Midterm #2 Flashcards
(105 cards)
1
Q
Why is business success a three-legged stool?
A
- Knowledge and commitment to make a great product
- The ability to sell your product
- Accounting
2
Q
What is goal congruence?
A
Need to align incentives to create, managers and employees
3
Q
How do we align goals?
A
- Policies and procedures
- Monitoring
- Incentives and performance evaluation
4
Q
What is the role of accounting?
A
Help decision makers measure the costs and benefits of decision options
5
Q
What are the two classes of decision makers?
A
Outside the firm and inside the firm
External = financial accounting
Internal = managerial accounting
6
Q
What is the information used for in terms of External Decision Makers?
A
The information being provided for the purposes of creating/setting up the Financial Statements
7
Q
What is the information used for in terms of Internal Decision Makers?
A
The information is being provided primarily for the purpose of helping the business to run better
8
Q
What are the time focuses for Managerial vs Financial Accounting?
A
F - historical perspective
M - future oriented
9
Q
Emphasis on..? Managerial vs Financial
A
F - objectivity and verifiability
M - relevance for planning and control
10
Q
What is the main importance? Managerial vs Financial
A
F - precision of information
M - timeliness of information
11
Q
What is the subject focus? Managerial vs Financial
A
F - summarized data for the whole organization
M - detailed segment reports of an organization
12
Q
Does it have to follow GAAP or prescribed formats? Managerial vs Financial
A
F - YES
M - NO
13
Q
Who are the key financial players in organization (the big three)
A
- Shareholders
- Board of Directors
- CFO
Shareholders manage the company indirectly though Board of Directors
14
Q
What is the CFO’s job?
A
- Maintaining the accounting records
- Maintaining an adequate system of internal control
- Preparing financial statements, tax returns, internal reports
15
Q
What is Strategic Management?
A
- The art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives
- A company’s game plan.
16
Q
What are the Three Broad Management Functions?
A
- Planning
- Directing
- Controlling
17
Q
What is Planning?
A
- Looking ahead and establishing objectives
- Identify alternatives, select alternative that does the best job of furthering goals, develop budgets to guide progress towards the selected alternative
18
Q
What is Directing?
A
- Involves coordinating a company’s diverse activities and human resources to produce a smoothly running operation
- Day-to-day activities
- Routine problem solving, conflict resolution, effective communication
19
Q
What is Controlling?
A
- The process of keeping the company’s activities on track (compare actual performance to budget performance)
- Check at regular intervals, best used in smaller operation
20
Q
What are The IMA’s Statement of Ethical Professional Practice code of conduct?
A
- Competence
- Confidentiality
- Integrity
- Credibility
21
Q
What is Competence?
A
- Maintaining professional competence
- Prepare complete and clear reports
22
Q
What is Confidentiality?
A
- Refraining from disclosing confidential info
- Refrain from using confidential info for unethical and illegal advantage
23
Q
What is Integrity?
A
- Avoid conflicts of interest
- Refrain from supporting any activity that would discredit accounting
24
Q
What is Credibility?
A
- Communicate info fairly and objectively
- Disclose all relevant info
25
What is Corporate Social Responsibility?
* Should evaluate not just profits, but also CSR
* Performance with regard to people, planet, and profit/sustainable approach (triple bottom line)
26
What is Just in Time Inventory?
* Goods are manufactured just in time for use
* Could become obsolete (not valuable anymore, grows old)
27
What is Theory of Constraints?
* Focus on bottlenecks (the thing that is holding up the production process)
* Once a major constraint has been identified and eliminated, the company moves on to fix the next most significant constraint
28
What is Value Chain?
* All activities associated with providing a product or service
* Research and development, getting raw materials, product design, production, sales and marketing, delivery, customer relations
29
What is Activity Based Costing?
* Overhead is allocated based on each products use of economic resources as it undergoes various activities
29
What is Total Quality Management?
* Systems to reduce defects in finished products
* Requires timely data on defective products, rework costs and the cost of honour warranty contacts
30
What is Balanced Scorecard?
* A performance measurement approach that uses both financial and non financial measures to evaluate all aspects of a companies operations in an integrated way
31
Cost Behaviour
How a cost will react to changes in the level of business activity
32
Total variable costs compared to total fixed costs in regards to change
V - changes when activity changes
F - remains unchanged
33
Classification by Controllability
* A cost which is capable of being regulated by a manager.
* A non-controllable cost is one which is not capable of being regulated by a manager.
34
Cost of Goods Sold Equation
Beginning inventory + Additions - Ending inventory
35
What is Direct Material?
The cost of raw material that is used to make, and can be conveniently traced, to the finished product.
Ex. steel, aluminum, glass
36
What is Direct Labour?
Cost of salaries, wages, and fringe benefits for personnel who work directly on manufactured products.
Ex. wages paid to a worker, salary paid
37
What is Manufacturing Overhead?
