CPA BEC

Budgeting

Budgeting process begins with sales forecast - flows to cash budget Master budget - plan for overall activities ***Static Budgets - represents budgeted costs for budgeted output Flexible Budgets - adjusted when actual sales deviate from planned sales; used for manufacturing and sales activities

Economics - Micro

Command Economic System - government allocates goods and services Market Economic System - individuals determine allocation of goods and services Ceteris Paribus = other factors held constant Change in demand/supply = shift in curve from factors other than price Movement along demand/supply curve = changing price Elasticity of demand = % change in quantity demaned/% change in price (change/original price/quantity); >1 elastic; <1 inelastic; 1=unitary; most common elasticity measure; elasticity of supply = % change in quantity supplied/ % change in price Utility Theory: total utility (increases with quantity acquired); marginal utility (decreases with quantity acquired - law of diminishing marginal utility); maximize total utility (where last dollar spent on every commodity acquired gives same MU); indifference curve (quantities of two commodities give same satisfaction) Short run: at least one input in production cannot be varied Marginal cost: cost of last acquired unit of input (u-shaped) Long-run average cost curve - takes multiple short-run average cost curves and draws a line at the minimum of each short-run curve (u-shape because of economies of scale) Market structures: perfect competition (easy entrance and exit; virtually same product; buyers/sellers have complete info; large number of buyers/sellers unable to affect price; in the long-run amount of firms will adjust so every firm breaks even; firm is a price taker so demand curve is horizontal; prices equals marginal revenue); perfect monopoly (firm has increasing returns to scale); monopolistic competition (large number of sellers; firms sell differentiated product; product has close substitutes; market entry/exit are easy; all firms break even in long-run; marginal revenue curve is below the demand curve and the curves diverge as quantity increases); oligopoly (few sellers; firms sell either homogeneous or differentiate product; market entry is restricted; interdependence of sellers; demand curve has a change in slope at market price, above market price demand curve is more elastic, this occurs because players will not increase price but some may decrease to meet competition; may cooperate to benefit all firms; overt collusion is illegal in US; tacit collusion involves firms following prices by market leader is not illegal) *short-run results depend on ATC vs. market price *see market characteristics summary table Economies of scale - larger the firm the more efficient is can operate

Diminishing Returns vs Decreasing Returns to Scale

Diminishing marginal returns are an effect of increasing input while at least one production variable is kept constant, such as labor or capital, which occurs in the short run. Returns to scale are an effect of increasing input in all variables of production, which occurs in the long run

Long-Term (Capital) Financing

Long-Term Notes: typically promissory note is required; commonly 1-10 years; repayment is usually periodic; may be secured by mortgage on property or real estate; may contain restrictive covenants (maintain certain working capital condition; restrictions on incurrence of additional debt without lender's approval; specification of required frequency and nature of financial info provided to lender, perhaps audited; restrictions on management changes without lender approval); cost depends on general level of market interest (i.e. prime rate); creditworthiness; nature/value of collateral Advantages: commonly available for creditworthy firms; periodic repayment Disadvantages: poor credit rating results in higher interest rate, greater security required and more restrictive covenants; violation of covenants can cause serious consequences Financial (capital) leases: compare with feasibility and rate of return of buying; also consider flexibility and convenience Net lease: lessee assumes cost associated with ownership (maintenance, taxes, insurance, etc.) aka executory costs; Net-net lease: lessee assumes cost associated with ownership and responsible for residual value at end of lease Advantages: limited immediate cash outlay required; possible lower cost than purchasing; related obligation specific to amount needed; possibility of scheduling lease payments to pattern cash inflows from the leased asset Disadvantages: not all available for lease; lease financing is asset specific; lease terms may provide different than asset usefulness to the lessee; leasing may be chosen for non-economic reasons (convenience) Bonds: LT promissory notes; pay interest each period and repay principal/face at maturity; characteristics (bond indenture/contract; par/face value (bond principal); coupon rate of interest (annual rate of interest stated on face of bond); maturity Debenture bond = unsecured; carry more risk and have higher cost Secured bonds: secured w/ collateral Bond selling price determined by relationship between rate of interest the bonds pay (coupon rate) and the rate of interest in the market for comparable risk when bond is issued); selling at less than par if coupon rate is less than market rate (discount); vice versa is premium; determined as PV of cash flows from bonds (cash flows: periodic interest: discounted as the PV of annuity using current interest rate; face value: discounted as the PV of a single amount using current interest rates) Measures of rate of return: current yield (ratio of annual interest payments to current price of the bonds in the market; annual coupon interest / current market price); yield to maturity (determines discount rate that equates the PV of future cash flows from bond with current price of bond; rate of return required by investors as implied by the current price of bonds in the market; computed like IRR) Market price of bonds changes inversely with market rate of interest Market interest rate risk: risk the market value will go down due to interest rates going up; longer maturity of bonds, greater the risk of that happening and the higher the required face stated rate Advantages: sources of large sums of capital; issuance does not dilute ownership of EPS; tax deductible interest payments Disadvantages: require periodic interest payments that if missed can result in default/bankruptcy; require principal repayment; may require security or have restrictive covenants; generally not available to small entities Preferred Stock: no voting rights, dividends limited in amount, are expected, grants ownership interest, no maturity date, does not require dividends (expected), not an expense not deductible; different classes possibility; cumulative or noncumulative; participating or nonparticipating (to distinguish whether or not dividends in excess of preference claim can be paid); convertible or nonconvertible into common stock; may be callable (firm has right to buyback shares at predetermined price) PS value is PV of expected cash flows - preferred dividends; need estimated future annual dividends, investors required rate of return; assumption that dividend stream will exist in perpetuity PSV = annual dividend/required rate of return; PSV = preferred stock theoretical value Preferred stock expected rate of return = annual dividend / market price Advantages: no legally required payment of dividends or repayment of investment; lower cost of capital than common stock due to less risk; usually no voting rights; no maturity date; no security required Disadvantages: expectation of dividends are high; payments are not deductible; if triggered, protective provisions may be onerous; higher cost of capital than bonds Common Stock: one class (in most cases); limited liability to amount of investment; residual claim on earnings and assets after creditors and preferred shareholders; right to vote for directors, auditors and changes to charter; preemptive right; proxy delegates voting rights Valuation: PV of expected cash flows; common dividends and common stock appreciation are cash flows Valuation technique #1: <1year: CSV = PV of dividends expected + PV of expected market price at EOY; both discounted at required rate of return >1year: 1st year dividend / (required rate of return - growth rate) Valuation technique #2: common stock expected rate of return CSER = (1st year dividend / market price) + growth rate; gives you required rate of return, or current cost of common stock capital Advantages: no legally required periodic payment; no maturity date; no security required Disadvantages: higher cost of capital than other sources; dividends not deductible; additional shares dilute ownership and EPS Most fundamental source for corporate entity; greater risk than preferred shareholders

Steps and Processes: Manual Accounting System; Batch Processing System; Online Real-Time Processing System; Data Entry and Master File Updating Process

MA: enter transaction on source document; record source document chronologically in journal; copy to ledger or master file; prepare report (TB), record to F/S Gl -> TB and FS Sub leger -> additional reports Computerized: increase efficiency, reduce redundancy Automated data capture equipment How does system capture data and update master file? Batch vs. Real-Time Batch - group new transactions by type, process periodically; batch is sequential; compute batch totals; transaction files must be sorted in the same key as master file; used when transactions are independent or unimportant; used with low volume periodic transactions; sequential processing improves speed (FA updates); delay between transaction and posting; delays error detection Real-time - random-access files (i.e. magnetic disks) instead of sequential; continuous; requires networked computer system or internet; most current acct system; good when interdependent data and high transaction volume; may be expensive and pointless with low priority systems Point-of-Sale system tech (part of OLRT); computer system connected with electronic cash register; networked to central computer which maintains databases of products, prices, sales, etc.

End-User Computing; Small-Organization Computing: Mobile Devices: unique risks and strategies to mitigate risks

Mobile Devices: risks (user-installed applications i.e. spyware; loss and theft; managing access and permissions (ie view only); mitigation (voice identification to avoid errors; biometric identification i.e. fingerprint) End-User: risks (no knowledge/application of Systems Development Life Cycle; inadequate system testing and documentation; poor data controls; poor integration with existing systems; mitigation (third-party review and testing; catalog programs; segregation of duties) Small-Organization: risks (harder to control higher risk of errors/defalcation, system errors); characteristics (exclusively microcomputers; no centralized info; poor segregation of duties); mitigation (protect physical access sites; logical control access such as user name, passwords, auto log outs; data backup regularly); compensating control (close involvement of knowledgeable owner)

Project Management

Planning is most important part; involves the work breakdown structure (ABS) which defines the work to be completed into successively smaller subcomponents Network planning is major tool; uses PERT and CPM PERT = program evaluation and review technique CPM = critical path method *specify activity sequence and time in a precedence relationship; one activity cannot start until a preceding activity has been completed

Source Program Library Management System (SPLMS) Types and levels of documentation Elements of record retention and destruction system

SPLMS: software & instructions for people, manages mitigation from application development test; controls and validates program changes Functions: store programs in the SPL; retrieve programs for updating and maintenance; delete obsolete programs; audit trail to document program changes System documentation: program, data files, processing logic, interactions with programs and systems Program documentation: detailed description of inputs, logic and outputs; may include source code listings or record layouts Operator documentation: run manual helping user loan and execute programs and data; rarely read by anyone * general control and preventive organization policy should dictate retention and destruction; must follow applicable law and regulation; can be liable if failure to properly retain or destroy electronic documents

International Economics

absolute advantage = ability of a country, business or individual to produce a good or provide a service more efficiently than another entity with few input resources comparative advantage = ability of one country, business or individual to produce a good or provide a service with lower opportunity cost than another entity; derive from differences in availability of resources and technology; calculates relationship between goods Porter's Four Attributes that promote or impede creating of national advantage: factor endowment (advantages in factors of production, land labor infrastructure); demand conditions (nature of domestic demand for a good or service); relating and supporting industries (extent to which suppliers and related industries are internationally competitive); firm strategy, structure and rivalry (how entities are created organized managed and how they compete) Porter's Four Outcomes: availability of resources and skills; how information is used to determine which opportunities to pursue with available resources; goals of individuals within entities; pressures on entities to innovate and invest socio-political issues: international economic activity causes or exacerbates domestic social and economic products with increased domestic unemployment from using cheaper labor, loss of domestic manufacturing capabilities, loss of industries essential to defense, lack of protection for domestic start-up companies response: import quotas (restrict quantity of goods that can be imported); import tariffs (taxes on imported goods that increases cost in domestic market) balance of trade = difference between money value of imports and exports, expressed in trade surplus/deficit balance of payments: summary of US base transactions with all other countries during a period of time; includes current account (amounts earned from export of goods and services, amounts spent on import of goods and services, net factor flow (income) from foreign investments, net factor flow from foreign aid and grants), capital account (inflows from investments and loans by foreign entities, outflows from investments and loans by US entities made abroad, net change in foreign ownership of US assets and US ownership of foreign assets), financial account (US owned assets located abroad, foreign owned assets in US; shows accumulated amount of investments from both gov't and private and monetary assets) Exchange rate determination: free-floating currency - exchange rate is determine by market forces of supply and demand for a currency; pegged/movable currency - exchange rate is fixed by the gov't with frequent revisions Currency demand factors: political and economic environment; relative inflationary rates; level of public debt; current account balance (deficits/surplus) Currency supply factors: determined by country's central bank; Fed buying dollars in open market using foreign currency reserves to reduce supply of dollars; selling dollars would increase supply of dollars Consequences of currency appreciation: foreign goods become cheaper for domestic buyers; encourages increased domestic efficiencies in order to compete; puts downward pressure on domestic inflation by keeping prices low; makes it difficult for domestic producers to compete in domestic and foreign markets Foreign currency exchange risks: transaction risk (possible unfavorable impact of changes in currency exchange rates on transactions that are denominated (carried out in FC not dollar so there is a foreign currency receivable) in a FC), translation risk (possible unfavorable impact of changes in currency exchange rates on financial statements of foreign operation that are converted from a FC to the domestic currency, spot rate changing continuously), economic risk (possibility that changes in exchange rates will alter value of future revenues and costs) Mitigate transaction risk: matching (incur equal payables and receivables to offset); leading/lagging payments and collections (paying obligations or collecting receivables earlier or later than otherwise to avoid exchange rate changes); hedging (using offsetting or contra transactions so that a loss on one would be offset by a gain on the other) Forward contract: to sell the FC when it is received at a price or rate set now; the dollar value of the FC to be received is fixed Mitigate economic risk: distributed productive assets in different countries with different currencies; shift sources of revenues and expenses to different locations with different currencies Foreign currency option contract - a contract that gives the right/option to buy or sell a specified amount of a FC for a specified time at a specified rate Transfer Price: the amount in which goods and services are transferred between affiliated entities; by manipulating transfer prices firms can manipulate taxes and therefore profits; in US appropriate allocation of income between entities under common control is provided by IRS, which requires income allocated based on function performed and risk assumed by each party; based on cost to the selling unit (variable or full cost), market price, negotiated price

