Wiley BEC The MotherLOAD - D
State the standard on "Proficiency and Due Professional Care" (Standard 1200).
"Engagements must be performed with proficiency and due professional care."
State the standard on "Communicating Results" (Standard 2400).
"Internal auditors must communicate the results of engagements."
State the standard on "Managing the Internal Audit Activity" (Standard 2000).
"The chief audit executive must effectively manage the internal audit activity to ensure that it adds value to the organization."
State the standard on "Monitoring Progress" (Standard 2500).
"The chief audit executive must establish and maintain a system to monitor the disposition of results communicated to management."
State the standard on "Independence and Objectivity" (Standard 1100).
"The internal audit activity must be independent, and internal auditors must be objective in performing their work."
State the standard on "Nature of Work" (Standard 2100).
"The internal audit activity must evaluate and contribute to the improvement of governance, risk management, and control processes, using a systematic and disciplined approach."
Basic formula for breakeven analysis
(Quantity × Sales price) = Fixed costs + (Quantity × Variable costs per unit)
Characteristics of monopolistic competition
- A large number of sellers exist. - Firms sell a differentiated product or service (similar but not identical), for which there are close substitutes. - Firms can enter or leave the market easily.
3 important points and features of benchmarking
1. A company can't be the best at everything. 2. Benchmarking should be an ongoing process within the organization. 3. Don't try to focus on improving in every benchmark area all the time.
3 classes of qualitative business forecasting methods
1. Executive opinion: The collective judgment and opinion of executives and managers are used to develop a forecast. 2. Market research: Surveys of customers and others are done to determine preferences and other factors as a basis for formulating a forecast. 3. Delphi method: Uses a consensus developed by a group of experts using a multi‐stage process for converging on a forecast.
4 electrical system risks
1. Failure (outage), 2. reduced voltage (brownout), 3. Sags, spikes, and surges, 4. Electromagnetic interference (EMI).
The "recommended" (nonmandatory) guidance in the International Professional Practices Framework of the Institute of Internal Auditors (IIA)?
1. Implementation guidance (including Practice Advisories) 2. Supplemental guidance
5 major sectors (or elements) of a macroeconomic free market flow model
1. Individuals 2. Business entities 3. Governmental entities 4. Financial entities 5. Foreign entities
4 principles of the Institute of Internal Auditors' (IIA) Code of Ethics (Framework for the 12 Rules of Conduct).
1. Integrity 2. Objectivity 3. Confidentiality 4. Competency
4 social factors that should be considered in a political, economic, social and technological analysis (PEST analysis)of a macroenvironment
1. Population growth rate 2. Age distribution 3. Educational attainment and career attitudes 4. Health and safety characteristics
3 activities that comprise assessing and reporting on control monitoring.
1. Prioritize findings. 2. Report results as appropriate. 3. Follow up to implement corrective actions.
4 activities that comprise the design and execution of control monitoring.
1. Prioritize risks. 2. Identify controls. 3. Identify persuasive information about controls. 4. Implement monitoring procedures.
6 factors that would help determine the level of rivalry in an industry
1. Relative size of competitors in the industry 2. Degree of product differentiation 3. Cost structure of the industry 4. Strategic objectives of firms in the industry 5. Cost to customers of switching providers 6. Cost associated with exiting industry
Overhead Application Rate
= (Budgeted Variable Overhead + Budgeted Fixed Overhead) / (Budgeted Units of the Allocation Base)
Fixed Asset Turnover
= Sales / Average Net Fixed Asset This metric provides an indication of how efficiently productive assets are generating sales. This metric multiplied by the profit margin (resulting in a return on sales ratio) equals return on investment as used in DuPont analysis.
Balance‐of‐payments deficit
A country has a balance‐of‐payments deficit when its imports and investment outflows exceed its exports and investment inflows
Program documentation
A detailed analysis of the input data, logic, and output of software. Includes program flowcharts, source code listings, and record layouts. (Lesson: Program Library, Documentation and Record Management, 12/28 - 2nd Lesson)
Node
A device connected to a computer network.
Banker's acceptance
A draft (or order to pay) drawn on a specific bank by a firm that has an account with the bank. If bank "accepts" the draft, it becomes a negotiable debt instrument of the bank.
Mirroring
A method of backup consisting of the maintenance of an exact copy of a data set to provide multiple sources of the same information. Mirrored sites are most frequently used in e‐commerce for load balancing ‐ distributing excess demand from the primary site to the mirrored.
Storage area networks (SANs)
A method of backup that can be used to replicate data from multiple sites. Data stored on a SAN is immediately available without the need to recover it. This enables highly efficient disaster recovery.
Long-run profit increase for a monopoly
A monopoly firm can increase its profits in two ways: 1. Reduce cost by changing the size of its operations 2. Increase demand through advertising, promotion, and the like
Peer‐to‐peer network
A network system in which all nodes share in communications management. No central controller (server) is required. These systems are relatively simple and inexpensive to implement; used by LANs.
Greenfield venture
A new, wholly owned subsidiary established in a foreign country
Client (on a computer network)
A node, usually a microcomputer, which is used by end users; uses but usually does not supply network resources.
Slope of a normal supply curve
A normal supply curve has a positive slope: at a higher price, a greater, the quantity will be supplied.
Instant messaging (IM)
A protocol for instant messaging
Use of secure electronic transactions (SET) protocols
A protocol that is often used in credit card payments. Used by the merchant to securely transmit payment information and authenticate trading partner identity.
Project management
A series of related activities to achieve a defined output in a specified and finite amount of time using a temporary structure
Remote backup service
A service that provides users with an online system for backing up and storing computer files. Remote backup has several advantages over traditional backup methodologies: the task of creating and maintaining backup files is removed from the IT department's responsibilities; the backups are maintained off site; some services can operate continuously, backing up each transaction as it occurs.
Social engineering
A set of techniques used by attackers to fool employees into giving them access to information resources.
Craft manufacturing process
A small number of a high variety of unique (i.e., customized or one-of-a-kind) products usually with simple tools or technology and highly skilled labor. Traditional cost accounting systems used with this approach typically involve job costing.
Back door attack on a system
A software program that allows an unauthorized user to gain access to the system by side‐stepping the normal logon procedures;. Back doors were once commonly used by programmers to facilitate access to systems under development.
Average propensity to consume (APC)
APC = Percentage of disposable income spent on consumption goods APC + APS = 1 (i.e., disposable income)
Average propensity to save (APS)
APS = Percentage of disposable income saved APC + APS = 1 (i.e., disposable income)
Which costing method is required for compliance reporting (i.e., financial and tax reporting)?
Absorption costing
Capital Structure
All elements of long‐term debt and owners' equity
Transfer price
Amount (price) at which goods or services are transferred between affiliated entities
Personal disposable income
Amount of income that individuals have available for spending, defined as total personal income after taxes are deducted.
Cost (as used in accounting)
Amount paid or obligation incurred for a good or service; may be unexpired or expired. An unexpired cost is an asset. An expired cost is an expense.
Compensating balance
An amount that a borrower may be required to maintain in a demand deposit account with a lender as a condition of receiving a loan or other bank services
Cost center
An area where costs are accumulated and then distributed to products, for example accounts payable, product design, and marketing.
Shared services
An arrangement where one part of an organization provides an essential business process where previously it had been provided by multiple parts of that same organization.
Unexpired cost
An asset; it has future value to the entity (e.g., the cost of a three‐year insurance policy would be an asset during the period covered).
Effective annual percentage rate (also called the "annual percentage yield")
Annual percentage rate with compounding on loans that are for a fraction of a year
What does "ceteris paribus" mean, as used in economics?
Assumption that any influences other than the variable(s) being considered are held constant. Literally, "all else being equal."
The distinction between "assurance" and "consulting" activities in internal auditing?
Assurance involves three parties (the process owner, the user, and the internal auditor), whereas consulting involves only two parties (the client and the internal auditor).
Describe some characteristics of a "strong" (i.e., good) password.
At least eight characters long; uses both upper and lower case letters; uses at least one numeral; uses at least one special character; must be periodically changed.
Intranets
Available only to members of the organization (business, school, association); often used to connect geographically separate LANs within a company.
Operating Budget
Budget which forecasts the results of operations: sales, production expenses, and selling and administrative expenses. The principal budgets found within this budget are: 1. Sales budget 2. Production budget 3. Production cost budgets (direct materials, labor, and overhead budgets) 4. Selling and administrative expense budget
What types of buyers takes precedence over perfected secured interests?
Buyers in the ordinary course of business.
Verifiability
Can be established, confirmed or substantiated as true or accurate
Why are cash discounts offered on trade accounts?
Cash discounts are offered to encourage early payment of amounts due on trade accounts.
4 variables that change aggregate supply
Changes in: 1. Number of providers 2. Cost of inputs 3. Government taxation or subsidization 4. Technological advances
How does a reasonableness check (also called a logic test) improve data input?
Checks to see that data in two or more fields is consistent. For example, a Rate of Pay value of "$3,500" and a Pay Period value of "Hourly" may both be valid values for the fields when the fields are viewed independently. However, the combination (an hourly pay rate of $3,500) is not valid.
A good location site for a computer operations facility
Climate controlled including air‐conditioned; away from risks of natural disasters (fire, flood, humidity), away from windows. Not on a top floor or basement.
The major types (extremes) of economic systems
Command economic system Market (free‐enterprise) economic system
Cost leadership strategy
Competitive strategy in which the organization seeks to gain an advantage by selling a high volume of low‐cost products
Product differentiation strategy
Competitive strategy in which the organization strives to produce a product that is perceived to offer unique features or benefits to the customer and that therefore commands a higher price
Transaction files
Computerized data files equivalent to the journals found in a manual accounting system.
How is the contribution margin calculated using the direct costing method?
Contribution margin is equal to revenue minus all variable costs, including period costs.
Logical access controls
Control electronic access to systems via internal and external networks.
Weighted‐average cost of capital
Cost of each element of capital weighted by the proportion (percentage) of total capital provided by each element, with the resulting products summed to get the weighted average cost for all elements of capital.
Interest
Cost of the use of money. It is expressed as a percentage rate, almost always as an annual percentage rate, and applied to the principal to determine dollar amount.
Direct Costs
Costs that can be traced to specific units of production. Direct materials are actually incorporated into the product. Direct labor is comprised of the salary costs of workers who fabricate the product.
Transferred‐in costs
Costs transferred from one department (process) to the next
Platform as a Service (PaaS)
Creating cloud‐based software and programs Salesforce.com's Force.com is an example.
Business cycles
Cumulative fluctuations in aggregate real gross domestic product that last at least two years
Distributed database systems
Database is distributed across locations according to their needs (note the subtle reference to Karl Marx here. . .)
United States Treasury Bills (also called T‐Bills)
Debt investment instruments that are the direct obligation of the U.S. government. They are considered to be virtually risk‐free and are commonly used as the basis for the risk‐free rate of return in many financial analyses.
Applications development
Department is responsible for developing new systems
Internal labels (header and trailer labels)
Descriptive information stored at the beginning and end of a file that identifies the file, the number of records in the file, and provides data enabling detection of processing errors.
Demand
Desire, willingness, and ability to acquire a commodity (good or service)
Cost approach
Determines the amount required to acquire or construct a comparable item
Some of the reasons for comparative advantage between countries
Differences in availability of economic resources, including: - Natural resources - Labor - Technology
The characteristics of a market (free‐enterprise) economic system
Distinct entities determine production, distribution, and consumption in an open market (e.g., capitalism).
What are the three major components of the COBIT model?
Domains and processes, information criteria, IT resources.
The shape of the demand curve for a firm in perfect monopoly
Downward sloping (and, since the firm is the only firm in the industry, it is also the industry demand curve)
Shape of the demand curve for a firm in monopolistic competition
Downward‐sloping and highly elastic (because there are close substitutes for the good or service offered)
In the context of transfer pricing, what is dual pricing?
Dual pricing is where the prices for the buying and the selling divisions are different as established by top management to achieve specific goals that differ between the buyer and seller.
How do the Program Evaluation and Review Technique (PERT) and the Critical Path Method (CPM) use relationships to assist with project management?
Each uses a precedence relationship that specifies a sequence for activities in the network.
Flat file system
Early information technology systems used flat file technology. Flat files are characterized by independent programs and data sets, high degrees of data redundancy, and difficulty in achieving cross functional reporting.
International Economics
Economic activities that occur between nations and outcomes that result from those activities
According to the COBIT model, what are the seven criteria or properties that information should possess?
Effectiveness, efficiency, confidentiality, integrity, availability, compliance, reliability
Self‐Assessment
Either the person responsible for a control, or that person's peer or supervisor, assesses control effectiveness.
Token‐based payment systems
Electronic cash, smart cards (cash cards), and online payment systems (e.g., PayPal); similar to electronic fund transfer (EFT), but governed by different laws.
Diversifiable risk (also called unsystematic risk, firm‐specific risk, or company‐unique risk).
Elements of business risk that can be eliminated through diversification of investments; for example diversification of projects or securities investments.
Online transaction processing system (OLTP)
Enterprise resource planning (ERP) modules that comprise the core business functions: sales, production, purchasing, payroll, financial reporting, etc. These functions collect the operational data for the organization and provide the fundamental motivation for the purchase of an ERP.
Overhead Rate Formula (aka Predetermined Overhead Rate or POR)
Estimated Total Overhead Costs / Estimated Activity Volume
Eurodollar market (Euromarket)
Eurodollars are U.S. dollars maintained outside the U.S. Investors holding these Eurodollars offer short‐term and intermediate‐term loans denominated in U.S. dollars. These loans are outside the normal banking systems and, therefore, generally carry a lower cost of borrowing than conventional bank loans.
Price indexes (or indices)
Factor that converts prices of each period to what those prices would be in terms of prices of a specific prior (or subsequent) reference period
Which is more inclusive, capital structure or financial structure?
Financial structure, which includes current and noncurrent liabilities as well as owners' equity. Capital structure does not include current liabilities, only long‐term debt and owners' equity.
In what ways do firms in an oligopoly market compete?
Firms in an oligopoly market compete based on quality, service, distinctiveness, and so on, but not on price, which might incite a "price war."
What is the general rule of priority between two perfected security interests?
First in time of perfection is first in right.
Potential benefits of international capital markets (as compared with domestic markets) to both lenders and borrowers
For investors (lenders), a greater range of investments is available and an increase in portfolio diversification is possible. For borrowers, a larger number of funding sources, increased levels of funding, and lower cost of borrowing are possible.
Key Risk Indicators
Forward‐looking metrics that identify critical potential problems, thus enabling an organization to take timely action, if necessary
Describe concentration banking
Funds collected in multiple local banks are transferred regularly and (usually) automatically to firm's primary bank; used to accelerate the flow of cash to a firm's principal bank.
Irrelevant costs
Future costs that do not differ between alternatives
Fiscal policy
Government influencing aggregate spending (demand) via changes in government spending and/or taxes.
Pilot implementation method for new systems
Implementation of a new system similar to phased implementation, except rather than dividing the system into modules, the users are divided into smaller groups and are trained on the new system one group at a time.
"Cold turkey" (also called the "plunge" or "big bang") implementation method for new systems
Implementation of a new system where the old system is dropped and the new system put in place all at once.
Phased implementation method for new systems
Implementation of a new system where the system is divided into modules that are brought online one or two at a time.
Parallel implementation method for new systems
Implementation of a new systems where the new system and the old system are run concurrently until it is clear that the new system is working properly.
How does the audit trail differ in an automated, compared to a manual, accounting system?
In automated systems, audit trails are often in imaged or other electronic forms. In manual systems, they were paper.
Transfer price
In intra company sales, the product price charged by the selling division to the buying division
Operator documentation (also called a "run manual")
In large computer systems, operator documentation provides information necessary to execute the program including the required equipment, data files and computer supplies, execution commands, error messages, verification procedures and expected output. It is used by computer operators.
Equivalent units
In process costing, the number of whole units represented by the partially complete units in terms of cost; for example, 100 units that are 50% complete (in terms of cost) equal 50 equivalent units.
Compound interest
Interest computed not only on the principal but also on any accumulated unpaid interest (i.e., interest is paid on interest).
Conventional aggregate supply curve
It is a continuously positive slope, with a steeper slope beginning at the level of full employment; supply increases with price but requires proportionately higher prices at full employment.
Knowledge work system
Knowledge work systems facilitate the work activities of professional‐level employees (engineers, accountants, attorneys, etc.) by providing information relevant to their day‐to‐day activities (e.g., how the company has handled specific types of audit exceptions) and/or by automating some of their routine functions (e.g., computer‐aided systems engineering [CASE] packages used by programmers to automated some programming functions).
What does the "times‐interest‐earned ratio" measure? How is it expressed as a formula?
Measures the ability of current earnings to cover interest payments for a period; expressed as: (Net Income + Interest Expense + Income Tax Expense)/Interest Expense.
Elasticity
Measures the percentage change in a market factor as a result of a given percentage change in another market factor
What does the "price‐earnings ratio" ("P/E ratio"; also called the "multiple") measure? How is it expressed as a formula?
Measures the price of a share of common stock relative to its latest earnings per share; expressed as: P/E Ratio = Market price per common share/Earnings per common share. Notice, it measures the number of times ("multiples") earnings per share is reflected in the market price.
What does the "debt to equity ratio" measure? How is it expressed as a formula?
Measures the relative amounts of assets provided by creditors (debt) and shareholders; expressed as: Debt to Equity = Total Liabilities/Total Shareholders' Equity.
What is the primary focus of international transfer price setting, other than goal congruence?
Minimizing income incidence to reduce tax liability
Difference between mixed costs and step‐variable costs
Mixed costs have a fixed component and a variable component, while step‐variable costs remain constant in total over a small range of production levels but vary with larger changes in production volume.
Define "reporting objectives" (according to the COSO ERM model).
One of four organizational objectives. Information system goals related to the accuracy, completeness, timeliness, and reliability of internal and external reporting.
Compliance Objectives (according to the COSO ERM model).
One of four organizational objectives. These are designed to ensure that the organization meets legal and regulatory requirements.
Residual income (RI)
Operating income - Required rate of return (Invested Capital)
How is operational risk best controlled?
Operational risk is best controlled by exceptional execution of the strategic plan. This is often enhanced by attention to customer credit checks, quality, employee training, and management expertise.
What kind of process costing problems include transfers in?
Organizations that have more than one sequential work‐in‐process (WIP) account.
Usually the main reason for outsourcing
Outsourcing is often used to lower cost and increase quality by utilizing a vendor's specialization.
Corrective Controls
Paired with detective controls, they attempt to reverse the effects of the errors or irregularity that has been detected. Examples: maintenance of backup files, disaster recovery plans, and insurance.
Password crackers
Password cracking software generates and tests a large number of potential passwords to try to access a system.
Describe a payment through draft.
Payment is made with a legal instrument, called a draft, that is drawn on an account of a bank and is guaranteed payment by the bank. Examples include bank drafts, cashier's checks, certified checks, and money orders.
Describe the use of preauthorized checks and preauthorized debit/credit cards.
Payment/collection of an amount due through the use of checks or debit/credit card charges that are authorized in advance
Components of Compensation
Payments to individuals as: - Wages, salaries and profit sharing for labor. - Interest, dividends, rental and lease payments for capital. - Rental, lease, and royalty payments for natural resources and intellectual property.
According to the COBIT model, what are the five physical resources that, together, comprise an IT system?
People, applications, technology, facilities, data.
The least likely market structure in the U.S. economy
Perfect competition. A market or industry with all of the criteria of perfect competition is virtually nonexistent in the U.S. economy. Monopoly, monopolistic competition, and oligopoly markets are common.
Batch processing
Periodic transaction processing method in which transactions are processed in groups.
Self‐Review
Person responsible for a control (but not that person's peer or supervisor) assesses control effectiveness. The least objective type is "self‐assessment."
Computer operators (and systems programmers, though their access should be limited to times when they need to update systems hardware or software)
Personnel in an organization that should have access to computer operations ("live data")
Purpose of file protection rings or locks
Physically prevent the media from being overwritten.
4 broad national attributes (factors) identified by Michael Porter as promoting or impeding the creation of competitive advantage for a firm within a country
Porter's four factors are: 1. Factor endowments — the factors of production 2. Demand conditions — the nature of domestic demand 3. Relating and supporting industries — the international competitiveness of related industries 4. Firm strategy, structure, and rivalry — how companies are created, organized, managed, and compete
Difference between quality of design and conformance quality
Quality of design is about meeting or exceeding the needs and wants of customers, while quality of conformance is the degree to which a product meets its specifications.
Capital asset pricing model formula and its components
RR = RFR + B(ERR - RFR) RR = Required rate of return RFR = Risk‐free rate of return B = Beta, a measure of volatility Expected rate of return for a ERR = Expected rate of return for a benchmark for the entire class of the asset being valued
Deflation
Rate of decrease in the price level Measured by the CPI-U
Inflation
Rate of increase in the price level Measured by the CPI-U
Profitability measures
Ratios (and other measures) that measure aspects of a firm's operating (profit/loss) results on a relative basis.
