales volume for target profit (before taxes)

Sales = fixed cost + profit (EBT)/Contribution margin ratio OR
Sales = variable costs + (fixed costs + EBT)

64

Required sales volume for target profit (after tax)

Target profit before tax = Target profit after tax / (1 - tax rate)

65

Margin of saftey

The excess of sales over breakeven sales

66

Margin of safety in sales dollars

Total sales (in dollars) - breakeven sales (in dollars)

67

Margin of safety as a percentage

Margin of safety in dollars/Total sales

68

Target costing

A technique used to establish the product cost allowed to ensure both profitability per unit and total sales volume

69

Target cost computation

Target cost = market price - required profit

70

Operational decision method (marginal analysis)

Used when analyzing business decisions such as the introduction of a new product or changes in input levels of existing products. Focuses on the relevant revenues and costs associated with a decision.

71

Marginal Analysis Relevant revenues and costs

When making business decisions that affect future periods, relevant revenues and costs relate to those decisions ONLY if they CHANGE as a result of selecting a different alternative.

72

Marginal Analysis Irrelevant costs

Don't differ between alternatives

73

Marginal Analysis Incremental Costs

AKA differential costs or out-of-pocket costs - additional costs incurred to produce an additional amount of the unit over the present output. These are relevant costs.

74

Marginal Analysis Sunk Costs

Unavoidable because they were incurred in the past and cannot be recovered as a result of a decision. These costs are not relevant.

75

Marginal Analysis Opportunity Costs

The cost of foregoing the next best alternative when making a decision. These costs are relevant.

76

Marginal Analysis Controllable and Uncontrollable Costs

Controllable costs can be authorized. Relevant if they will change as a result of selecting different alternatives.
Noncontrollable costs were authorized at a different level. No relevant because they cannot be changed by the manager making the decision.

77

Marginal Analysis Marginal Costs

The sum of the costs required for a one-unit increase in activity. Include all variable costs and any avoidable fixed costs associated with a decision.

78

Special Order Decisions - Presumed Excess Capacity

Accept if SP/Unit > VC/Unit

Determine the variable costs per unit (or subtract the fixed costs from the total costs) to determine what the SP per unit should be.

79

Special Order Decisions - Presumed Full Capacity

Accept if the SP/Unit > VC/Unit + the Opportunity cost/Unit (the contribution margin/unit that would have been produced by the next best alternative use of the facility).

80

Make vs. Buy - Excess Capacity

Make if the cost of making the product** < buying the product.
**Total all but the fixed costs, then add the avoidable costs. Compare to the cost to buy.

81

Make vs. Buy - No Excess Capacity

Make if the cost of making the product** + the opportunity cost of the decision < buying the product
**Total all but the fixed costs, then add the avoidable costs.

82

Joint Costs

Costs of a single process that yields multiple products. Joint costs cannot be traced to an individual product. They are suck costs that are not relevant.

83

Separable Costs

Costs incurred after the split-off point that can be traced to individual products and are relevant/

84

Deciding to sell or process further

Compare the incremental cost and the incremental revenue generated after the split-off point.

85

Keep or drop a segment

Compare the fixed costs that can be avoided if the segment is dropped (i.e., the cost of running the segment) to the contribution margin that will be lost if the segment is dropped.

86

Sensitivity analysis

The process of experimenting with different parameters and assumptions regarding a model and cataloging the range of results to view the possible consequences of a decision.

87

Forecasting Analysis

AKA probability/risk analysis. This is an extension of sensitivity analysis that involves predicting future values of a dependent variable using information from previous time periods.

88

Regression analysis

A method for studying the relationship between two or more variables. y=a+bx

89

Coefficient of correlation (r)

Measures the strength of the linear relationship between the independent variable (x) and the dependent variable (y). r is on a range between -1 (inverse relationship) and (direct relationship) with being no relationship.

90

Coefficient of Determination (r2)

The proportion of the total variation in the dependent variable (y) explained by the independent variable (x). Its value lies between 0 and 1. The higher the r2, the the better y is explained by x (the better the fit of the regression line).

91

Learning curve

The percentage expressing the decrease in time taken on a project as the project doubles. Take the time two of a project and divide by the time for one of the project times 2. E.g., one aircraft = 20 hours, but two = 32 hours. 32/40 = 80%.

