BEC Flashcards

Question

What is governance and culture? * Component of ERM * DOVES nemonic

Answer 1

Governance and culture is an entity tone at the top and culture of the organization. The five (5) principles are: 1. Defines desired culture - spectrum that progresses from risk adverse to risk neutral and extends to risk aggressive. * How conservative or aggressive do we want to be? 2. Exercises board oversight - entity strategy + business objectives 3. Demonstrates commitment to core values - support from the top of the organization, adopt a code of conduct 4. Attracts, develops and retain EE’s - Board selection of executive leadership and HR assisting management to staff competent + capable individuals 5. Establishes operating structure - How an entity carry out day-to-day operations * Centralized vs. Decentralized * Degree of operating leverage - FC (salary) and/or versus VC (commission) The ability of an organization to successfully achieve its strategy and business objectives is impeded when the behaviors and decisions of the organization (culture) do not align with its core values.

Answer 2

Strategy and objective-setting is how an entity sets its risk appetite with strategy-setting. Objectives enable strategy to be put into place. The four (4) principles are: 1. Evaluates alternative strategies - more equity/less debt, more VC/less FC, low risk but low return 2. Formulates business objectives that are specific, measurable or observable and attainable. They relate to financial performance, customer aspirations, and operational efficiency. * Must be realistic given risk assumed 3. Analyze business context external and internal. 4. Defines risk appetite in qualitative terms (goal based- how critical) and quantitative (standard deviation). Expressed in ranges with a ceiling and floor. * Must be suitable for entity

Answer 3

Performance is the identification and assessment of risk prioritization based on severity. Risk responses are selected and monitored “ARTS nemonic”. Similar to a risk assessment in COSO internal control framework. The five (5) principles are: 1. Develops portfolio view and evaluates from an entity-wide view (parent level) 2. Assesses severity of risk at multiple levels. Risks deemed severe at the operating level may be less of a concern at division or entity level b/c well diversified. Entity identifies triggers to reassessed severity of risk Risks can be the following: * Inherent - cyclical demographics * Target residual - entity prefers to assume in pursuit of strategy (DOL/ DFL) * Actual residual risk after management has taken action - pay low for insurance, high deductible - helps entity prioritize risk 3. Prioritizes risk - interest rate, currency, competition 4. Identify risks 5. Implement risks “ARTS” nemonic * Avoid - leaving a line of business (get out). High-High for Frequency/likelihood & Severity impact * Reduce - hedging to reduce severity of risk (security alarms, use derivatives). High-Low for Frequency/likelihood & Severity impact * Transfer - sharing to reduce severity of risk (buy insurance). Low-High for Frequency/likelihood & Severity impact * Self-insure - Acceptance of risks most appropriate when risk is within entity risk appetite - inherent in industry (self-insure). Low-Low for Frequency/likelihood & Severity impact * Entity can also pursue risk to amplify return (DOL/ DFL). Management would do this when they understand the nature and extent of changes

Answer 4

Review and revision is reviewing an entity risk management capabilities/practices relative to targets. The three (3) principles are: 1. Assesses substantial change - Internal (change in officers) and External (threat substitute product) 2. Pursue improvement in ERM (efficiency and usefulness) 3. Reviews risk and performance (was hedge effective?)

Answer 5

Information, communication, and reporting ongoing is the iterative process of obtaining relevant information (internal and external) and sharing it throughout the entity. The three (3) principles are: 1. Leverages information and technology relevant information that is fair, accurate, complete and timely which is a competitive advantage. Data management is integral to risk-aware decisions. Similar to “OIE” nemonic. 2. Communicates risk information (MDA) to internal and external stakeholders. 3. Reports on risk, culture and performance (MDA) from a portfolio view of risk at the entity level (parent level) as well as at different levels (subsidiary/ product line).

Answer 6

1. Sales order 2. Delivery of services/ goods 3. Customer billing 4. Payment collections

Answer 7

1. Sales order - list details of customer order (items/ services ordered, quantity, prices, and agreed upon timing & delivery). 2. Pick ticket - list provided to warehouse or inventory function detailing items and quantities to be picked/ packaged and sent to shipping department. 3. Packing slip - details items, quantities and included in shipment for verification. 4. Bill of lading - accompanies shipment that provides contract concerning allocation of responsibilities b/t seller, carrier and customer. 5. Sales invoice - sent to customer detailing goods, services ordered, total cost and payment instructions. 6. Receipt - document that acknowledges receipt of payment. 7. Remittance advice - notice of payment sent by customer to company.

Answer 8

1. Placing order for goods/ services 2. Goods delivered/ services rendered 3. Receipt and approval of billing (3-way match) 4. Bill payment

Answer 9

1. Purchase requisition - request generated for goods/ services to be purchased by purchasing function. 2. Purchase order - sent by buyer to seller indicating goods/ services desired, quantities, timing needs and agreed upon price. 3. Receiving report - indicates goods/ services received, quantity received, timing of receipt and corresponding PO (if applicable). 4. Supplier invoice - sent to company from supplier detailing goods/ services ordered, total order cost and payment instructions. 5. Voucher - PO, receiving report, supplier invoice to match what was ordered + received (3-way match).

Answer 10

1. Product design & engineering 2. Product development 3. Manufacturing forecasting & scheduling 4. Manufacturing operations 5. Manufacturing and fixed asset accounting & reporting

Answer 11

1. Treasury - manage cash flow and financial activities. 2. G/L updates 3. Report generation (F/S and managerial)

Answer 12

Processing controls protect organization against processed data incomplete or inaccurate. * Data matching * Input validation * Sequence check * Cross-footing

Answer 13

Master files or general data files that contain long-term data that does not change often. * Access & authorization control * Read-only rights * Change control * Regular backups * Periodic reconciliation of changes to data * Review of employee access, authorization, and rights

Answer 14

Input edit checks (constraints) are preventative controls that assist in protecting integrity of information + only allowing complete transactions to be submitted for processing: * Consistent forms * Completeness check * Reasonableness check * Field check * Size check * Limit or range check * Sign check * Referential check (Validity) check * Closed-loop verification

Answer 15

Transaction exposure is the potential that an organization could suffer economic loss or gain upon settlement of individual transactions as a result of changes in exchange rates. The following are risks for exporters and importers: Export: * A/R denominated in FC DECREASES; thus A/R DECREASES (Loss) Import: A/P denominated in FC INCREASES; thus A/P INCREASES (Loss)

Answer 16

Economic exposure is the potential that the PV of an organization cash flows could increase or decrease as a result of changes in exchange rates. 1. Domestic currency appreciation - domestic goods relatively more expensive now; thus exports DECREASE; thus FC DECREASES: * A/R DECREASES, PV of cash-in DECREASES (Loss) * A/P DECREASES, PV of cash-out DECREASES (Gain) PV cash in/out = economic exposure Loss/ gain = transaction exposure Also, foreign imports become LESS expensive; thus imports INCREASE. 2. Domestic currency depreciation - domestic goods relatively cheap now thus exports INCREASE; thus FC INCREASES: * A/R INCREASES; PV of cash-in INCREASES (Gain) * A/P INCREASES; PV of cash-out INCREASES (Loss) Also, foreign imports become MORE expensive; thus imports DECREASE.

Answer 17

1. Exporter: * A/R > A/P; net asset risk is that FC DECREASES. * Net asset export risk is that FC DECREASES, thus A/R DECREASES = Loss * Mitigate transaction exposure = BUY put options or SELL future contracts. If FC DECREASES, use profit on derivative to offset loss or sell contracts. * Concern for exporter is that domestic currency (US dollar) will strengthen, which means when the foreign buyer pays the exporter in the foreign currency, it will translate into a lower amount received when its converted to the domestic currency. 2. Importer: * A/P > A/R; net liability risk is that FC INCREASES. * Liabilities in FC: risk is FC INCREASES, which INCREASES liability = Loss * Mitigate transaction exposure = BUY call option or forward (large) / futures (small) contract. * If FC INCREASES, use profit on derivative to offset loss.