Competence (in relation to a control evaluator)
Refers to the evaluator's knowledge of the controls and related processes, including how controls should operate and what constitutes a control deficiency
6 risks that are greater in an automated than in manual systems
Reliance on faulty programs, unauthorized access, unauthorized changes, failure to update systems, inappropriate manual intervention, data loss.
Software as a Service (SaaS)
Remote access to software. Office 365, a suite of office productivity programs, is an example.
Financial Risk
Risk to common shareholders that derives from a firm's use of debt financing, which requires interest payment regardless of the firm's operating results, and its use of preferred stock, which requires payment of dividends before common shareholders receive dividends.
Annuity Due
Series of equal amounts received or paid at the beginning of each equal period
The effect on aggregate equilibrium of an increase in aggregate demand (only) when a Keynesian supply curve is assumed
Since the Keynesian supply curve is horizontal up to the point of full employment, as aggregate demand increases, there will be an increase in supply (quantity) with no change in price until the level of full employment is reached, at which point both quantity and price increase.
The effect on aggregate equilibrium of an increase in aggregate demand (only) when a classical supply curve is assumed
Since the classical supply curve is completely vertical, an increase in aggregate demand (alone) will increase price with no change in the quantity supplied.
The effect on aggregate equilibrium of a decrease in aggregate demand (only) when a conventional supply curve is assumed
Since the conventional supply curve has a continuous positive slope, as aggregate demand decreases, both supply (quantity) and price will decrease.
Six Sigma
Six Sigma is a quality improvement approach that is designed to systematically reduce defects. Six Sigma is also a fact‐based method to achieve cost reduction.
Flash drives (also known as jump drives or thumb drives)
Small, portable devices that can store anywhere from 500 megabytes to several gigabytes. The term "drive" is a bit of a misnomer as there are no moving parts to the "drive." Rather, the memory in a flash drive is similar to the RAM used as primary storage for your CPU.
Electronic wallets
Software programs that allow the user to manage credit cards, user names, passwords, and address information in an easy‐to‐use, centralized location (e.g., RoboForm).
Development step of the systems development lifecycle (SDCLC) process
Stage 4 of the systems development lifecycle (SDLC) process. During this phase, programmers use the systems design specifications to develop the program and data files.
Strategic budgeting
Strategic budgeting is a top‐down process, starting with the goals and mission the organization wants to achieve and allocating resources in proportion to priorities.
How is strategic risk best controlled?
Strategic risk is best controlled by rigorous forecasting and planning, and optimizing operating leverage.
SWOT
Strengths, weaknesses, opportunities, and threats
Economics
Study of the allocation of scarce economic resources among alternative uses
What considerations should be given by an organization regarding fire‐suppression systems?
Such systems are required in IT operations. Need to be appropriate for electrical fires (not halon). Should be periodically inspected.
SDCLC Process
Systems Development Lifecycle Process
Cleartext (or plaintext)
Text that can be read and understood.
Ciphertext
Text that has been mathematically scrambled so that its meaning cannot be determined without the use of an algorithm and key.
Describe the operation of "one‐time" passwords.
The "one time" password derives from an algorithm which usually involves the date and time. The user enters this password along with their user name and personal password. Once received, the computer independently recalculates the "password." If the entered value and computed value are the same, the computer then recognizes the individual.
Central processing unit (CPU)
The CPU is the control center of the computer system. It has three principal components.
When is the predetermined overhead rate (POR) established?
The POR is established prior to the beginning of the year.
The primary ways an entity may engage in international business activity
The alternative ways of engaging in international business activity include: - Importing/Exporting - Foreign licensing - Foreign franchising - Forming a foreign joint venture - Creating or acquiring a foreign subsidiary
Operating system
The interface between the user and the computer hardware.
Callable preferred stock
The issuing firm has the right to buy back the preferred stock, normally at a premium.
Joint probability
The probability of an event occurring given that another event has already occurred. The joint probability is determined by multiplying the probability of the first event by the conditional probability of the second event.
Crashing
The process of adding resources (such as overtime labor or adding additional materials or equipment) to shorten selected activity times on the critical path. Crash time is the shortest possible time to complete an activity after accelerating resources.
Valuation
The process of assigning worth or value to something
Encryption
The process of coding data so that it cannot be understood without the correct decryption algorithm.
Capital budgeting
The process of measuring, evaluating, and selecting long‐term investment opportunities, primarily in the form of projects or programs
What is the preferred method of ranking economically feasible projects?
The profitability index, which takes into account both the net present value and the initial cost of each project
Consumption function
The relationship between consumption spending and disposable income
Determinants of Price
The supply of and demand for the commodity being priced
Electronic data interchange (EDI)
The system‐to‐system exchange of business data (e.g., purchase orders, confirmations, invoices, etc.) in structured formats that allow direct processing of the data by the receiving system.
Equivalent units are equivalent in what sense?
They are equivalent in terms of cost.
Short‐term financing
This type of financing involves: 1. Obtaining funding through obligations (debt) that must be repaid within one year (current liabilities), or 2. The use of current assets to obtain funding.
Gross national product (GNP)
Total output of all goods and services produced worldwide using economic resources of U.S. entities
Cost leadership strategy
Under this generic strategy, an entity seeks to be the low‐cost provider for a given level of output in an industry. The strategy is intended to enable either higher gross profits than competitors or sales at a lower price to gain market share.
Asymmetric encryption (also called public/private‐key encryption and private‐key encryption)
Uses two paired encryption algorithms to encrypt and decrypt the text: if the public key encrypts, the private key decrypts. If the private key encrypts, the public key decrypts.
3 important goals of input controls
Validity, completeness, accuracy.
Simple Difference Calculation (for variance)
Variance = Standard Amount - Actual Amount
In what circumstance might the use of the payback period approach be useful in ranking capital projects?
When liquidity issues are a major concern in selecting from a set of projects
Extensible business reporting language (XBRL)
XML‐based protocol for encoding and tagging business information. A means to consistently and efficiently identify the content of business and accounting information in electronic form.
In addition to minimizing total income taxes, what other savings may be accomplished by the setting of transfer prices?
- Withholding taxes, which may apply to the transfer of cash as dividends, interest, or royalties. - Import duties, which are applied to goods based on transfer prices. - Profit repatriation restrictions, which limit the amounts of profits that can be transferred out of a country.
State the standard on "Engagement Planning" (Standard 2200).
"Internal auditors must develop and document a plan for each engagement, including the engagement's objectives, scope, timing, and resource allocations."
State the standard on "Performing the Engagement" (Standard 2300).
"Internal auditors must identify, analyze, evaluate, and document sufficient information to achieve the engagement's objectives."
State the standard on "Quality Assurance and Improvement Program" (Standard 1300).
"The chief audit executive must develop and maintain a quality assurance and improvement program that covers all aspects of the internal audit activity."
Market price
-The price the purchasing unit would have to pay on the open market. -Market price is the "theoretically correct" transfer price.
An entity's values and the operational role they play
An entity's values are the underlying beliefs that govern the entity's operations. They prescribe the conduct of an entity in its relationship with other parties.
Parity check (parity bit)
An example of a check digit. A 0 or 1 included in a byte of information which makes the sum of bits either odd or even.
Rolling budget
An incremental budget that adds the current period and drops the oldest period. Kaizen‐type (continuous improvement) companies typically use rolling budgets.
Evaluator
An individual who monitors internal control. Must have skills, knowledge, and authority sufficient to understand risks and identify the controls needed to manage those risks. Two most important attributes are competence and objectivity.
Bit (binary digit)
An individual zero or one; the smallest piece of information that can be represented.
Line of credit
An informal agreement between a borrower and a financial institution whereby the financial institution agrees to a maximum amount of credit that it will extend to the borrower at any one time. It is not legally binding on financial institution.
How is the selling price of a bond determined?
As the sum of the present value (PV) of future cash flows from: 1. Periodic interest ߝ PV of an annuity 2. Maturity face value ߝ PV of $1 Both discounted using market rate of return.
Knowledge management (KM)
Attempts to ensure that the right information is available at the right time to the right user. A variety of practices attempt to electronically capture and disseminate information throughout the organization. Knowledge management practices seek specific outcomes, including shared intelligence, improved performance, competitive advantage, and more innovation.
How do average fixed cost and average variable cost behave?
Average fixed cost decreases as volume increases, while average variable cost increases as volume increases (subject to the relevant range)
Short‐run average cost curves that have a "U" shape
Average variable cost, average total cost, and marginal cost curves have a "U" shape. Average fixed cost has a continuously downward‐sloped curve.
How would one choose an overhead resource driver such as direct labor hours or machine hours?
Direct labor hours would make sense for a labor‐intensive business with little automation. Machine hours would make sense for a highly automated, capital‐intensive business.
Mass manufacturing process
Making a large number of standardized or identical products usually with dedicated (i.e., single-purpose), often automated or otherwise sophisticated machinery, and unskilled labor. Traditional cost accounting systems used with this approach typically involve process costing.
Lean manufacturing process
Making small batches of a high variety of unique products usually with automated or otherwise sophisticated machinery and highly skilled labor (usually cross‐trained)
Describe the accounts‐receivable management function
Management functions concerned with the conditions leading to the recognition and collection of accounts receivables
Monetary policy
Management of the money supply so as to achieve national economic objectives (e.g., economic growth and price level stability)
Do automated systems increase or decrease the potential for data analytics compared with manual accounting systems?
Increase since they are designed to include data and text analytic subsystems (e.g., expert systems, DSS, executive support systems).
Risk Response (according to the COSO ERM model).
Management's response to risk. Depends on management's risk appetite. May include risk avoidance, reduction, sharing, or acceptance.
Will the profitability index (PI) and the net‐present‐value (NPV) approaches (to capital budgeting) result in the same ranking of multiple projects?
No. Since the NPV approach does not explicitly consider the differences in initial cost of one project compared to another project, it does not give the same ranking as the profitability index, which considers both the net present value and the initial cost of the project by getting an NPV per dollar invested.
Are standards based solely on historical results?
No; standards are not only based on historical performance, as this may incorporate past periods' inefficiencies.
Current liabilities
Obligations due to be settled within one year or that will require the use of current assets to satisfy (e.g., accounts payable, other shortߚterm payables, some unearned revenue, etc.)
Capital account
Net dollar amount of inflows from investments and loans by foreign entities, amount of outflows from investments and loans U.S. entities made abroad, and the resulting net balance
Current account
Net dollar amounts earned from export of goods and services, amounts spent on import of goods and services, and government grants to foreign entities
Return on investment (ROI)
Net income / Total assets
Long-run profits in perfect competition
No long‐run profits are possible in a perfectly competitive market. If profits are made in the short run, more firms will enter the market and increase supply, thus decreasing market price until all firms just break even.
Causes of supply‐induced (or cost‐push or supply‐push) inflation
Increases in the cost of inputs to the production process that are passed on to the final buyers in the form of higher prices
Spooling (print queue) controls
Jobs sent to a printer that cannot be printed immediately are spooled—stored temporarily on disk—while waiting to be printed. Access to this temporary storage is controlled to prevent unauthorized access to printed files.
Describe the relative physical volume allocation used in joint product costing.
Joint costs are allocated to products based on the quantity of products produced (units, gallons, feet, pounds, etc.).
Describe the relative sales value allocation used in joint product costing.
Joint costs are allocated to products based on the relative sales values of the products either at split‐off or after additional processing.
Marginal propensity to consume (MPC)
MPC = Change in consumption as a result of a change in disposable income (or percentage of an additional dollar of disposable income that will be spent) MPC + MPS = 1 (i.e., the change in disposable income).
Marginal propensity to save (MPS)
MPS = Change in savings as a result of a change in disposable income (or percentage of an additional dollar of disposable income that will be saved). MPC + MPS = 1 (i.e., the change in disposable income).
Centralized systems
Maintain all data and perform all data processing at a central location; remote users may access the centralized data files via a telecommunications channel, but all processing is centralized.
Official full employment
Officially, full employment exists where there is no cyclical unemployment. When there is official full employment, there could still be frictional, structural, and/or seasonal unemployment.
Net realizable value
Often used when there is no market at split-off, the NRV method uses the ratio of the net realizable value of each product (i.e., final sales value less any additional separable processing costs of each product) to the total net realizable value to allocate costs.
A market structure that includes only a few providers
Oligopoly market. In an oligopoly market, there are few providers of goods or services. In a monopoly, there is only one provider; in perfect competition or monopolistic competition, there are many providers.
In which form of market structure is competition based on price least likely to occur?
Oligopoly, because each firm in the industry is aware of the actions of other firms in the industry
Information and Communications (according to the COSO internal control framework).
One of five components of internal control. Enable an organization's personnel to identify, process, and exchange the information needed to manage and control operations.
Control Environment (according to the COSO internal control framework).
One of five components of internal control. Encompasses management's philosophy toward controls, organizational structure, system of authority and responsibility, personnel practices, and policies and procedures. The core or foundation of any system of internal control.
Control Activities (according to the COSO internal control and ERM frameworks).
One of five components of internal control. It relates to the policies and procedures that ensure that organizational actions address key risks related to the achievement of management's objectives.
Risk Assessment (according to the COSO internal control framework).
One of five components of internal control. The process of identifying, analyzing, and managing the risks related to achieving the organization's objectives.
Monitoring (according to the COSO internal control framework).
One of five components of internal control. This component ensures the ongoing reliability of information and control processes by monitoring and testing the control system.
Define "operations objectives" (according to the COSO ERM model).
One of four organizational objectives. Goals concerned with day‐to‐day operating activities (i.e. sales activities, warehousing, manufacturing, etc.).
Strategic Objectives (according to the COSO ERM model).
One of four organizational objectives. High‐level goals that support the organization's overall mission.
Cost-based price
One of several variations on the selling units' cost of production: variable cost, full cost, cost "plus" (a percentage or a fixed amount).
What items should be considered relevant for a make‐or‐buy decision?
Only avoidable costs (i.e., costs that go away when accepting the decision to buy) and any new revenues are relevant to the make‐or‐buy decision.
Default values
Pre‐supplied data values for a field when that value can be reasonably predicted. For example, when entering sales data, the sales order date is usually the current date;. Fields using default values generate fewer errors than other fields.
How digital certificates work
Provides legally recognized electronic identification of the sender and verifies the integrity of message content. Based on public/private key technology (like the digital signature).
Define "pull" inventory models
Pull models do not do any work until demanded by customer orders. Thus, customer demand "pulls" material orders, labor, and all other manufacturing activity through the plant.
The point of short‐run profit maximization for a firm in perfect competition
Short‐run profit is maximized when marginal revenue is equal to rising marginal cost; total revenue will exceed total costs by the greatest amount at that point.
The point of short‐run profit maximization for a firm in an oligopoly industry
Short‐run profit is maximized where marginal revenue is equal to rising marginal cost (provided Price > Average total cost).
The point of short‐run profit maximization for a firm in monopolistic competition
Short‐run profit is maximized where marginal revenue is equal to rising marginal cost (provided Price > Average total cost).
The point of short‐run profit maximization for a firm in perfect monopoly
Short‐run profit is maximized where marginal revenue is equal to rising marginal cost. The price charged at that quantity will depend on the level of the demand curve.
Commercial paper
Short‐term unsecured promissory notes sold by large, highly creditworthy firms as a form of short‐term financing (i.e., 270 days or less)
Worm
Similar to viruses except that worms attempt to replicate themselves across multiple computer systems. They generally try to accomplish this by activating the system's email client and sending multiple emails.
Abnormal spoilage
Spoilage that is unplanned but considered controllable (e.g., spoilage due to natural disaster, carelessness, inefficiency, or accidents). Abnormal spoilage is separated and deducted as a period expense in the calculation of net income.
Financing options
The alternative ways that funding may be obtained to carry out capital projects and other undertakings of an entity
Actual Overhead
The amount actually paid for overhead expenses. These costs are initially charged to the specific expense account (i.e., supplies inventory, utilities, maintenance, supervision, etc.) and to the Factory Overhead Control account.
Applied Overhead
The amount of estimated overhead charged to production. Applied overhead is calculated by multiplying the predetermined overhead rate by the actual number of units used in production (e.g., direct labor hours or machine hours).
Actual overhead
The amounts actually paid for indirect costs (utilities, maintenance, supervision, etc.)
Effective interest rate
The annual interest rate implicit in the relationship between the net proceeds of a borrowing (or other arrangement) and the dollar cost of the borrowing (or other arrangement). Computed as: Dollar cost of borrowing/Net proceeds of borrowing.
Stated rate (of interest) (also used interchangeably with "nominal rate" or "quoted rate"
The annual rate of interest specified in a debt instrument or other contract/agreement; it does not take into account the compound effects of payment frequency.
Annual percentage rate (APR)
The annualized effective interest rate (without compounding) on loans that are for a fraction of a year. In effect, the effective interest rate for a portion of a year is "grossed up" to an annual rate. Computed as the effective interest rate for the fraction of a year multiplied by the number of such fractions in a whole year. Basis of interest rate disclosure in U.S.
Ratio analysis (for financial management)
The development of quantitative relationships between various elements of a firm's financial, operating and other information.
How is absorption costing (AC) fundamentally different from direct costing (DC)?
The difference between AC and DC can be isolated to the treatment of fixed manufacturing overhead. For AC, it is a product cost; for DC, it is a period cost.
Working capital (also called net working capital)
The difference between a firm's current assets and its current liabilities; expressed as: Current assets - Current liabilities = Working capital
SOX Clawback Provision
The provision allows firms to reclaim incentive & bonus payments to officers that turn out to have been made based on wrongdoing by those officers.
Who is responsible for direct material price variances?
The purchasing manager is responsible for these.
Supply
The quantity of a commodity (good or service) that will be provided at alternative prices during a specified time
Market Demand
The quantity of a commodity that will be demanded by all individuals (and other entities) in the market at various prices during a specified time, ceteris paribus
Individual Demand
The quantity of a commodity that will be demanded by an individual (or other entity) at various prices during a specified time, ceteris paribus.
Relationship between a firm's capital projects and the firm's capital that funds those projects
The rate of return earned on a firm's capital projects must be equal to or greater than the rate of return required to attract and maintain investors' capital.
Risk‐free rate of return
The rate of return earned on a firm's capital projects must be equal to or greater than the rate of return required to attract and maintain investors' capital.
Risk premium
The rate of return expected above the risk‐free rate based on the perceived level of risk inherent in an investment/undertaking
Describe the yield to maturity for bonds (also called the expected rate of return).
The rate of return required by investors as implied by the current market price of the bonds; determined as the discount rate that equates present value of cash flows from the bonds with the current price of the bonds.
Law of Diminishing Returns
The short‐run economic concept under which the quantity of variable inputs begins to overwhelm the fixed factors, resulting in inefficiencies and diminishing returns on marginal units of variable inputs.
Describe the accounting treatment of non significant variances at the end of the period.
These amounts are closed to cost of goods sold.
Sunk costs
These are costs that are historical/in the past and are irrelevant for decision making going forward since they cannot be changed.
Professional Judgment
This skill is used in valuation to develop an understanding of the purpose and context of a valuation, the selection of appropriate quantitative techniques and data, and, ultimately, the assignment of a value
Online analytical processing system (OLAP)
This system incorporates data warehouse and data mining capabilities into an ERP system.
Central objective of inventory management
To determine and maintain an optimum investment in all inventories. Underinvesting in inventory can result in shortages and lost sales; overinvesting in inventory can result in incurring excessive cost for inventory.
Objective of working capital management
To maintain adequate working capital so as to: Meet ongoing operating and financial needs of the firm Not over‐invest in net working capital, which provides low returns or increases costs.
Objective of optimum capital structure
To minimize a firm's aggregate cost of capital financing by using an optimum mix of debt and equity components; to achieve the lowest possible weighted average cost of capital
Primary objective of the World Bank
To promote general economic development worldwide, focusing on lending to developing countries for infrastructure, agricultural, educational and similar projects
Fixed Costs
Total cost remains the same regardless of the quantity produced, within reasonable limits. Because of this, fixed costs per unit vary - increasing when production decreases and decreasing when production increases.
Net national product (NNP)
Total output of all goods and services produced worldwide using economic resources of U.S. entities, but only including the cost of investment in new capital (excludes depreciation)
Real gross domestic product (real GDP)
Total output of final goods and services produced for exchange in the domestic market during a period (usually a year), measured at constant prices
Nominal gross domestic product (nominal GDP)
Total output of final goods and services produced for exchange in the domestic market during a period (usually a year), without adjustment for changing price levels
Aggregate supply
Total output of goods and services at different price levels at the macroeconomic (economy) level
Aggregate demand
Total spending of individuals, businesses, governmental entities, and net foreign spending on goods and services at different prices at the macroeconomic (economy) level
Hash total
Totals of a field, usually an account code field, for which the total has no logical meaning, such as a total of customer account numbers in a batch of invoices.