steps in development life cycle

analysis, design, build, test, implement

Cost Behavior / Activity-Based Costing / Process Management

allows us to predict how costs change in response to changes in production or sales High-low method: rough estimate of the fixed and variable cost components that comprise total costs; calculate the change in costs from two production volume extremes; fixed costs are determined by removing variable costs from total cost *see high-low method example A-BC - method of assigning overhead costs to product; alternate to allocation (volume based, plant-wide); process-based drivers cost-drivers - measures closely correlated with the way in which an activity accumulates costs cost center - accumulates expenses for later assignment to products (AP, product design, marketing) cost pools: a group of costs that are associated with a specific cost center value-adding costs - costs that contribute to the product's ultimate value (packaging, inspecting) non-value adding costs - costs not contributing to product's value (storage of raw materials) Groups of activities: facility-level - support plan that produces products (plant manager salaries, property tax, insurance) product sustaining-level (support product as a whole (marketing) batch-level - must be performed for a batch of products (setting up production equipment for batch, random QC for batch) unit-level - must be performed for every product unit (polishing product, boxing for delivery) after costs are identified, overhead costs are assigned shifts cost away from high-volume simple products to lower-volume, complex products larger number of smaller cost pools that can be more closely aligned to products traditional systems tend to over-cost high-volume products and under-cost low-volume products effects of adopting ABC: more precise measures of cost, more costs pools, more allocation bases PM: objectives: increase manager understanding; promote the elimination of waste outsourcing, shared services (provide essential business in one operation instead of by multiple parts of the organization), offshoring

Put option; Call option

buying put options allows importer to sell foreign currency at a fixed price in the future buying

Forecasts and Trends

business forecasting - estimation of value of a variable at some future point in time; circumstances: macro-economic factors forecasting (market growth, inflation rate, tax rate, etc); budgeting process (sales forecasting); demand for products (inventory/production purposes; investment decisions (interest rates, commodity prices, currency exchange rates) Approaches: qualitative (judgment/opinion/consensus; useful for long-range forecasting) and quantitative (data and models; objective Qualitative methods: executive opinion (jury of executive opinion using judgment is used); market research (employs customer or other surveys to determine beliefs and preferences); Delphi method (consensus of expert group using multi-state process) Quantitative: time series models (patterns in past data to predict future outcomes); causal models (assume the variable being forecasted is related to other variables and makes projections based on assumptions Time horizons: ST (up to three months; time series methods appropriate); medium term (3 months to 2 years; time series and causal methods are appropriate); LT (causal and qualitative methods are appropriate) Accuracy: forecast error (measures accuracy for prior forecast period; difference between actual and forecasted value) Forecast error measures: mean absolute deviation (measures average of absolute values of forecast errors); mean squared error (measures average of sum of forecast errors squared); mean average percentage error (forecast error divided by actual value) Time Series models: naïve (uses immediate past period's actual value as forecast for next period); simple mean/average (average of past values as forecast for a future period of periods); simple moving average (average of a specific number of most recent values as forecast for future period(s); weighted moving average (average of a specific number of most recent values with each receiving a different emphasis or weight; exponential smoothing (average of a specific number of most recent values with the weights declining exponentially as data becomes older); trend-adjusted exponential smoothing (exponential smoothing method which makes adjustments to past data when strong trend patters are evident in the data); seasonal indexes; linear trend line (uses least-squares to fit a straight line to past data and extends trend line to establish forecast) Patterns: level or horizontal (stable); seasonal; cycles (upward/downward over long period); trend (steady movement up or down); random Decomposition: removal of effects of each pattern component from the data; i.e. remove seasonal effects Causal models: regression model (equations relating dependent variable to one or more independent variables; fits a curve to minimize error; input-output (flow from one state of process/sector to another); economic (statistical relationships existing between economic quantities (i.e. black scholes)

Systems: Centralized vs. Decentralized vs. Distributed

centralized - central location; enables better data security; improves consistency in processing; may have high transmission costs; input/output bottlenecks at high traffic times; slow response to info requests decentralized - individual locations; summarized data sent to central; low transmission cost; low I/O bottlenecks; low processing power; may increase response rate to local needs; increase in data redundancy; poor information integration; increased security issues; increases hardware costs distributed - distribute to locations according to need (in between the two); increasingly common; better communication between locations; may be more current and complete; reduces need for expensive central processing center; possible updating conflicts among locations

Overhead Variance Analysis

complications of overhead - separate variances must be calculated for variable overhead and fixed overhead (applied to production based on specified cost driver) if cost driver differs from planned; applied overhead costs will change solely as a result of changes in cost driver consumption and do not represent true changes in overhead consumption only some overhead variances are controllable by the production supervisor variable overhead variance (varying with level of production) reflects both differences in unit cost of variable overhead and quantities of variable overhead used spending variances are calculated like rate-type variances; efficiency variances are like quantity-type variances spending variance - variance due to price changes in indirect material and labor, and poor budget estimates; controllable variance efficiency variance - variance due to variations in the efficiency of the base used to allocate overhead; often controllable variances in fixed overhead result from differences between actual fixed costs and budgeted fixed costs AND budgeted fixed costs and fixed costs applied based on standard quantity allowed for actual production volume variance - variance due to differences in the actual activity level attained (at standard) and the estimated/budgeted total fixed costs; uncontrollable Budget (Spending) variance - variance due to price differences in the total fixed overhead costs and the budget; the difference between the estimated total fixed overhead and the actual total fixed overhead; controllable by the production manager Four-way variance method (combing 4 basic overhead variances) - comprised of the two variable overhead variances (efficiency and variable spending) and the two fixed overhead variances; usually two or three of these variances are combined Three-way - combines variable overhead spending variance and the fixed overhead budget (spending) variance into a single variance; aka total spending variance Two-way - combines the total overhead spending variance and the fixed overhead budget (spending) variance into a single variance; aka the controllable or flexible budget variance

Business Cycles

cumulative fluctuations up and down in aggregate real GDP expansionary, peak, recessionary, trough leading economic indicators of changes in business cycle: consumer expectations, initial unemployment claims, weekly manufacturing hours, stock prices, building permits issued, new orders for consumer goods, level of real money supply lagging indicators happening after change in business cycles: changes in labor costs per unit of output, relationship between inventory and sales, length of unemployment, amount of commercial loans outstanding, relationship between consumer installment credit and personal income

Short-Term (Working Capital) Financial Structure

defined: funding provided by obligations which become due within one year (current liabilities) forms: trade AP; accrued AP (wages, taxes, etc.); ST NP; LoC, revolving credit and letters of credit; commercial paper; pledging and factoring AR; inventory secured loans Trade AP: advantages (easy to use; little legal documentation required; flexible, expand and contract with needs/purchases; interest normally is not charged; collateral normally is not required; discounts often offered for early payment); disadvantages (require payment in ST; effective cost is higher if discounts are not taken; financing they provide is use specific, their use finances only the assets acquired through trade accounts) Accrued AP (salaries/wages payable, taxes payable, unearned revenue including gift and other prepaid cards); advantages (easy to use, occur in normal course of business; flexible, they expand and contract with activity; collateral normally is not required); disadvantages (payment in ST; some financing is use specific) ST NP: typically promissory note is required; interest rate charged is based on credit rating of borrower; compensating balance may be required, which is an amount that must be maintained in a demand deposit account with lender, a required compensating balance increases effective cost of borrowing; advantages (commonly available for creditworthy firms; flexible, amounts/periods can be varied with need; collateral normally is not required, unsecured; provides cash for various purposes); disadvantages (poor credit rating means higher interest rate and possibly requires collateral; require payment in ST; compensating balance would increase effective cost and reduce funds available; refinancing would be necessary, if the note cannot be paid when due Stand-by credit: arrangement to have financing available for a specific purpose or period of time; three forms Line of credit: informal agreement whereby a financial institution agrees to a max amount of credit that will be extended at any one time; not legally binding on financial institution; provides reasonable assurance of funds; available funds generally can be used for any purpose Revolving credit: formal agreement whereby a financial institution or other lender agrees to a max amount of credit that will be extended; like LoC with legally binding agreement Letter of credit: a conditional commitment by a financial institution to pay a third party in accordance with specific terms and conditions (i.e. payment to 3rd party upon proof of shipment of goods; provides 3rd party assurance of payment without the buyer, who is also the borrower, having to pay in advance; often used in connection with foreign transactions Advantages: commonly available for creditworthy firms; highly flexible, credit used and debt incurred happens when needed; usually no collateral required; both LoC and revolving credit provide cash for general use Disadvantages: poor credit rating will mean higher interest rate and possibly require security; typically involves a fee; require satisfaction in the ST; required compensation balance increases effective cost and reduces funds available for use Commercial paper: ST unsecured promissory notes sold by large highly-creditworthy firms; most are for <180 days; requires SEC registration is >270 days; may be sold directly or through dealers; may be sold on discounted bases or with interest paid over the ST life of the note Advantages: interest rates are generally lower than other ST sources; large amounts can be obtained; compensating balances are not required; no assets need to be pledged as collateral; unsecured; provides cash for general use Disadvantages: provides only to most creditworthy firms; requires satisfaction in ST usually in large amounts; lacks flexibility of extension/accommodations Pledging AR: using AR as security for ST borrowing; level of borrowing available depends on creditworthiness of AR and level of lender's recourse against borrower; fee based on value is usually charged Advantages: commonly available; flexible, as new AR occur they can be used; compensating balances are not required; provides cash for general use; lender may provide billing and collection services for a fee Disadvantages: accounts are committed to lender as security, no control; cost of pledging AR may be greater than other sources; requires payment in the ST Factoring AR: sale of AR; buyer is called factor; terms of sale may be with (recourse for some or all risk) or without recourse (factor bears risk associated with collectability unless fraud); charges a factor's fee based on creditworthiness and length of maturity of receivables and extent to which factor assumes risk of uncollectbility Advantages: commonly available; flexible as new AR can be sold as occurred; compensating balance is not required; provides cash for general use; buyer generally assumes billing/collection responsibilities Disadvantages: cost may be greater than certain other sources; if sold with recourse selling firm may have on-going risk; sale of AR may alienate customers Inventory secured loans: amount borrowed depends on value/marketability of inventory; several agreements used Floating lien agreement: borrower gives lien on all of its inventory but retains control of inventory which it sells and replaces Chattel mortgage agreement: lender has lien against specifically identified inventory, borrower retains control but cannot sell without buyer approval Field warehouse agreement - inventory remains at borrower's warehouse but under control of independent 3rd party Terminal warehouse agreement: inventory moved to public warehouse and placed under control of independent 3rd party Cost depends on nature of inventory; credit standing of borrower and type of security agreement used Advantages: commonly available for certain inventories including commodities, automobiles; flexible as new inventories become available they can become security; may provide cash for general use Disadvantages: pledged inventory may not be available when needed; cost of using inventory secured loans may be greater; may require repayment in the ST; not available for certain inventories

Accounting Rate of Return Approach

determines the expected annual incremental accounting NI from a project as a percent of the initial (or average) investment ARR = (average annual incremental revenue - expenses)/initial(or average) investment establish acceptable pre-established rate of return advantages: easy to use/understand; consistent with FS values; considers entire life and results of project disadvantages: ignores time value of money; uses accrual accounting values not cash flows