All other manufacturing costs
38
What is Indirect Material?
Materials used to support the production process.
Examples: lubricants and cleaning supplies for factories
39
What is Indirect Labour?
Cost of personnel who do not work directly on the product.
Examples: maintenance workers and security guards.
40
What are budgets?
* Detailed plan that sets out, in monetary terms, plans for income and expenditures in a future period.
* Prepared in advance based on agreed objectives and strategy.
41
What is budgetary control?
Using budget reports to compare actual results with planned objectives
42
Budgetary control works best when...
1. Identifies the name of the budget report, such as the sales budget or the manufacturing overhead budget.
2. States the frequency of the report, such as weekly or monthly.
3. Specifies the purpose of the report.
4. Indicates the primary recipient(s) of the report.
43
What in Variance?
The difference between actual cost and budgeted cost
44
What is Unfavourable Variance?
The actual cost is more than the budgeted cost.
Bad because you're exceeding budget
45
What is Favourable Variance?
The Actual cost is less than the budgeted cost.
Good because under budget
46
What is a Static Budget Report?
* A static budget is a projection of budget data at ONE level of activity.
47
What is Flexible Budget Report?
* A flexible budget projects budget data for various levels of activity.
* The flexible budget is basically a series of static budgets at different levels of activity.
48
Steps in a Flexible Budget Report?
1- Identify the activity index & range of activity
2- Identify variable costs & budgeted VC per unit
3- Identify the fixed costs
4- Prepare the budget for selected activity increments
49
What is the Total Budgeted Costs Equation?
Fixed costs + variable costs
50
For intersecting questions...
1. Find fixed cost
2. Find variable cost per unit (VC divided by hours given)
3. Multiple variable cost per unit x direct labour hours (new)
4. Add to fixed cost
51
What is Responsibility Accounting?
* Used to measure performance and to provide information for decision making by responsibility centre manager
* Developed to motivate, evaluate and reward only on what we can control
* All companies use it
52
Managerial Performance in terms of Responsibility Accounting
1. Costs and revenues can be directly associated with the specific level of management responsibility.
2. The costs and revenues are controllable at the level of responsibility that they are associated with.
3. Budget data can be developed for evaluating the manager's effectiveness in controlling the costs and revenues.
53
What are the three types of Responsibility Centres?
1. Cost Centre
2. Profit Centre
3. Investment Centre
54
What are cost centres?
They incurs costs but does not directly generate revenues (i.e. production or service departments accounting department, human resources department)
55
What is a profit centre?
It incurs costs and also generates revenues (i.e. clothing department of a retail store, branch of a bank)
56
What is an investment centre?
It incurs costs and generates revenues, as well as has control over the investment funds that are available for use. (i.e. subsidiary company or operating segment)
57
What is performance evaluation?
A management function that compares actual results with budget goals (using behavioral and reporting principles)
58
What is management by exception?
* Top management's review of a budget report is focused either entirely or mostly on differences between actual results and planned objectives
* To find problem areas
59
Behavioural Principles for Managers of Responsibility Centres
1. Managers should be directly involved in setting budget goals for their areas of responsibility.
2. The evaluation of performance should be based entirely on matters that can be controlled by the manager being evaluated.
3. Top management should support the evaluation process.
4. The evaluation process must allow managers to respond to their evaluations.
5. The evaluation should identify both good and poor performance.
60
What is the Return on Investment (ROI) formula?
Controllable margin / Average operating Assets
61
What is the Controllable Margin formula?
Sales - Variable Costs - Controllable Fixed Costs
62
What is the Contribution Margin formula?
Sales - Variable Costs
63
What is the Profit Margin formula?
Operating income / Sales
64
What is the Turnover formula?
Sales / Average Operating Assets
65
What can we do to increase ROI?
1. Increase Sales
2. Reduce Expenses
3. Reduce Assets
66
What are the different types of audit?
1. Organization
2. Compliance
3. Financial Statement
4. Tax
67
What is organization audit?
An examination of the manner in which an organization conducts business, with the objective of pointing out improvements that will increase its efficiency
68
What is compliance audit?
An examination of an organization’s adherence too certain guidelines/regulations (is the company following the regulations of a grant)
69
What is financial statement audit?
Examination of entity’s financial statements
70
What is tax audit?
CRA comes to check to ensure taxes are reported correctly (sales tax, payroll tax, income tax)
71
What is internal auditing?
Audits done “internally” by company employees, generally done to improve:
* Effectiveness and efficiency of operations
* Reliability and integrity of financial and operational information
* Safeguarding of assets
* Compliance with laws, regulations, and contracts
Internal audit department typically reports to the audit committee of an organization in order to maintain independence (hopefully decrease in bias, increase in honesty)
72
What is external auditing?
* Companies prepare information to be used by financial decision makers (required to be posted publicly, for investors and outsiders to see)
* External auditors perform checks to ensure the accuracy of the financial statements that were prepared by company management. (to mitigate bias)
73
What is the role of auditors?