Electronic audit trail
Transactions are written to a transaction log as they are processed. The transaction logs are an electronic audit trail.
E‐commerce
Transactions between the organization and its trading partners.
General transfer pricing rule
Transfer price per unit = Additional outlay cost per unit + Opportunity cost per unit
Mobile computing
Transportable computing devices. That is, computing devices that can be carried from place to place.
Major characteristics appropriate for an entity's goals
An entity's goals should be SMART: 1. Specific 2. Measurable 3. Attainable 4. Relevant 5. Time‐bound
E‐business
Any business process that relies on electronic dissemination of information or on automated transaction processing.
Financial account
Net dollar amount of U.S.‐owned assets abroad and foreign‐owned assets in the U.S.
Risk Assessment Materiality
The determination of how large of a risk poses a threat to objectives
Disadvantages of using common stock for long‐term financing
- Higher cost of capital than other sources - Dividends paid are not tax deductible - Additional shares issued dilute ownership and earnings per share
State the standard on "Purpose, Authority, and Responsibility" (Standard 1000).
"The purpose, authority, and responsibility of the internal audit activity must be formally defined in an internal audit charter, consistent with the Definition of Internal Auditing, the Code of Ethics and the Standards. The chief audit executive must periodically review the internal audit charter and present it to senior management and the board for approval."
State the standard on "Communicating the Acceptance of Risks" (Standard 2600).
"When the chief audit executive believes that senior management has accepted a level of residual risk that may be unacceptable to the organization, the chief audit executive must discuss the matter with senior management. If the chief audit executive determines that the matter has not been resolved, the chief audit executive must communicate the matter to the board."
Internal Auditing (according to the Institute of Internal Auditors (IIA))
"________ ________ is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control, and governance processes."
Alternative Computation of Contribution Margin
(Lesson: Cost-volume-Profit Analysis Issues and Graphics, 1/5/17, 3rd Lesson)
Two-Way Variance Analysis
(Lesson: Overhead Variance Analysis, 1/6/17, 1st lesson)
Characteristics of perfect competition
- A large number of independent buyers and sellers, each of which is too small to separately affect the price of a commodity. - All firms sell homogeneous products or services. - Firms can enter or leave the market easily. - Resources are completely mobile. - Buyers and sellers have perfect information. - Government does not set prices.
Functions of Money
- A medium of exchange - A measure of value - A store of value
Characteristics of a perfect monopoly
- A single seller - A commodity for which there are no close substitutes - Restricted entry into the market
Prevalent value‐based management (VBM) themes and concepts
- Accrual‐based metrics are discredited. - Cost of capital is increasingly emphasized. - Shareholders and shareholder value as the primary element of interest is common. - Relating VBM to strategy and making linkages to drivers of success is important.
Under the Sarbanes Oxley Act of 2002, what are the requirements and responsibilities of Audit Committees?
- All directors must be independent; - New role: select, compensate, fire outside auditor; - Set up whistleblower procedures
Assumptions/Limitations of the capital asset pricing model (CAPM)
- All investors have equal access to all investments and are using a one period time horizon. - Asset risk is measured solely by its variance from the asset class benchmark. - There are no external costs—commissions, taxes, and so on. - There are no restrictions on borrowing or lending at the risk‐free rate of return. - There is a market and market benchmark for all asset classes. - This model uses historical data.
Major assumptions of the cost‐volume‐profit (CVP) model
- All relationships are linear. - The number of units sold equals the number of units produced. - Fixed costs, unit variable costs, and price must behave as constants. - Volume is the only driver of costs and revenues. - Total costs can be divided into a fixed component and a component that is variable with respect to the level of output. - The model applies to operating income (i.e., the CVP model is a before‐tax model).
Absorption costing
- Assigns all three factors of production (direct material, direct labor, and both fixed and variable manufacturing overhead) to inventory. - Absorption costing is required for external reporting purposes. This is currently true for both external financial reporting and reporting to the IRS. - The absorption model assigns all manufacturing costs to products. "Absorbs all costs"
Direct costing (also known as Variable costing)
- Assigns only variable manufacturing costs (direct material, direct labor, but only variable manufacturing overhead) to inventory. - Direct costing is frequently used for internal decision-making but cannot be used for external reporting. - The direct model assigns only variable manufacturing costs to products. "Only considers costs that can be DIRECTLY assigned"
Identify some measures (averages and ratios) useful in assessing accounts‐receivable management.
- Average collection period - Day's sales in accounts receivable - Accounts receivable turnover - Accounts receivable to current or total assets - Bad debt to sales
The 3 levels of the corporate pyramid.
- Bottom: shareholders (vote for directors); - Middle: directors (select officers & set broad policies); - Top: officers (run firm day-to-day)
Advantages of using a lockbox system
- Cash is available for use sooner than it would be if receipts were routed through the firm. - Firm's handling of collections is greatly reduced. - There is a reduced likelihood of dishonored checks and earlier identification of those that are dishonored.
Examples of lagging indicators (of the business cycle)
- Changes in labor cost - Ratio of inventory to sales - Duration of unemployment - Commercial loans outstanding - Ratio of consumer installment credit to personal income
Advantages of short‐term notes (for financing purposes)
- Commonly available for creditworthy firms - Flexible—amounts and periods (within one year) can be varied - Generally, no collateral required - Provide cash
Advantages of standby credit for financing purposes
- Commonly available for creditworthy firms - Highly flexible (debt is incurred only when needed) - No collateral required - May provide cash for general use
Examples of leading indicators (of the business cycle)
- Consumer expectations - Initial claims for unemployment - Weekly manufacturing hours - Stock prices - Building permits - New orders for consumer goods - Real money supply
Reasons why monopolies exist
- Control of raw materials or processes - Government granted franchise (i.e., exclusive right) - Increasing return to scale (i.e., natural monopolies)
Assumptions inherent in using the economic order quantity (EOQ) model
- Demand is constant during the period. - Unit cost and carrying cost are constant during the period. - Delivery is instantaneous.
Characteristics of a just‐in‐time inventory system
- Demand pull—goods are produced only when there is an end user demand. - Excess inventory is minimized. - Production occurs in work centers that carry out a full set of production processes. - Relationships with suppliers are close and coordinated. - Quality standards = Total control of input quality and production process quality. - Simplified cost accounting is used.
Components associated with the evaluation and control element in a strategic planning context
- Determine what characteristics (attributes) to evaluate and measure. - Decide acceptable values (standards) for measurable characteristics. - Measure targeted characteristics. - Compare measurements with established acceptable values. - Implement changes needed to correct variances.
AICPA's guidelines to rank the reliability of audit evidence
- Direct personal knowledge by the auditor is the most reliable audit evidence. - Evidence obtained from an independent outside source is the next most reliable. - Evidence obtained from the entity under effective internal control is next. - Documentary evidence is more reliable than verbal responses to inquiries (and original documents are more reliable than faxes and photocopies).
Sociopolitical issues associated with international trade
- Domestic unemployment linked to use of foreign labor - Loss of manufacturing capabilities - Reduction of industries essential to national defense; - Lack of domestic protection for start‐up industries
Advantages of using short‐term payables (for financing purposes)
- Ease of use - Flexible - Usually interest free - Usually no security required - Discounts may be offered for early payment
Major steps in a strategic planning process
- Establish entity's mission, values and objectives. - Assess the entity (internal analysis) and the environment in which it operates (external analysis; environmental scanning). - Establish goals. - Formulate strategies. - Implement strategies. - Evaluate and control strategic activities.
Characteristics of an oligopoly
- Few sellers exist. - Firms sell either a homogeneous product (standardized oligopoly) or a differentiated product (differentiated oligopoly). - Entry into the market is restricted entry into the market.
Characteristics of lean manufacturing
- Flexible equipment - Low setup times - Highly skilled labor
For U.S. income tax purposes, in setting transfer prices, the resulting income should be allocated based on what factors?
- Functions performed by separate affiliates - Risks assumed by separate affiliates
Distinguish between factoring accounts receivable "with recourse" and "without recourse."
- If accounts receivable are factored "without recourse," the factor (buyer) bears the risk associated with collectability (unless fraud is involved). - If accounts receivable are factored "with recourse", the factor (buyer) has recourse against the selling firm for some or all of the risk associated with uncollectability.
Difference between overt collusion and tacit collusion
- In overt collusion, firms conspire to set output, price or profit. It is illegal in the U.S. - In tacit collusion, firms follow the price charged by the price leader in the market. It is not illegal in the U.S.
Examples of risk associated with investments in capital projects
- Incomplete or incorrect analysis of a project - Unanticipated actions of customers, suppliers, and competitors - Unanticipated changes in laws, regulations, and so on - Unanticipated macroeconomic changes (e.g., interest rates, inflation/deflation, tax rates, currency exchange rates, etc.)
The results of a change in market demand (only) on equilibrium
- Increase in market demand = Demand curve shifts up and to the right - Decrease in market demand = Demand curve shifts down and to the left - Increase in market demand with no change in supply = Increase in both equilibrium price and equilibrium quantity - Decrease in market demand with no change in supply = Decrease in both equilibrium price and equilibrium quantity
The results of a change in market supply (only) on equilibrium
- Increase in market supply = Supply curve shifts down and to the right - Decrease in market supply = Supply curve shifts up and to the left - Increase in market supply with no change in demand = Decrease in equilibrium price and increase in equilibrium quantity - Decrease in market supply with no change in demand = Increase in equilibrium price and a decrease in equilibrium quantity
Coefficient of determination (R2)
- Indicates the degree to which the behavior of the independent variable predicts or explains the dependent variable. The coefficient of determination is calculated by squaring the correlation coefficient. R2 can take on values from 0 to 1. - The closer R2 is to 1, the better the independent variable predicts the behavior of the dependent variable.
The characteristics of a free market economy
- Interdependent relationship between individuals and business firms. - Production depends on preferences of individuals with ability to pay for goods and services. - Production depends on availability of economic resources, level of technology, and how business firms choose to use them. - Production depends on sale price being at least equal to production cost.
Factors that influence investment spending
- Interest rate - Demographics - Consumer confidence - Consumer income and wealth - Current vacancy rates - Level of capacity utilization - Technological advances - Current and expected sales levels
Identify some measures (averages and ratios) useful in assessing inventory management.
- Inventory turnover - Number of days' sales in inventory
Advantages of the ORIGINAL Black‐Scholes option pricing model
- It assigns a probability factor to the likelihood that the price of the stock will pay off within the time to expiration. - It assigns a probability factor to the likelihood that the option will be exercised. - It discounts the exercise price to present value.
Net‐present‐value approach to capital project evaluation
- It compares the present value of expected cash inflows of a project with cash outflows, including initial cash investment in project. - It is derived by discounting future cash inflows (or savings) and determining whether or not the resulting present value is more or less than the present value of outflows, including cost of the investment.
Disadvantages of the payback period approach to project evaluation
- It ignores the time value of money. - It ignores cash flows received after the payback period. - It does not measure total project profitability. - The maximum payback period may be arbitrary.
Disadvantages of the accounting rate‐of‐return approach to project evaluation
- It ignores the time value of money. - It uses accrual accounting values, not cash flows.
Limitations of the ORIGINAL Black‐Scholes option pricing model
- It is appropriate only for European call options, which permit exercise only at the expiration date. - It assumes options are for stocks that pay no dividends. - It assumes options are for stocks whose price increases in small increments. - It assumes the risk-free rate of return remains constant during life of the option. - It assumes there are no transaction costs or taxes associated with the options.
Disadvantages of the internal rate of return approach to capital project evaluation
- It is difficult to compute. - It requires estimation of cash flows over the entire life of project, which could be very long. - It requires all future cash flows be in the same direction, either inflows or outflows. - It assumes cash flows resulting from the project are immediately reinvested at the project's internal rate of return.
Advantages of the accounting rate‐of‐return approach to project evaluation
- It is easy to use and understand. - It is consistent with financial statement values. - It considers the entire life and results of the project.
Advantages of the payback period approach to project evaluation
- It is easy to use and understand. - It is useful in evaluating liquidity of a project. - Use of a short payback period reduces uncertainty.
Disadvantages of using inventory‐secured loans for short‐term financing
- It is not available for all inventory. - Pledged inventory may not be available when needed. - It is more costly than certain other forms of short‐term financing. - It requires repayment in the short term.
Advantages of the internal‐rate‐of‐return approach to capital project evaluation
- It recognizes the time value of money. - It considers the entire life and results of the project.
Disadvantages of the net‐present‐value approach to capital project evaluation
- It requires estimation of cash flows over entire life of the project, which could be very long. - It assumes cash flows are immediately reinvested at the discount rate.
Advantages of the net‐present‐value approach to capital project evaluation
- It uses the time value of money concept. - It relates project rate of return to cost of capital. - It considers the entire life and results of project. - It is easier to compute than the internal rate of return approach.
Advantages of commercial paper for financing purposes
- Large amounts can be obtained. - Interest rate generally lower than other short‐term sources. - No collateral is required. - It provides cash for general use.
Major time‐series patterns
- Level: Data are relatively constant or stable over time. - Seasonal: Data reflect up- and down‐swings over short or intermediated periods of time; each swing is of about the same timing and level of change. - Cycles: Data reflect up‐ and down‐swings over a long period of time. - Trend: Data reflect a steady and persistent up or down movement over a long period of time. - Random: Data reflect unpredictable, erratic variations over time.
Primary purposes of the General Agreement on Tariffs and Trade (GATT)
- Liberalizing and encouraging trade by eliminating trade barriers - Harmonizing certain business‐related laws - Reducing transportation and other costs of doing international business
Advantages of leasing for long‐term financing purposes
- Limited immediate cash outlay - Possible lower cost than purchasing - Possible scheduling of payments to coincide with cash flows - Debt (lease payments) is specific to amount needed.
Major forms of long‐term financing
- Long-term notes - Financial (capital) leases - Bonds - Preferred stock - Common stock
Consequences of inflation
- Lower current wealth and lower future real income - Higher interest rates - Uncertainty of economic measures
Measures of money used by the Federal Reserve
- M1: Paper and coin currency held outside banks and check‐writing deposits - M2: Includes M1 items plus savings deposits, money market deposit accounts, certificates of deposit (less than $100,000), individual‐owned money market mutual funds, and certain other deposits - M3: Includes M2 items plus certificates of deposit ($100,000 and greater), institutional‐owned money market mutual funds, and certain other deposits
Factors that influence the cost of capital to a firm
- Macroeconomic conditions (e.g., interest rates, tax rates and inflation/deflation rates, etc.) - Past performance of the firm - Amount of total financing used - Relative level of debt financing - Length of debt maturity - Relative level of collateral provided
Examples of overinvesting in working capital
- Maintaining excess cash in low‐return accounts - Having excessive (large/old) accounts receivable that don't earn interest - Maintaining more inventory than needed and thus incurring storage costs and increasing the risk of obsolete inventory
Measures of performance from the customer perspective
- Market share - Product returns as a percentage of sales - Number of new customers - Percentage of repeat customers - Sales trends
Advantages of using preferred stock (for long‐term financing)
- No legally required periodic payments (i.e., dividends) - Lower cost of capital than common stock - Does not dilute common stock voting strength - No maturity date - No security required
Advantages of using common stock for long‐term financing
- No legally required periodic payments (i.e., dividends) - No maturity date - No security required
Disadvantages of leasing for long‐term financing purposes
- Not all assets available for leasing. - Lease terms may prove different from the period of asset usefulness. - This method is often chosen over buying for noneconomic reasons (e.g., convenience).
Elements of business cycles
- Peak: Point that marks the end of rising aggregate output and the beginning of a decline in output - Trough: Point that marks the end of a decline in aggregate output and the beginning of an increase in output - Economic expansion or expansionary period: period during which aggregate output is increasing - Economic contraction or recessionary period: periods during which aggregate output is decreasing
Kinds of factors that should be considered in a macroenvironmental analysis
- Political factors - Economic factors - Social factors - Technology factors - Ecological factors - Legal factors
Disadvantages of using short‐term notes for short‐term financing purposes
- Poor credit rating = High interest rate - Requires satisfaction in the short term - May require compensating balance or security
Disadvantages of standby credit for financing purposes
- Poor credit rating = High interest rate - Usually involves a fee - Compensating balance may be required - Requires satisfaction in the short term
Disadvantages of long-term notes for financing purposes
- Poor credit rating results in higher interest rate, greater security requirements, and more restrictive covenants. - Violation of restrictive covenants can trigger serious consequences.
Market Equilibrium Price
- Price at which the quantity of a commodity supplied is equal to the quantity of that commodity demanded - The intersection of the market demand and supply curves
Probability and Expected Value
- Probability analysis is used to determine the likelihood of a specific event occurring when several outcomes are possible. A probability for each outcome is assessed. The probability of a particular outcome is always between 0 (never) and 1 (always). The sum of the probabilities associated with the possible outcomes is always 1. (A sum less than one indicates that an outcome has been omitted from the analysis or a probability has been improperly assessed.) - The expected value is the long-run average outcome. Expected value is determined by calculating the weighted average of the outcomes: multiply the value of each outcome by its probability and then sum the results.
Process Management
- Process management involves activity analysis to achieve an understanding of the work that takes place in an organization. Fundamentally, process management recognizes that managers often focus on managing processes, while accountants often focus on managing costs. This disconnect prevents a proper understanding of work processes by accountants and the related cost management by managers. - Processes can be defined as a series of activities conducted to accomplish a defined objective.
The setting of transfer prices impacts what significant outcomes?
- Profit recognized by separate units - Allocation of taxes between units - Measures of separate unit performance
Benefits provided by ratio analysis
- Provides measures and enables comparisons of a firm's operating and financial activities and position for a single firm over time and across firms. - Facilitates identification of a firm's operating and financial strengths and weaknesses.
Benefits of a just‐in‐time inventory system (when compared with a traditional materials‐requirement‐planning inventory system).
- Reduced investment in inventory - Lower cost of inventory transportation, warehousing, insurance, taxes, and related costs - Reduced lead time in acquiring inputs - Lower cost of defects - Less complex and more relevant accounting and performance measurement
Factors that have facilitated or enabled an increase in global trade
- Reductions in trade barriers - Increased economic integration between nations - Regional trade agreements - Developments in communications (e.g., Internet) - Developments in the financial sector
Major forms of causal models used for forecasting
- Regression models (linear or non‐linear) - Input-output models - Economic models
The major types of causal models used for forecasting
- Regression: Uses an equation to relate a dependent variable to one or more independent variables to forecast the dependent variable. - Input‐output models: Describe the flow from one stage, sector, or other component to another in order to forecast values for either the predecessor or successor stage, sector or other component. - Economic models: Specify a statistical relationship between various economic quantities to forecast the value of one using the value of another.
Factors that determine the level of imports
- Relative levels of income and wealth - Relative values of currencies - Relative price levels - Import and export restrictions and tariffs - Relative inflationary rates
Disadvantages of using short‐term payables (for financing purposes)
- Requires payment in the short term - Use-specific - Lost discounts increase cost
Methods used by the Federal Reserve to regulate the money supply
- Reserve‐requirement changes (percentage of loan amounts that must be held by bank) - Open‐market operations (buying and selling U.S. Treasury debt obligations) - Discount rate (rate of interest banks pay when borrowing from Federal Reserve Banks)
Factors that will cause a change in the level of a supply curve
- Resource availability - Resource cost - Technological advances - Note: Not the price of the item supplied, which causes a movement along a given supply curve.
Differences between retail inventories and manufacturing inventories
- Retail = Merchandising inventory - Manufacturing = Raw materials, work in process, and finished goods
What are the major considerations in selecting short‐term securities as investments?
- Safety of principal - Price stability of the investment - Marketability or liquidity of the investment
The time periods of analysis used in economics
- Short‐run time period: At least one input to the production process cannot be varied (i.e., at least one input is fixed) - Long‐run time period: Quantity of all inputs to the production process can be varied
Factors that change market demand
- Size of market - Income or wealth of market participants - Preferences of market participants - Change in prices of other goods and services
Characteristics of a traditional materials‐requirement‐planning inventory system
- Supply push—goods are produced in anticipation of there being a demand for the goods. - Inventory buffers are maintained. - Setup times and production runs are long. - Relationships with suppliers are impersonal; suppliers are selected through a bidding process. - Quality standards = Acceptable levels; allows for some defects. - Traditional cost accounting is used.
Government methods for directly influencing market equilibrium
- Taxation increases the cost and shifts the market supply curve up and to the left; tax decreases have the opposite effects - Subsidization decreases the cost and shifts the market supply curve down and to the right; decreases in subsidization have the opposite effects - Rationing reduces demand, thus shifting the demand curve downward and to the left, and thus lowering the equilibrium quantity and price
Volume-Profit Chart
- The flatter the line, the smaller the contribution margin per unit. - When comparing profit lines for multiple years and assuming that the sales price has not changed, variable costs per unit for the steeper line are less than variable costs per unit for the flatter line. Steeper lines indicate larger contribution margins; if the sales price is constant, then variable costs must be relatively smaller. - Changes in the profit line's y-intercept indicate changes in fixed costs.