E-Business vs E-Commerce E-Commerce requisites, risks and business models

e-business: supercategory of e-commerce; uses internet to improve business performance through connectivity (within or between organizations) e-commerce: marketing, buying, and selling of products & services via the internet; transactions between organization and trading partners; B2B and B2C; B2Employee (sharing info and interacting w/ employees); B2Gov't Requisites: 1) trust w/ trading partner Risk: availability/downtime; security and confidentiality; authentication and nonrepudiation (after the fact, can't claim that transaction occurred); integrity Models: e-marketplaces and exchanges; viral marketing; online direct marketing (email, texts); e-tendering systems (bidding online); social networking

Natural Monopoly

economies of scale for a single provider for which there is no close substitutes and entry into industry is restricted government license granting an exclusive right is a characteristic of monopolies, but not a natural monopoly

Collusive pricing Cartel vs Oligopoly

firms in oligopolistic market conspire to set price higher than would exist under normal competition Cartel: group of firms that conspire to make price and output decisions for a product or service; overt collusion (OPEC) Oligopoly: not all firms operating in an oligopolistic market function as a cartel

Backup and Restoration Methods and Procedures: Data Recovery

goal: recover from equipment failures; maintain at least one remote archive off-site; use multiple backups *find where things got screwed up; return to that point; reprocess 1. Grandfather, father, son system 2. Checkpoint & restart: common in batch processing; checkpoint is where processing accuracy is verified 3. Rollback and recovery: common to OLRT; record processing transactions in log; periodically record master file contents; if problem, return to good master file and reprocess subsequent transactions Fault Tolerant Systems - operate despite component failure - include redundancy and corrections for component failure; used with space flight; ecommerce; bank credit card processing High availability clusters - computer clusters designed to improve service availability; common in ecommerce Remote backup - outsourcing backup SANs - replicate data from multiple sites; data available immediately; efficient Mirroring - maintain exact copy of data set; massive storage clog; expensive

Enterprise-Wide or Enterprise Resource Planning Systems; Cloud-Based Systems (benefits + risks)

integrate management support systems, support of knowledge work and operational support goals: integrate all data into 1 system, cost savings, employee empowerment with better communication & decision making; best practices internet and intranet based components of ERP systems: typically purchased in modules that build bridges between systems; online transaction processing system: includes core business functions; online analytical processing system with data warehouse and data mining capabilities within ERP Cloud-Based Systems are a "virtual data pool" often managed by 3rd party vendor Infrastructure as a Services (access to virtual hardware such as Amazon Web Service and Carbonite) Platform as a Service: access operating system & related services including development ie. Salesforce.com Software as a Service (access software such as Office 365 and google docs) Cloud Vendors: Google and Amazon Cloud deployment models: public clouds available to public or large industry groups and owed by an organization selling cloud services; private clouds are for 1 organization may be outsourced; community clouds available to members of a community like google apps; hybrid clouds Benefits: universal access, cost savings without multiple systems, scalability, outsourcing & economies of scale, enterprise wide integration to sync with ERP Risks: data loss by having all eggs in one basket, system penetration risk such as Target case, linked to outsourcing provider ***PaaS is the use of the cloud to create software

Capital Budgeting

measuring/evaluating/selecting LT operations risks: changes in laws/regulations and macroeconomic changes cost of capital determines rate of return firm must earn on capital project evaluating capital projects: payback period approach; discounted payback period approach; accounting rate of return approach; net present value approach; internal rate of return approach; profitability index approach

Spoilage and Scrap, Flow of Costs and Inventory

normal spoilage - unavoidable part of current manufacturing process; included in CoGS abnormal spoilage - controllable and avoidable; period cost scrap is material left over after production; monies received can reduce factory overhead; can be treated as other sales alternatively; unless traceable to a job it is spread equally across jobs Direct materials: beginning inventory direct materials + direct materials purchased = direct materials available - ending inventory direct materials = direct materials used Direct material used + direct labor + manufacturing overhead = total manufacturing costs Beginning inventory WIP + total manufacturing costs = WIP available - ending inventory WIP = cost of goods manufactured Beginning inventory finished goods + cost of goods manufactured = goods available for sale - ending inventory for finished goods = CoGS

Globalization

permits reduced investment portfolio risk and a lower cost of capital Bretton Woods Agreement: world bank (general economic development); IMF (maintain order by providing funds to economies in financial crisis (currency crisis, banking crisis, financial debt crisis) Reduction in worldwide trade barriers (GATT) 1947: eliminating tariffs, subsidies, import quotas, etc.; reduce transportation and other costs (WTO coordinates GATT) WTO - oversee covered trade agreements; provides forum for negotiations and settling disputes; does not establish procedures for collection of international debt Removed restrictions on foreign direct investments Trade, production, capital markets (areas where globalization has occurred significantly) Production: outsourcing (risks: quality; security; export/import restrictions; currency exchange changes); foreign direct investment (establishing owned or controlled facilities in a foreign location to produce goods or services; lowers cost, potential for increased growth) mitigate risks through an arbitration clause with the foreign supplier Capital Markets: brings together investors and borrowers; stock/bond/commodities markets; zllar market (short and intermediate-term loans world-wide in US dollars); Eurobond market (LT loans outside borrower's home country offered in most major currencies); benefits: change for greater returns and diversification for investors; more sources of capital and lower cost of capital for users; risks: currency exchange risks GDP output by country - US is about 22%, projected to decrease slowly over time FDI world-wide share is increasing significantly for developing countries Exporting advantages: achive economies of scale domestically; avoids cost of establishing foreign production capability; provides experiences in international business at low risk; advantages of importing: obtaining goods not otherwise available, better quality possibility; possibly lower cost; disadvantages of both: existence/possibility of trade barriers (quotas/tariffs), possible high transportation costs Foreign licensing: granting foreign entity right to use asset (patent, trademark) through royalty payments; increases revenue from royalties, avoids trade barriers, avoids costs/risks of opening foreign operation; but licensee may misuse patents/processes/information; licensor may not be able to control licensee to make sure standards are met Foreign franchising: mandates strict operating procedures; franchisor provides on-going assistance; increased revenue from royalties; avoids costs/risks of opening foreign facility; but franchisee may misuse information; franchisee QC may not meet franchisor standards Foreign Joint Venture: joined by two otherwise unrelated entities; one of the owners is usually located in the foreign country; host country co-owner has knowledge of environment; costs/risks are shared; local stakeholder maintains local resistance; but foreign co-owner may misuse patents/technology/information; co-owner from home does not have absolute control; shared ownership can lead to differences in goals/strategies Foreign subsidiary: advantages of acquiring - quick entry into foreign market, known level of results and related historical info; may block/preempt competitors from entering market due to quick entry; but possible lack of understanding of acquired firm's values/cultures/processes; synergies or other expected benefits may not materialize; capital investment costly Establishing new foreign subsidiary (greenfield venture): can be built from ground up to have desired culture/operating style/procedures; but time consuming, costly, greater risk; capital investment costly

control group

responsible for providing a continuous review function by supervising and monitoring input operations and the distribution of output (continuous internal audit function)

Strategic Management

strategy - to achieve mission Porter's Five Forces: bargaining power of customers (product choices available; characteristics of customers) bargaining power of suppliers (negotiation ability) threat of new entrants threat of substitutes (products/technologies) intensity of competition Generic Competitive Strategies: product differentiation - better quality, desirable product features cost leadership - high volume low cost Environmental scanning - a process in which the organization continuously gathers and evaluates info that could impact its ability to compete using its current organizational strategies

Ratio Analysis

when using B/S values with IS items you have to use the average Liquidity (appropriate for management for working capital) working capital = CA - CL working capital ratio = CA/CL acid test = cash + AR + marketable securities / current liabilities defensive interval ratio = cash + receivables + marketable securities / average daily cash payments times interest earned = NI + interest expense + income tax exp / interest expense *# of times current earnings measure interest payments for period times preferred dividends earned = net income / annual preferred dividend obligation Operational Activity AR turnover = net credit sales / average AR # of days sale in average AR = 360 days / AR turnover Inventory turnover = CoGS / average inventory *helps identify over/under stocking of inventory and identifies obsolete inventory # of days supply in inventory = 360 / inventory turnover *assess general inventory management efficiency ***Operating Cycle Length = number of days' supply in inventory + # of days sales in average receivables *average length of time to invest cash in inventory, convert the inventory to AR and collect the receivables Profitability Measures Gross profit = sales - cost of goods sold Gross profit margin = gross profit / net sales Net profit margin = net income / net sales Return on total assets (ROI) = (net income + interest expense + interest tax savings) / average total assets *efficiency with which invested resources are used Return on OE = net income / average stockholders' equity Return on common equity = net income - preferred dividend / average CS equity Residual income = NI - required dollar return Required dollar return = average invested capital x hurdle rate *execss of NI over the dollar amount of the required rate of return on average investment *dollar amount is hurdle rate Economic Value Added = earnings before interest - [rate of return x (LT debt + SE)] *economic profit EPS = net income - preferred dividend / weighted average number of CS outstanding PE = market price for common share / EPS for common shares *price of share of common stock relative to latest EPS Equity or Investment Leverage Measures debt to equity = total liab / total SE OE ratio = SE / total assets Debt ratio = total liab / total assets BV per common share = CS equity / # of common shares outstanding BV per preferred share = preferred stock equity + dividends in arrear / # of preferred shares outstanding *dividends in arrear are prior years' dividends unpaid Diversifiable risk (unsystematic, firm-specific; eliminated through diverse project, investment portfolios, location) Non-diversifiable risk (cannot be eliminated through diversification; relate to larger environment) General business risk - measured by expected variability in firm's EBIT Financial risk - common shareholder risk that results from the use of debt financing and preferred stock which require payment before common shareholders receive a return on investment Default risk - risk issuer may default on obligations Interest rate risk - risk it will decrease value of outstanding debt (inverse relationship between changes in general interest rate and market value of existing debt) Inflationary risk (purchasing power risk) - inflation will result in reduction of purchasing power of fixed sum or money Liquidity risk - cannot be sold at FV for cash readily Political risk - operations in foreign country with different socio-political elements than firm's domestic market Currency exchange - between two currencies (foreign currency transaction risk; foreign currency translations; foreign currency economic risk)

Profitability Index

*concerned with ranking projects; not economic feasibility like other approaches takes into account both NPV and cost of each project to get PI (cost-benefit ratio); NPV of project inflows/ PV of project cost *higher %, higher rank

Performance Standards

26 total standards 7 primary themes: 1) managing IA activity; 2) nature of work; 3) engagement planning; 4) performing the engagement; 5) communicating results; 6) monitoring progress; 7) communicating the acceptance of risks Standard 2000: 1 above; to ensure it adds value to organization Standard 2100: evaluate and contribute to improvement of governance Standard 2200: develop and document plan with objectives, scope, timing and resource allocations Standard 2300: sufficient information to achieve engagement's objectives Standard 2400: 5 above Standard 2500: CAE must establish/maintain system to monitor disposition of results to management Standard 2600: unacceptable risks are communicate to senior management; if unresolved communicates to the BoD

Aggregate Demand

AD: total spending in economy, sum of all market demand curves (consumption - 70% of aggregate spending - PDI, investment - 15% spending, gov't spending, exports - imports) *new housing is investment Consumption function: measures relationship between PDI and consumption spending (how much they have available to spend vs. how much they spend; measures borrowing/savings) Average propensity to consume: measures percent of disposable income spent on consumption: CS/DI *average propensity to save is reciprocal of APC Marginal propensity to consume: measures change in consumption spending as a percent of change in disposable income (CS on additional dollar received) MPC = $ change in spending / $ change in disposable inc Marginal propensity to save: reciprocal of MPC Investment = capital items, such as residential construction, non-residential construction, business PPE, business inv; fluctuates more than consumption Factors influencing investment spending: interest rates, demographics, consumer confidence, consumer income/wealth, level of capacity utilization, tech advances, vacancy rates, expected levels of sales Gov't spending: purchases of goods and services by all levels of gov't; excludes transfer payments; this spending impacts taxes which impacts PDI which changes personal consumption Discretionary fiscal policy: gov't changes to spending/taxation to impact aggregate demand exports > imports increases AD Factors that influence imports/exports: relative levels of income/wealth, relative currency exchange rates, relative price levels, relative inflationary rates, import/export restrictions and tariffs Shifting AD outward: reduction in taxes, improved consumer confidence, new technology to increase investment, interest rate decline, gov't spending increases, export increase imports decrease, increases in wealth Multiplier effect: increased demand has ripple through entire economy (i.e. increased investment spending = more personal income = more consumption spending); computed using MPC (change in spending X (1/(1-MPC)) increased business investment increases AD