Answer 18

1. Trade-related factors * Relative inflation rates, relative income levels and government controls (trade restrictions) impacts demand for goods + demand/supply for currency. 2. Financial factors * Relative to interest rates + cash flow impacts demand for securities + demand/supply of currency.

Answer 19

1. LT forward contracts - set up to stabilize transaction exposure over long periods. 2. Currency swaps (swap borrowings): * Two firms * Financial intermediaries * Parallel loan

Answer 20

Represents risk that assets, liabilities, equity, or income of consolidated organization that includes foreign subsidiaries will change as a result of changes in exchange rates. * Translation exposure INCREASES as the proportion of foreign involvement by subsidiaries INCREASES.

Answer 21

Cross rate is the exchange rate between two (2) currencies derived by using two exchange rate quotes that have a common currency.

Answer 22

= Effective annual interest payments / Debt outstanding (Outflow/ Net inflow)

Answer 23

Cost of pref. Stk. = Pref. stock dividends (par x rate) / Net proceeds of pref. stock Net proceeds = Selling price - cost of issuance Net proceeds = Mkt value of pref. stock (Outflows / Inflows)

Answer 24

1. CAPM: = Risk-free rate + Risk premium = Risk-free rate + (Beta x Mkt risk prem) = Risk-free rate + [Beta x (Mkt return - Risk-free rate)] 2. DCF: = D1 (Divd today x 1 + g)/ Mkt value C/S = [Divd per share / Mkt price] + growth rate 3. Bond yield risk premium: = Pretax cost of LT debt + Mkt risk prem

Answer 25

As current assets INCREASE, liquidity INCREASES, risk of distress DECREASES, but ROA DECREASES. * Cash + cash equivalents DECREASE ROA

Answer 26

As non-current assets INCREASE, liquidity DECREASES, risk of distress INCREASES, but ROA INCREASES. * LT investments + PP&E INCREASES ROA

Answer 27

= Income before int income, int exp + taxes */ Net sales * = Net income - interest income + interest expense + tax expense Both interest income and expense adjusted for: Subtract income and add back expense.

Answer 28

Provides an assessment of an entity's % return relative to its capital investment risk. Expressed as income divided by invested capital in simplistic form. Also expressed as a product of Profit Margin and Investment Turnover: 1. ROI = Net income / Average invested capital * Avg. Invested capital = Assets - operating liabilities 2. ROI = Profit Margin x Investment Turnover 3. ROI = [Income/ Sales] x [Sales/ Invested Capital]

Answer 29

Similar to ROI, except ROA uses average total assets in the denominator rather than invested capital: ROA = Net income/ Average total assets

Answer 30

Measure for determining an entity's effectiveness: ROE = Net income/ Average total equity [Assets - Liabilities]

Answer 31

EOQ inventory model attempts to minimize total ordering and carrying cost: E = sqrt 2 x SO/ C E = Order size (EDQ) S = Annual sales (units) O = Cost per PO C = Annual carrying cost/ unit Assumptions: * Demand is known + constant * Carrying cost/ unit are fixed * Does NOT consider stock out costs * Does NOT account for costs of safety stock

Answer 32

= [360 / Pay period - Discount period] x [Discount % / 100% - Discount %] Example: 2/10, net/30: APR Discount = [360/ 30 - 10] x [2%/ 100% - 2%]

Answer 33

SCOR model developed to create a generic model for supply chain analysis. Four (4) key management processes or activities: * Plan - determining demand (sales forecast + talking to suppliers) * Source - procure required resources (select vendors) * Make - turn RM to finish goods to meet demand (manage production process - manufacturing, testing and packaging) * Deliver - activities to get finished product to customers

Answer 34

Planning to properly balance demand and supply: * Demand requirements (sales forecasts) * Ability of suppliers to supply resources * Inventory levels

Answer 35

Procure the measures required to meet it: * Selecting vendors

Answer 36

Activities that turn raw materials into finished products that are produced to meet a planned demand: * Production process * Manufacturing * Testing * Packaging

Answer 37

Activities of getting finished product into hands of consumers to meet planned demand: * Managing of orders * Forecasting * Pricing * Transportation * Shipping * Labeling Ex: Managing A/R and collections from customers

Answer 38

1. Concentration banking 2. Lock-box system 3. Use of local post office

Answer 39

= Net Sales/ Average A/R (net) * If Avg A/R DECREASES, Sales INCREASES, will result in INCREASE in A/R turnover

Answer 40

= 365 / Accounts receivable turnover A/R turnover = Net Sales/ Avg. A/R (net)

Answer 41

Safety stock levels are affected by the following: 1. Uncertain sales forecasts - greater uncertainty means a higher level of safety stock should be carried. 2. Dissatisfaction of customers - if customers are dissatisfied with back orders (which occur when there are stock outs), then more safety stock should be carried to prevent stock outs. 3. Uncertain lead times - greater uncertainty means a higher level of safety stock is needed.

Answer 42

* JIT inventory model was developed to reduce the lag time between inventory arrival and inventory use. * Reduces need of manufacturers to carry large inventories BUT requires considerable degree of coordination between manufacturer and supplier. * JIT is a pull approach inventory model.

Answer 43

* Kanban inventory control technique give visual signals (time to order) that component in production needs to be replenished. * Prevents oversupply or interruption of entire manufacturing process as a result of lacking component.

Answer 44

Compare cost of implementing a lock-box to investment income that can be earned by investing funds. Lock-box system cost Investment income: (1) divide # of days lock-box system will reduce collection time by year (I.e. 360 days). (2) Multiply #1 by annul sales x investment percentage (return rate) (3) Compare investment income to cost of lock-box system.

Answer 45

Price-to-sales ratio can be used to estimate current stock price. Ratio can provide meaningful information when net earnings data is not available: Price-to-sales = P0/ S1 P0 = Stock price or value today P0 = Market capitalization/ Shares outstanding S1 = Expected (per share) sales in one year S1 = Sales1/ # CSO Sales1 = Sales0 x (1 + Growth rate) * Ratio is not as volatile as P/E ratio. * Sales are always positive (can’t use negative earnings for a P/E multiple). * Ratio is a good multiple for analyst to use in valuing a new company.

Answer 46

PEG ratio is a measure that shows the effect of earnings growth on a company’s P/E assuming a linear relationship between P/E and growth: PEG = (P0 / E1) / G P0 = Stock price or value today E1 = Expected EPS (forward) G = Growth rate = 100 x Expected growth rate Stocks with lower PEG ratios are more attractive to investors than high ratios. If P0/ E1 is low and growth rate is high, then the ratio is low and if it’s LESS than peers, relatively undervalued which means “buy it”.

Answer 47

PEG ratio calculates the P/E ratio per unit of growth. PEG ratio can be multiplied by both forecasted future earnings + growth rate to determine current (or projected) price of stock: P0 = PEG x E1 x G P0 = Stock price or value today E1 = Expected EPS (forward) G = Growth rate = 100 x Expected growth rate

Answer 48

Zero growth model is a perpetuity (zero growth stock). Cash flow paid by an annuity last forever. When a company is expected to pay the SAME dividend each period, the perpetuity can be used to determine stock value: PV of a perpetuity = Stock value per share P = D/ R P = Stock price D = Dividend (Par x fixed %) R = Required return (Not 1 + R) Assumptions: dividend will be specified and it never changes. Required rate of return will be specified.

Answer 49

P/E ratio is the most widely used multiple when valuing equity securities. Measures amount that investors are willing to pay for each dollar of EPS. Rationale is that earnings are a key driver of investment value (stock price): P/E ratio = P0/ E1 P0 = Stock price or value today P0 = Market capitalization/ Shares outstanding E1 = EPS expected in one year (next 4 quarters) E1 = E0 x (1 + G) E1 = NI1 / # CSO * Higher P/E ratios generally indicate investors are anticipating more growth and are bidding up price per share in advance of performance. * P/E ratio is where P0 “should be” E1 x “justified multiple”. Also, the P/E ratio is termed “forward P/E” as the denominator is based on expected earnings over the next 4 quarters.