Factors that must be considered in assigning value
- The specific item or items (asset, liability, equity, etc.) being valued - The condition of the item(s) - The location of the item(s) - The time at which the valuation is occurring - The economic environment in which the valuation is occurring
The kinds (types) of cost that make up total cost
- Total fixed cost (FC): Costs that cannot be changed with changes in the level of output - Total variable cost (VC): Costs for variable inputs that will vary directly with changes in the level of output - Total cost (TC) = FC + VC
Identify the general credit‐related factors that must be determined by an entity if it sells on account.
- Total period for which credit will be extended for sales on account - Discount terms, if any, granted for early payment of credit sales - Penalty for failure to pay according to credit terms - Nature and extent of documentation required for sales on account
Examples of short‐term financing that is available only as needed
- Trade accounts - Line of credit - Revolving credit - Letter of credit
Special costs associated with international trade that often are critical in determining the viability of such trade
- Transaction costs, including costs of using letters of credit and costs of mitigating currency exchange risk - Transportation costs, including the extra costs of shipping goods long distances and/or using more costly transportation methods - Tariff and other compliance costs, including the direct costs of tariffs and complying with other requirements - Time costs, the costs associated with the extra time due to distance and other requirements
Distinguish between convertible preferred stock and nonconvertible preferred stock.
- With convertible preferred stock, preferred shareholders can exchange (convert) preferred stock for common stock according to a specified exchange plan. - With nonconvertible preferred stock, preferred shareholders cannot exchange (convert) their preferred stock to common stock.
Distinguish between participating preferred stock and nonparticipating preferred stock.
- With participating preferred stock, preferred shareholders can "participate" with common shareholders in receiving dividends in excess of the preferred preference rate. - With nonparticipating preferred stock, preferred shareholders cannot "participate" with common shareholders in receiving dividends in excess of the preferred preference rate; each period they receive only their preference rate of dividends.
Just-in-time production environments are characterized by:
1. A flexible manufacturing environment that can be set up quickly when a different product needs to be produced. Emphasis is on constantly reducing setup time, lead time, and cycle time, and simplifying production processes. 2. A skilled, flexible, and empowered workforce that can perform multiple tasks. In just-in-time production environments, workers are often organized in teams or manufacturing cells. In this environment, each worker is able to perform many or all of the tasks necessary to complete the product and can switch from one task to another as necessary to keep the production flow moving. This approach aids in production line smoothing. Employees are cross-trained to improve production flexibility and work cooperation. They are empowered to stop the production line to resolve problems. 3. A very low rate of defects. Because there are few or no "extra" units in the production process, virtually all units must be good or the production line will not be able to produce the required units of finished goods.
3 main functional areas within an information technology department
1. Applications Development 2. Systems Administration and Programming 3. Computer Operations
4 features of a good balanced scorecard
1. Articulates a company's strategy 2. Assists in communicating the strategy 3. Limits the number of measures 4. Highlights suboptimal trade‐offs that managers may make
3 steps to allocation of overhead (MEMORIZE)
1. At the beginning of the year, we calculate the predetermined overhead allocation rate (POR). For example, estimated overhead is divided by estimated direct labor hours. 2. During the year, we periodically allocate overhead by multiplying the overhead allocation rate (POR) by the actual units of the allocation base. 3. At the end of the year we dispose of over/underapplied overhead by taking the difference between actual overhead and applied overhead to Cost of Goods Sold.
2 basic categories of standards that comprise the International Standards for the Professional Practice of Internal Auditing.
1. Attribute standards 2. Performance standards
According to COSO, what four critical accounting activities should be segregated?
1. Authorizing 2. Recording 3. Safeguarding 4. Reconciling, oversight, and auditing
5 factors that would help determine the level of threat posed by substitute goods or services
1. Availability of substitutes 2. Ease of use of substitutes 3. Relative price and performance of substitutes 4. Buyers' brand loyalty 5. Cost to buyers of switching to substitutes
5 forces outlined in Michael Porter's framework for industry analysis and business strategy development
1. Bargaining power of customers 2. Bargaining power of suppliers 3. Threat of new entrants 4. Threat of substitute products 5. Intensity of competition
5 factors that would help determine the bargaining power of buyers in an industry
1. Extent of product standardization 2. Number of suppliers 3. Extent to which there are dominant buyers of the good/service 4. Extent to which information about the good or service is available 5. Cost to buyers of switching suppliers
Effects of Adopting ABC
1. Because of the way activity-based costing identifies and allocates costs, organizations that adopt activity-based costing tend to have: - More precise measures of cost - More cost pools - More allocation bases (e.g., multiple causes for costs to occur) 2. Activity-based costing can be used: - With job order and process costing systems - With standard costing and variance analysis - For service businesses as well as manufacturers 3. In general, compared to traditional, volume-based costing, activity-based costing tends to shift costs away from high volume, simple products to lower volume, complex products.
6 factors that would help determine the extent to which new competitors are likely to enter an industry
1. Capital investment required 2. Access to raw materials, technology, and suppliers 3. Economies of scale required for profitability 4. Customer loyalty and customer cost of switching providers 5. Access to distribution channels 6. Governmental impediments to entry
3 steps in overhead allocation
1. Choose the predetermined overhead rate (POR). 2. Allocate using the POR. 3. Adjust over-/underapplied overhead to actual at the end of the year.
4 types of computer crime
1. Computer as target, 2. Computer as subject, 3. Computer as tool, 4. Computer as symbol.
3 common price indices
1. Consumer Price Index (CPI) 2. Wholesale Price Index (WPI) 3. Gross Domestic Product (GDP) Deflator
What are the 5 categories of the 17 control principles of the COSO model?
1. Control Environment (5 principles) 2. Risk Assessment (4) 3. Control Activities (3) 4. Information & Communication (3) 5. Monitoring Activities (2)
The 5 components of internal control
1. Control environment 2. Risk assessment 3. Information & communication 4. Monitoring 5. Control activities
3 generic strategies enumerated by Michael Porter
1. Cost leadership 2. Differentiation 3. Focus (or niche)
3 major bases for setting transfer prices
1. Cost: The transfer price is a function of the cost to the selling unit. 2. Market price: The transfer price is based on the price of the good or service in the market (if available). 3. Negotiated price: The transfer price is based on a negotiated agreement between buying and selling affiliates.
3 risks of not implementing e‐commerce systems
1. Customers move online, 2. Limited growth, 3. Limited markets.
5 phases of the Six Sigma DMAIC (Define, Measure, Analyze, Improve and Control) project methodology
1. Define customers and their requirements. 2. Measure defects and other items related to quality. 3. Analyze to determine root cause of failures and the sources of variation. 4. Improve through experimentation. 5. Control results using TQM statistical process control tools (e.g., control charts).
4 elements that constitute "mandatory" guidance in the International Professional Practices Framework of the Institute of Internal Auditors (IIA).
1. Definition of internal auditing 2. Core principles (10 characteristics) 3. Code of Ethics 4. Standards
3 major steps involved with process costing
1. Determine equivalent units. 2. Determine cost per equivalent unit. 3. Determine (a) cost of goods transferred out of work in process and (b) ending work‐in‐process Inventory.
3 factors of production
1. Direct material 2. Direct labor 3. Factory overhead
6 reasons why organizations document their accounting systems
1. Documentation is required by law, 2. To facilitate building and evaluating complex systems, 3. To facilitate training, 4. To improve system survival and sustainability, 5. To enable system audits (e.g., trails), 6. to enable process re‐engineering.
5 pitfalls that should be avoided with a balanced scorecard
1. Don't assume all linkages to be precise. 2. Don't seek improvements across all measures all the time. 3. Don't use only objective measures on the scorecard. 4. Don't fail to consider both costs and benefits of initiatives, such as spending on information technology and research and development. 5. Don't ignore nonfinancial metrics when evaluating managers and employees.
Advantages of the discounted payback period approach to capital budgeting evaluation
1. Easy to use and understand; 2. Uses time value of money approach; 3. Useful in evaluating liquidity of a project; 4. Use of a short payback period reduces uncertainty.
4 economic factors that should be considered in a political, economic, social and technological analysis (PEST analysis) of a macroenvironment
1. Economic structure, stability, and growth rate 2. Interest rate 3. Inflation rate 4. Currency exchange rates
4 measures of elasticity
1. Elasticity of demand 2. Elasticity of supply 3. Income elasticity of demand 4. Cross elasticity of demand
3 types or versions of overhead involved in allocation
1. Estimated 2. Actual 3. Applied
3 characteristics of the small business computing environment
1. Exclusive use of microcomputers and laptops (e.g., there may be no servers), 2. Outsourced IT, 3.poor segregation of duties.
Repurchase agreement (also called a repo)
A debt investment instrument with a commitment by the buyer to resell the instrument to the seller at a specified price, which includes the original principal plus an interest or fee factor, at a specified time
4 factors that would help determine the bargaining power of suppliers in an industry
1. Extent of substitutes for the product or service 2. Relationship between the number of users (buyers) and suppliers (sellers) 3. Ability of supplier to move downstream in the distribution/sales channel 4. Extent to which supplier is unionized
4 evaluation perspectives for a balanced scorecard
1. Financial 2. Customer 3. Internal business processes; 4. Learning, innovation, and growth.
2 major ways goods may be acquired internationally
1. Foreign outsourcing — acquiring goods from foreign suppliers 2. Foreign direct investment — producing goods in facilities owned or controlled by U.S. companies but located in foreign countries
The effect of interest rate on investment spending
1. Higher interest rates lead to lower levels of investment; 2. Lower interest rates lead to higher levels of investment.
Disadvantages of the discounted payback period approach to capital budgeting evaluation
1. Ignores cash flows received after the payback period; 2. Does not measure total project profitability; 3. Maximum payback period may be arbitrary.
3 reasons for capital rationing
1. Insufficient funds to undertake all economically feasible projects 2. Insufficient management capacity to take on all economically feasible projects 3. Perceived instability in the market/economy
What are the 5 control principles of "Control Environment" of the COSO model?
1. Integrity & ethical values 2. BOD is independent of management and manages internal control 3. Management establishes structure, reporting lines & appropriate authorities/responsibilities to achieve objectives 4. Competence 5. Accountability
Significant factors that cause a negatively‐sloped demand curve
1. Interest rate factor 2. Wealth-level factor 3. Foreign purchasing power factor
4 technology factors that should be considered in a political, economic, social and technological analysis (PEST analysis) of a macroenvironment
1. Level of research and development activity 2. State of automation capability 3. Level of technology "savvy" 4. Rate of technology change
3 responsibilities of the financial management function of an entity
1. Managing the capital and financial structure of the entity 2. Planning, allocating and controlling an entity's financial resources 3. Identifying and managing financial risks faced by the entity
7 primary themes of performance standards.
1. Managing the internal audit activity 2. Nature of work 3. Engagement planning 4. Performing the engagement 5. Communicating results 6. Monitoring progress 7. Communicating the acceptance of risks
3 basic approaches to valuing a business
1. Market approach 2. Income approach 3. Asset approach
3 approaches to determining fair value as specified by U.S. generally accepted accounting principles (GAAP)
1. Market approach 2. Income approach 3. Cost approach
8 major forms of time‐series models (mathematical methods) used for forecasting
1. Naive 2. Simple mean (average) 3. Simple moving average 4. Weighted moving average 5. Exponential smoothing 6. Trend‐adjusted exponential smoothing 7. Seasonal indexes 8. Linear trend line
5 factors that might constitute external threats to an entity in a market
1. New substitute products or services 2. Changes in customer preferences 3. Increases in legal or regulatory restrictions 4. Increases in international trade barriers (quotas, tariffs, etc.) 5. Union demands
5 risks of user‐developed systems
1. Not integrated with existing systems, 2. Inadequate testing and documentation, 3. Poor data input controls, 4. Poor system design, 5. Management may rely on these systems without knowing their risks.
What are the 4 control principles of "Risk Assessment" of the COSO model?
1. Objectives 2. Assessment 3. Fraud 4. Change management
What are the 2 control principles of "Monitoring Activities" of the COSO model?
1. Ongoing & periodic 2. Address deficiencies
5 factors that might constitute strengths which provide an entity a relative competitive advantage in its market
1. Ownership of patents, copyrights, and so on 2. Favorable reputation 3. Proprietary processes, including those that give cost advantage 4. Exclusive or preferential access to natural resources/commodities 5. Desirable location
5 different techniques for evaluating capital budgeting projects
1. Payback period approach 2. Discounted payback period approach 3. Accounting rate of return approach 4. Net present value approach 5. Internal rate of return approach
4 market structures normally considered in economic analysis
1. Perfect competition 2. Perfect monopoly 3. Monopolistic competition 4. Oligopoly
5 political factors that should be considered in a political, economic, social, and technological analysis (PEST analysis) of a macroenvironment
1. Political stability 2. Tax policy 3. Labor laws 4. Environmental laws 5. International trade attitudes and restrictions
Costs of Quality
1. Prevention costs: Costs incurred to prevent the production of defective products, such as: - Re-engineering to improve product design - Improved production processes - Better quality materials - Programs to train personnel 2. Appraisal costs: Costs incurred to identify defective products during the manufacturing process through: - Inspection - Testing 3. Internal failure costs: Costs of defective components and final products identified prior to shipment that result in: - Scrap; - Rework; or - Costs of delays due to defective products. 4. External failure costs: Costs caused by failure of products in the hands of the customer, which may result in: - Field repairs - Returns - Warranty expenses - Litigation
3 examples of fixed cost
1. Property taxes 2. Contracted rent 3. Insurance
4 primary themes of attribute standards.
1. Purpose, authority, and responsibility 2. Independence and objectivity 3. Proficiency and due professional care 4. Quality assurance and improvement program
2 major classes of business forecasting methods
1. Qualitative: methods that are subjective in nature and based on judgment and opinion. 2. Quantitative: methods that are objective in nature and based on mathematical calculations and determinations.
What are the 3 control principles of "Information & Communication" of the COSO model?
1. Quality 2. Internal 3. External
5 risks encountered when engaging in foreign outsourcing
1. Quality risk: Goods/services so not meet buyer's standards. 2. Security risk : Foreign provider misappropriates proprietary information. 3. Export/Import risk: Trade barriers prevent transfer of goods/services. 4. Currency exchange risk: Exchange rates change unfavorably. 5. Legal risk: Home country or foreign country laws are violated.
3 Examples of variable cost
1. Raw materials; 2. Most labor; 3. Electricity.
3 examples of investment spending
1. Residential construction 2. Nonresidential construction 3. Business durable equipment 4. Business inventory
What are the 3 control principles of "Control Activities" of the COSO model?
1. Risk Reduction 2. Technology Controls 3. Policies
Most Common Measures of Customer Satisfaction
1. Sales returns 2. Warranty costs 3. Customer complaints
Differences in Calculating Weighted-Average vs. FIFO in Process Costing
1. See pic for equivalent units difference 2. In calculating cost per equivalent unit, WA uses current period costs + costs of beginning WIP inventory divided by equivalent units. FIFO uses only current period costs. 3. Both methods multiply EU cost by ending inventory.
4 elements of each perspective of the BSC
1. Strategic goals 2. Critical success factors 3. Tactics 4. Performance measures
Differentiate among strategic, operational, and market risk.
1. Strategic risk is relatively long‐term and can be managed by continually assessing the competitive space in which the organization operates; 2. Operational risk is short‐term in nature and involves daily implementation issues 3. Market risk is associated with large‐scale economic events or natural disasters that, to some extent, influence all companies.
4 categories of factors that should be considered in a SWOT‐type analysis of the relationship between an entity and its environment
1. Strengths of the entity 2. Weaknesses of the entity 3. Opportunities in the environment (market) 4. Threats in the environment (market)
Characteristics needed for JIT inventory management to function properly
1. The company places many small orders that the suppliers must deliver frequently in a timely manner. 2. To motivate suppliers to provide a high level of performance and reliability, buyers usually negotiate long-term contracts with a much smaller number of (certified) suppliers than would be the case in a traditional processing environment. Certified suppliers guarantee the delivery time and quality of the units according to the terms of the long-term contract. Vendors often use electronic funds transfer to pay invoices, and factories often have systems to provide real-time order information to suppliers. 3. Raw materials must be of consistently high quality. Because, there is little or no excess inventory to fall back on, the entire production process may be delayed if any materials are faulty. 4. When the company is confident that the goods are of high quality and when there is a strong relationship with the supplier, inspection of materials can be reduced to a minimum. Most inspection is done by highly skilled direct laborers directly on the manufacturing line. These laborers work cooperatively in U-shaped "islands" or manufacturing "cells" and also maintain their own workspace, keeping the area clean and often doing their own machine maintenance. 5. Order and payment processing costs must be reduced, often by use of an electronic order and payment system known as integrated computer-based manufacturing (ICBM). Because of the higher level of trust between the customer and the supplier, some of the controls and procedures usually present between trading partners are dropped. For example, suppliers may check the production schedule directly and make ordering decisions independently. Also, suppliers are often paid on a periodic basis (e.g., monthly) rather than for each delivery (based on the terms of the long-term contracts mentioned earlier).
3 elements of establishing a foundation for control
1. The tone at the top 2. Organizational structure 3. Baseline understanding of control effectiveness
5 forces described by Michael Porter as determining the operating attractiveness and likely long‐run profitability of an industry
1. Threat of entry into the market by new competitors 2. Threat of substitute goods or services 3. Bargaining power of customers of the good or service 4. Bargaining power of suppliers of inputs used by the industry 5. Intensity of rivalry within the industry
2 major classes of quantitative business forecasting methods
1. Time‐series models: Use patterns from past data to predict a future value or values. These methods are not concerned with causes of patterns, just the patterns in the data. 2. Causal models: Use assumed relationships between the variable being forecasted and other variables to make projections based on those relationships.
3 major reasons for international economic activity
1. To develop new markets for the sale of goods and services 2. To obtain commodities not otherwise available domestically 3. To obtain goods and services at lower costs than available domestically
3 major kinds (types) of cost used in short‐run economic analysis
1. Total cost = Total fixed cost + Total variable cost 2. Average cost = Cost per unit of commodity produced 3. Marginal cost = Cost of the last acquired unit of an input
Forms of short‐term financing
1. Trade accounts payable 2. Accrued accounts payable 3. Short‐term notes 4. Lines of credit, revolving credit or letter of credit 5. Commercial paper 6. Pledging accounts receivable 7. Factoring accounts receivable 8. Inventory secured loans
E‐commerce depends on trust in two parties. Please identify them.
1. Trading partner, 2. The trading site or service provider.
3 specific kinds of risk associated with changes in currency exchange rates
1. Transaction risk 2. Translation risk 3. Economic risk
4 factors that might constitute opportunities for an entity in a market
1. Unmet market needs (demand) 2. Development or employment of new technology/processes 3. Reduction in legal or regulatory restrictions 4. Reduction of international trade barriers (quotas, tariffs, etc.)
2 major approaches to determining a customer's creditworthiness
1. Use of credit‐rating service 2. Financial analysis of prospective credit customer
Expired cost
A cost whose benefit to an entity has been used up and is of no future value. This type of cost is an expense (.e.g., cost of wages and salaries) or a loss (e.g., cost of goods destroyed by fire).
Quick Ratio or Acid Test Ratio
= (Current Assets − Inventory) / Current Liabilities This metric removes inventory since inventory is often less liquid than other current assets such as short-term investments and receivables. Also, inventory may only be valued at liquidation value when a company is in distress making it less appropriate for meeting current obligations.
Days' Sales in Receivables or Average Collection Period
= Average Accounts Receivable / Average Sales per Day Similar to receivable turnover, this provides an indication of the average length of the receivables collection period.
Fixed overhead volume variance
= Budgeted Fixed Overhead − (Standard Fixed Overhead Rate × Std. Qty. Allowed for Actual Production)
Contribution margin (CM) ratio
= CM per unit / Price or = Contribution Margin / Sales Revenue This represents the percentage of each sales dollar that is available to cover fixed costs.
Book Value per Share
= Common Stock Owners' Equity / # of Common Shares Outstanding
Inventory Turnover
= Cost of Goods Sold / Average Inventory This metric provides an indication of how quickly investment in inventory is being recovered.
Current Ratio
= Current Assets / Current Liabilities This ratio measures the same concept that working capital does. The current ratio provides a comparison that is useful for standardizing working capital data when comparing organizations of differing sizes.
Breakeven formula in sales dollars
= Fixed Costs / Contribution Margin Ratio
Breakeven formula in units
= Fixed costs / (Price - Variable costs per unit) or = Fixed costs / CM per Unit
Price Earnings (PE) Ratio
= Market Price per Share / Earnings per Share.