Absorption and Direct Costing

Absorption Costing (full accrual costing): assigns three factors of production to inventory - Direct material, Direct labor, variable & fixed manufacturing overheads Difference between variable and absorption costing is related to treatment of fixed manufacturing costs fixed manufacturing overhead is allocated to each item produced (if produce more than sell, portion is capitalized as inventory) sales - variable - fixed = gross margin - S&A variable - S&A fixed = operating income Variable (direct) Costing: assigns only variable manufacturing costs to inventory - direct material, direct labor, variable manufacturing overhead *used for internal decision making cannot be used for external reporting sales - variable man - variable selling & am = contribution margin Selling and admin expenses are not product costs in either method when production = sales, both methods have same income when units sold < units produced, AC income > DC income

Valuation Techniques - CAPM (Capital Asset Pricing Model)

An economic model that determines a measure of relationship between risk and expected return; incorporates time value of money (using risk-free rate of return) and element of risk (using beta) Required rate of return = risk-free rate of return (rate on US gov't bonds) + beta (measure of volatility of asset being measured, measure of risk) * (Expected rate of return (benchmark rate for the class of asset being valued) - risk-free rate of return) RR=RFR+beta(ERR-RFR) beta - measure of systematic risk as reflected by the volatility of an investment or other asset (asset standard deviation / benchmark standard deviation) ; ***(relationship between asset return and benchmark return) X coefficient of correlation between a and b beta = 1, asset being valued moves in line with benchmark; same level of systematic risk as that class of asset beta > 1, more volatile than that class of asset beta <1, less volatile than that class of asset Widely used with assumptions and limitations: assumes there is an asset class and benchmark for asset being valued; all investors have equal access to all investments of the class being valued and all use a one-period time horizon; asset risk is measure solely by variance of the asset being valued from asset class benchmark; no external costs involved (no commissions, taxes, etc.); no restrictions on borrowing or lending at the risk-free rate (all parties can do so); uses historical data which may not be appropriate for computing FV Uses: securities analysis; capital budgeting (company beta or industry beta used as surrogate for project beta); setting fair compensation for regulated monopolies

Computer Crimes: Computer Attack Methods and Cyber-Incident Responses

Attack Methods: back door (small amount of code that allows a programmer to access program without going through normal protocol); botnets; denial of service (flooding computer system with incomplete requests making system unavailable to users; often use botnets - zombie computers used by hackers); eavesdropping (unauthorized intercept of private communication); email bombing (sending millions of emails to an address); logic bomb (program implanted in a system that is dormant until event or time occurs); malware (software that exploits system/user vulnerabilities to gain access or damage computer; virus - unauthorized programs that copies itself and may damage data; worm - virus that replicates across systems; Trojan horse - programs hidden inside benign file often seen in email that plants codes into system) ; packet sniffing (can analyze traffic on a network but can also capture data illegally; man-in-the-middle attack is where the hacker impersonates sender and receiver); password crackers (generate potential passwords and test to gain access); session hijacking & masquerading (IP address identification and hacks by impersonation); salami fraud (slice a tiny unnoticeable amount, less than a penny and transfer from a large number of accounts); social engineering/spoofing (tricking employees to gain access to a system; phishing - spoof emails and fraudulent websites); spam (irrelevant or inappropriate email sent to a large number of recipients or to the same recipient many times); war chalking, driving, walking (chalking - draw symbols in public places to indicate available Wi-Fi network access; driving - seeking access to Wi-Fi while driving; walking - seeking access to Wi-Fi while walking) Control: virus and spyware detection software to detect and remove malware Cyber-Incident Response - protocol org has dedicated in response to specific violations; detection procedures; event logging procedures; short analysis of response; incident recovery; monitoring; decision and action regarding event

International Professional Practices Framework (IIA): Mandatory elements; principles underlying code; internal auditing attribute and performance standards

CIA - certified internal auditor Strongly recommended guidance (position papers - important issues related to IA, practice advisories - general matters related to IA, practice guides - detailed guidance for internal auditing) Mandatory guidance (definition of internal auditing; - independent, objective assurance and consulting activity designed to add value and improve an organization's operations) IIA code of ethics - see 4 principles; international standards for the professional practice of internal auditing standards IIA principles: 1) integrity; 2) objectivity; 3) confidentiality; 4)competency Standards: include 1. statements of basic requirements; and 2 interpretations Attribute standards - involve characteristics of entities & individuals performing IA Performance standards - involve the criteria to evaluate the quality of IA services Includes implementation standards differentiating between assurance and consulting activities Standards are issued by IASB

Balanced Scorecard and Benchmarking

Categories: Financial Customer Internal business processes Learning, innovation and growth Creating balanced scorecard: identify strategic goals/objectives, critical success factors (SWOT), operational tactics, and performance measures for each tactic Don't use only objective/financial measures on scorecard 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

Attribute Standards

Chief Audit Executive - senior position responsible for effectively managing IA activity in accordance with IA charter; need appropriate professional certifications 4 Themes: 1) purpose, authority, responsibility; 2) independence and objectivity; 3) proficiency & due care; 4) quality control and improvement program Standard 1000: 1 above must be formally defined in a charter which must be periodically reviewed and approved Standard 1100:2 above Standard 1200: 3 above Standard 1300: 4 above 14 total standards

Competitive Analysis

Conventional Financial Performance: ROI most commonly used; NI / Total Assets DuPont Approach: ROI = return on sales X asset turnover return on sales = NI / sales; evaluates the profitability of sales ROI is external financial analysis used to evaluate broad performance; it suffers from accrual distortions (can be arbitrary) and from the diluted hurdle rate Residual income - eliminates diluted hurdle problem; general form of economic profit; recognizes cost of capital and expresses answer in dollars not a rate operating income - (required rate of return X invested capital) Value Based Management: accrual-based metrics are discredited; cost of capital is increasingly emphasized; shareholder value is primary element of interest commonly EVA = Net operating profit after tax - WACC (total assets - current liabilities) *often used for incentive comp and investor relations CRFOI = (CFO - ED) / cash invested CFO = cash flow operations ED = economic operation *cash-based metric

E-Commerce Applications (CRM, EDI, EFT, SCM)

Customer Relationship Management - technologies for managing client relationships (customer data, profitability, personalized marketing) Electronic Data Interchange - computer-to-computer exchange of business data; need structured data & processing protocols to reduce costs and speed processing; facilitates just-in-time inventory use; often relies on value added networks (which provide audit trails, controls and securities); benefits (paperless; no data entry; reduces errors in information exchange; required with Walmart suppliers; real-time data; faster invoicing and payment; costs (finding vendors, new contract costs, process reengineering; training; security/audit/control procedures; hardware; translation costs) E-banking: requires (senior management and BoD oversight; technology under Senior IT leadership; operational management monitoring and measuring risk) Electronic Funds Transfer - technology for electronically transferring money; increase time efficiency reduce costs; usually 3rd party vendor acting as intermediary; processes through automated clearing house; security (data encryption); token-based payment systems; electronic wallets (programs for managing credit cards, user names, passwords, address) Supply Chain Management - process of transforming raw materials into finished products and delivering goods; process of planning, implementation and controlling supply chain operations (often includes EDI)

Cost-Volume-Profit Analysis/Model

Determine break-even point or income; in general, the effect on income is opposite of the effect on break-even point Break-even model (target operating model): breakeven point in units = fixed costs / contribution margin breakeven point in dollar = fixed costs / (contribution margin / revenue) fixed costs per unit deceases as volume increases contribution margin ratio price, variable cost per unit, and fixed costs behave as constants costs can be defined as strictly fixed and strictly variable volume is the only driver of costs and revenues number of units produced = number of units sold (no change in inventory) model applies to operating income (Before-tax) assumptions are relevant since they apply only to a relevant rate margin of safety - difference between the current sales level and the breakeven point; expressed in units or dollars targeted profit - (fixed costs + targeted profit) / contribution margin per unit

Financial Structure vs. Capital Structure

Financial structure: the mix of liabilities and OE accounts of a firm Capital structure: LT sources of funding; LT debt and OE

Financial Valuation

Financial valuation = process of estimating FV of asset, liability or entire business FV = price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants Valuation used in: recognition of assets/liabilities/equity items; investment analysis; capital budgeting; business mergers/acquisitions; assessment of closely-held businesses; tax determination; buy/sell agreements value is at a poinlocationt in time called measurement date Hierarchy of inputs: level 1 (quoted prices in active markets for identical assets at measurement date), level 2 (observable for item being valued, directly or indirectly, but are not quoted prices described in level 1 - quoted prices for similar item; quoted prices for identical/similar that is not active; inputs other than quoted prices that are observable including interest rates, yield curves, credit risk, default risk; inputs derived from observable market data by correlation or other means), level 3; unobservable, entity's assumptions or internal data (i.e. asset retirement obligation; closely held businesses valuation) Approaches to developing FV: market approach (a.k.a. sales comparison approach; uses prices and other relevant info generated by market transactions for items identical or comparable to item being valued, used in valuing pre-existing house/building), income approach (uses valuation techniques to convert future amounts of economic benefits or sacrifices of economic benefits to determine what the future amounts are worth at valuation date, techniques include: discounted cash flows, option pricing model, earnings capitalization models, etc.), cost approach (uses valuation techniques to determine the amount required to acquire or construct a substitute item (a.k.a. replacement/reproduction cost approach); more limited approach but especially useful for specialized items

Flat-File vs. Database Systems (categories of systems) Knowledge Management System (components); data warehousing and data mining

Flat-File - early IT systems had separate programs and data sets, each application managing its own data, data sharing was a mess that required restructuring data (high data redundancy; poor cross-functional availability) Database Systems: pool data into logically related files; MIS always implemented in database environment Data Warehouses & Mining: system to collect organize integrate and store entity-wide data; easy access to large quantities of varied data across the organization Mining = analysis of data in the data warehouse using analytical tools and exploratory techniques Warehousing: database of archived operational transactions; incorporated in DSS usually; may include external data if relevant to understanding of internal data Drill Down: move from summary to detailed information Slicing and Dicing: view data in multiple ways Data mart - focused on a particular market or purpose and contains only info specific to that objective

Accounting Controls

IC is a process designed to provide reasonable assurance, it is effected by management, BoD, other personnel; objective: effective/efficient operations; reliability of fin rep; compliance with laws/regulations Preventive (before) controls: cheaper; building locks, user names/passwords; segregation of duties; access control software Detective (after) controls: data entry edits; reconcile accounting records to physical assets (inventory counts) Corrective (reversing) controls: maintenance of backup files, disaster recovery plans, insurance; *some detective controls function also as preventive (i.e. security cameras) *contingency planning relates to detective and corrective procedures Feedback controls (evaluate and respond to results of a process) Feed-forward controls (project future results and alter inputs in response) General holistic controls: apply broadly to most computerized functions (restricting access to computer facility, backup file systems, background checks of personnel) Application specific controls: focus on accounting applications that include data entry, update and reporting (data checks)

Physical Access Controls

IT facilities: computer hardware, software, data files, computing infrastructure General controls; preventive and/or corrective Power system risks - failure (blackout); reduced voltage (brownout); sags, spikes, surges, electromagnetic interference Environmental controls: alarm control panel; water and smoke detectors; climate controls; fire extinguishers; manual fire alarms; uninterruptible power supply; fire suppression systems appropriate for electrical fires Mainframe controls - restrict access to programs/data files/ hardware; use locks, keypad devices; access card readers; security personnel and surveillance Control: system penetration risk (social engineering - seek access by tricking employees; white or black hackers) piggybacking - following person through authorization External and internal labels; set file attributes

sub buying in its own currency eliminates foreign currency risk US share of worldwide exports = 10% freely fluctuating exchange rates automatically correct a lack of equilibrium in the balance of payments World Bank promotes economic development through loans to developing countries Requirements definition document is signed during the analysis phase After changes to a source program have been made and verified, it moves to production