92

Present Value calculation

PV = FV * PVF

93

When to use debt rather than equity financing

When tax rates are high and when there are few non-interest tax benefits because debt is tax deductible.

94

Cost of Capital

The required return necessary to make a capital budgeting project worthwhile. Includes the cost of debt and the cost of equity.

95

Why is the NPV method of capital investment valuation considered superior to the IRR method

Because it is flexible enough to consistently handle either uneven cash flows or inconsistent rates of return for each year of the project.

96

Calculating DCF (the basis for net present value methods)

1. Calculate after tax cash flows
2. Add depreciation benefit = Depreciation * tax rate
3. Multiply result by appropriate present value of an annuity
4. Subtract initial cash outflow

97

Hurdle rate

The desired or minimum rate of return that is set to evaluate investment projects. May be adjusted to account for risk or inflation.
WACC is often the hurdle rate.

98

What is the optimal capital structure?

The mix of financing instruments that produces the lowest WACC.

99

WACC Calculation

Cost of equity * % of equity in capital structure + WACOD (after tax) * % of debt in capital structure

100

WACOD

Effective annual interest payments (outflows) / Debt cash available (inflows)

101

Three ways to calculate the cost of retained earnings (kre)

1. Capital asset pricing model
2. Discounted cash flow (DCF)
3. Bond yield plus risk premium (BYRP)

102

Risk free rate notation

krf

103

Risk premium

the stock's beta coefficient (bi) times the market risk premium (PMR)

104

Market Risk Premium

PMR = the market rate (km) - the risk free rate (krf)

105

Calculating the cost of retained earnings using CAPM

kre = risk-free rate + risk premium
kre = kfr + (bi *PMR)
kre = kfr + (bi *(km - krf))

106

ROI Calculation

1. Income / Investment Capital
2. Profit Margin * Investment Turnover
Profit Margin = Income / Sales
Investment Turnover = Sales / Invested Capital

107

APR (annual cost) of payment discount calculation

360 / pay period - discount period * Discount / 100 - Discount %

108

Factors that shift aggregate demand

TWICE Government
Taxes
Wealth
Interest rates
Consumer confidence
Exchange rates
Government spending

109

Spending multiplier calculation

Multiplier = 1 / (1-MPC)

110

GDP under the expenditure approach

GICE
Government purchases of goods or services
Gross private domestic INVESTMENT
Consumption expenditures
Exports (net)

111

GDP under the income approach

IPIRATED
Income of proprietors
Profits of corporations
Interest (net)
Rental income
Adjustments for foreign net income and misc. items
Taxes
Employee compensation (wages)
Depreciation (capital consumption allowance)

112

Frictional unemployment

Normal unemployment caused by workers routinely changing jobs or temporary layoffs

113

Unemployment rate

Number unemployed / Total labor force

114

Structural unemployment

1. Available jobs don't correspond to the skills of the workforce
2. Unemployed workers don't live where the jobs are located

115

Seasonal unemployment

The result of seasonal changes in demand and supply. E.g. supply decreases after Christmas.

116

Cyclical unemployment

Unemployment due to declines in real GDP during periods of contraction or recession

117

Full employment

There is no cyclical unemployment

118

Inflation rate

Consumer price index (cpi) this period - cpi last period / cpi last period

119

Demand pull inflation

Caused by increases in aggregate demand

120

Cost push inflation

Caused by reductions in short term aggregate supply

121

Relationship between inflation and unemployment

Inverse

122

Nominal

Doesn't account for inflation

123

Preventive costs

Incurred to prevent the production of defective units

124

Appraisal costs

Incurred to discover and remove defective parts before they are shipped to the customer or next department including statistical quality checks, testing, inspection, and maintenance of the lab

125

High low method

Used to estimate the fixed and variable portions of cost, usually production cost.
1. Calculate the difference between the high and low units/volume and cost.
2. Calculate the variable cost per unit using the results from 1
3. Calculate the fixed cost by taking either the high or the low total cost, and subtracting the variable cost

126

Cost of preferred stock (kps)

Kps = dps (ps cash dividends) / nps (net proceeds of ps)

127

Bond yield risk premium

Kre = kdt (pre-tax cost of long term debt) + kmr (market risk premium)

128

Discounted cash flow (dcf) calculation

Kre = (d1/p0) + g
D1 = dividend per share expected at the end of one year**
P0= Current market value or price of the outstanding common stock
G = constant rate of growth in dividends
**d1= d0 * (1+g)