Market-to-Book Ratio
= Market Value per Share / Book Value per Share
Return on Equity or Return on Common Equity
= Net Income / Common Stockholders' Equity
Profit Margin or Return on Sales
= Net Income / Net Sales This metric expresses the ability of revenue to generate profits and is an important external financial evaluation metric. As presented by the DuPont formula, Profit Margin or Return on Sales multiplied by capital or asset turnover is equal to return on investment.
Return on Investment or Return on Assets
= Net Income / Total Assets
Economic value added (EVA)
= Net operating profit after taxes (NOPAT) - Weighted average cost of capital (WAAC) (Total assets - Current liabilities) NOPAT = net operating profit after tax; WACC = weighted average cost of capital
Times Interest Earned
= Operating Income / Interest Expense. This approach measures the enterprise's ability to service its debt obligations by measuring the ability to make regular interest payments based on earnings. This reflects risk on the income statement.
Operating Profit Margin
= Operating Income / Sales This is a useful metric for determining comparable performance without considering potential confounding interest and tax effects that usually have little to do with operations.
Residual Income
= Operating Income − Required Rate of Return (Invested Capital) Residual income (RI) is a general form of economic profit. Economic profit differs from accounting income in that it recognizes the cost of capital. RI has often been used as an alternative to ROI to preclude the diluted hurdle rate problem by expressing the return on investment in terms of dollars rather than a rate.
DuPont Formula
= Return on Sales (ROS) × Asset Turnover, where Profit Margin or ROS = Net Income / Sales Capital or Asset Turnover = Sales / Total Assets The DuPont approach to ROI separates ROI into two parts for analysis. The two pieces allow a separate evaluation of profitability as a percentage of sales and the efficiency with which assets were utilized to generate those sales. Multiplying the two parts together results in ROI.
Gross Margin
= Revenue − Cost of Goods Sold This is a conventional metric that reflects profitability prior to the recognition of period expenses (i.e., selling and general/administrative expenses).
Contribution Margin
= Revenue − Variable Expenses This is a metric primarily related to internal decision making. Contribution margin (as opposed to gross margin) focuses on cost behavior so that management can evaluate the consequences on profitability and the break-even point of alternative decision scenarios.
Contribution Margin per Unit
= Sales Price per Unit − Variable Costs per Unit
Contribution Margin
= Sales Revenue − Variable Costs
Receivables Turnover
= Sales on Account / Average Accounts Receivable This metric provides data on the frequency with which (on average) receivables are collected.
Debt to Total Assets
= Total Debt / Total Assets Debt to Equity = Total Debt / Total Owners' Equity
Internet
A "network of networks:" a global network of millions of interconnected computers and computer networks.
Market Surplus
A ______ _______ is created when the actual price (AP) of a commodity is more than the equilibrium price; therefore, quantity supplied is more than quantity demanded (e.g., minimum wage).
Market Shortage
A ______ ________ is created when the actual price (AP) of a commodity is less than the equilibrium price; therefore, quantity supplied is less than quantity demanded at AP (e.g., rent controls).
Rollback and recovery backup and recovery system methodology
A backup and recovery system method that is common to online, real‐time processing. All transactions are written to a transaction log when they are processed. Periodic "snapshots" are taken of the master file. when a problem is detected, the recovery manager program starts with the snapshot of the master file and reprocesses all transactions that have occurred since the snapshot was taken.
Describe the uses of zero‐balance accounts
A bank account with no real balance. Two variations exist: 1. Checks written on account overdraw the account, but by agreement with the bank, the overdrawn amount is paid automatically from another account. 2. Only the known amount of payments from an account is deposited into the account (e.g., payroll account).
Data warehouse
A database for organizational decision making. Data from the live databases are copied to the warehouse so that data can queried without reducing the performance (i.e., speed) or stability (i.e., reliability) of the live systems.
The major components of the U.S. banking system
A central banking system, the Federal Reserve System, consisting of: - Board of Governors: Policy‐making body - Federal Open Market Committee: Implements monetary policy through open‐market operations to affect the money supply (M1) - Federal Reserve Banks: 12 district banks, each responsible for a specific geographical area of the U.S
Client/server system
A central machine (the server) mediates communication on the network and grants access to network resources. Client machines use of network resources and also perform data processing functions; used by LANs.
Difference between a change in quantity demanded and a change in demand
A change in quantity demanded is movement along a given demand curve as a result of a change in price only. A change in demand is a shift in a demand curve as a result of changes in variables other than price.
Difference between a change in quantity supplied and a change in supply
A change in quantity supplied is movement along a given supply curve as a result of change in price only. A change in supply is a shift of a supply curve as a result of changes in variables other than price.
Cloud‐based system
A cloud‐based system is a virtual data pool that is created by contracting with a third‐party data storage provider.
File
A collection of records for one specific entity (an Invoice File, a Customer File, a Product File). In a relational database environment, files are also known as tables.
Objective Setting (according to the COSO ERM model).
A company must establish objectives at four levels (strategic, operational, reporting, and compliance)
Knowledge base (or knowledgebase)
A component of a knowledge management system. A special type of database designed for retrieval of knowledge. It provides the means to collect and organize the information and develop relationships among information components.
Master budget
A comprehensive plan for all activities of a company (sales, production, cash management, etc.); this is a static budget. It provides a basis for comparison at a planned level of sales and production and is not usually changed to conform to actual events.
Expert system (knowledge‐based system)
A computer program that contains subject‐specific knowledge derived from experts. The system consists of a set of rules that are used to analyze information provided by the user of the system. Based on the information provided, the system recommends a course of action.
Internal Control Deficiency
A condition requiring attention. May represent a perceived, potential, or real shortcoming or an opportunity to strengthen the system to increase the likelihood of achieving objectives.
Letter of credit
A conditional commitment by a bank to pay a third party in accordance with specified terms and commitments (e.g., bank payment to a supplier upon proof that goods have been shipped to bank client).
Budget variance
A controllable fixed overhead variance equal to the difference between the budgeted fixed overhead and the actual fixed overhead. Budget variances are the result of unexpected changes in components of fixed overhead (i.e., a change in the salvage value or the estimated life of a piece of manufacturing equipment triggers a change in depreciation expense).
Overhead efficiency variance
A controllable variable overhead variance calculated by multiplying the difference between the actual allocation base units used (hours, gallons, pounds, etc.) and the estimated allocation base units by the estimated cost per unit.
Variable overhead spending variance
A controllable variable overhead variance calculated by multiplying the difference between the actual variable overhead rate and the estimated variable overhead rate by the actual number of units used (hours, gallons, pounds, etc., depending on the allocation base used).
Firewall
A firewall consists of hardware, or software, or both, that help detect security problems and enforce security policies on a computer system. Like a door with a lock for a computer system. There are multiple types, and levels, of firewalls.
Long-run profits for an oligopoly firm
A firm in an oligopoly industry will make profits in the long run if average total cost is less than market price. The firm can continue to make profits because entry into the market is restricted.
Inventory‐secured loan for short‐term financing
A firm pledges part or all of its inventory as collateral for a short‐term loan.
The income effect (as it applies to individual demand)
A given amount of income buys more units at a lower price.
Time‐Series Graph
A graph showing changes in a variable over time. Commonly, time is considered the independent variable and plotted on the horizontal x‐axis.
Byte
A group of (usually) eight bits that are used to represent alphabetic and numeric characters and other symbols (3, g, X, ?, etc.). Several coding systems are used to assign specific bytes to characters. ASCII and EBCIDIC are the two most commonly used coding systems. Each system defines the sequence of zeros and ones that represent each character.
Field
A group of characters (bytes) that identify a characteristic of an entity. A data value is a specific value found in a field. Fields can consist of a single character (Y, N) but usually consist of a group of characters. Each field is defined as a specific data type. Date, Text and Number are common data types.
Cost pools
A group of costs that are associated with a specific cost center.
Record
A group of related fields (or attributes) that describe an individual instance of an entity (a specific invoice, a particular customer, an individual product).
Backflush costing
A just‐in‐time (JIT) product costing approach in which costing is delayed until goods are completed or, in some cases, until the goods are sold
Warm site
A location to which the business can relocate after a disaster. The location is already stocked with computer hardware similar to that of the original site, but does not contain backed up copies of data and information.
Trojan horse
A malicious program that is hidden inside a seemingly benign file.
Black‐Scholes option‐pricing model
A mathematical formula for valuing stock options, which are derivative instruments (and certain other instruments). The original model was developed to value European‐style options, which permit exercise only at the expiration date of the option.
Default risk
A measure of the likelihood that the issuer will not be able to make future contracted interest and/or principal payments to a security holder
Beta
A measure of the systematic risk associated with an investment as reflected by its volatility as compared with the volatility of the entire class of the investment.
Activity-based costing (ABC)
A method of assigning overhead (indirect) costs to products. It is an alternative to the traditional, volume-based approach of accumulating large amounts of overhead in a single pool and assigning the costs across all products based on the labor dollars, labor hours, or some other generic allocation base. The volume-based approach, while simple, does not accurately reflect the true relationship between the products produced and the costs incurred as it systematically over-assigns costs to some products and under-assigns costs to others. By closely focusing on the causes of costs, ABC is better able to identify the cost of an activity and to more accurately associate activities with the products that require them. This has the potential to significantly improve the accuracy of the resulting product cost. Improved costing accuracy leads to improved pricing and other decisions that depend on the accuracy of costs. In addition, managers can potentially improve their understanding of processes and how they consume resources.
Participative budget
A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by the manager's supervisor, and any issues are resolved by mutual agreement. This method is widely considered a positive behavioral approach.
Economic order quantity (EOQ).
A model (formula) for determining the size of an inventory order that will minimize total inventory cost, both cost of ordering and cost of carrying inventory. The formula uses: - Total demand for the inventory item - Cost of each order - Cost of carrying each unit of inventory
The justification for natural monopolies
A monopoly exists when there is a single provider of a commodity for which there are no close substitutes and where entry into the market is difficult. Natural monopolies exist when there is increasing return to scale of operations and is justified by a single entity being able to satisfy demand at a lower cost than two or more firms. Public utilities have been cited traditionally as examples of natural monopolies.
Biometric controls
A physical characteristic is used to gain access instead of a password. Common choices for biometric controls include fingerprint or thumbprint, retina patterns, and voice print patterns. Biometric controls can be very reliable, but generally require special input equipment.
Negotiated price
A price that is mutually agreeable to both the selling and purchasing unit
Feedback Controls
A procedure in which the results of a process are evaluated and, if the results are undesirable, the process is adjusted to correct the results. Most detective controls are also this type of control.
Feed-Forward Controls
A process in which future results are projected based on current and past information and, if the future results are undesirable, the inputs to the system are changed to avoid the projected outcome. Many inventory ordering systems are essentially this type of control: The system projects product sales over the relevant time period, identifies the current inventory level, and orders inventory sufficient to fulfill the sales demand.
Benchmarking
A process in which organizations compare their own processes and performance with the processes and performances of business leaders within or across competing industries
Environmental scanning
A process in which the organization continuously gathers and evaluates information that could impact its ability to compete using its current organizational strategies
Zero‐based budgeting
A process of starting over each budget period by justifying each item budgeted. This requires additional work over an incremental approach but may provide more accuracy.
Internal Control
A process, effected by the entity's board of directors, management, and other personnel, that is designed to provide reasonable assurance regarding the achievement of objectives in these categories: - Effectiveness and efficiency of operations - Reliability of financial reporting - Compliance with applicable laws and regulations
File Transfer Protocol (FTP)
A protocol used for file transfer applications.
Economic order quantity model
A push model that specifies the most efficient quantity to order to minimize inventory costs
Revolving credit agreement
A revolving line of credit is a legal agreement between a borrower and a financial institution whereby the financial institution agrees to provide an amount of credit to the borrower. The line of credit may be borrowed, repaid, and then reborrowed in a "revolving" or recurring manner.
Foreign currency risk hedging
A risk management strategy that seeks to offset losses resulting from changes in exchange rates between currencies by using contracts, swaps, and other instruments that will result in changes counter to (opposite of) the adverse effects of changes in the currency exchange rate
Cross‐Enterprise Risk
A risk that occurs in multiple units in an organization. For example, a security breach that allowed unauthorized access to a system could occur at multiple sites or units within an organization.
Market Supply Schedule
A schedule that shows the quantity of a commodity that will be supplied by all providers in the market at various prices during a specified time
Individual Supply Schedule
A schedule that shows the quantity of goods that an individual producer is willing to provide (supply) at various prices during a specified time
Describe an aging of accounts receivable schedule.
A schedule that shows, for each credit customer, how long each amount due from the customer has been owed. For example, amounts may be classified as being: not due, 1-30 days overdue, 31-60 days overdue, 61-90 days overdue, over 90 days overdue.
Data mart
A specialized version of a data warehouse that contains data that is pre‐configured to meet the needs of specific departments. Companies often support multiple data marts within their organization.
Control Baseline
A starting point for control monitoring. A control assessment that provides sufficient, persuasive information to support a conclusion about control effectiveness, either across the entire organization or in a given area.
What is the purpose of executive support systems (ESS) and strategic support systems (SSS)?
A subset of decision support systems (DSS) especially designed for forecasting and making long‐range, strategic decisions. As such, they have a greater emphasis on external data. Sometimes called "DSS for dummies."
Balance‐of‐payments account
A summary accounting of all of a country's transactions with other countries
External labels
A tag placed on data storage media (floppy disks, magnetic tape, CDs, etc.) designed to prevent inadvertent use of the wrong file.
Grandfather‐father‐son file security control
A technique used to maintain redundant backup copies (three "generations") of data files; backup files are used to recover from systems failures in which data files are damaged or destroyed.
Electronic funds transfer (EFT)
A technology for transferring money from one bank account directly to another without the use of paper money or checks. Reduces the time and expense required to process checks and credit transactions.
What data is stored in random access memory (RAM)?
A temporary data store for information in process.
Discounted payback period approach to capital budgeting evaluation
A variation of the payback period approach that takes the time value of money into account by discounting expected future cash flows.
Describe the control objectives for information and related technology (COBIT) framework.
A widely used international standard for identifying best practices in IT security and control. Provides management with an information technology (IT) governance model that helps in delivering value from IT processes and in understanding and managing the IT related risks.
Enterprise Risk Management (definition)
According to COSO, the methods and processes used by organizations to identify and manage the events and circumstances that influence the organization's ability to achieve its objectives
Risk Appetite
According to COSO, the amount of risk exposure, or potential adverse impact from an event, that an organization chooses to accept or retain, as opposed to sharing, avoiding, reducing or eliminating the risk
What is usually the most important criterion used by top management in establishing transfer pricing mechanisms?
Achieving goal congruence
The types of economic resources
Acquired from individuals as: - Labor: human work, skills, and similar human effort - Capital: financial resources (e.g., savings) and man‐made resources - Natural resources: land, minerals, timber, water, etc. - Intellectual property: inventions, literary and artistic works, etc.
Ongoing Monitoring
Activities to monitor the effectiveness of internal control in the ordinary course of operations
Fixed overhead budget variance
Actual Fixed Overhead − Budgeted Fixed Overhead
Marginal cost of revenue
Additional cost or revenue resulting from one more unit of output
Separable costs
Additional processing costs incurred beyond the split-off point. Separable costs are attributable to individual products and can be assigned directly
Advantages and disadvantages of a wholly owned (100%) foreign subsidiary
Advantages: Gives the parent entity security of assets and proprietary information, and ability to control and coordinate activities of the subsidiary entity Disadvantages: A costly means of undertaking international business and parent has entire cost and risk of the undertaking
Detective Controls
After-the-fact controls designed to detect an error after it has occurred (though preferably before the erroneous information is used to update the database or appears in reports). Examples: data entry edits (field checks, limit tests) and reconciliation of batch control totals.
Causes of demand‐induced (or demand‐pull) inflation
Aggregate spending for goods and services exceeds the productive capacity of the economy at full employment.
Foreign currency forward exchange contract
Agreement to buy or sell a specified amount of a foreign currency at a specified future date at a specified (forward) rate
Why does multi‐factor authentication increase control?
All authentication techniques may fail. Requiring multi‐factor authentication procedures—the use of several separate authentication procedures at one time (e.g., user name, password, one‐time password and fingerprint) enhances the authentication process.
Financial Structure
All elements of liabilities (current and noncurrent) and owners' equity of a firm constitute its financial structure.
Programming languages
All software is created using programming languages. They consist of sets of instructions and a syntax that determine how the instructions can be put together.
Decentralized systems
Allow each location to maintain its own processing system and data files. In decentralized systems, most of the transaction processing is accomplished at the regional office, and summarized data is sent to the central office.
Capital asset pricing model (CAPM)
An economic model that determines the relationship between risk and expected return and uses that measure in assigning value to securities, portfolios, capital projects, and other assets.
Denial of service attacks
An attack that attempts to prevent legitimate users from gaining access to the system. These attacks, called denial of service attacks, are perpetrated by flooding the server with incomplete access requests.
Cold site (empty shell)
An off‐site location that has all the electrical connections and other physical requirements for data processing, but does not have the actual equipment or files. Cold sites often require one to three days to be made operational. A cold site is the least expensive type of alternative processing facility available to the organization.
Hot site
An off‐site location that is completely equipped to immediately take over the company's data processing. All equipment plus backup copies of essential data files and programs are also usually maintained at this location. It enables the business to relocate with minimal losses to normal operations ‐ typically within a few hours. A hot site is one of the most expensive facilities to maintain.
Binomial option pricing model
An option‐pricing model method that can be generalized for the valuation of options. It uses a tree or network diagram to represent points in time between the present (valuation date) and the expiration of the option and uses probabilities to work backward in assigning value to each branch in the tree to derive a value at the present (valuation date).
Logic bomb attack on a system
An unauthorized program which is planted in the system. The logic bomb lies dormant until the occurrence of a specified event or time (e.g., a specific date, the elimination of an employee from "active employee" status, etc.).
Virus
An unauthorized program, usually introduced through an email attachment, which copies itself to files in the users system. These programs may actively damage data, or they may be benign.
Volume variance
An uncontrollable fixed overhead variance equal to the difference between budgeted fixed overhead and fixed overhead applied to production (fixed overhead rate times the standard quantity of units allowed for actual production)
How is applied overhead calculated?
Applied overhead is calculated by multiplying the predetermined overhead rate by the actual number of finished goods units used in production (e.g., direct labor hours or machine hours).
Asset approach to valuing a business
Approach to valuing a business that determines the value of a business by adding (summing) the values of the individual asset that comprise the business. The sum of those asset values constitutes the value of the entire business. This approach is particularly appropriate when the business being valued has little or no cash flows and/or earnings, or when the business will not continue as a going concern.
Income approach to valuing a business
Approach to valuing a business that determines the value of a business by calculating the present value of the expected benefit stream to be generated by the business. This approach may use discounted cash flows, capitalization of earnings, multiple of earnings or other similar approaches that develop a fair value based on income/earnings.
Market approach to valuing a business
Approach to valuing a business that determines the value of a business by comparing it to other entities with highly similar characteristics for which a fair value can be more readily determined.
Opportunity cost
Benefit lost from the next best opportunity as a result of choosing another opportunity. It is measured as the discounted value of the cash flow or other benefit forgone and is relevant in making current decisions.
How is business process reengineering (BPR) different from incrementally reducing non value activities?
BPR often involves an extreme transformation by analyzing and making sweeping improvements to an entire process.
In computing the accounting rate‐of‐return approach (to capital budgeting), will using the initial investment or the average investment give the higher rate of return?
Because the average investment gives a smaller denominator, the accounting rate of return will be higher when the average investment is used than when the initial investment is used.
Preventive Controls
Before-the-fact controls designed to stop an error or irregularity from occurring. Examples: locks on building and doors, password-protected access to files, and segregation of duties.
3 possible alternative values of beta
Beta ( B) = 1: The individual asset being valued changes in the same proportion as the entire class of the asset being valued; the asset has average systematic risk for the entire class. Beta (B) > 1: The individual asset being valued changes greater than the entire class of the asset being valued; the asset is more volatile than the entire class. Beta (B) < 1: The individual asset being valued changes less than the entire class of the asset being valued; the asset is less volatile than the entire class.
Flexible Budget
Budget which adjusts revenues and some costs when actual sales volume is different from planned sales volume. This makes it easier to analyze actual performance because the actual revenues and costs can be compared to the expected revenues and costs at the actual level of sales activity. The following adjustments are typical: 1. Revenue is adjusted by multiplying the actual quantity times the sales price. 2. Total variable costs are adjusted by multiplying the actual quantity times the variable cost per unit. 3. Total fixed costs remain the same as long as volume remains within a relevant range, which is normally the case on CPA exam questions. (Lesson: Budgeting, 1/4/17 - 4th lesson)
The relationship between economic resources and compensation in a free market economy
Business firms acquire economic resources from individuals (labor, capital and natural resources), who receive compensation in return (wages/salaries, rents, interest, dividends, etc.); individuals use this compensation to acquire goods and services produced by businesses.