* Don't make financial statements
* Provide recommend statements
* Just try to determine whether statements are reliable or not
74
What is the objective of an audit?
* The overall objective of a financial statement audit is to enable the auditor to express an opinion as to whether the financial statements are prepared, in all material respects, in conformity with an applicable framework, usually GAAP.
* An auditor performs work to obtain reasonable assurance that the information prepared by management is correct, not absolute assurance (potentially due to both fraud or error).
75
What are the four audit opinions?
1. Unmodified
2. Qualified
3. Adverse
4. Disclaimer of Opinion
76
What is unmodified in terms of audit opinion?
Clean opinion, no material misstatements (the best opinion)
77
What is qualified in terms of audit opinion?
Opinion that the financials are fairly presented, with the exception of a specific area
78
What is adverse in terms of audit opinion?
Opinion that the financials are misrepresented, misstated, and do not accurately reflect its financial performance and health (a fail)
79
What is disclaimer of opinion in terms of audit opinion?
No opinion is being given regarding the financial statements of a client
80
What is business risk?
The risk that a company may fail to achieve its objectives due to:
* economic changes
* technology changes
* poor management decisions
Auditors do not report on business risk (they can tell you that it is accurate info, but not whether they should invest or not)
81
What is information risk?
The risk that the financial information fails to reflect economic substance of business activities (risk of things being unreliable)
82
What are the two major categories of information risk?
Accounting Risk and Audit Risk
83
What is Accounting Risk?
The risk that accounting information presented in the financial statements does not accurately reflect the underlying economic event(s) of the business due to the misapplication of GAAP, unrealistic assumptions, unrealistic estimates, or other such errors.
84
What is Audit Risk?
The risk of insufficient evidence being gathered on the facts concerning the client’s economic circumstances and an inappropriate opinion is expressed. (incorrect opinion)
85
What are the three parts to audit risk?
1. Inherent Risk
2. Control Risk
3. Detection Risk
86
What is Inherent Risk?
The probability a material misstatement will occur in the financial statements.
87
What is Control Risk?
Material misstatements will not be prevented or detected by internal controls (high control risk when control is weak)
88
What is Detection Risk?
Material misstatements will not be detected by the auditor (applying audit procedure incorrectly, incorrect audit testing method, sampling risk)
89
What is forensic accounting?
The intersection of accounting and the law
90
What is fraud examination?
* Only start when fraud is suspected
* A deliberate deception practiced so as to secure unfair or unlawful gain (a knowingly false statement)
91
What is defining occupational?
The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.
92
What are the three major categories of fraud?
1. Corruption
2. Asset Misappropriation
3. Fraudulent Statements
93
What categories fall under corruption?
1. Conflicts of Interest → when you have some sort of bias in exerting your power (exam marker, marking siblings exam)
2. Bribery → paying someone off before an action happens to get someone to act the way they want them to act
3. Illegal Gratuities → gifts given after action happens, trying to encourage people to make decisions in your favor in the future
4. Economic Extortion → holding something for random, exposing info about a company unless they pay you off
94
What is asset misappropriation?
Stealing assets or cash
95
What is fraudulent statements?
Intentionally creating errors to increase personal benefits
96
Four elements of fraud
1. A material false statement
2. Knowledge that the statement was false when it was uttered
3. Reliance on the false statement by the victim
4. There is a risk that damages may be suffered as a result of the victim’s reliance on the false statement
97
How do we resolved allegations of fraud?
* Documentary evidence
* Interviewing witnesses
* Writing investigative reports
* Testifying
* Assisting in the detection and prevention of fraud
97
Related Financial Crimes
* Larceny (theft)
* Conversion (unauthorized exercise of the right of ownership over property belonging to another, to the alteration of their condition or the exclusion of the owner’s rights… Takes possession of property that does not belong to you and thereby deprive the true owner of the property for any length of time… includes theft)
* Embezzlement (To take someone else’s property that you originally acquired possession of lawfully in a position of trust)
* Breach of Fiduciary Duty- breach of duty of care when in a highly trusted position
98
Predication
* All the reasons for believing fraud has occurred
* Fraud examinations based on predication
99
What conditions are present that trigger someone to commit fraud? (Cressey’s Hypothesis)
1. Pressure
2. Perceived Opportunity
3. Rationalization
100
Types of entities in tax
T1 - individuals
T2 - Corporations
T3 - Trusts
T4 - Employment income
101
What is an RRSP? How does it affect tax?
Registered Retirement Savings Plan
* Contributions to RRSP, decrease on tax return so less tax
* Deductions to RRSP, increase on taxes
102
Capital gains
Only 50% taxable, only adding 50% of capital gains to net income
103
Who can open a TFSA?
Any individual that is a resident of Canada who has a valid SIN and who is 18 years of age or older is eligible to open a TFSA