Implementation approaches: phased - system is divided into modules for implementation IT Phases: planning and feasibility - technical, economic and operational feasibility analysis - systems analysts work with end users to understand and document business processes and system requirements at this stage. All parties sign off on the requirements definition to signify their agreement with the projects goals and processes at this stage Fixed rate LT notes best facilitate financial leverage for borrowing firm The market price of a bond issued at a premium is equal to the present value of its principal amount and the present value of all future interest payments, at the market (effective) interest rate The cost of debt most frequently is measured as Actual interest rate minus tax savings historic economic rate of return on common stock = (Dividends + change in price) divided by beginning price floating-rate bonds have a constant market value In a net-net lease, the lessee is responsible for executory costs and residual value of the leased asset Materials Requirement Planning - The materials requirement planning approach to manufacturing and inventory management focuses on a set of procedures to determine inventory levels for demand-dependent inventory types such as work-in-process and raw materials. Under this approach, inventories are maintained at every level in the process (as raw materials, work-in-process and finished goods) as buffer against unexpected increases in demand. The alternative approach, just-in-time inventory, seeks to eliminate excess raw material, work-in-process and finished goods inventories. Economic value-added (EVA) represents the residual income that remains after the cost of all capital, including equity capital, has been deducted ROI may lead to rejecting profits that yield positive cash flows standard cost system may be used in process costing or job order costing ROI = (income / sales) * asset turnover When using PERT, project completion times are measured by a pessimistic, optimistic, and most probable estimate... And assigning a weight of one for the pessimistic and optimistic estimates and a weight of four for the most probable estimate and dividing by six inventory is most commonly used as security for ST loans a majority of board members must be independent (mandated by the NYSE), also a director can be a significant customer of the corporation and can still retain independence IC assumes that controls are properly designed nominal means before inflation; if nominal interest rates increase, investors expect a higher yield so their stock declines serial bonds mature on different dates so investors can choose a maturity date When calculating the cost of capital, the cost assigned to retained earnings should be Lower than the cost of external common equity In an interest rate swap, two companies exchange their debt servicing obligations on some amount of debt principal. The actual exchange of funds during the agreement is in the form of a net payment from the party owing the greater amount for the period. Work to complete BWIP + Units started and completed + Work to date on EWIP = Equivalent units (FIFO) *EWIP = ending work in process The weighted-average cost of capital is equal to 7.10% {50% debt × [6% × (1 − 0.4 tax rate)] + (10% preferred stock × 7%) + (40% common stock × 11.5%)}. In a capital lease transaction, the lessee is using the lease as a financing source and the lessor is financing the transaction (providing the investment capital) through the leased asset Conversion costs are equal to total production costs ($12,200) minus raw material costs ($5,700), or $6,500 digital signature assures the recipient that the message came from a certain individual and it was not modified production volume variance is caused by the fact that production activity is different from planned The economic order quantity model minimizes the sum of ordering and carrying costs Materials requirements planning is a manufacturing planning system control group is responsible for providing a continuous review function by supervising and monitoring input, operations, and the distribution of output (i.e., a continuous internal audit function). cost of debt is equal to the effective rate less the tax advantage cost savings is referring to cost of debt (interest!)

Computer Hardware Components

Inputs & Outputs Peripherals = I/O devices (input: keyboard, mouse, microphones, etc.; output: printers, monitors, voice systems) Central Processing Unit: has control unit to interpret program instructions and arithmetic logic unit to perform arithmetic calculations and primary storage to stores programs (RAM - temp; ROM permanent) Secondary Storage: permanent storage for programs and data (online or offline); magnet disks (most common; ipod); magnetic tape (backup; slow/cheap; for large archive storage in less important systems); optical disks (written and read by light instead of electrical impulses; laser burns data on disk; Blu-ray); flash drives (similar to RAM) Supercomputers: fastest available; parallel processing and computer clusters (connected computer's); calculation-intensive applications such as weather forecasting mainframe computers: used in ERP applications; often used with microcomputers in networked systems with thousands of simulated users; often used in systems with redundancy; input/output intensive Servers: computer that provides resource on a computer network PCs

Job Costing and Overhead Allocation

Job Costing: questions related to identifying cost flows used for production of large, relatively expensive, heterogeneous (customer ordered) items; costs are accumulated by job, group costs by customer Process Costing: used to accumulate costs for mass-produced, continuous, homogenous items that are often small and inexpensive; costs are accumulated by process, usually grouped by department Overhead Costs - estimated overhead amount is applied to production based on a predetermined formula Three step process to overhead allocation~~~~~~~ 1. BOY - calculate predetermined overhead rate (POR) = budgeted factory overhead costs / estimated cost driver activity level 2. allocate overhead by multiplying step 1 rate by the actual units of the allocation base 3. EOY - dispose of over-/under-applied overhead. take the difference between allocated OH and actual OH to CoGS estimated and budgeted mean same thing; so do allocate and apply

Quality and Inventory Management

Just-in-Time: don't order raw materials until they are actually needed; do not order more than you will need; this reduces carrying costs significantly Uses a pull production process (production schedule determined by actual sale of goods If well managed, there will no inventory (raw materials; WIP; FG) Characteristics: many small orders delivered in timely manner; use of LT contracts with small number of suppliers; high quality raw materials; inspection of materials reduced to a minimum; reducing costs of order and payment processing; suppliers paid on a periodic basis rather than for each delivery Production process: flexible manufacturing environment; skilled/flexible workforce that can perform multiple tasks; teams; low/zero rate of defects Push - demand is forecasted and production is produced to that forecast Backflush costing - unlike traditional costing; JIT usually uses backflush costing to take costs directly to FG or CoGS; if there are goods remaining in inventory at the end of the period, the costs are adjusted (flushed) back to inventory accounts Importance of quality: most commonly used satisfaction measures are sales returns; warranty costs; customer complaints quality of conformance - conforming to design specifications costs of quality: first two = voluntary; second = involuntary prevention - prevent defects (reengineering to improve design) appraisal - identify defective products during manufacturing (inspection; tests of functionality) internal failure - costs of defective components and final products identified prior to delivery external failure - caused by failure of products in the hands of the consumer (i.e. warranty, litigation) when the overall quality of conformance is low, more of the total cost of quality is typically related to cost of failure increases in the cost of prevention and the cost of appraisal are usually accompanied by decreases in the cost of failure and increases in the quality of performance prevention can be more effective and less expensive to focus on

Factors Affecting Cost of Capital

Macroeconomic conditions; past performance of the firm (greater firm risk higher cost of capital); amount of financing (larger amount sought, higher cost); relative level of debt financing (higher proportion of financing sought through debt relative to equity the higher the cost of debt capital); debt maturity (longer, higher cost); debt security (unsecured higher cost) Hedging principle of financing - calls for matching cash flows from assets with cash requirements needed to finance those assets; LT assets should be financed with LT financing Business risk: firms with higher business risk (variability in EBIT) should use less debt financing Higher tax rate, greater amount saved by financing through debt

Process Costing

Most complex; calculation of equivalent units under different cost flow assumptions used to accumulate cost of mass-produced, continuous, homogeneous items that are often small/inexpensive cost allocation process: complications - partially completed items in beginning and ending inventory; the 3 factors of production may be at different levels of completion; some costs do not occur uniformly across the process (raw materials); the choice of inventory evaluation methods affects the flow of costs Necessary to allocate manufacturing costs to ending WIP and CoGS transferred out of WIP *see WIP inventory t-account three steps to dividing WIP into pieces of ending WIP inventory and CoG transferred out 1. determine equivalent unit (for both direct materials and conversion costs; equivalent on basis of cost); common for all materials to be added at a certain point in the process; conversion costs applied uniformly throughout production process 2. compute cost per EU (divide the cost for direct materials and conversion costs by the equivalent unit) 3: determine cost of goods transferred out and ending WIP inventory; combines first two by requiring that the appropriate EQ by multiplied by the cost per equivalent unit to value WIP EI and CGTO ***Weighted average - assumes prior period costs are averaged together FIFO - assumes prior period costs are separate *only difference is treatment of beginning inventory; with weighted average the beginning inventory costs are averaged with the current period; with FIFO, beginning inventory value is treated as a lump sum and is added to the current period costs

Basic Principles related to Computer Networks: transmission media; network operating system (and its configurations); communications devices; LAN vs. WAN; common network management tools/reports

Network: two or more computing devices connected by a communications channel Node: network access point; a connected device (ie printer) Each node is assigned a DNS (translates network node into IP address) and IP address Network monitor displays node activity Network interface card or network adapter card: translates computer speak to network speak; getting info into and out of computer system) Types of Nodes: client - end user's microcomputer; uses but does not provide network resources server - provides services or resources to network; end-users access server resources but don't use directly Types of Networks: LANs - use dedicated communications lines; cover limited area WANs - use shared communications lines SANs (storage area networks; type of LAN; connect storage devices to servers and other devices; centralize data storage; increasing use of in cloud computing) PAN (personal area network) - created or used by individuals; wireless or wired access (ie Bluetooth) Transmission Media: Wired - twisted copper pair (slowest, originally for phone connections; worst capacity; most susceptible to electromagnetic interference); coaxial cable (faster more secure, moderate capacity; usually used for wired cable TV system; less subject to interference); fiber optic cable (fast and secure; high capacity; no electrical interference; no degradation over long distances; expensive) Wireless - microwave transmission (primarily used in WANs); Wi-Fi (slower than wired; used in LAN and also to provide access to WANs); Bluetooth (same radio frequencies as WiFi; used in PANs; low power consumption; small area connection) Wireless - scalable, flexible, often lower cost, mobility Wired - reliable, security, speed, occasionally lower cost

Typical Transaction Processing Systems (MIS, DSS, ESS); relationships; goals and components (think capabilities)

Operational Systems (low level management) large volume day to day activities; (non)financial activities that generate debits and credits to acct system Management Information Systems (mid level management) support routine day to day structured problems using internal data; sometimes they compare planning info with outcomes Accounting info system is a subset Decision Support Systems (high level management manage non-routine problems and long-range planning; often integrate external market level with TPS data; include significant analytical and statistical capabilities; data driven (process large amounts of data to find relations and pattern) or model drive (use models to forecast outcomes) i.e. client risk assessment; client acceptance and retention; IC doc and testing; compute audit sample size Executive Support Systems (high level management) support forecasting and long range strategic decisions; greater use of external data (DSS for dummies?); can be ad hoc Knowledge Work Systems - provides means to collect, organize and develop relations among information

Time Value of Money

PV of single amount to be received in the future: need discount rate; time period for table FV of single amount invested now: interest rate = annual rate / number of periods in one year; need to know how many times interest compounds during year (this times total years = number of periods) PV of ordinary annuity - series of equal amounts to be received at the end of equal intervals over future period; table with rate and number of periods, multiply that by singular annuity to get PV FV of ordinary annuity: table with rate and number of periods, multiply that by singular annuity for FV (should be greater than sum of all annuity amounts) PV of annuity due - beginning of each period; a.k.a. annuity in advance; rate; periods; multiply for PV *if question relates to annuity due but gives ordinary annuity table: use one less period then add 1 then multiply by singular amount FV of annuity due

Economics - Macro Employment/Unemployment

Population divided into labor force and not in labor force; labor force includes employed and unemployed; not in labor force includes <16 years old, retirees, not seeking work, institutionalized, active military; both unemployment categories: frictional (transition between jobs or do not have info necessary to get matched up with employer); structural (need for prior types of jobs have been greatly reduced or eliminated; lack skills for currently available jobs); seasonal; cyclical (downturn in business cycle; reduced current demand for employees; most important form, greatest policy concern) Natural unemployment rate: due to frictional, structural and seasonal reasons Full employment = no cyclical unemployment