Answer 50

Dividend discount model (DDM) assumes that the intrinsic value of a company’s stock is the PV of expected future dividends: Economic return = change in price “growth” + Dividend income/ Beginning price Price = Dividend/ (Return - Growth)

Answer 51

Pt = Dt * (1 + G)/ (R - G) Pt = Current price (price at period “t”) D (t + 1) = Dividend one year after period “t” R = Required return G = (Sustainable) Growth rate P0 = Div1/ (R - G) P1 = Div2/ (R - G) Div1 = Div0 x (1 + G)

Answer 52

Free cash flow is the amount of cash that a business generates after taking into account reinvestments in non-current assets: Net income or Net operating profit AFTER taxes + non cash expenses - INCREASE in working capital - capital expenditures = Free cash flow

Answer 53

P/CF ratio may be used to calculate current stock price. Rationale for using this price multiple is that cash flow is harder for companies to manipulate than earnings. P/CF is a more stable measure of P/E. Changes in a company’s P/CF ratios over time are positively related to changes in a company’s LT stock returns: P/CF = P0/ CF1 P0 = Stock price or value today CF1 = Expected cash flow in 1 year = CF1/ # CSO = CF0 x (1 + G) = Operating CF x (1 + G)/ # CSO

Answer 54

Value of equity can be calculated as follows: P0 = [P0/ CF1] x CF1 P0 = Stock price or value today CF1 = Expected cash flow in 1 year

Answer 55

Capital asset pricing model (CAPM) is often used to determine required rate of return for dividend discount model: Rce = Rf + B1 * [E(Rm) - Rf] Rce = Required rate of return on CE security Rf = Risk-free rate of return B1 = Beta on security E(Rm) = Expected return on market (portfolio) [E(Rm) - Rf] = Equity risk premium Assumptions: * Dividends one year beyond year which price is determined * Constant growth rate of dividends “Exponential” - Div4 = Div0 x (1 + G) to the 4th power * Stock price will grow at same rate as dividend * Required rate of return is GREATER THAN dividend growth rate

Answer 56

Prime cost = DL + DM * Direct labor is “directly related” to production of a product or performance of a service + expected ‘downtime’ for labor. * Direct raw material are costs of materials purchased + freight-in (net of purchase discounts) + normal scrap.

Answer 57

Conversion cost = DL + Manufacturing overhead * Direct labor is “directly related” to production of a product or performance of a service + expected ‘downtime’ for labor. * MOH includes indirect costs that are NOT easily traceable to cost pool or cost object. Includes indirect materials (I.e., cleaning supplies for shop floor and machines), indirect labor (forklift drivers, maintenance workers, shift mangers, engineers, etc.) and other “in factory” indirect costs (depreciation, rent, maintenance, property taxes, insurance and utilities).

Answer 58

COGS + Ending FG - Beg. FG = COGM COGM accounts for manufacturing costs of products COMPLETED during the period: Step 1: Calculate AFU Beg. RM + Purchases = Available for use (AFU) * * Has to go in either two (2) places: EI or Used (meaning RM was used) Step 2: Calculate COGM Beg WIP + DM (per step 1) + DL + MOH APPLIED = Total manufacturing cost incurred - Ending WIP = COGM Note 1: Current manufacturing cost = DM + DL + MOH applied Note 2: If no beg. WIP, then current mfg. cost is same as COGM Step 3: Calculate COGS Beg. FG + COGM (per step 2) = COGAS - Ending FG = COGS Note 3: COGS statement for manufacturer similar to retailers, except COGM used in place of purchases.

Answer 59

IRR is the expected rate of return on a project. * IRR is a time-adjusted rate of return from an investment * Focuses decision maker on discount rate at which the PV of a project's cash inflows = PV of cash outflows * IRR determines the PV factor and related interest rate that yields NPV = 0

Answer 60

Black-Scholes model inputs include the following: * Common stock price (of underlying stock) * Option exercise price * Risk-free interest rate * Time to expiration * Measure of risk tied to underlying stock

Answer 61

Debt ratio = Total Debt/ Total Assets

Answer 62

After-tax cash flows are relevant to capital budgeting decisions and are computed using one of two methods. Operating cash flows differs from net income b/c noncash expenses (i.e., deprecation) must be ADDED back to net income to get to cash flow After-tax CFs = Pretax CF (EBT) x (1-T) = Inflow * Cash inflows = Sales - Variable costs * Cash inflows x tax rate = cash inflows net of tax * Initial investment divided by UL = Depreciation expense * Depreciation expense x TR = Noncash expense ADDED to cash inflow net of tax

Answer 63

Black-Scholes option pricing model assumptions: * European-style options * Can ONLY be exercised at maturity * Risk-free rate and volatility of stock prices are constant over option life * No taxes or transaction costs exist * Stock prices behave in a random manner * Stock pays no dividends

Answer 64

Determined by the lowest total weighted-average cost of capital (WACC). Capitalization of WACC maximizes shareholder's equity. WACC is internally used as a hurdle rate for capital investment decisions. The lower the hurdle, the easier it is to expect positive spread where ROIC > WACC.

Answer 65

Product costs = DM + DL + Factory (Manufacturing) overhead applied. Examples include the following: * Wages & fringe benefits for factory employees * Raw materials purchased * Plant utilities (overhead) * Rent costs on manufacturing plant (overhead) * Plant worker costs

Answer 66

With traditional costing, all indirect costs (total manufacturing overhead) costs are allocated to a "single" cost pool: Step 1: Overhead rate (single) = "All" Budgeted overhead costs / (single) Estimated cost driver (i.e., DL $, DL hrs., Machine hrs.) Step 2: Applied overhead = Actual cost driver x Overhead rate Applied O/H = Actual output x Standard per unit

Answer 67

As volume INCREASES, total cost INCREASES, but is fixed or constant per unit. This behavior is only within the revelvant range.

Answer 68

Beg. RM + RM purchases = RM available for use - RM used = Ending RM (Balance Sheet)

Answer 69

Beg. WIP + RM used + DL [DL rate * Act. Hrs.] + OH used = WIP available to be finished - Inv. transferred to FG = Ending WIP (Balance Sheet) Another way to reflect the flow of WIP inventory: Beg. WIP + RM used + DL [DL rate * Act. Hrs.] + OH applied - Ending WIP = COGM Note: To calculate OH used, calculate the OH rate, then applied OH Step 1: OH rate = Budgeted OH / Budgeted cost driver Step 2: OH rate x Actual cost driver

Answer 70

Beg. FG + Inv. transferred from WIP = FG available for sale - COGS (Income Statement) = Ending FG (Balance Sheet) Another way to reflect the flow of FG: Beg. FG + COGM - Ending FG = COGS

Answer 71

Equivalent units under the FIFO method is composed of three (3) parts: 1. Completion of units on hand at beg. of period: [Beg. WIP x (1 - % already complete)] 2. Units started and completed during period: [Units completed - Beg. WIP] 3. Units partially completed at end of period: [Ending WIP x % complete]

Answer 72

Method of product costing that averages costs and applies them to a large number of homogeneous items using the following steps: 1. Summarize flow of physical units 2. Calculate "equivalent unit" output 3. Accumulate total costs to be accounted for 4. Calculate average unit costs based on total cost and equivalent units 5. Apply average costs to units completed and remaining in Ending WIP

Answer 73

Cost per equivalent unit = Beg. cost + Current cost/ Equivalent units Units completed (Beg. WIP + units started and completed during the month) + Ending WIP x % completed = Equivalent units