How is the theoretical value determined for a share of common stock (CSV) that is to be held for multiple periods?
CSV = Dividend in 1st year / (Investors' required rate of return - Dividend growth rate) Note: Dividends are assumed to grow at a constant rate indefinitely.
Income reconciliation rule
Calculates the difference between AC income & DC income: Ending Inventory Units × Fixed Cost Per Unit − Beginning Inventory Units × Fixed Cost Per Unit When: Units Sold = Units Produced ==> Absorption Costing N.I. = Direct Costing N.I. When: Units Sold > Units Produced ==> Absorption Costing N.I. < Direct Costing N.I. When: Units Sold < Units Produced ==> Absorption Costing N.I. > Direct Costing N.I.
Period costs
Cannot be matched with specific revenues (i.e., accountant's salary) and are expensed in the period incurred. These costs are also called selling and administrative costs.
Current assets
Cash and other resources expected to be converted to cash, sold, or consumed within one year (e.g., a receivable, inventory, some prepaid items, etc.)
Point‐of‐sale (POS) systems
Combine on‐line, real‐time processing with automated data capture technology, resulting in a system that is highly accurate, reliable, and timely.
What does the acronym COSO stand for?
Committee of Sponsoring Organizations
Limited liability of common stock
Common shareholders' liability is limited to their investment in a corporation.
Checkpoint and restart backup and recovery system methodology
Common to batch processing, a checkpoint is a point in data processing where the accuracy of the processing can be verified. Backups are maintained during the update process so that, if a problem is detected, it is only necessary to return to the backup at the previous checkpoint instead of returning to the beginning of transaction processing.
Inbound Communications
Communications with outsiders to the organization, including customers, suppliers, external auditors, regulators, financial analysts, and others.
Server
Computer or other device on a network which only provides resources to the network and is not available (normally) to individual users; examples include print servers, file servers, and communications servers. Contrast with a workstation.
Master files
Computerized data files equivalent to the ledgers found in manual accounting system.
Supercomputers
Computers at the leading edge of processing capacity. Used for calculation‐intensive scientific applications, for example, weather forecasting and climate research.
Online, real‐time (OLRT) processing
Continuous, immediate transaction processing method in which transactions are processed individually as they occur.
Mainframe computer
Computers used by commercial organizations to support mission critical tasks such as sales and order processing, inventory management, and e‐commerce applications. Unlike supercomputers, which tend to support processor‐intensive activities (i.e., a small number of highly complex calculations), mainframe computers tend to be input/output (I/O) intensive (i.e., a very large numbers of simple transactions). Mainframes frequently support thousands of users at a single point in time. (Lesson: Information Systems Hardware, 12/30 - 2nd Lesson)
Drill down
Concept associated with data warehouses. The ability to move from summary information to more granular information (i.e. viewing an accounts receivable customer balance and drilling down to the invoices and payments which resulted in that balance).
Industry (for purposes of competitive analysis)
Consists of those entities that produce goods or provide services which are identical or close substitutes and which compete for the same customers.
What is the importance of the contribution margin to breakeven analysis?
Contribution margin represents the portion of revenues that are available to cover fixed costs.
Hardware controls
Controls built into the computer equipment to ensure that data is transmitted and processed accurately.
Application Controls
Controls over specific data input, data processing, and data output activities. They are designed to ensure the accuracy, completeness, and validity of transaction processing. As such, these controls have a relatively narrow focus on those accounting applications that are involved with data entry, update, and reporting.
General Controls
Controls over the environment as a whole. These controls apply to all functions, not just specific accounting applications. They help ensure that data integrity is maintained.
Compensating Controls
Controls that accomplish the same objective as another control and will "compensate" for deficiencies in the first control
Key Controls
Controls that are most important to monitor in order to support a conclusion about the internal control system's ability to manage or mitigate meaningful risks
Processing controls
Controls to ensure that master file updates are completed accurately and completely and to detect unauthorized transactions entered into the system and maintain processing integrity.
Income approach
Converts future amounts of benefit or sacrifice to determine current value
Hypertext markup language (HTML)
Core "markup" language (a way of tagging text) for web pages. The basic building‐block protocol for constructing webpages.
Product costs
Cost that can be associated with making or acquiring goods for sale; product costs are held in inventory until the products are sold; also known as inventoriable or manufacturing costs.
Sunk cost
Costs incurred in the past that cannot be changed by current or future decisions and, therefore, are irrelevant to current decisions.
Joint costs
Costs incurred prior to split‐off that must be allocated to the joint products
Conversion costs
Costs necessary to convert raw materials into a finished product: comprised of direct labor costs plus factory overhead costs
Differential cost
Costs that are different between two or more alternatives. These costs are relevant in making decisions between the alternatives. For example: In deciding whether to accept a special order for a product, only the new costs that would be incurred in accepting the order would be relevant. Fixed costs that would not change whether the order is accepted or not would not be relevant.
Avoidable costs
Costs that can be eliminated by choosing one alternative over the other
What is the accounting treatment of scrap and by‐products in joint product costing?
Costs: Joint costs are not allocated to scrap or by‐products; costs incurred to process scrap or by‐products after split‐off are offset against proceeds from the sale of the scrap or by‐product. Proceeds: Proceeds from sale of the scrap or by‐product are used to reduce joint product overhead costs (unless they can be identified with a particular direct material, in which case they may be offset against that cost).
Direct (currency) exchange rate
Currency exchange rate expressed as the domestic price of one unit of a foreign currency (e.g., U.S. dollar cost of one euro) 1 euro = $1.10
Indirect (currency) exchange rate
Currency exchange rate expressed as the foreign currency price of one unit of the domestic currency (e.g., euro cost of one U.S. dollar) $1 = .909 euros
Describe the operation of a lockbox system.
Customers remit payments to a firm's post office box, where they are collected and then processed and deposited by the firm's bank; may reduce the float by several days.
Market segmentation
Customizing the market to meet the demands of a specific customer group; also known as niche marketing or focus strategy
Law of Diminishing Marginal Utility
Decreasing utility (satisfaction) is derived from each additional (marginal) unit of a commodity acquired.
Trade accounts payable (also called trade credit) as a means of short‐term financing
Defers payment for goods or services provided by suppliers in the normal course of business. May carry the offer of a cash discount for early payment of obligation.
Nondiversifiable risk (also called systematic risk or market‐related risk)
Elements of risk that cannot be eliminated through diversification of investments; usually derive from general economic and political factors (e.g., general level of interest rate, new taxes, inflation/deflation, etc.)
What purpose do check digit tests serve in accounting systems?
Ensures that validity of a number. Created by applying an arithmetic algorithm to the digits of a number, for example, a customer's account number. The algorithm yields a single digit that is appended to the end of the code.
What does the acronym ERM stand for?
Enterprise Risk Management
How is the projected completion time determined using Program Evaluation and Review Technique (PERT)?
Expected time of completion is determined by assigning a weighting of 1 for each of the optimistic and pessimistic estimates, a weighting of 4 for the most probable estimate, adding the assigned values together, and then dividing that sum by 6.
Characteristics of short‐term borrowing
Financing (borrowing or deferred payment) with payment due within one year or less; generally does not require collateral and does not impose restrictive covenants.
Long‐term financing
Financing provided by those sources of capital funding that do not mature within one year (e.g., long‐term notes, financial leases, bonds, preferred stock and common stock)
Describe the difference between gross margin (GM) and contribution margin (CM).
GM = Revenue − Cost of goods sold CM = Revenue − Variable expenses
Why are input controls more important than processing and output controls?
Garbage in, garbage out (GIGO), if bad data enters the systems nothing good will come out of it.
Generally, how do the costs compare of financing using long‐term debt, preferred stock, and common stock?
Generally, the cost of long‐term debt is lower than the cost of either preferred stock or common stock, and the cost of preferred stock is lower than the cost of common stock. However, as the level of long‐term debt increases relative to equity, the cost of marginal debt increases due to the increased risk of default.
The characteristics of a command economic system
Government largely determines the production, distribution and consumption of goods and services (e.g., communism and socialism).
What is the role of graphs in economics?
Graphs show the relationship between two variables, usually referred to as independent and dependent variables.
Utils (as used in economics)
Hypothetical unit of measure used to measure satisfaction derived from a commodity
Event Identification (according to the COSO ERM model).
Identifying events that might affect—either positively or negatively—the organization's ability to meet its objectives
Elastic Demand
If demand is elastic, the percentage change in quantity demanded is greater than the percentage change in price; the elasticity coefficient is greater than 1, and total revenue will change in the opposite direction as the change in price.
Describe the accounting treatment of overapplied or underapplied overhead (e.g., the difference between actual overhead and overhead applied to production)
If immaterial, simply charge to cost of goods sold (COGS); if material, prorate to work in process (WIP), finished goods (FGs), and COGS.
How are overhead accounts closed?
If overhead is overapplied, then "actual" overhead is debited and cost of goods sold is credited for the amount overapplied. Where underapplied, the opposite entry is made.
Effects of substitute and complementary products
If products A and B are substitutes, an increase in the price of A will cause an increase in the demand for B. If products A and B are complements, an increase in the price of A will cause a decrease in the demand for product B.
Accounting treatment of proceeds from sale of scrap
If the amount of scrap is immaterial, any monies received from the sale of scrap can be used to reduce factory overhead and thereby to reduce cost of goods sold. Alternatively, if the value of scrap is significant and is salable, it can be treated as "other sales" in the revenue category.
Using the net‐present‐value approach (to capital budgeting), under what conditions would a project be considered economically feasible
If the net present value is zero or positive, the project is considered economically feasible; otherwise, the project is not considered economically feasible.
What items should be considered relevant for a special order decision if there is adequate excess capacity to fill the order?
If the special order can be completed using existing capacity, only sales revenues and the (avoidable) variable costs of producing the order need be considered.
What 5 organizations formed COSO & when?
In 1987, the following five organizations formed COSO: 1. AICPA 2. Institute of Internal Auditors 3. Institute of Management Accountants 4. American Accounting Association 5. Financial Executives Institute
End user
In relation to systems development, the employees who will use the program to accomplish their tasks. Responsible for identifying the problem to be addressed and approving the proposed solution to the problem.
Terminal warehouse agreement
In such an agreement, the inventory used as collateral is moved to a public warehouse where it is held as security.
Accounting treatment of normal spoilage
Included with other costs as an inventoriable product cost
Examples of security tokens
Includes (1) devices which provide "one‐time" passwords that must be input by the user and (2) "smart cards" that contain additional user identification information and must be read by an input device.
Market approach
Information generated by market transactions for identical or similar items
Relevant Information
Information is meaningful to assessing a risk, control, or control component.
Timely Information
Information is produced and used in a time frame that makes it possible to prevent or detect control deficiencies before they become material.
Reliable Information
Information must be accurate (see "Accuracy"), verifiable (see "Verifiable") and from an objective source (see "Objective").
Injections (in a macroeconomic free market flow model)
Injections are the sources of amounts added to domestic production that do not result from domestic consumption expenditures. These injections include amounts that come from government spending, and subsidies, investment spending and amounts received for exports.
Discretionary fiscal policy
Intentional changes by the government in its tax receipts and/or spending to increase or decrease aggregate demand (e.g., to close a recessionary gap, increase demand; to close an inflationary gap, reduce demand).
Simple interest
Interest computed on the principal only; there is no compounding in the interest computation (i.e., no interest paid on interest)
The purpose of "Interpretations" of the International Standards?
Interpretations clarify the terms/concepts within the attribute and performance standards. (Interpretations are an integral part of the International Standards.)
How does absorption costing (AC) versus direct costing (DC) effect inventory valuation?
Inventory using AC will always be greater than inventory using DC because AC includes fixed product overhead costs.
Work breakdown structure
It defines the work to be completed by dividing project components into subcomponents and uses successive levels of specificity to define all activities of the project team, the resources involved, and their costs.
Payback period approach to project evaluation
It determines the number of years (or other periods) needed to recover the initial cash investment in the project and compares the resulting time with a preestablished maximum payback period. It uses undiscounted expected future cash flows.
Describe the internal rate of return (also called time adjusted rate of return) approach to capital project evaluation
It evaluates a project by determining the discount rate that equates the present value of a project's cash inflows with the present value of the project's cash outflows.
Probability analysis
It evaluates the likelihood of a specific event occurring when several outcomes are possible; the probability of a particular outcome is always between 0 and 1 (never and always); the sum of the probabilities associated with the possible outcomes is always 1.
In ranking economically feasible projects, what is the primary shortcoming of the net‐present‐value approach?
It fails to take into account differences in the initial cost of economically feasible projects. Each project is evaluated independently of each other project; therefore, differences in initial cost among projects is not considered.
Classical aggregate supply curve
It is completely vertical; supply remains unchanged at various price levels.
Keynesian aggregate supply curve
It is horizontal up to the level of output at full employment, then slopes upward to the right; supply increases with no change in price until the economy is at full employment.
How is the net present value determined?
It is the difference (net) between the present value of expected cash inflows from a project and expected cash outflows, including the initial cost of the project.
Describe how job order costing is used
It is used to accumulate costs related to the production of often large, relatively expensive, heterogeneous (custom‐ordered) items.
Describe the profitability index (PI; also called cost/benefit ratio or present value index).
It ranks projects by taking into account both the net present value (NPV) of each project and the cost of each project. Computed as: PI = NPV / Project cost
What does the flat line on a cost‐volume‐profit (CVP) graph always represent?
It represents fixed costs.
Source program library management system (SPLMS)
Its functions include storing, retrieving, and deleting programs, and, documenting by whom, when, where, and how programs are changed.
Leakages (in a macroeconomic free market flow model)
Leakages are the purposes for which individual income is used other than for domestic consumption expenditures. These leakages include amounts of income that go for taxes, savings and payments for imports.
Net‐net lease
Lessee (using party) assumes not only the cost associated with ownership during the life of the lease, including maintenance, taxes, insurance, and so on., but also the obligation for a residual value at the end of the lease.
Net lease
Lessee (using party) assumes the cost associated with ownership during the life of the lease, including maintenance, taxes, insurance, and so on.
3 component levels of the U.S. generally accepted accounting principles (GAAP) hierarchy of inputs used for determining fair value
Level 1: Quoted prices in active markets for identical items Level 2: Quoted prices in inactive markets or for items similar (but not identical) to those being valued; observable inputs other than quoted prices relevant to the item being valued Level 3: Unobservable inputs relevant to valuing an item (e.g., assumptions, estimates, etc.)
Capital rationing
Limiting the number of economically feasible projects that are undertaken and selecting those that will be undertaken
Major elements of a firm's capital (or capital structure)
Long-term debt, preferred stock, and common stock
Concept of long‐term financing
Long‐term financing involves obtaining funding through sources for which repayment is not due within one year, including sources that do not require any "repayment" (e.g., common or preferred stock). These sources of funding constitute the capital structure of a firm.
Bonds
Long‐term promissory notes wherein the borrower, in return for buyers'/lenders' funds, promises to pay the bondholders a fixed amount of interest each year and to repay the face value of the note at maturity
The substitution effect (as it applies to individual demand)
Lower‐priced items will be purchased as substitutes for higher‐priced items.
What macroeconomic conditions affect the cost of capital?
Market conditions and expectations concerning economic factors such as interest rates, tax rates, and inflation/deflation rates
How is market risk best controlled?
Market risk can be controlled to some degree by insurance for specific hazard risks, but economic events often cannot be controlled. Thus, companies must assess their exposure to economic downturns and use sensitivity analysis to evaluate their position.
Goal of the financial management function in a profit‐oriented entity
Maximize the value of the entity, usually as reflected by the market price for the firm's stock
Liquidity measures
Measurements of the ability of a firm to pay its obligations as they become due; useful in working capital management.
What does the "economic value added (EVA)" measure? How is it expressed as a formula?
Measures an entity's economic profit (not its accounting profit) as accounting earnings before deducting interest less the dollar value of opportunity cost associated with long‐term debt and shareholders' equity; expressed as: EVA = Earnings before interest ‐ [Opportunity cost rate x (L‐T debt + SE)].
What does the "net profit margin on sales" measure? How is it expressed as a formula?
Measures how much (percentage) of each sales dollar that ends up as net income; expressed as: Profit Margin = Net Income/Net Sales.
What does the "gross profit margin ratio" measure? How is it expressed as a formula?
Measures how much (percentage) of each sales dollar that is available to cover operating expenses and provide a profit; expressed as: Gross Profit Margin = Gross Profit/Net Sales
Lagging indicators of business cycles
Measures of economic activity associated with changes that occur after changes in the business cycle
Leading indicators of business cycles
Measures of economic activity that occurs before a change in the business cycle.
Describe equity or investment‐leverage measures.
Measures of relative sources of equity and equity value.
Important gross measures used in macroeconomics
Measures of total activity or output in an economy including: - Nominal gross domestic product (GDP) - Real gross domestic product - Potential gross domestic product - Gross national product (GNP) - Net national product - National income - Personal disposable income
Cost drivers
Measures that are closely correlated with the way an activity accumulates costs; for example, the cost driver for production line setup costs might be the number of machines that have to be set up; cost drivers are the basis by which costs are assigned to products (traditionally direct labor hours, machine hours, occupancy percentages, etc.).
What does the "operating cycle length" measure? How is it expressed as a formula?
Measures the average length of time to acquire inventory, convert the inventory to receivables, and collect the receivables; it can be measured as: Operating cycle length = Number of days' sales in average receivables + Number of days' supply in inventory
What does the "number of days' sales in average receivables ratio" measure? How is it expressed as a formula?
Measures the average number of days required to collect receivables; measures the average age of receivables. Number of Days Sales in Average Receivables = 365 (or other days)/Accounts Receivable Turnover.
What does the "residual income" measure? How is it expressed as a formula?
Measures the excess of an entity's dollar amount of income over the dollar amount of its required return on average investment (based on its hurdle rate of return); expressed as: Residual Income = Net Income ‐ (Average Invested Capital x Hurdle Rate).
Accounting rate‐of‐return (also called the simple rate of return) approach to capital project evaluation.
Measures the expected average annual incremental accounting income from a project as a percentage of the initial (or average) investment and compares that with the established minimum rate required ARR = (Average Annual Incremental Revenues − Average Annual Incremental Expenses) / Initial (or Average) Investment
Describe the "Common Stock dividend payout rate" measure.
Measures the extent (percent) of earnings distributed to common shareholders; expressed as: C/S Dividend Payout Rate = C/S Cash Dividends/Net Income Available for Common Shareholders. Also, can be computed on a per share basis.
What does "working capital" measure? How is it expressed as a formula?
Measures the extent to which current assets exceed current liabilities and, thus, are uncommitted in the short term; expressed as: Working Capital = Current Assets ‐ Current Liabilities.
What does the "number of days' supply in inventory ratio" measure? How is it expressed as a formula?
Measures the number of days inventory is held before it is sold or used; indicates the efficiency of inventory management. Number of Days Supply in Inventory = 365 (or other days)/Inventory Turnover.
What does the "accounts receivable turnover ratio" measure? How is it expressed as a formula?
Measures the number of times that accounts receivable turnover (are incurred and collected) during a period; expressed as: Accounts Receivable Turnover = Credit Sales/Average Net Accounts Receivable. Useful in assessing credit policies and collection efficiency.
What does the "inventory turnover ratio" measure? How is it expressed as a formula?
Measures the number of times that inventory is acquired and sold or used during a period; expressed as: Inventory Turnover = Cost of Goods Sold/Average Inventory. Useful in assessing overstocking/understocking of inventory and obsolete inventory.
What does the "book value per common share" measure? How is it expressed as a formula?
Measures the per share amount of common shareholders' claim to assets; expressed as: BV per CS = Common Shareholders' Equity/Number of Common Shares Outstanding. (Can be similarly computed for Preferred Stock.)
What does the "debt ratio" measure? How is it expressed as a formula?
Measures the proportion of assets provided by creditors and indicates the extent of leverage used in funding the entity; expressed as: Debt ratio = Total liabilities / Total assets
What does the "owners' equity ratio" measure? How is it expressed as a formula?
Measures the proportion of assets provided by shareholders; expressed as: Owners' Equity Ratio = Shareholders' Equity/Total Assets.
What does the "working‐capital ratio" (also called the "current ratio") measure? How is it expressed as a formula?
Measures the quantitative relationship between current assets and current liabilities in terms of the "number of times" current assets can cover current liabilities; expressed as: Working Capital Ratio = Current Assets/Current Liabilities.
What does the "return on owners' (all stockholders') equity ratio" measure? How is it expressed as a formula?
Measures the rate of return (earnings) on all stockholders' investment; expressed as: ROE = Net Income/Average Stockholders' Equity.