SOX in corporate governance

SOX: Audit Committees - all independent directors; choose, compensate, oversee and terminate outside auditor; procedures for whistleblowing complaints: Officer Certification of Financial Statements - CEO and CFO certify they reviewed quarterly SEC reports and it is fairly presented; certify they are responsible for establishing/maintaining IC; certify design and evaluation of IC; conclusions about effectiveness of IC including significant deficiencies, fraud or material weaknesses; unlawful to fraudulently influence or coerce outside auditors: Financial Statement Shenanigans - off-balance sheet transactions (requires 10-Ks and 10-Qs disclosing material off-b/s transactions); limited use of pro forma f/s, must be reconciled to GAAP: Section 404 - annual report includes IC report audited: install code of ethics for officers, cannot loan money to top officers, can claw back incentive payments when wrongdoing was responsible for targets being attained *Dodd-Frank imposes bounty of 10% and 30% of sanctions imposed for whistleblowers; if over $1M

Risk Management

Strategic Risk - LT broad-based exposure related to the overall strategy of the organization Operational Risk - ST including process risk, shared services risk, foreign/off-short risk, credit/default risk Market Risk - economic events or natural disasters

Business Strategy and Market Analysis

Three generic strategies: cost leadership (become low cost provider - focus on selling low to gain market share or at average cost to attain profit; seeks to minimize costs; risky because other entities can do it); differentiation (highly skilled and creative product/service development personnel; technologically capable; high reputation; risky because customers can preferences and economic status, competitors can do knock-offs; competitors will focus on market segments and become differentiated within each segment) focus (CL or diff applied to narrow market, niche market; outstanding market research/understanding of targeted group; high degree of customer satisfaction/loyalty; smaller in size w/ lower volume so little bargaining power with suppliers; knock-offs; changes in preferences/economic status; cost leader will adapt into focus market)) PEST analysis (macro-assessment): political; economic; social; technological elements Five factors (Porter): threat of new entrants; threat of substitutes; bargaining power of buyers; bargaining power of suppliers; intensity of rivalry External/Internal analysis: SWOT *SW - internal Alternative Resources-Based Model: alternative strategic planning model; assesses resources and capabilities of an entity; bases strategy on collection of resources and capabilities to take advantage of opportunities in the market Deciding which country an entity should operate: consider the economic system, industry analysis, economic market structure, NOT entitys strategy

The Internet

a network of networks protocol: TCP/IP - transmission control protocol; internet protocol *all nodes assigned IP for delivery of information Protocol - rules by which a network operates Packet - sent files are broken into packets which contain header; routing info; length; protocol; originating info; data; trailer message such as error detection bits Browser - translates URL to an IP address - sends request for URL via HTTP (hypertext transfer protocol); HTTPS has greater security; SMTP for email services; FTP for uploading and downloading messages; IM; VoIP (voice over IP; Skype) Markup (tagging) languages - HTML (core markup language for web pages); XML - encoding documents into readable form; XBRL (for encoding and tagging financial information) Internet Service Providers - provide access through direct connections to internet backbone Intranet - private networks built using internet protocols; allows access to network resources through web browsers rather than proprietary interface; reduces training and system development time; rapidly replacing traditional proprietary LANs and WANs; easier to use; greater security; "intranet portal" is the entry site (URL) for an intranet; available only within an organization Extranets: extend intranet to associates (suppliers, customers); extends beyond company firewall; typically use VPN to secure communications

Economics - Macro overview, GDP

adds foreign sector, financial sector, and government leakages = individuals income not spent on domestic consumption (taxes, savings, imports) injections additions to domestic production not from individuals expenditures (investment expenditures, government spending, exports) most common and important measure: nominal gross domestic product: measures the total output of final goods and services produced for exchange in the domestic market during a period (does not include: illegal activities, activities where there is no market exchange ie volunteering, goods produced in foreign countries by US-owned entities) nominal does not adjust for changing prices GDP measurement approaches: expenditures approach: measures GDP using final sales/purchases, the sum of spending by individuals/businesses/gov't/exports; income approach: measures GDP as the value of incomes and resources costs, the sum of compensation, rental income, proprietors/corporate income, net interest, taxes on production and inputs, depreciation, etc. Real GDP: measures the total output of final goods and services produced for exchange in the domestic market during a period of constant prices; adjusting nominal GDP Net GDP: measures GDP less capital consumption during the period (GDP - depreciation) Potential GDP: measures max output that can occur in domestic economy at a point of time without creating upward pressure on general level pricing, inflation; assumes full use of available tech and current resources; if this exceeds actual national income, shows economy is in recessionary phase GDP gap: difference between Real GDP and potential GDP if Real GDP > potential GDP, negative GDP gap, creates upward pressure on prices and inflation Gross National Product: measures the total output of all goods and services produced world-wide using US resources Net National Product: measures the total output of all goods and services produced world-wide using US resources but does not include a value for dep'n (GNP - dep'n) National Income: measures the total payments for economic resources included in the production of all goods and services, includes payments for wages/interest/rents/profits Personal Income: measures total payments for economic resources received by individuals (NI - Corp Profits - Social security deductions + dividends and interest received by individuals + gov't transfer payments to individuals Personal disposable income: measures the amount of income individuals have to spend: PI - income taxes

COBIT Model of IT Governance and Management

align IT with business goals/strategies understand risks and identify them in a common language understand how much needs to be invested in IT security & control and auditing & oversight "to provide the information that the organization needs to achieve its objectives, IT resources need to be managed by a set of naturally grouped processes **See Basic COBIT Framework 7 desired attributes: information should be effective, efficient, confidential, integrity, available, compliant, reliable Set of activities within COBIT framework: business processes; planning & organization; acquisition & implementation; delivery & support; monitoring IT resources: data, application systems, technology, facilities and people COBIT focuses on IT controls & processes, while COSO focuses on organizational controls & processes; both concerned with monitoring of organizational processes One purpose is to guide managers, users and auditors to adopt best practices related to the management of IT

Harware Controls, Logical Asses Controls, Data Encryption Application Controls related to processing, files and ouptuts

application controls: input, processing, file, output processing: A,V,C,E - run-to-run controls (use batch totals to agree the batch from one procedure (run) to another); transaction logs used on online real-time systems (can see unauthorized access attempts; can see IP addresses) (A,C,V) files: master files, standing files (rarely changed master file i.e. fixed asset files); transaction files, system control parameter files; internal labels, external labels, version controls, file access & updating controls; LEDGERS Hardware controls: check digit (parity bit - one form of a check digit, 1 or 0 to determine odd or even) Read after write check - verifies that data was correctly written to disk Echo check - verify transmission received Boundary protection - prevents one program/person from overwriting data and instructions of another program/person Output: transaction logs of printed output, permission and access controls; spooling print files - send files to queue for printing

Shirking

avoid or neglect a duty or responsibility fixed compensation - management may not be inclined to work hard or take appropriate risks

COSO Enterprise Risk Management - Framework

builds on COSO; larger cube (objectives: strategic; operations; reporting; compliance) (components: internal environment - objective setting - event identification - risk assessment - risk response - control activities - information & communication - monitoring) requires a portfolio of potential risk events that manages risks to be within risk appetite to provide reasonable assurance regarding achievement of entity objectives defines essential control components and provides direction and guidance effected by Bod, Management, other personnel

IC Monitoring: Benefits and Processes

controls deteriorate (entropy); lessen negative effects of entropy, timely accurate & reliable information, maximize efficiency reduce costs Evaluators monitor IC (competent and board monitoring) self-assessment determining effectiveness of controls for their activities; self-review is a review of one's own work compensating controls can compensate for deficiencies in other controls deficiency requires attention repair or fixing questionnaires, focus groups Control monitoring process: 1) foundation for monitoring (tone at the top; effective organizational structure); 2) designing and executing monitoring procedures; 3) assess & report results w/ corrective action Assessing changes in IC effectiveness (monitoring-for-change continuum); 1) establish control baseline starting with area where controls are well understood; 2) change identification; 3) control revalidation periodically for effectiveness and maintaining continuous control baseline; 4) change management verifying effectiveness and new control baselines

Cost Concepts

cost and expense are not the same! sunk cost: costs of resources that have been incurred in the past and cannot be changed by current or future decisions (not relevant in decision making; i.e. cost of old asset) opportunity cost: discounted dollar value of benefits lost from an opportunity not taken as a result of choosing another opportunity differential/incremental cost: costs that are different between two or more alternatives cost of capital: cost of LT funds (debt/equity) used to finance an operation; sources include LT debt, preferred/common stock; rate of return determined by opportunity cost cost of debt: rate of return that must be paid to attract and retain lenders' funds (determined by interest rate, default risk, interest rate risk, inflationary risk, length of debt, etc.); debt is less risky than equity cost of preferred stock: rate of return that must be paid to attract and retain preferred shareholders' investments (characteristics of debt - dividends expected and equity - possible claim to additional dividends, priority claim to assets) more risk than debt less than common stock cost of common stock: rate of return that must be paid to attract and retain common shareholders' investments (rate of return - risk, dividends, price appreciation expectations); most risky Weighted Average Cost of Capital: rate of return of each source of capital weighted by its share of the total capital; calculation: 1) percent of total capital for each source; 2) percent of each multiplied by cost of capital for that source; 3) resulting weighted costs are summed to get weighted average cost of capital

COSO

created by five organizations that came together - 1987 external financial reporting (annual/interim f/s;earning release); external non-financial reporting (IC; report sustainability; supply chain/custody of assets); internal financial reporting (divisional reporting; cash flow/budget; bank covenant calculations); internal non-financial reporting (staff/asset utilization; customer satisfaction surveys; key risk indicator dashboards; board reporting) CE: 1) commitment to integrity and ethical values through tone at the top; 2) board of directors demonstrates independence of management and oversees monitoring of IC; 3) management establishes, with board oversight, structures, reporting lines, appropriate authorities and responsibilities to achieve objectives; 4) competent individuals; 5) accountability for IC responsibilities RA: 1) objectives having sufficient clarity to identify risks that threaten achievement of objectives; 2) analyze risks and build strategy; 3) considers potential fraud in assessing risks; 4) change management with external environment, organization leadership or business model CA: 1) reducing risk to acceptable levels including integrating IC (think SCARE) with RA; 2) selects and implements general controls over technology; 3) establish control policies that are appropriate to the environment IC: 1) qualify information; 2)internal communication that supports IC processes; 3) external communication with outsiders supports IC processes M: 1) ongoing and periodic; 2) address deficiencies with correction action along with timely communication; 3) tests the system and its data

Working Capital Management - ST Securities

criteria St investments: safety of principal, price stability, marketable/liquid investment (ready market) US treasury bills (91, 181, 365 day maturities; safety of principal, marketability and stability in ST) Federal agency securities: securities issued by and obligation of the individual federal agencies (ie Fannie Mae) Negotiable CDs - issued by a bank in return for fixed time deposit with bank (bought and sold in secondary market), high safety of principal and price stability, less marketable than federal securities Bankers' Acceptances - order to pay drawn on a bank by a firm with an account at the bank (negotiable instrument; sometimes used in financing foreign transactions, more risk and less marketable than federal securities, higher yield) Commercial Paper - ST unsecured promissory notes issued by largest established firms with high credit ratings (maturities up to 270 days, less marketable, greater return) Repurchase agreements - securities issued for loans with a commitment by the buyer to resell the loan security to the issuer at the original contract price plus an agreed interest for period outstanding, they are usually for large amounts and can be for any agreed length of time (as short as 1 day, risk of market price declines is avoided due to interest being specified

Payback Period Approach

determines # of years needed to recover initial cash investment in project, compares that with pre-established max payback period advantages: easy to use/understand; useful in evaluating project liquidity; establishing short max period reduces uncertainty disadvantages: ignores time value of money (uses nominal values not real values); ignores cash flows after payback period; does not measure total project profitability; max payback period established may be arbitrary

Discounted Payback Period Approach

determines number of years needed to recover the initial cash investment in a project using discounted cash flows and compares that time with a maximum payback period advantages: easy to use/understand; useful in establishing project liquidity; establishing a short max period reduces uncertainty; uses time value of money concept disadvantages: ignores cash flows after payback period; does not measure total project profitability; max payback period may be arbitrary ranks projects based on how quickly invested capital is recovered using DCF; does not rank in terms of relative economic value; only considers outcome up to point at which initial investment recovered