Answer 74

Cost per equivalent unit = Current cost ONLY/ Equivalent units Beg. WIP x (1 - % already complete) + Units completed - Beg. WIP + Ending WIP x % complete = Equivalent units

Answer 75

Equivalent units under the Weighted Average method is composed of two (2) parts: 1. Units completed: Beg WIP + units started and completed during the month 2. Ending WIP x % completed

Answer 76

Need to calculate the difference between actual OH and applied OH: 1. Compute the standard rate per driver (i.e., machine hour): Application rate per hour = Total standard costs/ Total standard hours 2. Compute amount applied: Total applied OH = Total ACTUAL hours x Application rate per hour 3. Determine amount of over/ underapplied OH: Over/ underapplied OH = Total applied OH - ACTUAL OH

Answer 77

Sales price - Cost to complete = Relative sales value at split-off * * Represents the additional contribution to income generated by completing the product 1. Joint cost allocation by volume (relative unit volume) - Direct cost for each product plus the joint cost allocation. * Calculate the total unit volume, then divide by each one. 2. NRV at split-off point - Sales value at split-off point used to allocate joint costs IF sales price quotations are known. * Units produced x selling price per unit for each product * Multiply allocation % x joint cost to get allocated cost for each product * Figure out total value is at split-off, figure out ratios, and then multiply joint cost by the ratio 3. NRV at split-off point - If sales values at split-off are NOT available, then it must be derived using formula: Final selling price - Identifiable costs incurred AFTER split-off (Separable costs) = Sales value at split-off * If we don’t know sales value at split-off, we take our selling price less further processing costs to calculate ratio. Then we use ratio to allocate the joint costs

Answer 78

1. Applies high amounts of OH to a product that places high demands on expensive resources. 2. If product places few demands on expensive resources, system will assign little of that cost to the product. 3. Removes much of the cost distortion caused by traditional volume-based overhead systems.

Answer 79

Engineered cost bears an observable and known relationship to a quantifiable activity base.

Answer 80

Multiple or departmental OH rates would be more preferable when various products are manufactured because multiple OH rates are preferable to a single OH rate. Activity-based costing would be better still.

Answer 81

Traditional costing system - assigns OH to a single cost pool with a single plant-wide overhead application rate using a single allocation base. Appropriate to use in the following situations: * Single-product manufacturer * Majority of costs are direct costs * Many different products produced that homogeneously consume resources Activity-based costing system - assumes that best way to assign indirect costs to products (cost objects) is based on product's demand for resource-consuming activities. Attempts to improve cost allocation by emphasizing long-term product analysis. * Appropriate to use when products produced heterogeneously consume resources

Answer 82

Measure of operating efficiency: Net profit margin = Net Income/ Sales

Answer 83

Measure of the degree of efficiency with which an entity is using its assets: Asset turnover = Sales/ Assets

Answer 84

Measures the extent to which an entity uses debt in its capital structure: 1. Financial leverage = Assets/ Equity 2. Degree of Financial leverage = 1 + [Debt/ Equity]

Answer 85

1. DuPont ROE = Net profit margin x Asset turnover x Financial leverage 2. DuPont ROE = [Net income/ sales] x [Sales/ assets] x [Assets/ equity] 3. DuPont ROE = ROA x Financial leverage Note: ROA = [Net income/ sales] x [Sales/ assets]

Answer 86

DuPont ROE = Net profit margin x Asset turnover x Financial leverage Net profit margin can be broke out into three (3) distinct components: Tax burden x Interest burden x Operating income margin: 1. Tax burden is the extent to which an entity retains profits after paying taxes. It is the amount of profit that is retained (dependent on political factors): Tax burden = Net income/ Pretax income 2. Interest burden reflects how much pretax income an entity retains after paying interest to debt holders (dependent on amount of debt, short/long term and cost of borrowing): Interest burden = Pretax income/ EBIT 3. EBIT margin is a measure of entity profits earned on sales after paying operating and nonoperating costs (other than interest and taxes). Dependent on competition and power of suppliers: EBIT margin = EBIT/ Sales * EBIT = Sales - COGS - SG&A - Depreciation

Answer 87

Measures excess of actual income earned by an investment over return required (WACC - firm perspective EVA): Residual income (value in $) = Net income - Required return (on equity) Required return (hurdle rate in $) = Net book value (Equity) x Hurdle rate

Answer 88

Method of performance evaluation similar to residual income method, but this method measures excess of income after taxes (not counting interest expense) earned by investment over return rate defined by company's overall WACC: 1. Economic value added = Net Operating Profit After Tax (NOPAT) - ($ invested capital) WACC 2. Economic value added = NOPAT - Required return * NOPAT = EBIT x [1 - T] * Required return = Investment [interest bearing debt + Equity - approximates total assets] x WACC Note: Same result as in residual income, but use of a different method.

Answer 89

Reorder point is inventory level at which an entity should order or manufacture additional inventory to meet demand and to avert incurring stock out costs: Reorder point = Safety stock + [Lead time x Sales during lead time] Note: Need to be consistent in how we measure lead time and sales (i.e., days, weeks, months)

Answer 90

* Represents a third-party guarantee generally from a bank * Represents an external credit enhancement used by company issuing otherwise unsecured debt to enhance its credit or can be required by a creditor to ensure payment * Lowers cost of borrowing

Answer 91

Leading indicators predict economic activity and may include the following: * Avg. new unemployment claims * Building permits * Avg. length of workweek * Money supply (M2) * S&P 500 stock index * Orders for goods * Price change of materials * Index of consumer expectations * Interest rate spread * Index of supply deliveries

Answer 92

Lagging indicators follow economic activity - they change AFTER a given economic trend has already started + give signals: * Prime rate charged by banks * Average duration of employment * Commercial and industrial loans outstanding * CPI for services * Consumer DTI ratio * Changes in labor cost/unit of manufacturing output * Inventories-to-sales ratio

Answer 93

Coincident indicators change at approx. same time as the whole economy; thus, provides information about current state of economy. May be used to identify, after the fact, timing of peaks and troughs in a business cycle: * Industrial production * Manufacturing and trade sales * Industrial production (GDP) * Personal income less transfer payments

Answer 94

* Learning curve analysis is based on premise that as workers become more familiar with a specific task, the per-unit labor hours will decline. * Relates to the efficiency with which productive resources (typically labor) are employed and it suggests that productivity will increase over time (includes per unit of output)

Answer 95

= Total fixed costs/ Contribution margin per unit * Fixed costs = units sold x fixed cost per unit * Units sold = Total sales/ price per unit

Answer 96

There are two (2) approaches to computing breakeven in sales dollars: 1. Contribution margin per unit method: Breakeven point in dollars = Unit price x Breakeven point (in units) 2. Contribution margin ratio method: Breakeven point in dollars = Total fixed costs / Contribution margin ratio * Contribution margin ratio = contribution margin per unit/ price per unit

Answer 97

Revenue - Variable costs: DM, DL, Var. MOH and Var. Selling Expenses = Contribution Margin - Fixed costs: Fixed OH, Fixed selling, G&A expenses = Net income Note: If your given a variable cost %, you can derive the contribution margin %: Variable costs = 25% of sales Contribution margin % = 1 - 25% = 75% The contribution margin ratio can be used to compute Breakeven in sales.

Answer 98

Desired profit = [Fixed cost + Pretax profit] / Contribution margin per unit * CM per unit = Sales price - variable costs Note: Can also calculate sales dollars needed for a desired profit: Desired profit = [Fixed cost + Pretax profit] / Contribution margin ratio

Answer 99

1. Compute fixed cost/ unit = Fixed MOH/ Units produced 2. Compute change in net income = Change in inventory units x FC/ unit 3. Determine impact on net income: * No change in inventory: Absorption NI = Variable NI * Increase in Inventory: Absorption NI > Variable NI * Decrease in Inventory: Absorption NI < Variable NI

Answer 100

Margin of safety is the excess sales over breakeven sales: Total sales (in dollars) - Breakeven sales (in dollars) = Margin of safety (in dollars) Total sales (in dollars) - Fixed costs / [CM / Sales] = Margin of safety (in dollars) 1. Breakeven sales (in dollars) = unit sales x sales price/ unit 2. Breakeven sales (in dollars) = Fixed costs / Contribution margin ratio

Answer 101

1. Volume is the only relevant factor affecting cost. 2. All costs can be divided into fixed and variable elements. 3. Selling prices are to be unchanged. 4. ONLY total variable costs are directly proportional to volume over the relevant range.

