WC BEC FLASHCARDS
(82 cards)
1
Q
board of directors- primary role
A
primary role is to safeguard the company assets and to ultimately maximize shareholders return.
2
Q
Board of directors principal duties:
A
- Declaration of dividends
- Fiduciary duties
a. right to rely
b. Liability for unlawful distributions
c. duty of loyalty- act in the best interest
d. Corporate opportunity doctrine - Indemnifications- if acts of bad faith then is liable
3
Q
COSO- Committee in Sponsoring Organizations
A
Three categories:
- Operations objective- effectiveness and efficiency of an entity operations
- Reporting objectives- reliability, timeliness and transparency
- Compliance objectives- adhering to all applicable laws and regulations.
4
Q
CRIME
A
C- Control Environment R- Risk Assessment by management I- Information and communication system M- Monitoring E- Existing control activities
5
Q
Control environment
A
C- Commitment to ethics and integrity B- Board Independence and oversight O- Organizational structure C- Commitment to competence A- Accountability
6
Q
Risk Assessment
A
S- Specify objectives
I- Identify and analyze
C- Consider potential for fraud
I - Identify and assess changes
7
Q
Information and communication
A
O- Obtain and use information
I- Internally Communicate information
C- Communicate with external parties
8
Q
Monitoring
A
O- Ongoing and separate evaluations
C- Communication of deficiencies
9
Q
(Existing) Control activities
A
May be detective and preventive in nature.
S- Select and develop control activities
S- Select and develop technology controls
D- Deploy through policies and procedures
10
Q
ERM- Enterprise risk management
A
COSO issued Enterprise Risk Management- integrated framework- to assist organizations in developing a comprehensive response to risk management.
ERM is a process, effected by an entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity and manage risk to be within the risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.
11
Q
ERM framework: “IS EAR AIM”
A
I- Internal environment
S- Settings objectives
E- Event identification
A- Assessment of risk
R- Risk response
A- Activities (control)
I- Information and communication
M- Monitoring
12
Q
Risk response (component of ERM)
A
Response to risk must aling with the organization overall risk appetite. Risk response is supported by the following key elements:
A- Avoidance- management elect to avoid or terminate risk
R- Reduction- Management may elect to reduce or mitigate risk.
S- Sharing- Management may reduce risk by transferring risk
A- Acceptance- The company may take no action.
13
Q
Balanced scorecard
A
Framework used for implementing strategy that converts a company strategic objectives into a set of performance measure.
14
Q
External benchmark-Partial productivity ratio
A
PPR= Quantity of output produced/Quantity of input used
15
Q
External benchmark- Total factor productivity
A
TFP= quantity of output produced/ cost of all inputs used
16
Q
Internal benchmark- Control Charts
A
Graphical tool used to plot a comparison of actual results by batch or other suitable constant interval to an acceptable range.
17
Q
Internal benckmark- Pareto diagram
A
Used to determine the quality control issues that are most frequent and often demand the greatest attention. Demonstrate the frequency of defects from highest to lowest frequency.
18
Q
Cause and effect (Fishbone) diagram
A
Provide a framework for managers to analyze the problems that contribute to the occurrence of defects. Used to identify the source of problems in the production process by resource and take corrective action.
19
Q
Prime cost
A
= Direct material + Direct labor
20
Q
Conversion cost
A
= Direct labor + factory overhead
21
Q
Product cost
A
Product cost consist of direct material,direct labor and manufacturing overhead applied.
22
Q
Period cost
A
Include selling, general and administrative expenses as well as interest (financing) expenses.
23
Q
Variable cost
A
Variable cost= constant per unit; total varies
24
Q
Fixed cost
A
fixed cost= varies per unit; total remains constant
25
Cost accumulation systems
If the cost object is a custom order, job order is used. If the cost object is a mass produced homogeneous product process costing is used.
26
Cost of goods manufactured:
```
WIP Beg balance
+ Direct material used (@)
+ Manufacturing overhead applied
= Total manufacturing cost incurred
(WIP ending balance)
= COGM
```
```
@ If not provided
Beg raw material
+ purchases
= Available
(End raw material)
= Direct material used
```
27
Cost of goods sold
```
Finished goods BB
+ COGM
= COG available for sale
(FG ending balance)
= COGS
```
28
Equivalent units definition
An equivalent unit of DM, DL and coversion costs is equal to the amount of DM, DL or conversion cost necessary to complete one unit of production.
29
Equivalent units (Weighted average and FIFO)
Weighted average
Units completed and transfer out
+ Ending WIP * % completed
= EU
FIFO
Beg WIP * % TO BE completed
+Units completed and tranf out LESS Beg WIP
+ Ending WIP * % completed (same as Weighted Av.)