Internal Rate of Return Approach

determines the discount rate (rate of return on project) that equates the PV of expected cash inflows with the PV of expected cash outflows discount rates makes NPV of cash flows equal to zero Equation for NPV = 0 future annual cash inflows x PV factor = investment cost *PV factor = unknown; rearrange equation use PV to look up discount rate for # of periods receiving a return - discount rate would be in between two discount rates Advantages: recognizes time value of money; considers entire life/results of project Disadvantages: difficult to compute without calculator and when cash flows are uneven; requires estimation of cash flows over entire life of project which could be long and requires ALL cash flows to be positive or negative; assumes cash flows are immediately reinvested at internal rate of return NPV vs. IRR: NPV uses a rate of return to determine whether or not the PV of net cash flows is positive, if so, the project will earn at least hurdle rate of return; IRR determines what rate of return makes the NPV of cash flows equal to zero, that rate of return is the rate earned by the project; can result in different project rankings

Encryption; Virtual Private Networks

encryption - process of converting plantext message into a secure-code form (ciphertext) decryption - reverse encryption to read a message elements: encryption algorithm - math function encryption key - device/code to make message unique key length - longer keys are slower but harder to crack only those with key can understand the message Forms: Symmetric: single-key or private key encryption - one algorithm to encrypt and decrypt - sender creates and sends and tells which key to use; most common; fast simple and easy; less secure *data encryption standard - old; advanced encryption standard - better Asymmetric: public/private key encryption - one to encrypt one to decrypt (one is public one is private) Digital certificate - electronic doc that identifies sender and creates secure communication; legally recognized form of ID; uses asymmetric encryption Certification authority - created by Microsoft; must apply for CA to acquire key pair Digital signatures - facilitates secure exchanges; uses asymmetrical pair which can be acquired without verification so can be less secure than certificates Secure internet transmission protocols: SSL (secure socket layer; encryption scheme to confirm ID of sender and compare to key received by receiver); S-HTTP (secure hypertext transport protocol; encryption scheme to confirm ID of sender and compare to key received by receiver); SET (secure electronic transactions protocol; commonly used for internet consumer purchases)

Working Capital Management - AR, Inv, CL

establish general terms of credit: influenced by terms common in industry total credit period, discounts if any, late payment penalty, nature of credit sales documentation if any ***related to collection and recognition of AR determine customer creditworthiness: cost/benefit of being strict set credit limits: do financial analysis if necessary use aging of AR - increasingly serious demands, potentially go to collection agency inventory: risk-reward tradeoffs, goal is to not under or over invest Systems of inventory management: traditional materials requirement system - predominant in US from 1960 until just-in-time, supply push (goods produced in anticipation of their sale), use of inventory buffers (maintained at every level in case of unexpected demand), long production time and production runs, impersonal relationships with suppliers, purchases are on lowest bid, quality standards are "acceptable", cost accounting for job order and process cost just-in-time: obtaining (supply) and delivering (sell) when needed; demand pull (produced when and as needed by end user), reduce inventory considerably, production in work centers with multiple pieces of equipment/robotics; close working relationships with limited # of suppliers located physically close to production facilities; quality is essential; simplified cost account (less accounts more direct costs); benefits: reduced investment in inventory, lower costs associated, reduce lead time in replenishing inputs of production, less complex more relevant accounting/performance measures; cannot be used by every firm/process *concerned with economic order quantity and reorder point in choosing system economic order quantity - square root of (numerator: 2 X annual demand X cost per order)/ (carrying cost per unit)Total inventory admin costs = total order costs + total carrying costs *economic order quality determines the total order costs Total order cost = number of orders (Q) X per order cost Total carrying cost = average inventory x per unit carrying cost Optimum order quantity = square root of (2TO/C) T = total demand; O = per order cost; C = per unit carrying cost assumptions used: constant demand, unit cost and carrying cost are constant, delivery is instantaneous Inventory reorder point: determine inventory quantity at which goods should be reordered reorder point = delivery time stock (cover during delivery period; how much you need during time period)) + safety stock Current Liabilities used to generate cash in the ST; effective cost is greater than stated cost in the case of compensating balances

Interest Rate Concepts/Calculations

fixed, variable or changing rate basis (rate type may change over life of instrument - shift from fixed to variable or vise versa) Stated interest rate - annual rate specified in a contract (per loan agreement or bond coupon rate); no compounding; if semi-annual interest and stated rate is 6%, effective rate is >6% due to frequency of payments Simple interest - interest computed on original principal only; no compounding; interest paid at end of term (I=PRT) Compound interest - interest computed on principal plus accumulated unpaid interest; Y2 computes interest as (amount of note + unpaid interest) X interest rate X time (in this case 1) Effective interest rate - annual interest rate implicit in the relationship between the net proceeds of borrowing and the dollar cost of that borrowing; net cost of borrowing / net proceeds *net proceeds may be less than amount borrowed due to: discounting (interest deducted in advance, calculated same as simple interest); compensating balance requirement (occurs when entity borrows and is required to maintain a balance with the financial institution with which it borrows; does not have full amount of borrowing available for use) Annual percentage rate - annualized effective interest rate without compounding on a borrowing that is for a fraction of a year; effective interest rate for fraction of year X number of fractions in year $2,000 90 day note discounted @6% simple interest = 2,000 x .06 x (90/360) = $30 effective interest = 30/1 ,970 = 1.52% for 90 days APR = 1.52 x 4 quarters 6.08% APR is legally required basis for interest rate disclosure in US Effective Annual Percentage Rate - annual percent rate with compounding on borrowings for fraction of year (annual percentage yield); (1+I/p)^p - 1 I = annual stated rate p = number of periods in a year

Input Application Controls

goals: validity (approved and represent actual economic events); completeness; accuracy; efficiency (using minimal resources) Closed Loop Verification: use entered data to display additional (confirming) data (C,A,E) Batch Control Total: 1) financial total - add invoice amounts; 2) hash total - add invoice #s; 3) record count - count number of invoices (C,A) Scanning instead of human entry (A,C,E) Sequence check: confirm numerical sequence (C,V) Key Verification (re-key and compare critical data) Completeness or missing data check (C) Field Check - data is correct type; (A); correct format, not left blank Limit tests: numeric field with specified values (V,A); range or sign test (+ or -) Valid code test: valid account number (V,A); called referential integrity; compares value inputted to list of valid data values Reasonableness check (logic test): do two or more fields agree that should be agreeing? (V,A) Preprinted forms and preformatted screens: speeds data entry errors (ACE) Default values - pre-supplied data values for fields (A,E)

Joint and By-Product Costing

joint products and by-products are the result of a single manufacturing process that yields multiple products; two or more products of significant sales value are said to be joint products when they are produced from the same set of raw materials and aren't separately identifiable until a split-off point Split-off point - point at which products manufactured through a common process are differentiated and processed separately Joint Costs - costs incurred prior to split-off; must be allocated to the joint products separable costs - additional processing costs incurred beyond the split-off point, attributable to individual products ***4 methods used to mechanically allocate joint costs physical volume method (costs are allocated based on quantity of products purchased; total volume of all products is established (pounds, feet, etc.) each products' pro rate share is determined, and the joint costs are allocated based on that proportion sales value at split off method (costs are allocated based on their relative sales values of the products either at split off or after additional processing; when significant markets exist for the products at the split off point, the relative sales value of each product is used to allocate costs; when there is no market at split off, the ratio of the net realizable value of each product to the total net realizable value is used to allocate costs 3.net realizable value method 4.constant g by-products differ from joint products in that they have relatively insignificant sales value when compared to the main product(s); when by-products are processed beyond the split off point, the additional processing costs are assigned to the by-product, which reduce proceeds net proceeds from the sale of by-products are used to reduce the cost of the main products; no revenue is recognized from the sale of the by-products scrap - remnant of the production process that has some little recovery value; seldom processed beyond the split-off point; net proceeds from sale of scrap are used to reduce overhead costs; may be offset against a cost if directly related

Critical roles & functions & controls in an IT department

managing risks: 1) physical asset theft and destruction IT department commonly builds applications, support delivery of IT services organization, manages databases and networks Functions: applications development (safeguarding assets; create and maintain applications); systems administration & programming (grant authorization); computer operations (executes events, safeguard archived IRP) Roles: systems analysts (design new systems define problems and solutions); application programmers system administrator (authorize events, data admin, network admin, web admin) system programmers (maintain operating systems & hardware; must not have access to application programs or data files Data control (clerk): control document flows; schedule batches for data entry File librarian maintains files & data that are not online in file library; check files in and out to support scheduled jobs; should not have access to operating equipment or data outside of library Computer Operators: operate the mainframe computer, load program and data files; run programs Segregation of Duties software exists Termination - disable username and keycard before notification

Manufacturing Cost

manufacturing costs (assets, aka factors of production) direct material, direct labor, manufacturing overhead prime costs - direct material costs + direct labor costs conversion costs = direct labor costs + factory overhead cost production costs associated with revenues period costs expensed in period incurred (cannot be matched with revenues) actual costing: most accurate, all costs are known AQ X AP normal costing: moderately simple/accurate AQ X POR (predetermined overhead rate estimated at BOY, reconciled to actual at EOY) standard costing: predetermined estimated rates and quantities to record both direct costs and overhead SQA X SP (standard quantity of inputs allowed for actual units of outputs) manufacturing costs -> work in process -> finished goods -> CoGS

Monetary Policy

medium of exchange, measure of value, store of value M1: paper, coin currency, check-writing deposits M2: M1 plus savings deposits, money-market deposits, CDs < $100k, individual owned money-market mutual funds (most common measure) M3: M2 plus CDs > $100k, institutional-owned money-market mutual funds Fed: reserve requirement (percent of loans made by banks that must be held in reserve; open market operations (Fed buying and selling US treasury debt with member banks; buying increases funds available for banks to loan because it increases money supply); discount rate (interest rate member banks pay when borrowing from Fed), purchasing federal securities is relevant during expansionary period *monetary policy is increasing/decreasing money supply *fiscal policy is increasing/decreasing gov't spending and taxes

Net Present Value Approach

most commonly used in practice determines the present value of expected cash inflows and compares that value with the PV of expected outflows of the entire life of the project PV determined using discount rate (a.k.a. hurdle rate based on cost of capital to firm; WACC) NPV = difference between PV of cash inflows and outflows; accept if greater than 0 advantages: recognizes time value of money; relates project rate of return to cost of capital; considers entire life/results of project; easier to compute than internal rate of return disadvantages: requires estimation of cash flows over entire life of project which could be long; assumes cash flows are immediately reinvested at the discount (hurdle) rate of return used

Disaster Recovery Plan; Organizational (business) continuity planning; controls over end-user computing; controls over computing in small organizations

natural disasters unintentional human disasters intentional human disasters outsourcing (contracting) data backup and recovery Recovery point objective: acceptable data loss, objective = acceptable downtime Recovery time objective: acceptable downtime Cold site: off-site location with electrical & other physical requirements for processing; no equipment or files (added when needed); 1-3 days start-up; cheap; for simple Warm site: off-site location with similar computer hardware, does not included backed up data; Hot site: completely equipped including data, near-immediate setup Mirrored site: fully redundant, fully staffed, fully equipped; real-time replication of mission critical systems Organizational continuity planning: identify and plan for disasters/disruptions, integrate into organizational culture, risk management Business risk management (BRM) Business Impact Analysis (BIA; risk analysis portion of BCP) Steps to OCP&BCP: 1) create a policy and program; 2) determine critical functions/business risks; 3) determine continuity strategies (maintain redundant systems for instant availability to assure the flow of transactions) 4) develop & implement response; 5) exercise, maintain and update plan; 6) embed plan into the culture Incident management maps level of incidents to events to responses Small business computing should have spreadsheets reviewed and tested by an independent third party; authorization is most likely to be absent