Answer 102

Horizontal merger is when two (2) companies in the SAME industry merge.

Answer 103

Involves combination of companies at different stages of the production process: * Backward integration - ensures supply of raw material * Forward integration - provides a stable market for products sold

Answer 104

* Different business units with relatively "remote connections" come together under single management * One management group * Combined units reduces overall administrative and operational costs

Answer 105

Company that engages in an activity integrates with another company that provides "ancillary support" [shipping] for the primary activity.

Answer 106

Entities combine to form a single new corporation with stocks merging companies surrendered and replaced with new stock: * A + B = C [new company], A and B are similar size entities

Answer 107

* Acquisition of one company by another that involves no new company. Acquired firm is generally smaller * May retain its legal structure or name; OR * Subsumed by acquirer and cease to exist * A + B = A [no new company], A is the larger firm

Answer 108

* Represents the outright sale of a subsidiary as subsidiary's core competencies do not align with overall company * Lack of synergy * Underperforming - sell off to generate cash and focus on core * No potential - get rid of it entirely

Answer 109

* Creates a new and independent company by separating subsidiary business from a parent company * Unit is less profitable and/or unrelated to core parent business * Subsidiary has more value than it did as part of larger corporation * Subsidiary has some potential - no cash inflow/ not public

Answer 110

1. Descriptive analytics - describing or explaining what has occurred 2. Diagnostic analytics - diagnosing or explaining why something occurred 3. Predictive analytics - predicting what will occur (statistical techniques/ forecasting models) 4. Prescriptive analytics - prescribing what could or should occur

Answer 111

1. Volume - quantity, amount, size of data points 2. Velocity - speed or flow of data accumulation or data processing 3. Variety - range of data types or source being processed or analyzed: * Structured data - defined organizational format that has specific parameters * Semi-structured data - hybrid of the two formats * Unstructured data - format that does not have predefined parameters and lack organization 4. Veracity - reliability, quality, trustworthiness, or integrity of data 5. Value - insights that Big Data can yield. Recognizes that not all data translates into actionable insights. Important to understand question or business problem that needs to be solved

Answer 112

Boxplots are a type of data visualization that are graphical displays that show the following: * Lower and upper extremes * Lower and uppers quartiles * Median data point

Answer 113

Dot plots are a type of data visualization with a two-dimensional mapping of observances onto a coordinate plane: * Shows the frequency of data points on one axis and another dimension on the other

Answer 114

Histograms are a type of data visualization. It is essentially a bar chart that plots a measurement of data points at different points in time.

Answer 115

Costs incurred to prevent production of defective units: * Employee training * Inspection [pre-production] * Preventive maintenance * Redesign of product * Redesign of processes * Search for higher-quality suppliers

Answer 116

Costs incurred to discover and remove defective parts BEFORE they get to the customer or next department: * Statistical quality checks * Product testing * Inspection [post-production] * Laboratory maintenance

Answer 117

Costs incurred to cure a defect BEFORE product is sent to customer: * Rework * Scrap * Tooling charges * Tooling changes * Costs to dispose * Cost of lost unit * Downtime

Answer 118

Costs incurred to cure a defect AFTER product is sent to customer: * Warranty costs * Returns and allowances * Complaints * Radical or reengineering an external failure * Liability claims Note: These enable management to measure product quality and customer satisfaction.

Answer 119

Breakeven point is when sales = total costs (fixed and variable costs) Area beyond breakeven point between total costs = profit

Answer 120

= Cash flow from operations/ Current Liabilities = CFO/ CL * Represents an entity’s ability to generate cash from operations to cover current liabilities. * If this ratio is expected to decline in the future, company will need to look at other financing options to cover the shortfall. Note: Current liabilities used could be average or ending balance.

Answer 121

= Sales/ Avg. working capital = Sales/ WC * Represents how effective a company is able to use its working capital to generate sales. * Ratio that is too high could mean that working capital is too low.

Answer 122

= Inventory / [Sales/ 365] * Represents the average number of days to sale inventory. * Lower number of days represents company more efficient at converting inventory to sales.

Answer 123

= Accounts receivable/ [Sales/ 365] * Indication of quality of A/R and an entity’s ability to collect.

Answer 124

= Accounts Payable / [COGS/ 365] * As long as entity is meeting payment terms for vendors, should focus on extending this period to conserve cash.

Answer 125

= Days in Inv. + Days sale in A/R - Days of payables outstanding * Companies want Days in Inventory and Days sale in A/R to be LOWER. * Companies want Days of payables outstanding to be HIGHER.

Answer 126

= Total liabilities/ Total Equity * Represents the degree of protection to creditors in case company becomes insolvent. * The higher the ratio, the lower protection creditors have against company if they become insolvent.

Answer 127

= Total liabilities / Total assets * Similar to debt-to-equity ratio

Answer 128

= EBIT/ Interest expense * Indicates level of funding to cover interest expense for amount borrowed. * Higher the better; however, if ratio is too high it could indicate that company is not leveraged enough and could borrow. * If company wants to further improve ratio, it could pay down old debt or replace old debt with new debt carrying a lower interest rate.

Answer 129

= Net sales - COGS/ Net sales * As company becomes more efficient and reduce costs relative to sales, ratio should improve. * Higher the better

Answer 130

= Net income/ Sales * Represents the direct cost of selling. How profitable is a company after taking into consideration all costs to generate sales. * Higher the better.

Answer 131

= Net income/ Average total equity

Answer 132

= Net income/ Average total assets * Higher the better. * Represents level of income a company can generate from its asset base.

Answer 133

Production budget is made up of amounts to be spent on DM, DL and factory OH. The amount is also based on inventory on hand and inventory needed to sustain sales: Budgeted sales + Desired ending inventory - Beginning inventory = Budgeted production

Answer 134

1. Determine the production budget: Budgeted sales + Desired ending inventory - Beginning inventory = Budgeted production 2. Calculate units of DM needed: Units of DM needed for production period + Desired ending inventory - Beginning inventory = Units of DM to be purchased * Represents dollar amount of DM purchases required to sustain production requirements. 3. Calculate cost of DM to be purchased: Units of DM to be purchased x Cost per unit = Cost of DM to be purchased 4. Calculate DM usage budget: Beg. Inventory + Purchases - Ending inventory = DM usage (cost of materials used)

Answer 135

Budgeted production (in units) x Hours required to produce per unit = Total hours needed x Hourly wage = Total wages

Answer 136

DM used + DL + Variable factory OH + Fixed factory OH = COGM + Beg. Finished Goods = Goods available for sale - Ending Finished Goods = COGS Note: 1. DM used - comes from DM usage budget calculation (cost of DM used). 2. DL - comes from DL budget calculation. 3. Variable FOH - comes from factory OH budget calculation.

Answer 137

Beg. Cash + Cash collections from sales - Cash disbursements for OPEX + Purchases = Ending cash - Cash requirements to sustain ops = Working capital loan to maintain cash requirements ** ** Represents the amount that we need to borrow to reach our required cash balance (this is what’s needed to cover the cash shortfall).

Answer 138

Flexible budgets allows managers to identify how an individual change in a cost or revenue driver affects the overall cost in a process.