What does the "return on total assets" (also called the "return on investment") measure? How is it expressed as a formula?
Measures the rate of return on total assets and indicates the efficiency with which invested resources (assets or total equity) are used; expressed as: Net Income + Interest Expense + Income Taxes/Average Total Assets. (NOTE: Some versions may not add back Interest Expense and/or Income Taxes.)
What does the "acid test ratio" (also called the "quick ratio") measure? How is it expressed as a formula?
Measures the relationship between highly liquid assets and current liabilities; expressed as: Acid Test Ratio = (Cash [Cash Equivalents] + Net Accounts Receivable + Marketable Securities)/Current Liabilities Note: Inventory is excluded from the numerator.
What does the "defensive‐interval ratio" measure? How is it expressed as a formula?
Measures the relationship between highly liquid assets and the average daily use of cash; expressed as: Defensive‐Interval Ratio = (Cash [Cash Equivalents] + Net Accounts Receivable + Marketable Securities)/Average Daily Cash Expenditures.
Correlation coefficient (R)
Measures the strength of the relationship between the dependent and independent variable. The correlation coefficient can have values from -1 to 1. 1. 1 indicates perfect positive correlation (as x increases, so does y), 2. −1 indicates perfect negative correlation (as x increases, y decreases), and 3. 0 indicates no correlation (you cannot predict the value of y from the value of x).
Spending Variance
Measures variance due to changes in both rates and quantities of overhead items. It is a controllable variance.
Efficiency Variance
Measures variance due to variations in the efficiency of the base used to allocate overhead (i.e., direct labor hours, machine hours, etc.). As long as the underlying allocation base is under the control of the production manager, it is a controllable variance.
Composition of the information technology steering committee
Members of the committee are selected from functional areas across the organization, including the IT department; the committee's principal duty is to approve and prioritize systems proposals for development.
Key Performance Indicators
Metrics that reflect critical success factors. They help organizations measure progress toward critical goals and objectives.
The major divisions of the field of economics.
Microeconomics Macroeconomics International economics
How does monitoring benefit corporate governance?
Monitoring is the core, underlying control component in the COSO ERM model. Controls degrade over time, technologies change, and people forget or get lazy. Because of this, monitoring is essential to maintaining strong internal control and effective risk management.
Suitable Information
Must be relevant (i.e., fit for its intended purpose), reliable (i.e., accurate, verifiable and from an objective source), and timely (i.e., produced and used in an appropriate time frame)
Indirect Costs
Necessary costs of the manufacturing process that cannot be easily associated with specific units.
Income Statement to Illustrate Product/Period Costs
Net Sales - Cost of Goods Sold (product costs) = Gross Profit -Selling & Administrative Expenses (period costs) = Net Profit(Loss)
What types of product costs are included in the direct costing model?
Only variable manufacturing costs are included in product costs.
Extranets
Open to an organization's associates (company suppliers, customers, business partners, etc.) to access data that is relevant to them.
Difference between operating income and earnings before interest and taxes (EBIT)
Operating income and earnings before interest and taxes (EBIT) are considered the same thing.
Local area networks (LAN)
Originally confined to very limited geographic areas (a floor of a building, a building, or possibly a couple of buildings in very close proximity to each other). Inexpensive fiber optic cable now enables local area networks to extend many miles.
Differences between off shoring and outsourcing
Outsourcing is always outside of the company (but may or may not be outside the country). Off shoring is always outside of the country (but may or may not be outside the company).
When are overhead accounts closed?
Overhead accounts are closed at the end of every year.
System documentation
Overviews the program and data files, processing logic and interactions with other programs and systems; often includes narrative descriptions, flowcharts and data flow diagrams.
Preferred stock
Ownership interest in a corporation that has certain preferences over common stock; often described as having characteristics of both bonds and common stock
How is the currently expected rate of return on preferred stock (PSER) determined?
PSER = Annual preferred dividend / Market price of preferred stock Note: This expected rate of return is the current cost of preferred stock capital.
How is the theoretical value of a share of preferred stock (PSV) determined?
PSV = Annual preferred dividend / Investors' required rate of return Note: - The annual dividend is assumed to exist in perpetuity. - The investors' required rate of return is a "discount rate."
According to the COBIT model, what are the four IT domains?
Planning and organization, acquisition and implementation, delivery and support, and monitoring.
What is commonly considered the best method to use to minimize failure costs?
Prevention cost
Hedging principle of financing (also called the principle of self‐liquidating debt)
Principle that focuses on matching cash flows from assets with the cash requirements needed to satisfy the related financing. Thus, long‐term assets should be financed with long‐term sources of capital, and short‐term assets should be financed with short‐term sources of financing.
Activities
Procedures that comprise work. 4 categories: 1. Unit level, 2. batch level, 3. Product sustaining level, 4. Facility level
Describe the difference between process costing and job order costing.
Process costing typically accumulates production costs across a large number of mass‐produced units that are often homogeneous, small, and inexpensive. Job order costing accumulates costs often associated with large, relatively expensive, heterogeneous (custom‐ordered) items.
What does process management do that activity‐based costing (ABC) alone does not do?
Process management increases manager understanding of the cause‐and‐effect relationships involved between processes and the resources they consume and promotes the elimination of waste.
Value-added activities
Processes that contribute to the product's ultimate value; includes items such as design and packaging in addition to direct conversion of direct materials into finished goods.
Nonvalue-added activities
Processes that do not contribute to the product's value; includes items such as moving materials and more obvious activities such as rework; cost reductions can be achieved by reducing or eliminating nonvalue-added activities.
Key to revenue maximization under constrained resources
Produce the product that offers the highest contribution margin per unit of the constrained resource (e.g., if production in a bakery is constrained by the amount of oven time available, produce the product that maximizes the contribution margin per hour of oven time).
Prime costs
Product costs that can be associated with specific units of production; comprised of direct material and direct labor costs
The principle of increasing cost
Production costs increase in the short run as the quantity produced increases, because new resources are not used as efficiently as the resources used previously.
Which budget must be done first, production or purchases?
Production must be done first. The production budget establishes how many units must be produced to achieve projected sales volume and inventory level targets.
Joint products
Products that are produced from the same set of raw materials and that are not separately identifiable until a split‐off point. Only products with significant sales value are treated as joint products; products with little or no sales value are treated as by‐products or scrap.
Diagnostic routines
Program utilities that check the internal operations of hardware components.
Packet sniffers
Programs called packet sniffers capture packets of data as they move across a computer network. Packet sniffing has legitimate uses to monitor network performance or troubleshoot problems with network communications. However, it is often used by hackers to capture user names and passwords, IP addresses, and other information that can help the hacker break into the network. Packet sniffing a computer network is similar to wire tapping a phone line.
Malicious software (malware)
Programs that exploit system and user vulnerabilities to gain access to the computer. There are many types of malware.
Project risks
Project risks are related to adequately defining the project, properly organizing resources, and organizing and committing team members.
When over‐/underapplied overhead is significant (i.e., large), how is the amount reconciled?
Prorated amounts of the overhead are allocated to work in process (WIP), finished goods (FGs), and cost of goods sold (COGS).
Extensible markup language (XML)
Protocol for encoding (tagging) documents in machine‐readable form.
Purpose of secondary storage devices
Provide permanent storage for programs and data. Depending on the way the devices are set up, they can either be online (the data on the device is available for immediate access by the CPU) or offline (the device is stored in an area where the data is not accessible to the CPU).
Operational activity measures
Ratios (and other measures) that measure the efficiency with which a firm carries out its operating activities.
How is quality tied to just in time (JIT)?
Raw materials must be of consistently high quality. Because, there is little or no excess inventory to fall back on, the entire production process may be delayed if any materials are faulty.
What is the impact of being required to maintain a compensating balance on the cost of short‐term borrowing?
Required compensating balances result in: - Less funds available than the amount borrowed. Therefore, - The effective cost of borrowing is greater than the stated cost.
Duties of the file librarian
Responsible for controlling IT‐related files, checking them in and out only as necessary to support scheduled jobs. Should not have access to live operating equipment or data.
Responsibilities of the computer operations department
Responsible for the day‐to‐day operations of the computer system
Import quotas
Restrictions on the quantity of goods that can be imported into a country.
Currency exchange risk
Risk that derives from changes in exchange rates between currencies; may affect foreign currency transactions, foreign currency investments and/or future foreign currency economic activity.
Interest rate risk
Risk to investors associated with the effects of changes in the market rate of interest on outstanding fixed‐rate debt instruments. If the market rate of interest increases, the market value of already outstanding fixed‐rate debt instruments will decrease.
Biggest risk in outsourcing
Risk to quality due to a decreased amount of control over the process
Targeted Profit Formula (units)
Sales in units = (Fixed Costs + Targeted Profit) / Contribution Margin per Unit
What items should be considered relevant for a special order decision if there is no excess capacity to fill the order?
Sales revenues, avoidable/variable costs of producing the order, and the opportunity cost of not providing the special order need to be considered.
On what are sales variances based?
Sales variances are based on budgeted sales levels.
Variance Formulas
Sales variances are based on budgeted sales levels.
What does the acronym SOX mean?
Sarbanes-Oxley Act
Utility (as used in economics)
Satisfaction derived from the acquisition or use of a commodity
Data mining
Searching data in a warehouse to discover patterns and relationships in historical data.
How does segregation of duties differ in an automated, compared to a manual, accounting system?
Segregated functions are often combined in automated systems, with automated processes then used as a compensating control.
2 internet protocols that are typically used for secure Internet transmission protocols
Sensitive data sent via the internet is usually secured by one of two encryption protocols: 1. SSL (Secure Sockets Layer) or 2. S‐HTTP (Secure Hypertext Transport Protocol).
DuPont approach to return on investment (ROI)
Separates ROI into two parts for analysis: Profit margin × Asset turnover DuPont Formula = Return on Sales (ROS) × Asset Turnover, where: ROS = Net Income / Sales Asset Turnover = Sales / Total Assets
Ordinary Annuity
Series of equal amounts received or paid at the end of each equal period
Planning and feasibility study step of the systems development lifecycle (SDCLC) process
Stage 1 of the systems development lifecycle (SDLC) process. When an application proposal is submitted for consideration, it is evaluated from three respects: Technical, Economic, and Operational feasibility.
Analysis step of the systems development lifecycle (SDCLC) process
Stage 2 of the systems development lifecycle (SDLC) process. During this phase the systems analysts work with end users to understand the business process and document the requirements of the system; the collaboration of IT personnel and end users to define the system is known as joint application development (JAD).
Design step of the systems development lifecycle (SDCLC) process
Stage 3 of the systems development lifecycle (SDLC) process. In the design phase, the technical specifications of the system are established; the design specification has two primary components: Technical architecture specification, creation of a systems model.
Testing step of the systems development lifecycle (SDCLC) process
Stage 5 of the systems development lifecycle (SDLC) process. The system is evaluated to determine whether it meets the specifications identified in the requirements definition.
Implementation step of the systems development lifecycle (SDCLC) process
Stage 6 of the systems development lifecycle (SDLC) process. Before the new system is moved into production, existing data must be often be converted to the new system format and users must be trained on the new system; implementation of the new system may occur in one of four ways.
Maintenance step of the systems development lifecycle (SDCLC) process
Stage 7 of the systems development lifecycle (SDLC) process. Monitoring the system to ensure that it is working properly and updating the programs and/or procedures to reflect changing needs and requirements.
Standard quantity allowed (SQA)
Standard quantity is the standard amount of input units allowed for the actual number of output units produced.
Attribute Standards
Standards that involve the characteristics ("attributes") of organizations and of the individuals performing internal audit services
Management information systems
Systems designed to support routine management problems based primarily on data from transaction processing systems.
Theory of Constraints (TOC)
TOC identifies strategies to maximize income when the organization is faced with bottleneck operations. A bottleneck operation occurs when the work to be performed exceeds the capacity of the production facilities.
Import tariffs
Taxes imposed on imported goods as a means of reducing the quantity of goods imported into a country.
The profitability index (PI)
Technique that is intended to rank capital budgeting projects in terms of desirability
Customer relationship management (CRM) systems
Technologies that facilitate managing e‐relationships with clients. Both biographic and transaction information about existing and potential customers is collected and stored in a database. The CRM provides tools to analyze the information and develop personalized marketing plans for individual customers.
Compare the internal rate of return (IRR) approach with the net‐present‐value (NPV) approach (to capital budgeting).
The IRR approach computes the discount rate that would make the present value of a project's cash inflows and outflows equal to zero. The NPV approach uses an assumed discount rate to determine whether the net of the present value of a project's cash inflows and outflows is positive or not.
How is the predetermined overhead rate (POR) calculated?
The POR is based on an estimated overhead amount divided by an estimated allocation base amount.
The nature of the market structure in the U.S. economy
The U.S. economy is a mix of market structures with different commodities/industries operating in different market structures.
Comparative advantage
The ability of a country, business, individual, or other entity to produce a particular good or service at a lower opportunity cost than the opportunity cost of producing the good or service by another entity
Absolute advantage
The ability of a country, business, individual, or other entity to produce a particular good or service more efficiently (with fewer resources) than another entity
"Slicing and dicing" as it relates to data warehouses.
The ability to view a single data item in multiple dimensions; for example, the sale of VCRs might be viewed by product, by region, by time period, by company, etc.
(External) environmental scanning
The assessment of the macroenvironment in which an entity operates (or may operate) and the industry within that macroenvironment. Includes consideration and analysis of the economic system, economic market, and industry in which an entity operates.
Price Taker Firm
The assumption that a firm in a perfectly competitive market must accept ("take") the price set by the market and can sell any quantity of its commodity at that price. Thus, the demand curve faced by a single firm in perfect competition is a straight horizontal line at the market price.
What further substantive procedures should the auditor perform in responding to significant risks?
The auditor should evaluate: - How management addressed estimation uncertainty in making the estimate. - Whether management's significant assumptions are reasonable. - Whether management has the intent and ability to carry out specific actions, as relevant.
Budgetary slack
The deliberate overestimation of expenses or underestimation of revenue for a project. Budgetary slack may be built into a project for a cushion in case targets are not met.
The shape of the demand curve for a firm in perfect competition
The demand curve faced by a single firm in a perfectly competitive market is a straight horizontal line originating at the price set by the market (of all firms).
Opportunity cost
The benefit that is forgone as a result of making one choice instead of an alternative (in transfer pricing, usually of selling internally rather than selling externally) Opportunity Cost per Unit = Selling Price per Unit - Additional Outlay Cost per Unit
Bond indenture
The bond contract, which sets forth such terms as face amount of bond, coupon or stated interest rate, maturity date, and so on
Floating loan agreement
The borrower gives a lien against all of its inventory to the lender but retains control of its inventory, which it continuously sells and replaces.
What is the intersection of total cost and total revenue on a graph?
The breakeven point
Scalability
The capacity of a system to grow with the information processing needs of an organization. (Lesson: Enterprise-Wide and Cloud-Based Systems, 12/27 3rd lesson)
Transmission Control Protocol / Internet Protocol (TCP/IP)
The core protocol transmission of the internet.
Factory Overhead
The cost of indirect labor, indirect materials, and other manufacturing costs other than direct material and direct labor that are necessary to support the production process but are not easily traceable to the finished product.
Direct Materials
The cost of significant raw materials and components that are directly incorporated in the finished product.
Critical path
The critical path is the longest path in the network. If any activity on the critical path is delayed, then the project will not be accomplished according to the original schedule. The critical path is specified by the sum of the mean completion times of each of the activities on the path.
Accuracy
The degree to which information can reasonably be expected to be free from error and/or to communicate results that reflect reality
Persuasiveness of Information
The degree to which the information provides support for conclusions. Derived from its suitability (i.e., its relevance, reliability, and timeliness) and its sufficiency.
Will the payback period from using the discounted payback period approach be longer or shorter than using undiscounted payback period approach (to capital budgeting)?
The discounted payback period will be longer than the undiscounted payback period because the present value of cash flows will be less than the undiscounted values.
Application software
The diverse group of end‐user programs that accomplish specific user objectives. Can be general purpose (word processors, spreadsheets, databases) or custom‐developed for a specific application (ex.: a marketing information system for a clothing designer). May be purchased "off the shelf" or developed internally.
Macroeconomics
The economic activities and outcomes of a group of entities taken together, typically of an entire nation or major sectors of a national economy
Microeconomics
The economic activities of distinct decision‐making entities, including individuals, households, and business firms
Business‐to‐business (B2B) e‐commerce
The electronic processing of transactions between businesses. Includes electronic data interchange (EDI), supply chain management (SCM) and electronic funds transfer (EFT).
Applied overhead
The estimated overhead charged to production. It is calculated by multiplying the overhead rate times the allocation base activity units (direct labor hours, machine hours, raw material weight, etc.).
"Tone at the Top"
The extent to which top management is ethical and proactive in establishing an ethical and moral tone and culture. Consider a counterexample: Kenneth Lay urged Enron employees to buy more Enron stock at the same time that he was selling millions of dollars in Enron stock options (called a pump‐and‐dump scheme).
Characteristics that exclude individuals from the labor (or work) force
The following are not included in the labor force: - Those less than 16 years old - The retired - Those not actively seeking work - Those who are institutionalized - Military members on active duty
Segregation of IT Functions
The functions in each area must be strictly segregated within the IT Department. Without proper segregation of these functions, the effectiveness of additional controls is compromised.
Risk/reward relationship
The greater the perceived risk of an undertaking, the higher the expected reward from the undertaking.
Source program library (SPL)
The lLibrary of source code computer programs. Securing these programs, and separately these from live programs, is critical to the internal control system.
Reorder point
The level of an inventory item on hand at which that inventory item should be reordered. It takes into account: - Inventory needed while ordered items are delivered. - Inventory need as "safety stock" to cover unexpected demand.
Level 2 Inputs
The level of inputs in the U.S. GAAP fair value framework that consists of inputs that are either directly or indirectly observable, including: 1. Quoted prices for similar items in active markets and in inactive markets 2. Quoted prices for identical items in inactive markets 3. Observable inputs other than quoted prices 4. Inputs not directly observable but that are derived from or corroborated by observable market data
Level 3 Inputs
The level of inputs in the U.S. GAAP fair value framework that consists of inputs that are not observable but are based on an entity's assumptions and estimates.
Level 1 Inputs
The level of inputs in the U.S. GAAP fair value framework that consists of quoted market prices in active markets for identical assets or liabilities.
Determinants of aggregate equilibrium
The level of output and price at which aggregate demand and aggregate supply are equal
Economies of Scale (also called increasing return to scale)
The long‐run average cost curve is decreasing, reflecting that the quantity of output is increasing in greater proportion than the increase in inputs, largely due to specialization of labor and equipment; a long‐run concept.
Expected value
The long‐run average outcome; determined by calculating the weighted average of the outcomes (multiply the value of each outcome by its probability and then sum the results).
Lead systems analyst
The manager of the programming team: Usually responsible for all direct contact with the end user; Often responsible for developing the overall programming logic and functionality.
Potential gross domestic product (potential GDP)
The maximum final output that can occur in the domestic economy at a point in time, without creating upward pressure on the general level of prices in the economy
Objectivity
The measure of the extent of factors that might influence a person to report inaccurate or incomplete information about risks or controls
Safety Stock
The minimum amount of inventory that must be maintained to prevent stockouts (running out of inventory). = (Max Lead Time − Mean Lead Time in Days) × (Average Usage per Day)
When deciding whether to process a product further, what costs are relevant?
The only relevant costs are the differential future costs and benefits.
Organizational Policies
The organization's control activities that establish stakeholder expectations regarding conduct and operations
What is the purpose of COSO?
The original goal of COSO was to develop an integrated internal control model to guide efforts to articulate and improve accounting controls. COSO now provides guidance related to "ERM, internal control, and fraud deterrence."
Price elasticity of demand
The percentage change in quantity demanded divided by the percentage change in price
Elasticity of Demand
The percentage change in quantity of a commodity demanded as a result of a given percentage change in the price of the commodity
Elasticity of Supply
The percentage change in the quantity of a commodity supplied as a result of a given percentage change in the price of the commodity
Variable interest rate
The percentage rate of interest can change over the life of the related debt instrument.
Fixed interest rate
The percentage rate of interest does not change over the life of the loan or parts of that life.
Split off
The point at which products manufactured through a common process are differentiated and processed separately.
Identify the intercept on a graph.
The point at which the plotted line intersects the y‐axis (i.e., at the zero point on the x‐axis).
Risk
The possibility of loss or other unfavorable results that derives from the uncertainty implicit in future outcomes
Economic risk
The possible unfavorable impact of changes in currency exchange rates on a firm's future international earning power. Exchange rates may change so that future revenue, costs, and prices are adversely impacted.
Translation risk
The possible unfavorable impact of changes in currency exchange rates on the financial statements of an entity when those statements are converted from one currency to another currency. Exchange rates may change so that domestic (dollar) values of financial statement items are adversely impacted.