Working Capital Management - Cash

objective of cash management is to have minimum needed for operations float: time between when payment is initiated to a firm and when that payment is received and available for use; to reduce float: lock-box system (increased security; incident of dishonored checks is reduced and there is earlier detection); preauthorized checks (useful when amount being collected is same each period; predictable amount; firm handling of cash/collections reduced; automatic bill payment feature); concentration banking - accelerates flow of funds from multiple local banks to a firm's primary bank by regular, usually auto, transfer of funds (better control of cash; arrangements are possible for aggregated excess cash to be temporarily invested); depository transfer checks - transfers funds between firm's account (unsigned, non-negotiable; can be used in conjunction with lock-box or concentration banking); wire transfer (relatively expensive method of transferring funds; speedy and secure) defer cash outflows: purchases and payment processes management (establish/use charge accounts; select suppliers that provide generous payment terms; pay bills only when due unless advantage discounts; stretch payments); remote banking (establishing checking accounts in remote locations and making payments by checks written on those accounts; take longer; electronic processing and banking requirements are eliminated); zero-balance accounts (by agreement establishing account with zero balance, write checks, results in overdrawn, bank transfers funds daily to zero out account; by deposit, deposit amount exactly equal to checks written on that account so balance is zero; advantages are - nearly eliminate excess cash balances; reduce administration tasks such as reconciliation); payment through draft - firm uses legal instrument drawn on an account of issuing bank or another bank not the firm's account (bank draft - order to pay drawn by a bank on itself; cashier's checks - one-time order to pay drawn on issuing bank; certified check - order to pay drawn on a depositor's account that is certified to be paid by the bank; money order - certified checks sold by non-bank institutions such as post office, limited in amount; advantages: assures instrument will be honored at stated value; may not require having a checking account or disclosure of bank account info; can be recurring; may be more costly though) Positive pay system: entity sends its bank an electronic file of checks written on its account with bank; bank compares presented checks with info on the electronic file; detects unauthorized checks EFT: reduce float; administration can be automated; low per transaction fee cost

Valuation Techniques - Option Pricing

option = contract that entitles owner to buy or sell an asset at a stated price within a specified period *American-style: permitted exercise any time before expiration option value factors: current stock price relative to option price; time to expiration of option (longer the time greater the value); risk-free rate of return; measure of risk of optioned asset (standard deviation; larger the SD greater the value); exercise price of the option; dividend payments on optioned security (smaller the dividends greater the value) Black Sholes: uses probabilities (probability that the price of the stock will pay off by expiration date; probability that the option will be exercised); discounts the exercise price Binomial Model: uses tree diagram to estimate values at a number of points in time between valuation date and expiration date Steps: generate price tree diagram (use a branch for each desired time period until expiration); calculate option value at each tree end node as of the expiration date; calculate option value at each preceding node back to present valuation date assigns probabilities to each potential outcome to determine expected value expected value = (probability x option value) + (p2 x o2) / (1+discount rate)

Transfer Pricing

price charged by the selling division to the buying division types: market based (price on the open market); cost based (cost of production); negotiated (price that is mutually agreeable) General transfer pricing rule: additional outlay cost - incremental production costs incurred by selling unit (rule helps to ensure goal congruence); opportunity cost as well when the selling unit is operating at full capacity, the transfer price should be equal to the market price; when the selling division has excess capacity, the transfer price should be equal to the additional costs incurred to produce each unit the selling division's minimum price will be equal to its direct costs if it has excess capacity OR its market price if it does not have excess capacity cost-based pricing - the transfer cost is determined by the production costs associated with the selling division dual pricing - attempt to eliminate internal conflicts associated with transfer prices by giving both buying and selling division s the price that works best for them can be an important tool for reducing tax liability (can provide tax benefits for international companies by attempting to declare profits in the country or state that has the lowest marginal tax rates

Forecasting Techniques

probability of outcome is always been 0 and 1 expected life/value is determined through weighted average of years/value and probability Joint probability - probability an event will occur given another event has already occurred; determined by multiplying the probability of the first event by the conditional probability of the second; then sum results for all event combinations; divide each result for each event combination by the total of all the event combinations variance analysis - measures the dispersion of values around the expected value; smaller the variance lower the risk correlation analysis - measures the relationship between two variables; between -1 to 1 coefficient of determination - indicates the degree to which the behavior of the independent variable predicts the behavior of the dependent variable; closer R^2 is to 1, the better the independent variable predicts the dependent variable regression analysis - predicts the value of one factor (dependent variable) based on the value of one or more other factors (independent variable); linear regression analysis is frequently used in cost accounting to evaluate the strength of the relationship between costs and cost drivers; y = A + BX

Relevant Costs

relevant costs/benefits - future costs and benefits that differ among alternatives avoidable costs - can be eliminated by choosing one alternative over the other; considered relevant unavoidable - irrelevant irrelevant costs - sunk cost (cost that has already incurred and cannot be changed) accounting costs - costs that can be found in fundamental books of record fixed costs are not equivalent to unavoidable costs (fixed costs can change incremental costs - difference between two decision alternatives joint costs are not relevant to the decision to sell or process further Decisions: sell or process further; special order; outsourcing (make or buy); drop or keep a product line/segment special order relevant costs: costs directly attributable to the special order; if the company is operating at capacity, the opportunity costs associated with production that must be cancelled in order to complete the special order; if special order can be completed using existing capacity, only sales revenues and the avoidable variable costs of producing the order need be considered make or buy: based on comparative analysis of the external purchase costs and the relevant costs of internal production

Stages of Typical Systems Development Life Cycle, related work processes and goals

risks: doesn't work, cost higher than intended, behind schedule roles: IT steering committee (review, approve and prioritize systems development proposals), lead systems analyst (manages development teams, contact with end users, oversight), systems analysts and application programmers (design create and test programs and work with users on detailed issuers, end users (identify problems and suggest solutions) SDLC: is it technical, economic and operational to build the system? if feasible create project plan with critical success factors responsibilities and major risks systems analysts partner with end users to document system requirements and understand processes and purposes accountants/IAs role includes preparing or evaluating requests for proposals for hardware or software and to do vendor evaluations design and develop technical specifications, programmers and analysts put the "stuff" in place testing - assessing if system meets design specifications; test at processing unit, system testing level, inter-system level and test user acceptance

Performance Improvement Tools

theory of constraints - constraints result from a variety of different resources (limited labor hours, machine hours or space); optimization rule for product mix - maximize the contribution margin per unit of the constrained resource Lean manufacturing - blends the features of custom and mass production processes to make a small number of a high variety of products; rejects the belief that costs are driven by production volume, attempts to increase quality, reduce waste and minimize resource consumption; similar to JIT and TQM tools identify steps in the value stream; eliminate steps that do not increase customer value; streamline the process; monitor to reach for perfection; pull-type (flexible equipment; low setup times; highly skilled laborers) Six Sigma (similar to TQM) - continuous approach to systematically reduce defects (99.999966% perfect quality)

Computer Data: fundamental elements, relations among elements and structure Categories of computer software Common types of programming languages Advantages of databases Database Management Systems - components and controls

to computers there are only 0's and 1's (bits) Byte: logical grouping of bits (8 bits; 2^3) Field (aka attribute): logical grouping of bytes; characteristic or attribute of an entity (ie invoice, customer, product) Record: logical grouping of fields (describe example of entity; specific invoice, particular customer) File (aka table): collection of related records for multiple entities (i.e. invoice files) Database: collection of files Kilobyte - 2^10 (1,024 bytes) Megabyte - 2^20 (1,024 kilobytes) Gigabyte - 2^30 (741,824 bytes) Software: systems software: programs that run computer and support (operating system) programming languages: what we use to create applications (OOPL - object-oriented programming languages such as Java); must be converted from source code to object code, which are 0s and 1s Application software - end-user programs (may be purchased or developed internally) Operating system - interface between user and hardware; defines what commands can be issued and how; controls all input and output to main memory, assigns workspace to applications, etc. DBMS - "middle-ware" sitting between software and operating system to help manage database 3 languages: Data definition language: user can define tables and fields and relations among tables; uses meta-data to define database elements ***Data manipulation language: user can add delete or update records Data query language - allows you to extract info from database; most relationship databases use structured query language (SQL) to extract data which is a test approach; some use Query-by-example which is a graphic approach using drag & drop fields to create query Data processing model: inputs -> hardware, database system, software -> outputs

Aggregate Supply

total output of goods and services produced in the economy at different price levels Three theories: classical aggregate supply curve (completely vertical; no change in output as price increases at full employment, no change in output as prices increase; may be appropriate in very short-run); Keynesian ASC (horizontal up to the output at full employment, then slopes upward; increasing supply at a price until full employment, then increased supply only with increased price); conventional ASC (continuous positive slop that is steeper for output after full employment; at full employment, prices increase proportionately faster than output supplied *X = real output in quantity; Y = price level Shifting AS outward: resources available increase; cost of resources decrease; tech advances occur

Logical Access Controls

uses logical access control software to manage LAC - big database by roles and who can access what User authentication - passwords; security tokens (one-time password); credit card; biometric controls (physical characteristic for access); multi-factor authentication (mix of others); smart cards; security challenge questions User authorization matrix embedded in LAC software - who can do what and when Firewall - combination of hardware and software that reviews and filters network traffic; network (filters data packets based on header info; very fast; forward approved packets to application firewall), application (inspect data packet contents; deep packet inspection; control file and data availability to specific applications) and personal (software enabling end-users to block unwanted network traffic; usually on home network or computer) Intrusion detection systems - monitors network use anomalies; 3 identification methods (signature-based - stored patterns/sources; statistical-based - unusual activity modeling; neural networks - learns from created database) Intrusion prevention systems - allow hackers access to a decoy system; allows identification and blocking from live systems (aka honeypot; honeynet)

Valuation Techniques - Business Entity

uses: buying/selling business; developing buy/sell agreement; estate purposes, etc. involves: establishing standards and premise of valuation (identifies reasons for and circumstances of valuation; legality; who requested it; assumptions to be used); assessing economic environment of entity being valued; analyzing F/S and related info (common-size analysis - converting $s to %s for comparison; trend/ratio analysis); formulating value Market approach (determines value of a business by comparing it with highly similar entities for which there is a readily determinable value); adjustments: premium for controlling interest in business being valued; discount for lack of controlling interest in business being valued; discount when business being valued is not as marketable as entity on which its value is based disadvantages: difficulty in identifying highly comparable entities; difficulty in determining appropriate liquidity (sellability) and other discounts Income approach (determines value by calculating net present value of the benefit stream generated by the entity being valued); using discount rates based on rate of return needed to attract funding given level of risk DCF; capitalization of earnings; earnings multiple; free cash flow Asset approach (adding values of individual assets using FV of each asset/liability; sum of net assets is value; could use income/market/cost approach to value each asset less appropriate for valuing going concern; less appropriate for valuing NCI; appropriate for valuing entity in liquidation; appropriate for entity with little or no cash flows or earnings

Standard Cost and Variance Analysis

variances are differences between standard costs and actual costs *non significant allocated to CoGS *significant allocated to ending WIP, FG and CoGS *know basic calculations of sales variances standards are actually entered into GL; represent expectation Variances due to difference between actual and standard quantity are called quantity or efficiency variances Variances due to difference between actual and standard price are called price or rate variances Positive variance is favorable; negative is unfavorable Amount listed for the standard qty/hrs is always the standard quantity allowed for actual production (SQA); SQA is the standard inputs per unit multiplied by the actual finished good units produced Difference in quantity is always multiplied by standard price Difference in price is always multiplied by actual quantity Flexible budget variance - sum of the price/rate variance and the usage/efficiency variance Sales variance - occur due to the differences in the expected and actual number of units sold; differences in the expected and actual product mix sold Sales mix variance - quantifies the effect on contribution margin resulting from selling different proportions of products with differing profit margins Sales quantity variance - due to selling a different number of units than expected at the weighted average unit contribution margin for the sales mix Sales volume variance - result of combining the sales mix/quantity variances

Risks in Manual and Computerized Accounting Systems

weakest control element in most accounting systems is people Elements: people, procedures, hardware, software, data *people and procedures are manual controls Differences between auto and MANUAL: 1)segregation of duties; 2)audit trail (physical paper); 3)transaction processing (more clerical errors); 4)computer initiate transactions (none less efficient); 5)risk of errors & defalcations; 6)management review (isolated data) AUTO:1) include compensating controls; combine previously separated functions); 2) electronic trail; 3) potential for systemic logic errors; 4) increase efficiency; 5) remote access risk, less observation, manipulation of or errors in programs); 6) greater data accessibility, embedded controls Risks in computer based systems: systems, programs and people (FUNI) & Data (unauthorized access and loss of data) F: reliance on faulty systems or programs U: unauthorized changes in master files, systems or programs N: failure to make needed changes I: inappropriate intervention by people