Answer 139

Standard costing systems measure costs a company SHOULD incur during production: 1. Direct costs Standard direct costs = Standard price x Standard quantity 2. Indirect (Overhead) costs Standard indirect costs = Standard (predetermined) application rate x Standard quantity

Answer 140

DM and DL variances typically calculated for a price (rate) variance and quantity (efficiency) variance: 1. DM price var. = Actual Qty. purchased x [Actual price - Std. price] 2. DM Qty. usage var. = Std. Price x [Act. Qty. used - Std. Qty. allowed) 3. DL rate var. = Act. Hrs. worked x [Act. rate - Std. rate] 4. DL efficiency var. = Std. rate x [Act. Hrs. worked - Std. Hrs. allowed]

Answer 141

Manufacturing overhead compares actual OH incurred to applied OH in same period. There are fixed and variable OH and they have the following variances: 1. Fixed OH Budget and Volume variance: * FOH budget (spending) var. = Actual fixed OH - Budgeted FOH * FOH volume var. = Budgeted FOH - Std. FOH cost allocated to production [Actual production x Std. Rate] 2. Variable OH Rate and Efficiency variance: * VOH rate (spending) var. = Actual Hrs. x [Actual rate - Std. Rate] * VOH efficiency var. = Std. Rate x [Actual Hrs. - Std. Hrs. allowed for Actual production volume]

Answer 142

1. Calculate OH rate = Budgeted OH costs/ Estimated cost driver 2. Applied OH = Std. Cost driver for actual level of activity x OH rate * Over-applied OH is favorable, which will result in credit (reduction) to COGS * Under-applied OH is unfavorable as it will result in a debit (increase) to COGS

Answer 143

These can be used to evaluate effectiveness of an entity’s identification of target markets and its strategies to target those markets: 1. Sales price var. = [Act. SP/unit - Budgeted SP/unit] x Actual units sold 2. Sales volume var. = [Actual sold units - Budgeted sold units] x Std. CM per unit

Answer 144

COGS = 1 - GP%

Answer 145

Unfavorable DL efficiency variance could be caused by an unfavorable material usage variance. Poor quality materials could mean unfavorable material usage + cause inefficient labor usage.

Answer 146

Federal Reserve can increase the money supply by doing one or a combination of the following: * Purchase government securities * Lower the discount rate * Lower reserve requirement

Answer 147

A natural monopoly exist when economic and technical conditions permit only one efficient supplier.

Answer 148

NPV = (-) Initial investment + PV of expected CFS/ [1 + int. Rate] nth power * NPV method recognizes time value of money and discounts CFs over life of project using using minimum desired (hurdle) rate.

Answer 149

EBIT = Pretax income + Interest Pretax income = Aftertax income / [1- tax rate]

Answer 150

Critical success factors are necessary to accomplish a firm’s strategy. They include the following: * Financial * Internal business factors * Customer satisfaction * Advancement of innovation * Human resource development (learning and growth)

Answer 151

Average gross receivable balance = Avg. Daily Sales x Avg. Collection Period Note: The larger the amount of daily sales and longer the collection period, the bigger the balance in gross receivables.

Answer 152

Average inventory = Cost of sales (COGS) / Inventory Turnover

Answer 153

PV Factor = Investment/ CFs Note: Higher the PV factor, lower the computed rate (IRR). Increases to the investment or decreases to CFs serve to INCREASE the PV factor.

Answer 154

There is a positive relationship with price INelasticity and revenue: * Selling price INCREASE, quantity demanded DECREASES, revenue INCREASE Implied elasticity = Less than 1 Price increase impact = Total revenue INCREASES Price decrease impact = Total revenue DECREASES

Answer 155

There is a negative relationship with price elasticity and revenue: * Selling price INCREASE, quantity demanded DECREASES, revenue DECREASE Implied elasticity = Greater than 1 Price increase impact = Total revenue DECREASES Price decrease impact = Total revenue INCREASES

Answer 156

There is no effect on revenue (cancels out) Implied elasticity = Equal to 1 Price increase impact = No change to total revenue Price decrease impact = No change to total revenue

Answer 157

Segregation of duties normally revolves around granting and/or restricting access to: * Production programs * Production data * Execution activities The following IT infrastructure areas must be segregated: * System programming * End user transaction/data entry * Data custody + storage * Authorization responsibility and monitoring

Answer 158

Total mkt value of C/S = Number of Common shares x market price per share Number of Common shares = Total common shares / Par value

Answer 159

Mkt. value of bonds = Par value from B/S x [Current market value per bond/ 1,000] Note: Divide by 1,000 if they give you the market value of the bond expressed in thousands.

Answer 160

Sales +/- Change in A/R + Allowance - Write-offs = Cash collections Note 1: Use sales from the income statement. Note 2: When analyzing the change in A/R, add back the allowance b/c you want to calculate the change on gross receivables.

Answer 161

1. System Analysts and Computer Programmers * System analyst - designs information system to meet user needs (hardware) * Computer programmers - use the system design to create an information system by writing computer programs (software) Issue: If the same person is in charge and/or responsible for hardware and software, they could bypass security systems without anyone knowing and steal information 2. Security Administrators, Computer Operators and Computer Programmers * Security Administrators - responsible for restricting access to systems, applications and databases Issue: If the security administrator is also a programmer, they could gain access to unauthorized areas and give access to another person, which would give the ability for the individual to steal information

Answer 162

Company will suffer an economic LOSS in the event it has net cash OUTFLOWS of a FC and the FC APPRECIATES. Note: When a FC APPRECIATES, the domestic currency DEPRECIATES.

Answer 163

Company will enjoy an economic GAIN in the event it has net cash INFLOWS of a FC and the FC APPRECIATES. Note: When a FC APPRECIATES, the domestic currency DEPRECIATES.

Answer 164

Company will suffer an economic LOSS in the event it has net cash INFLOWS of a FC and the FC DEPRECIATES. Note: When a FC DEPRECIATES, the domestic currency APPRECIATES.

Answer 165

Company will enjoy an economic GAIN in the event it has net cash OUTFLOWS of a FC and the FC DEPRECIATES. Note: When a FC DEPRECIATES, the domestic currency APPRECIATES.

Answer 166

Company should take a short position in a derivatives contract when it has goods sold and payment is coming due in a FC. Example: Company has a receivable that will be denominated in FC when its paid. Company should enter into a forward contract or a forward hedge to offset the risk. The concern is that the value of the FC will drop (or domestic currency strengthens) before payment is received, which means that the Company will be paid LESS when receivable is due. The foreign buyer pays the exporter (US company) in the foreign currency that will translate into a lower amount received when it's converted into the domestic currency.

Answer 167

Potential output will exceed Actual output.

Answer 168

Pre-tax CF x (1 - Tax rate) + (Depreciation x Tax rate) = Annual Operating CFs

Answer 169

IRR uses net incremental investment + net annual cash flows.

Answer 170

The following factors affect the competitive environment for firms: * Barriers to market entry * Market competitiveness * Existence of substitute products * Bargaining power of customers * Bargaining power of suppliers

Answer 171

[Actual SP/ unit - Budgeted SP/ unit] x Actual sold units * Measures aggregate effect of a selling price different from budget. * Hold actual sold units constant

Answer 172

Sales volume variance = [Actual sold units - Budgeted sales units] x Standard contribution margin per unit * Sales volume variance is a flexible budget variance that distills volume activity from other sales performance components.

Answer 173

Economic indicators are used to help individuals predict business cycles. There are three (3) indicators: 1. Leading - predictors of economic activity that change before economy follows a trend. Investors review statistics to understand where economy is headed. Ex: Money supply, S&P 500 index, building permits for new houses, avg. new employment claims. 2. Lagging - tend to follow economic activity. Investors use to confirm what has already happened and validate strength of a trend. Ex: avg. duration of unemployment, prime rate charged by banks, CPI for services, and consumer DTI ratio. 3. Coincident - change at same time as economy, provides info about current state. Investors use to understand what is currently happening and understand how markets and economies are reacting to various factors. Ex: Industrial production, manufacturing + trade sales, GDP and personal income less transfer payments.

