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