30
Cost per equivalent unit (Weighted average and FIFO)
Weighted average= Beg cost + current cost
/
Equivalent units
FIFO= Current cost only
/
Equivalent units
31
Activity based costing definition
ABC= assumes that the resource consuming activities (tasks, units of work, etc) with specific purposes cause costs. ABC assumes that the best way to assign indirect costs to products is bases on the products demand for resource consuming activities.
32
By products treatment
By products represent outputs of relatively minor prices that are incidental to a manufacturing process. Any proceeds from the sale of by products are a reduction to common cost for joint product costing. In Joint products method, by products are excluded from the calculation.
33
Types of joint cost allocations:
1. Allocation by unit volume relationship
2. Net realizable vale at split off point
a. sales price quotations available at split off
b. sales values not available at split off
3. Service department cost allocation
34
Absorption approach
Required by GAAP does not segregate fixed and variable costs
```
Revenue
Less COGS
= Gross Margin
Less Operating expenses
= NI
```
35
Contribution Approach
Uses variable costing (also called direct costing). Useful for internal decision making.
Revenue
Less Variable cost (DM, DL, Variable OH, variable SG&A)
=Contribution Margin
Less Fixed cost (fixed OH & SG&A)
= NI
36
Contribution margin ratio
Contribution margin/ revenue
Cont margin= revenue less variable cost
37
Difference between contribution approach and absorption approach
1. Treatment of fixed factory overhead. Under absorption- fixed factory OH are product cost; under contribution approach fixed manufacturing overhead are period cost.
2. Selling, general and admisnistrative; absorption approach variable and fixed SG&A are operating expenses reported separately in P&L. Contribution apporcah variable SG&A are part of total variable cost for the contribution margin calculation.
38
Absorption and contribution effects in Net Income
Absorption Approach
Production greater than sales= Inventory increase; NI increase
Sales Greater than production= Inventory decrease; NI decrease
(al reves para Contribution approach)
39
Absorption costing limitations and benefits
Required by GAAP
Limitations:
- Level of inventory affects NI because fixed costs are a component of product cost.
- NI is less reliable under performance evaluations that under variable method.
40
Breakeven point in dollars
Total fixed cost/ Contribution margin ratio= BE point in $$
41
Sales units needed to obtain a desired profit
Desired profit BEFORE tax:
| Sales (units)= (fixed cost + pretax profit)/ contribution margin per unit
42
Transfer pricing:
Methodology for allocating profits among related entities with in the same legal group (corporation) in different tax jurisdictions. Multiple methos may have to be tested to determine the best to use: Transactional or profitability
43
Discretionary costs
Cost arising from periodic budgeting decisions by management to spend in areas not directly related to manufacturing. (relevant cost) Example cost to maintain landscaping.
44
Incremental cost
Additional cost incurred to produce an additional amount of the unit over the present output. Also known as marginal cost, differential cost or out of pocket cost).
45
Opportunity costs
Cost of foregoing the next best alternative when making a decision (relevant cost)
46
Special order decisions- presumed excess capacity
Special order should be accepted if selling price per unit is greater than the variable cost per unit.
Note: Consider only the incremental variable cost like DM, DL, variable OH and Shipping & handling). That should be the minimum acceptable price.
47
Special order decisions- presumed full capacity
CM given up/size of special order= opportunity cost
| Plus incremental cost like DM, DL, Man OH and shipping & handling.
48
Make vs Buy- excess capacity
Cost of making the product internally is the cost that will be avoided. relevant cost = avoidable costs
49
Make vs Buy- No excess capacity
Cost of making the product internally is the cost that will be avoided plus the opportunity cost associated with the decision.
50
Sell or process further rule
Decision rule: Process further if incremental revenue > incremental cost.
51
Forecasting analysis( extension of sensitivity test)
Involves predicting future values of a dependent variable using information from previous years.
52
Linear Regression analysis
Linear regression is a method for studying the relationship between two or more variables. One use is to predict value of a dependent value of a dependent variable(ej total cost (y)) corresponding to given values of the independent variables (ej. fixed cost, variable cost per unit and production expense per unit (x)).
y = A + Bx
```
y= dependent variable
x= independent variable
a= the y axis intercept of the regression line
b= slope in the regression.
```
53
Coefficient of Correlation (r)- Statistical measure to evaluate regression analysis
The range is from -1.00 to +1.00
+1.00= perfect positive correlation
-1.00= perfect inverse relationship
54
Learning curve calculation
Average time for 2 units:
Hrs to produce one unit * % learning curve
50 hrs * .70= 35 hrs
2.Total time to produce 2 units. Step 1 * # units (en este caso 2 unidades)
35 hrs * 2 units= 70 hrs
```
Si fueran 4 unidades
Average time to produce 4 units= 35 hrs * .70= 24.5 hrs
Total time(4 units)= 24.5hrs * 4 units= 98
```
55
The coefficient of determination R2 in a multiple regression equation is:
The coefficient of determination is the proportion of the total variation in the dependent variable (Y)explained by the independent variable (X). The regression equation estimates the dependent variable based on changes in the independent variables.
