Flashcards in BEC Review Deck (128):
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.
Statute of limitations for securities fraud
The earlier of two years after discovery or 5 years after the violation
Securities fraud penalties
Fined, up to 25 years, or both
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
Penalty for tampering with record or impeding an official proceeding
Up to 20 years
The COSO framework uses what kind of approach?
3 COSO framework objectives
5 Components of Internal Control
Risk Assessment by Management
Information and Communication Systems
Existing Control Activies
5 Principles of the Control Environment
Board Independence and Oversight
Commitment to Competence
Ethics and Integrity
Principles of Risk Assessment
Principles of Information and Communication
Communicate Internally and Externally
Principles of Monitoring Activities
1. Ongoing and/or Separate Evaluations
2. Communication of Deficiencies
Principles of Existing Control Activities
Select and develop control activities
Select and develop technology controls
Deploy though policies and procedures
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
4 ERM Objectives
Components of ERM
IS EAR AIM
Internal Environment (C in CRIME)
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)
Elements of the ERM Internal Environment
Commitment to Competence
HR - Risk Management Philosophy, HR Standards, Risk Appetite
R in EAR - Possible Responses
Avoidance - terminate the risk
Reduction - mitigate the risk
Sharing - transferring the risk
Acceptance - take no action
When is ERM considered ineffective?
When there are material weaknesses
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
Control Chart - Goalpost Conformance
Graph a comparison of actual results by batch or other suitable constant interval to an acceptable range. Determine "zero" defects.
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.
Cause and Effect (Fishbone) Diagram
Traces a defect back to the source. Sources may include materials, machinery, method, or manpower.
Effective performance measures:
promote the achievement of goals.
Customers are looking for the lowest price
Interaction-based relationship marketing
Repeat business - loyalty discount
Customers are segmented into markets
The internet is used to accomplish marketing functions
Sometimes referred to as multilevel marketing, focuses on relationships and referrals to accomplish marketing functions.
DM + DL
DL + OH Applied
DM, DL, FOH which become WIP which beome Finished Goods which are sold as COGS
When are product costs expensed?
When the product is sold - matching principle
When are period costs expensed?
In the period incurred. These costs are not inventoriable.
Most frequent cost objectives
Income determination (profitability)
Efficiency measurements (comparison to standards)
What makes costs variable?
Volume of production. Variable costs change in total according to production, by remain constant per unit.
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.
What are semi-variable (mixed) costs?
Semi-variable costs contain both fixed and variable costs. E.g., manufacturing overhead
Cost accumulation system for custom orders
Cost accumulation system for mass-produced homogeneous products
Averages costs and applies them to a large number of homogeneous items.
Cost accumulation system which uses both job order costing and process 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
+ DM used
+ Direct labor
+ MOH Applied
= Total manufacturing costs incurred
Add to B WIP to get total manufacturing costs available. Subtract E WIP.
Direct materials used calculation
- E RM
= RM Used
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.
FIFO EU - 3 steps
BWIP x % to be completed
+ Units completed - BWIP
+ EWIP x % completed
WA EU - 2 steps
+ EWIP x % completed
Cost per EU -WA
Beginning cost + Current cost/WA EU
Cost per EU FIFO
Current cost only/ FIFO EU
Normal Spoilage (Shrinkage)
Capitalized as part of inventory cost
Accounted for as a period expense included in COGS
Is ABC GAAP?
No. ABC can be used for internal, but not external purposes.
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.
Accounting options for by products in joint costing
1. Proceeds reduce the common costs for joint product costing
2. Credit misc. Income
Breakeven analysis (Cost volume profit (CVP) analysis)
Used by managers to forecast profits at different levels of sales and production volume.
Breakeven (CVP) analysis contribution (variable) approach
The contribution approach to the income statement uses variable costing (direct costing).
- Fixed costs
= Net income
CVP Absorption Approach
Required per GAAP
Does not segregate fixed and variable costs
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
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
Breakeven point (BEP) occurs when:
sales equals total cost (variable + fixed)
BEP in units
Total fixed costs/Contribution margin per unit
BEP in sales dollars using contribution margin per unit
Unit price x BEP (in units) = BEP (in dollars)
Total fixed costs/contribution margin ratio
Required sales volume for target profit (before taxes)
Sales = fixed cost + profit (EBT)/Contribution margin ratio OR
Sales = variable costs + (fixed costs + EBT)
Required sales volume for target profit (after tax)
Target profit before tax = Target profit after tax / (1 - tax rate)
Margin of saftey
The excess of sales over breakeven sales
Margin of safety in sales dollars
Total sales (in dollars) - breakeven sales (in dollars)
Margin of safety as a percentage
Margin of safety in dollars/Total sales
A technique used to establish the product cost allowed to ensure both profitability per unit and total sales volume
Target cost computation
Target cost = market price - required profit
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.
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.
Marginal Analysis Irrelevant costs
Don't differ between alternatives
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.
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.
Marginal Analysis Opportunity Costs
The cost of foregoing the next best alternative when making a decision. These costs are relevant.
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.
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.
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.
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).
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.
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.
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.
Costs incurred after the split-off point that can be traced to individual products and are relevant/
Deciding to sell or process further
Compare the incremental cost and the incremental revenue generated after the split-off point.
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.
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.
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.
A method for studying the relationship between two or more variables. y=a+bx
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.
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).
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%.
Present Value calculation
PV = FV * PVF
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.
Cost of Capital
The required return necessary to make a capital budgeting project worthwhile. Includes the cost of debt and the cost of equity.
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.
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
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.
What is the optimal capital structure?
The mix of financing instruments that produces the lowest WACC.
Cost of equity * % of equity in capital structure + WACOD (after tax) * % of debt in capital structure
Effective annual interest payments (outflows) / Debt cash available (inflows)
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)
Risk free rate notation
the stock's beta coefficient (bi) times the market risk premium (PMR)
Market Risk Premium
PMR = the market rate (km) - the risk free rate (krf)
Calculating the cost of retained earnings using CAPM
kre = risk-free rate + risk premium
kre = kfr + (bi *PMR)
kre = kfr + (bi *(km - krf))
1. Income / Investment Capital
2. Profit Margin * Investment Turnover
Profit Margin = Income / Sales
Investment Turnover = Sales / Invested Capital
APR (annual cost) of payment discount calculation
360 / pay period - discount period * Discount / 100 - Discount %
Factors that shift aggregate demand
Spending multiplier calculation
Multiplier = 1 / (1-MPC)
GDP under the expenditure approach
Government purchases of goods or services
Gross private domestic INVESTMENT
GDP under the income approach
Income of proprietors
Profits of corporations
Adjustments for foreign net income and misc. items
Employee compensation (wages)
Depreciation (capital consumption allowance)
Normal unemployment caused by workers routinely changing jobs or temporary layoffs
Number unemployed / Total labor force
1. Available jobs don't correspond to the skills of the workforce
2. Unemployed workers don't live where the jobs are located
The result of seasonal changes in demand and supply. E.g. supply decreases after Christmas.
Unemployment due to declines in real GDP during periods of contraction or recession
There is no cyclical unemployment
Consumer price index (cpi) this period - cpi last period / cpi last period
Demand pull inflation
Caused by increases in aggregate demand
Cost push inflation
Caused by reductions in short term aggregate supply
Relationship between inflation and unemployment
Doesn't account for inflation
Incurred to prevent the production of defective units
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
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
Cost of preferred stock (kps)
Kps = dps (ps cash dividends) / nps (net proceeds of ps)
Bond yield risk premium
Kre = kdt (pre-tax cost of long term debt) + kmr (market risk premium)