Answer 174

Balanced scorecard is a methodology for measuring performance that blends financial and non-financial evaluation criteria. It breaks down "critical success factors" into four (4) categories based on different perspectives of success. 1. Financial - Increase profit and growth * Measures of financial performance such as net income, ROI, etc. and of costs/ revenues associated with individual components of the scorecard. 2. Internal business processes - Efficient production, decreased defects * Metrics measuring the efficiency and efficacy of production processes. Includes evaluating internal innovations and how they contribute to goals. Evaluate how processes add value for customers. 3. Customer satisfaction - Customer surveys * Focus on metrics that evaluate how well firm is meeting customer requirements and satisfying their needs. Ensure maximization of values for customers 4. Advancement of innovation + HR development - Learning and growth, retention of key employees * Retaining and sustaining capable employees is foundational to production and long-term growth. Note 1: ICA items = non-financial Note 2: All factors (financial and nonfinancial) are critical to accomplishment of business objectives

Answer 175

Elasticity = % Δ Quantity/ % Δ Price = [Quantity 2 - Quantity 1/ Quantity 1] / [Price 2 - Price 1/ Price 1] P1 = Original price P2 = New price Q1 = Original quantity demanded Q2 = New quantity demanded

Answer 176

Unit elasticity is where E = 1 1 = Elasticity = % Δ Quantity/ % Δ Price = [x - Quantity 1/ Quantity 1] / [Price 2 - Price 1/ Price 1] P1 = Original price P2 = New price Q1 = Original quantity demanded/ supplied Q2 = New quantity demanded/ supplied - [solve for this variable]

Answer 177

Elasticity = % Δ Quantity/ % Δ Price = [Quantity 2 - Quantity 1/ Quantity 1] / [Price 2 - Price 1/ Price 1] P1 = Original price P2 = New price Q1 = Original quantity supplied Q2 = New quantity supplied Note: Do NOT use absolute value.

Answer 178

Cross elasticity = % Δ Quantity of Product X/ % Δ Price of Product Y = [Quantity 2 - Quantity 1/ Quantity 1] / [Price 2 - Price 1/ Price 1] P1 = Original price P2 = New price Q1 = Original quantity demanded Q2 = New quantity demanded Note 1: If cross elasticity = Positive, the two goods are SUBSTITUTES. For example, price of Product Y goes up, causing the demand for Product X to go up. People stop buying the higher-priced goods and begin to buy the substitute. Note 2: If cross elasticity = Negative, the two goods are COMPLEMENTS. For example, price of Product Y goes up, causing the demand for Product X to go down. People stop buying Product Y and X.

Answer 179

Income elasticity = % Δ Quantity of Product X/ % Δ Income = [Quantity 2 - Quantity 1/ Quantity 1] / [Income 2 - Income 1/ Income 1] I1 = Original income 12 = New income Q1 = Original quantity demanded Q2 = New quantity demanded Note 1: If income elasticity = Positive, the good is a normal good. For example, normal good is a product whose demand is positively related to income. As income goes up, demand for the normal good increases. Demand increases as income increases. Note 2: If income elasticity = Negative, the good is an inferior good. For example, inferior good is a product whose demand is inversely related to income. As income goes up, demand for the inferior good decreases. Demand decreases as income increases.

Answer 180

Market structure characteristics: * Most competitive * Homogenous products * No differentiation * Many firms * No barriers to entry * Price takers - means these firms CANNOT increase their price Elasticity of demand characteristics: * Perfectly elastic - if firm raises price, will lose a lot of demand due to too much competition * Firm sells as much, or as little, as they want at the given market price Competitive strategy: * Perfect (Pure) competition firms should try and maintain market share by being responsive to changes in competitor's prices and market conditions.

Answer 181

Market structure characteristics: * Competitive * Products are differentiated * Many firms * Not many barriers to entry * Have ability to control price Elasticity of demand characteristics: * Highly elastic but downward sloping - can't raise price too much or will lose to competition, but some ability to control price * Firm can adjust quantity of products sold without affecting the price very much Competitive strategy: * Monopolistic competitive firms should use a competitive market strategy focusing on maintaining existing market share by enhancing differentiation of its products.

Answer 182

Market structure characteristics: * Less competition * Products are similar but differentiated * Small number of firms * Large barriers to entry * Ability to control price + output Elasticity of demand characteristics: * Inelastic - have ability to raise price and NOT lose a lot of demand * Firms face a kinked downward-sloping demand curve Competitive strategy: * Oligopoly firms should focus on maintaining or building market share through advertising and proper adaption to both price and product volume changes of its competitors. * Best cost provider is usually NOT an optimal strategy for an oligopoly - this is playing the middle of the road.

Answer 183

Market structure characteristics: * No competition * Products are unique * Insurmountable barriers to entry * Set price and output to maximize profit * Price setters Elasticity of demand characteristics: * Inelastic * Firm faces the entire demand curve for the product, which slopes downward Competitive strategy: * Monopoly firms should use a competitive strategy that focuses on profit maximization without regard to changes in market share.

Answer 184

* Elasticity = % Δ Quantity/ % Δ Price * The more elastic a product is, the more substitutes available, therefore the more difficult it is for a firm to raise its prices. * The more inelastic a product is, the less substitutes available, therefore it is easier to raise prices. Note 1: Product is elastic when E > 1, means there are many substitutes and firm can't really change their price. Note 2: Product is inelastic when E < 1, means less substitutes and firm can change their price.

Answer 185

* When selling products overseas, customers generally pay US company in a foreign currency. * US company converts foreign currency into the domestic currency * If US dollar strengthens against foreign currency = foreign currency weakening against the US dollar. * This means US company exchange foreign currency for US dollars and since it has weakened, we receive less US dollars * This is known as transaction exposure * If trend continues long, it can affect US Company cash flow and profitability. This is Economic exposure Advantage: US company can purchase greater amount of supplies in foreign markets because of weakened foreign currency.

Answer 186

Step 1: Identify the highest and lowest units produced during the period and calculate the change (the difference). Step 2: Calculate the change (difference) in dollar value (cost) for the highest and lowest units. Step 3: Divide Δ dollar value (cost) / Δ units

Answer 187

Step 1: Using the High-Low method, select either the highest or lowest units produced and the total cost associated with quantity of units produced. Step 2: Multiply either the highest or lowest units produced by the total variable cost per unit calculated using the High-Low method. This amount is total variable cost. Step 3: Total cost (step 1) less Total variable cost (step 2) = Total fixed cost for one month. Step 4: Multiply total fixed cost for month (step 3) x 12 = Total fixed cost for the year.

Answer 188

Contribution Margin can be expressed as per unit and as a %: 1. Contribution Margin = Sales price (per unit) - Variable costs (per unit) 2. Contribution Margin % = Contribution margin (per unit) / Sales price (per unit)

Answer 189

* Depreciation on machine * Depreciation on building that is allocated to manufacturing * Insurance on machinery * Plant manager salary

Answer 190

Attributes * Provides an expected cost structure and bottom-line result based on an adjusted volume figure that differs from master budget. Advantages: * Allows individuals to look at different volume levels in order to determine where cost efficiencies and inefficiencies are achieved. * Forecast bottom-line profits or losses based solely on selling more or fewer units than master budget predicts. * Facilitates variance analysis by isolating per-unit revenue + variable costs and overall fixed costs from volume for comparisons between actual and budget. Disadvantages: * Per-unit revenues, variable costs and fixed costs required to utilize flexible budgeting, as such, accuracy of these numbers from a budgeting standpoint is imperative. * Assessing relevant range is vital because within the range, cost behaviors are expected to hold true. Outside the range, standards per unit and fixed costs may vary dramatically.