56
Budget order (one of them)
Sales budget
Production budget
Income statement budget
Balance sheet budget
57
Budget order (one of them)
Sales budget
Production budget
Direct material budget
Cash disbursement
58
Discounted cash flow
Technique that use time value money concepts to measure the present value of cash inflows and cash outflows expected from a project. Focus the attention of management on relevant cash flow appropriately discounted to present value.
59
Net present value method
NPV is one of several discounted cash flow techniques used to screen capital projects for implementation. The objective is to focus decision makers on the initial investment amount that is required to purchase (or invest in) a capital asset that will yield returns in an amount in excess of a management-designated hurdle rate.
60
NPV- interest rate adjustments for required return
- Adjustments to hurdle rate (discount factor) due to risk- higher hurdle rate (discount) reduces future cash flows creating smaller present value.
- Adjustment to hurdle rate due to inflation
61
Advantages and limitations of the net present value
Advantage- NPV is flexible and can be used when there is no constant rate of return required for each year of the project.
Limitation- limited by not providing the true rate of return of the investment (evaluate $$ of return instead of percentage of return).
62
Internal rate of return (IRR)
IRR is one of several discounted cash flow methods used to screen the acceptability of investments. IRR method determines the present value factor and related interest rate that yields an NPV equal to 0.
IRR focuses the decision maker on the discount rate at which the PV of the cash inflows equals the present value of the cash outflow (usually initial investment).
63
WACC definition
Average if cost of debt and equity financing associated with a firm existing assets and operations
64
WACC formula
wacc= Cost of equity multiplied by the percentage equity in capital structure
+
WA cost of debt (after tax) multiplied by the percentage debt in capital structure
65
Financial leverage
Degree to which a company use debt rather than equity to finance the company.
66
Operating leverage
Degree to which a company uses fixed operating cost rather than variable operating costs. (labor intensive industries usually had low operating leverage/ capital intensive had higher operating leverage). High CM= High operating leverage.
67
Cost of retained earnings
Three common methods of computing the cost of retained earnings
1. Capital assets pricing model (CAPM)
2. Discounted cash flow (DCF)
3. Bond yield plus risk premium (BYRP)
68
CAPM- Capital assets pricing model
Assusmptions:
1. Cost of retained earnings is equal to the risk free rate plus a risk premium,
2. The risk premium is equal to the systematic (non diversifiable)risk associated with the overall stock market.
3. The beta coefficient is a numerical representation of the volatility (risk) of the stock relative to the volatility of the overall market.
**** A beta equal to 1 means the stock is as volatile as the market; a beta greater (less) than 1 means the stock is more (less) volatile than the market.
69
CAPM FORMULA
CAPM= Risk free rate + [beta x (market return - risk free rate) ]
70
ROI limitations
Focus managers on maximizing short term returns.
ROI= income/invested capital
or
profit margin x investment TO
* * Profit margin= income/sales
* ** Investment TO= sales/invested capital
71
ROA formula
ROA= Net income/ Average total assets
72
ROE formula
ROE= net income/ total equity
73
Dupont ROE
Dupont ROE= Net profit margin x Asset TO x Financial leverage
** financial leverage= average total assets/equity
74
EVA- Economic value added
Method of performance evaluation that measures the excess if income after taxes (not counting interest expense) earned by an investment over the return rate defined by the company overall cost of capital (WACC).
75
EVA calculation per steps
Step 1: Calculate required amount of return and income after taxes:
Investment x Cost of capital = required return
Step 2: Compare income to the required return
Net operating profit after taxes - required return=EVA
76
Residual Income
Measures the excess of actual income earned by an investment over the return required by the company.Residual income is a performance measure for investment SBU's.
Residual income= Net income- required return
Required return= Net book value (equity) x hurdle rate
77
Economic order quantity
Method of inventory control which anticipates orders at the point that carrying costs are nearest to restocking costs. The objective is minimize inventory cost and the method assumes that periodic demand is known.
78
4 primary roles in business operations
1. Process detailed data (such as transaction data)
2. Provide information used for making daily decision
3. Provide information used for developing business strategies
4. Take orders from customers.
79
XML
Extensible markup language- Technology that has been develop to transmit data in flexible formats instead of the standard formats of EDI.
80
EDI- Electronic data interchange
Computer to computer exchange of business transactions documents (Invoices, PO).
81
ERP- Enterprise resource planning system
Cross functional enterprise system that integrates and automates the many business process and systems that must work together in the manufacturing, logistic, distribution, accounting, finance and HR.
82
Supply chain management
4 important characteristics:
- What (goods should match the goods ordered)
- When (goods should be delivered on promise date
- Where (goods deliver in location requested)
- How much (low as possible)
