Ch. 2 SIMS Flashcards
SIM#1 Inflation ~ write memo to explain basics of inflation. What is inflation?
Rise in general level of prices over a period of time.
Rises during good economic times and fall during weak times.
SIM#1 inflation- If rising rate of inflation, what does that mean for companies?
What happens to raw materials?
Rise in raw materials means you have to increase your product prices
SIM#1 inflation- How is unionized workforce impacted by inflation?
As prices of goods and services increase, wages paid to workers can buy less.
Unions will usually demand higher wages for their workers, leading to higher costs for the company.
Sometimes workers must be laid off if sales are low and demand for product has fallen.
SIM#1 inflation- how is low fixed mortgage impact company during rising inflation?
The bank will have what?
the bank will have less purchasing power
with the same interest.
Your borrowed money costing you less
SIM #2 APR and EAR
It is possible that there are two interest rates associated with the same loan. What two interest rates are required to be disclosed to the borrower?
Nominal annual percentage rate (APR) & Effective annual rate (EAR)
SIM #2 APR and EAR
What is APR formula?
periodic interest rate x the number of periods per year = APR
SIM #2 APR and EAR
What is EAR? What fees does it take into account? Is it usually higher or lower?
Takes into account all fees compounding more than once a year, late fees and loan origination fees (except prepayment fees)
It is usually higher.
Must be disclosed per the Truth in Lending Act.
SIM #3 - prepare a memo for your audit team explaining how the four basic phases of a business cycle impact a business’s environment and processes.
A business cycle is a pattern of expansions and contractions in economic activity. Economic activity can be measured with a variety of leading and lagging indicators, including gross domestic product (GDP), jobs, production, and sales. Understanding the phases of a business cycle can help to explain and predict the long-term trend of the economy, and the resulting impact upon a client’s business.
SIM #3 - what are the four basic phases of a business cycle and how are they measured?
The business cycle is characterized by four phases, and is measured as the period of time from the peak of one cycle through the four phases to the peak of the next cycle. The four phases of a business cycle are expansion/recovery, peak, contraction/recession, and trough.
SIM #3 - explain expansion/recovery
In expansion/recovery, businesses are growing, new jobs are being created, wages are rising, and unemployment is decreasing. This can increase demand for products and services which exceed the supply, applying upward pressure on prices and driving inflation. In the extreme, overtime can become excessive and the utilization rate for plant and equipment can exceed normal levels. Firms may expand too rapidly, creating a risk that established internal controls no longer function effectively. Management may not notice or respond in a timely manner as they are overwhelmed by the production demands on the business itself.
SIM #3 - explain peak
The peak is the highest point of output during the cycle. The economy is operating above the long-term growth trend of real GDP. The economy is no longer growing, sales are declining, unemployment is rising, and economic output begins to fall.
SIM #3 - explain contraction/recession
In contraction/recession, the economy begins to shrink. Employment levels contract, consumer demand falls, and inventory levels build, depressing employee morale and price levels. It is often more difficult for management to meet their performance goals, increasing the risk that management may override or circumvent internal controls. Internal controls may be compromised as entities try to cut costs, resulting in unintentional errors or fraud. Disgruntled employees may find it easier to rationalize theft.
SIM #3 - explain trough
The trough is the lowest point of output during the cycle, with high unemployment rates, a decline in annual income, and overproduction. This is the time at which the real GDP stops declining and starts expanding.