Answer 191

Remember the BASE mnemonic when dealing with budgeting problems: Beg Inventory + Added Inventory (new production for period) - Subtract Inventory sold = Ending Inventory The following must hold true: Beg. Inventory + Added Inventory = Inventory sold + Ending Inventory To solve for units "added" or produced: A = S + E - B Inventory added in = Inventory units sold + EI - BI

Answer 192

Direct Material Usage $ = Units Produced x Material cost per unit x Cost

Answer 193

Direct Labor cost $ = Units Produced x Hrs. per unit x Hourly rate

Answer 194

Variable OH cost $ = Units Produced x Hrs. per unit x VOH rate

Answer 195

FOH costs = Annual FOH costs/ 12

Answer 196

Total variance is the difference between operating income from the Master Budget and Actual. Master and Actual budget: Sales - Variable costs = Contribution Margin - Fixed costs = Operating Income Actual > Master budget = Favorable Actual < Master budget = Unfavorable Note: The total variance = Volume variance + Flexible budget variance

Answer 197

Volume variance is the difference between operating income from the Flexible Budget and Master Budget relating to the # of units sold. Master and Flexible budget: Sales - Variable costs = Contribution Margin - Fixed costs = Operating Income The difference between these budget is the # of units sold Sell more units than you originally budgeted = Favorable Sell less units than you originally budgeted = Unfavorable

Answer 198

Flexible budget variance is the difference between operating income from the Flexible Budget and Master Budget relating to anything OTHER THAN the # of units sold. Flexible budget variance = Total variance - Volume variance

Answer 199

VOH spending variance = Actual Hrs. x [Actual VOH rate - Std. VOH rate]

Answer 200

FOH volume variance = Std. FOH rate x Std. Hrs. x [Actual items - Std. items]

Answer 201

Period costs are expensed in the period which they are incurred and are NOT inventoriable. Examples include the following: * SG&A * Interest (financing) * Advertising and promotion * Staff salaries associated with HR and legal

Answer 202

* Job-order and process costing are two cost accumulation systems that can be used to track and accumulate costs associated with manufacturing products. * Both systems assign costs to inventory and COGS, but use different methodologies. * Process costing - averages product costs (DM, DL and OH) and applies the costs to a large # of HOMOGENEOUS products. * Job-order costing system allocates product costs (DM, DL and OH) to each individual job. * Job-order costing system is more appropriate to use when building products that are unique + easily identifiable (i.e., building homes).

Answer 203

ROI * Net income is divided by investment in order to produce an annual percentage return * Advantage: Ease of interpretation - higher the return, better the investment, percentage output can easily be compared with firm's required rate of return and other potential projects to determine which investments to pursue. * Disadvantage: Large investments will increase the denominator of ROI calculation; thereby lowering the calculated rate. Managers judged on ROI may be hesitant to pursue a large dollar investment. ROI tends to put more focus on the short-term horizon rather than the long-term. IRR * IRR is also a percentage output and similar to ROI, can be compared with a required rate of return or hurdle rate. * Advantage: IRR also has an ease of interpretation - higher is better and a project with a forecasted return > required rate of return is worth pursuing. * Disadvantage: IRR is less reliable when cash flows and outflows both occur during life of project. Total net dollar impact is never accounted for as IRR is focused solely on a percentage return.

Answer 204

Revenue market share compares a firm products to sales of competitor products. Evaluate percentage portion of market share.

Answer 205

Unit market share is similar to revenue market share except it measures in units as opposed to revenue dollars (sales).

Answer 206

Profitability index = Discounted inflows for each year / Outflows

Answer 207

* Use the payback method to determine the years it will take us to pay back the outflow of funds from the inflow * Add the cumulative inflows for each year * Determine the year when we pay back the outflow of funds * Some portion during the last year will result in us paying back the total outflow of funds. To determine portion do the following calculation: Total outflows - Cumulative amount already paid back / Current year outflow Take the summation of each year, including the portion paid in the last year.

Answer 208

Net realizable value = Selling price - Cost to sell

Answer 209

Replacement cost method uses the cost to replace the valued asset (includes transportation and assembling cost) Replacement cost = Cost of replacing equipment + all cost to get product to firm and to get it in operation

Answer 210

Summation of all costs (including opportunity cost) except sunk costs. Sunk costs are excluded because they do not impact the value of the asset.

Answer 211

Income approach: Annual cash flow x Discount factor

Answer 212

Growth rate = ROA x Retention / 1 - [ROA x Retention]

Answer 213

D0 = E0 x Dividend Payout ratio D0 = Dividend value today E0 = Current EPS

Answer 214

Median stock price (P0/ E1) of peer group x E1 of firm PO = Stock price or value today E1 = Expected EPS (forward)

Answer 215

Price-to-book ratio can be used to estimate current stock price. Price-to-book = P0/ Book value P0 = Stock price or value today Book value = C/S + APIC + R/E Book value = C/S + APIC + R/E/ # CSO

Answer 216

Quick ratio = Cash and CE + Short-term marketable securities + Net receivables/ Current liabilities DECREASE. Factoring without recourse means that a factor will pay firm the value of their receivables, but they keep the factoring fee. This means the net receivables are converted to cash, but the firm receives less money. As such, the numerator decreases, so the Quick ratio decreases.

Answer 217

Quick ratio = Cash and CE + Short-term marketable securities + Net receivables/ Current liabilities INCREASE. Borrowing funds means that the numerator increases (cash) without increasing the denominator. Note: Non-current liabilities are affected as they are increased; NOT current liabilities.

Answer 218

Inventory turnover ratio = COGS/ Avg. Inventory NO IMPACT. Factoring only affects cash and receivables, not COGS or inventory.

Answer 219

Inventory turnover ratio = COGS/ Avg. Inventory NO IMPACT. Borrowing funds only affects cash and non-current liabilities, not COGS or inventory.

Answer 220

A/R turnover ratio = Net sales/ Avg. A/R (net) INCREASE. Factoring reduces A/R but has no effect on sales. The numerator is unchanged, but the denominator decreases.

Answer 221

A/R turnover ratio = Net sales/ Avg. A/R (net) NO IMPACT. Borrowing funds only affects cash and non-current liabilities, not sales or A/R.

Answer 222

Current ratio = Current assets/ Current Liabilities DECREASE. Same result as the Quick ratio. Factoring without recourse means that a factor will pay firm the value of their receivables, but keep the factoring fee. This means the net receivables are converted to cash, but the firm receives less money. The denominator is not affected by factoring. As such, the numerator decreases, so the Current ratio decreases.

Answer 223

Current ratio = Current assets/ Current Liabilities INCREASE. Borrowing funds means that the numerator increases (cash) without increasing the denominator. Note: Non-current liabilities are affected as they are increased; NOT current liabilities.

Answer 224

Debt-to-Equity ratio = Total liabilities/ Total Equity INCREASE. Current assets (A/R) and net income are reduced by the factoring fee, which results in equity in the denominator being reduced. There are no new liabilities, so the numerator remains constant. Since the denominator is smaller and the numerator remains constant, the ratio will increase.

Answer 225

Debt-to-Equity ratio = Total liabilities/ Total Equity INCREASE. Borrowing funds means that the numerator increases without increasing the denominator.

Answer 226

Profit Margin Ratio = Net Income/ Sales DECREASE. Net income is reduced by the factoring fee; thus the numerator is reduced. The denominator remains unchanged. As such, ratio will decrease.

Answer 227

Profit Margin Ratio = Net Income/ Sales DECREASE. Numerator decreases due to interest cost incurred from borrowing. No impact on the denominator; thus ratio would decrease.

Answer 228

* Credit risk in context of sales is the risk that customers will not be able to make payments when due * Credit sales result in firm having to wait to collect payment * Firm must balance the benefit of increased sales with the drawback of having to wait to collect payment from sales * Management of credit risk has direct correlation with credit standards, which relates to financial strength of customers. * If firm only sell on credit terms to financially strong customers, may limit sales, but have a higher likelihood to collection

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