Transaction risk
The possible unfavorable impact of changes in currency exchange rates on transactions denominated in a foreign currency. Exchange rates may change so that transactions to be settled in a foreign currency result in receiving fewer dollars or paying more dollars to settle.
Currency exchange rate
The price of one unit of a country's currency expressed in units of another country's currency; the rate at which two currencies will be exchanged.
Accounting Fair Value
The price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
How "fair value" is defined and determined for U.S. generally accepted accounting principles (GAAP) purposes
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
Primary objective of the International Monetary Fund (IMF)
The primary objective of this fund is to maintain order in the international monetary system, primarily by providing funds to economies in financial crisis, including those in: - Currency crisis, when there are dramatic decreases in the value of a country's currency. - Banking crisis, when there are dramatic levels of withdrawals from a country's banks (a "run on banks"). - Financial debt crisis , when a country is unable to satisfy its foreign debt obligations.
Financial Valuation
The process of estimating the fair value (market value) of an asset (investments, intangible assets, etc), a liability (warranty obligations, bonds, etc.), equity (preferred stock, common stock, etc.) or a business enterprise.
Supply chain management (SCM)
The process of planning, implementing, and controlling the operations of the supply chain: the process of transforming raw materials into a finished product and delivering that product to the consumer. Supply chain management incorporates all activities from the purchase and storage of raw materials, through the production process, into finished goods through to the point‐of‐consumption.
Systems software
The programs that run the computer and support system management operations.
When using the profitability index (PI), how are projects ranked relative to each other?
The projects are ranked according to the computed profitability index (i.e., NPV / Project cost) for each for each project; the higher the PI, the higher the rank of the project.
Determination of Cost of Capital for a Firm
The rate of return that must be earned by prospective investors in order for a firm to attract and retain their investments. Investors' expected rate of return is determined primarily by the rate of return that could be earned on other opportunities with comparable risk; in other words, it is investors' opportunity cost.
Calculation of the current yield on a bond
The ratio of annual interest payments to the current market price of the bond. It is computed as: Annual interest payment / Current market price
Cost equation necessary for the calculation of regression or the high‐low method
The relationship between fixed costs, variable costs, and total costs expressed as a regression equation: y = A + Bx where: y = total costs (dependent variable) A = fixed costs (the y intercept) B = variable cost per unit (the slope of the line) x = number of units (independent variable) or Total Costs = Fixed Costs + (Variable Cost per Unit × Number of Units.)
Under monopolistic competition, determinant of profit
The relationship between the price (P) that can be charged and the firm's average total cost (ATC). If ATC < P, the firm will make a profit. Otherwise, it will either break even (ATC = P) or have a loss (ATC > P).
Relevant range
The relevant range is the range of activity (1) for which the assumptions of cost behavior reasonably hold true and (2) over which the company plans to operate.
Preemptive right of common stock
The right of first refusal to acquire a proportionate share of any new common stock issued by a corporation
Liquidation risk (also called marketability risk)
The risk associated with the possibility that an asset cannot be readily sold for cash equal to its fair value.
Default risk
The risk associated with the possibility that the issuer of a security will not be able to make future interest payments and/or principal repayment.
Market rate risk
The risk of loss in the market value of outstanding bonds and other fixed rate instruments as a result of an increase in the market rate of interest during the life of the outstanding instrument. If the market rate of interest increases after an instrument is issued, the market value of the instrument will decrease.
Business risk
The risk of loss or other unfavorable outcome that results as variability in operating results increases; the higher the variability in a firm's expected operating earnings, the greater the business risk (i.e., the increased chance that it may not be able to meet its debt obligations)
Currency exchange rate risk
The risk of loss or other unfavorable outcome that results from changes in exchange rates between currencies
Inflation risk (also called purchasing power risk)
The risk that a rise in the general price level (inflation) will result in reduced purchasing power of a fixed sum of money
Factoring of accounts receivable
The sale of trade accounts receivable to a commercial bank or other financial institution, called a "factor." Sale may be "with recourse" or "without recourse."
Methods of accounting for by‐product sales
The sales value of the by‐product may be recognized (e.g., used to reduce the cost of joint products) either: - When the by‐product is produced; or - When the by‐product is sold.
Strategic planning
The sequence of interrelated procedures for determining an entity's long‐term goals and identifying the best approaches for achieving those goals
Estimation uncertainty
The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement. (The risks of material misstatement increase when there is high estimation uncertainty.)
Application programmers
The team of programmers who, under direction of the lead analyst are responsible for writing and testing the program.
What is the meaning of cash discount terms of "2/10, n/30"?
The term "2/10, n/30" is a typical credit term. - The first digit (2) is the percentage discount offered by the seller. - The second digit (10) is the number of days within which the discount is available. - n/30 indicates that if the buyer does not pay the (full) invoice amount within the 10 days to qualify for the discount, then the net amount is due within 30 days after the sales invoice date.
Bond maturity
The time at which the issuer repays the par value to the bondholders
Incoming float
The time between when a payment is initiated and when the related cash is available for use by the recipient
Shifts in the share of worldwide trade over the past 50 years or so
The total level of worldwide trade has grown dramatically in the past 50 years. During that time, the four largest export countries have been the U.S., Germany, Japan, and China. The share of worldwide exports attributable (in total) to the four countries has remained fairly constant, around 30%. But among those countries, the share has changed significantly. The U.S. has lost share, from about 18% to 8%. Germany has maintained about a 8% share. Japan has increased its share from about 3% to about 4%. China has increased its share from about 2% to 12%.
National income (NI)
The total payments for economic resources included in all production (but not including taxes as a payment)
What should the transfer price be when the selling division has excess production capacity?
The transfer price should be equal to the additional costs incurred to produce each unit.
How should you think about transferred‐in costs in process costing?
The transferring department views transferred‐in costs as the cost of goods transferred out; the receiving department should treat those costs in a manner similar to an additional category of direct materials used.
What is the meaning of a graphed plot with a negative slope?
The two variables move in opposite directions (i.e., the dependent variable decreases as the independent variable increases).
What is the meaning of a graphed plot with a positive slope?
The two variables move in the same direction (i.e., the dependent variable increases as the independent variable increases).
Under what circumstances is the use of short‐term financing most appropriate?
The use of short‐term liabilities for financing purposes is most appropriate when the related assets financed will generate cash in the short run to be able to repay the liabilities.
Pledging of accounts receivable
The use of trade accounts receivable as collateral for a short‐term loan, usually from a commercial bank or finance company
Marginal Utility
The utility derived from each (additional) marginal unit (i.e., from the last unit acquired)
Direct Labor
The wages and salaries paid for work that directly converts raw materials into a finished product.
Identify the x‐axis and y‐axis of a graph.
The x‐axis is the horizontal line; the y‐axis is the vertical line. (To help remember, the the letter "Y" has a vertical element to it.)
Long‐run profits for a firm in monopolistic competition
There are no long‐run profits possible in a monopolistic competition. If profits are made in the short run, more firms will enter the market and lower the demand for each firm until each just breaks even in the long run.
Magnetic disks
These are random access devices. Data can be stored on, and retrieved from, the disk in any order. This is the most efficient way to store and retrieve individual records. Magnetic disks are the most commonly used form of secondary storage.
What purpose do output controls serve?
These controls ensure that computer reports are accurate and distributed as authorized.
What purpose do run‐to‐run controls serve?
These counts to monitor the number of units in a batch as it moves from one programmed procedure (run) to another. Totals of processed transactions are reconciled to batch totals ‐ a difference indicates an error.
User documentation
These documents the system in language that is understandable by the end user. It tells users how and when to submit data and request reports, and the procedures for verifying the accuracy of the data and correcting errors.
Describe smart cards and identification badges.
These have identification information embedded on a magnetic strip on the card and require the use of additional hardware (a card reader) to read the data into the system. Depending on the system, the user may only need to swipe the card to log onto the system, or may need to key in other information in order to log on. (Lesson: Logical Access Controls, 12/31 - 3rd lesson)
Subsidiary ledgers (sub‐ledgers)
These ledgers classify transactions by alternative accounts (e.g., customer accounts, vendor accounts, product accounts).
Wide area network (WAN)
These networks vary dramatically in geographic coverage. Most WANs are national or international in scope.
Control Objectives
These provide specific targets for evaluating the effectiveness of internal control. Typically they are stated in terms that describe the nature of the risk to be managed or mitigated.
Implementation Standards
These standards differentiate the requirements specifically applicable to "assurance" activities and "consulting" activities within the attribute standards and the performance standards.
Data‐driven decision support systems (data‐driven DSS)
These systems process large amounts of data to find relationships and patterns that are useful in decision making.
Decision support systems (DSS)
These systems provide information to mid‐ and upper‐level management to assist them in managing nonroutine problems and in long‐range planning. Unlike MISs, DSSs frequently include external data in addition to summarized information from the TPS and include significant analytical and statistical capabilities.
Enterprise resource planning systems (ERPs)
These systems provide transaction processing, management support, and decision‐making support in a single, integrated package. By integrating all data and processes of an organization into a unified system, ERPs attempt to eliminate many of the problems faced by organizations when they attempt to consolidate information from operations in multiple departments, regions, or divisions.
Operational systems
These systems support the day‐to‐day activities of the business (purchasing of goods and services, manufacturing activities, sales to customers, cash collections, payroll, etc.) Also known as transaction processing systems (TPS).
Long-term notes for long-term financing purposes
These types of notes are used for borrowings normally of from one to 10 years, but some may be of longer duration. Such borrowings usually require collateral and may have restrictive covenants but often permit repayment in installments over some period of time.
Optical disk
These use laser technology to "burn" data on the disk (although some rewritable disks use magnetic technology to record data). In general, read‐only and write‐once optical disks are a more stable storage medium than magnetic disks. Optical disks, like magnetic disks are random access devices. There are several different types of optical disks.
What purpose do liquidity metrics serve?
They are used to evaluate an enterprise's ability to meet its short‐term obligations.
What purpose do market ratios serve?
They are used to evaluate the value of the enterprise as based on capital market reflections of stock price as related to earnings and book value.
What purpose do asset‐utilization metrics serve?
They examine the efficiency with which assets are used to maintain and generate wealth.
Pro forma financial statements must be reconciled with what?
They must also include comparable GAAP numbers.
List prohibitions observed by corporate insiders and outside auditors.
They must observe the following prohibitions: - fraudulent influence - coercion - manipulation - misleading
Why are "one‐time" passwords used by organizations?
They provide an additional level of authentication. Used to strengthen the standard password by requiring access to a physical device which displays a new "one‐time password" every 30‐60 seconds.
What purpose do debt‐utilization metrics serve?
They provide measures of balance sheet risk (i.e., in terms of financial leverage). An enterprise is considered more leveraged, and thus more risky, if it has a comparatively high amount of debt versus owners' equity.
How do preprinted forms and preformatted screens improve data input?
They reduce the likelihood of data entry errors by organizing input data in a logical manner. When the position and alignment of data fields on an entry screens matches the organization of the fields on a source document, data entry is faster andmore accurate.
Responsibilities of application programmers
They work under the direction of the systems analyst to write the actual programs that process data and produce reports.
Financial Budget
This budget forecasts cash flows and projects the financial statements that will result from operations. It consists of the: 1. Cash budget 2. Budgeted (or pro forma) income statement 3. Budgeted (or pro forma) balance sheet
Capital Expenditures Budget
This budget projects expenditures related to the acquisition or construction of capital (fixed) assets. Since acquisition of capital assets often requires an extended planning horizon, this budget often spans multiple fiscal periods.
How does closed loop verification improve data input?
This helps ensure that a valid and correct entry has been made. For example, after a customer's account code is entered, the system looks up and displays additional information about the selected customer. For example, the system might display the customer's name and address.
Computer hardware
This includes the physical equipment in your computer and the equipment that your computer uses to connect to other computers or computer networks.
Business‐to‐consumer (B2C) e‐commerce
This involves selling goods and services directly to consumers, almost always using the Internet and web‐based technology. B2C e‐commerce relies heavily on intermediaries or brokers to facilitate the sales transaction.
Time lags (in batch processing systems)
This is an inherent part of batch processing. There is always a time delay between the time the transaction occurs, the time that the transaction is recorded, and the time that the master file is updated.
Accounts Receivable (A/R) sub‐ledger
This ledger classifies A/R transactions (credit sales and customer payments) by Customer.
Purpose of setting file attributes
This logically restricts the ability of the user to read, write, update, and/or delete records in a file.
Session hijacking or masquerading
This occurs when an attacker identifies an IP address (usually through packet sniffing) and then attempts to use it to access a network. If successful, the hacker has "hijacked" the session, i.e., gained access to the session by pretending to be another user.
What alternative investment bases can be used in the accounting rate‐of‐return approach (to capital budgeting)?
Two alternative investment bases may be used: 1. Initial investment 2. Average investment (i.e., the average book value of the asset over its life)
The factors that determine the effect of a change in aggregate supply (alone) on aggregate equilibrium
Two factors: 1. Which aggregate supply curve is assumed 2. Direction of change in the aggregate supply curve
Computer network
Two or more computing devices connected by a communication channel on which the devices exchange data.
Changes in U.S. international trade over the past 50 years
U.S. imports and exports have both grown dramatically over the past 50 years. The U.S. is by far the world's largest importer and one of the top three exporters. Imports and exports account for about 17% and 14%, respectively, of U.S. gross domestic product. The U.S. exports only more capital goods, agricultural products and services than it imports.
Normal spoilage
Unavoidable spoilage as part of the manufacturing process. Normal spoilage is included with other costs as an inventoriable product cost.
Difference between a foreign currency exchange contract and a foreign currency option contract
Under a foreign currency exchange contract, the obligation to buy or sell a foreign currency is firm; the exchange must occur. Under a foreign currency option contract, the party holding the option has the right (option) to buy (call) or sell (put) but does not have to exercise that option; the exchange will occur according to a decision made by the option holder.
Differentiation strategy
Under this generic strategy, an entity seeks to develop and offer a product or service that has unique features for which customers are willing to pay a premium price that more than covers the extra cost of providing the product or service.
Focus strategy
Under this type of generic strategy, an entity focuses on a narrow industry segment (an industry subgroup or "niche") and seeks to achieve either a cost advantage, or, differentiation.
Cyclical unemployment
Unemployment in which members of the labor force are not employed because a downturn in the business cycle has reduced the current need for workers
Structural unemployment
Unemployment in which members of the labor force are not employed because their prior types of jobs have been greatly reduced or eliminated, and/or because they lack the skills needed for available jobs.
Seasonal unemployment
Unemployment in which members of the labor force are not employed because their work opportunities regularly and predictably vary by the season of the year
Frictional unemployment
Unemployment in which members of the labor force are not employed because they are in transition between jobs or have imperfect information about job opportunities
The "future value" of an annuity due
Value at some future date of a series of equal amounts to be invested at the beginning of equal intervals over some period of time. It is the amount that will accumulate as a result of the amounts invested at the beginning of each period and the compounding of interest on those amounts.
How does the denominator differ when calculating breakeven units and breakeven dollars?
Units = Price — Variable costs per unit Dollars = (CMunit /price)
Automated data capture
Use of automated equipment, such as bar code scanners, to reduce the amount of manual data entry . Reducing human involvement reduces the number of errors in the system.
Infrastructure as a Service (IaaS)
Use of the cloud to access virtual hardware, such as computers and storage. Examples include Amazon Web Services and Carbonite.
How is read‐only memory (ROM) used?
Used to permanently store the data needed to power on the computer; includes portions of the operating system.
What makes a computer language extensible?
Users can create taxonomies for specific environments, for example for the purpose of taxation reporting, environmental regulation reporting, or automobile manufacturing.
Symmetric encryption (also called single‐key encryption or private‐key encryption)
Uses a single algorithm to encrypt and decrypt. Sender uses the encryption algorithm to create the ciphertext and sends the encrypted text to the recipient. Sender tells recipient which algorithm was used to encrypt. The recipient uses the algorithm to decrypt. Common in data storage applications.
Demand flow technology (DFT)
Uses mathematical methods to link materials, time, and resources based on continuous flow planning. The objective is to link process flows and manage those flows based on customer demand.
How digital signatures work
Uses public/private key pair technology to provide authentication of the sender and verification of the content of the message.
The "future value" of an ordinary annuity
Value at some future date of a series of equal amounts to be invested at the end of equal intervals over some period of time. It is the amount that will accumulate as a result of the amounts invested at the end of each period and the compounding of interest on those amounts.
The "future value" of $1
Value at some future date of a single amount invested now. It is the amount that will accumulate as a result of compounding of interest on the single amount invested at the present.
The "present value" of $1
Value now (at present) of a single amount to be received in the future. The amount to be received in the future is discounted using an interest rate to get the present value of that amount.
The "present value" of an ordinary annuity
Value now of a series of equal amounts to be received at the end of equal intervals over some future period. Equal amounts to be received at the end of a number of equal periods are discounted using an interest rate to get the present value of those amounts.
Indifference Curve
Various quantities of two commodities that give an individual the same total utility as plotted on a graph
Variable Costs
Vary in total, in direct proportion to changes in production volume. Variable costs per unit remain constant regardless of production volume.
How does a sequence check improve data input?
Verifies that all items in a numerical sequence (check numbers, invoice numbers, etc.) are present. It is a common control for assessing record completeness.
Variability is defined in terms of what?
Volume, activity, or output
When a ratio requires using a balance sheet value together with an income statement value, how should the balance sheet value be determined?
When a balance sheet value is used together with an income statement value in a ratio, the balance sheet value must be an average balance for the period covered by the income statement, not the balance at year‐end (or other point in time).
Under what conditions is the internal rate of return approach (to capital budgeting) not appropriate?
When future cash flows of a project are both positive and negative, the internal rate of return method should not be used because it can result in multiple solutions.
Boundary protection in an accounting system
When multiple programs and/or users are running simultaneously and sharing the same resource (usually the primary memory of a CPU), boundary protection protects program instructions and data from one program from being overwritten by program instructions and/or data from another program.
High-low method
When predicting the behavior of a total cost or a mixed cost, the high-low method provides a rough estimate of the fixed cost and the variable cost components. Although a more precise cost prediction can be obtained using regression analysis, the high-low method provides a quick, easy cost estimate. To identify fixed and variable cost components using the high-low method: 1. From the range of production volumes presented, select the period with the highest production and the period with the lowest production. 2. Note: Do not use highest and lowest costs. Always use production volume. 3. Calculate the difference in units produced at the highest and the lowest levels of production. 4. Calculate the difference in costs at the highest and the lowest levels of production. 5. Divide the difference in costs by the difference in units This is your estimated variable cost per unit. 6. Find total variable costs by multiplying the estimated variable cost per unit by the actual number of units produced at either the high or the low level of production. 7. Subtract the total variable costs from the total cost to determine fixed costs. 8. You can now estimate total costs at any production level by multiplying the production in units times the variable cost per unit and adding it to the total fixed costs.
When does absorption costing income equal direct costing income?
When the number of units sold equals the number of units produced, absorption costing and direct costing produce identical incomes. Note: This assumes that fixed cost per unit remains the same from one period to the next.
Under what circumstances would the payback period approach to project evaluation be most appropriate?
When: - Used as a preliminary screening technique - Used in conjunction with other evaluation techniques - Recovery of cash (liquidity) is of critical importance
Risk Assessment Precision
Whether, and the extent to which, risk can be quantified
Shifts in the share of worldwide gross domestic product (GDP) (output) over the past 50 years or so
While total worldwide output has more than tripled over the last 50 years, the growth has not been uniform among countries/regions. The most dramatic changes have been in the decline of European share of output and the increase in the Asian share of output. The European share of worldwide output has declined from about 36% to about 24%, and the Asian share has increased from about 15% to over 30%. The share of output held by the U.S. (22%), Latin America, and Africa/Middle East has remained fairly constant.
Bluetooth
Wireless transmission medium. It uses the same radio frequencies as Wi‐Fi, but with lower power consumption resulting in a weaker connection. It is used to provide a direct communications link between two devices (e.g., a cell phone and ear piece, computer and a printer).
Compared to traditional costing, how does activity‐based costing (ABC) treat high‐volume simple products compared to lower‐volume complex products?
With ABC, costs tend to shift away from high‐volume, simple products to lower‐volume, complex products.
Distinguish between cumulative preferred stock and noncumulative preferred stock
With cumulative preferred stock, the dividend preference amount not paid in any year accumulates and must be paid before common dividends are paid. With noncumulative preferred stock, the dividend preference amount not paid in any year does not accumulate; it is "lost" to the preferred shareholder for that period.
When can activity‐based costing (ABC) be used?
With job order and process costing systems; standard costing and variance analysis, and service businesses as well as manufacturers.
What does the journal entry look like that actually allocates overhead?
Work in process is debited; factory overhead applied is credited.
