CPA BEC Exam
Objectives - ANS-ORC
Operations
Reporting
Compliance
Internal Control Components - ANS-CRIME
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring Activities
Organizational Structure - ANS-EDOF
Entity Level
Division
Operating Unit
Function
Control Environment - ANS-EBOCA
Ethical
Board independent
Org structure
Commitment to competence
Accountability
Risk Assessment - ANS-SAFR
Specify objectives
Assess Changes
Fraud potential
Risk analysis
Information & Communication - ANS-OIE
Obtain and use information
Internally communicate information
External party communication
Monitoring Activities - ANS-SOD
Separate Ongoing evaluations
Communication of Deficiencies
,updating mission and vision as internal controls
Existing Control Activities - ANS-CATP
Control Activities selected and developed
Technology controls
Policies and procedures
Components of ERM - ANS-GO PRO (5 components)
Governance and culture
strategy and Objective-setting
Performance
Review and Revision
information, communication and reporting Ongoing
Principles of ERM - ANS-DOVES SOAR VAPIR SIR TIP (20 principles)
ERM principles of Governance and Culture - ANS-DOVES
defines Desired culture
exercises board Oversight
demonstrates commitment to core Values
attracts, develops and retain capable Employees
establishes operating Structure
ERM principles of Strategy and Objective-setting - ANS-SOAR
evaluates alternative Strategies
formulates business Objectives
Analyzes business context
defines Risk appetite
ERM principles of Performance - ANS-VAPIR
develops portfolio View
Assesses severity of risk
Prioritizes risk
Identifies risks (events)
implements risk Responses
ERM principles of Review and Revision - ANS-SIR
assesses Substantial change
pursues Improvement in ERM
Reviews risk and performance
ERM principles of Information, Communication, and Reporting Ongoing - ANS-TIP
leverages information and Technology
communicates risk Information
,reports on risk, culture and Performance
Principles based approach - ANS-requires management judgement
COSO Framework Document - ANS-COPS
Component evaluation
Overall assessment
Principal evaluation
Summary of IC deficiencies
Developing Value - ANS-CPER
Creation
Preservation
Erosion
Realization
Mission, Vision and Core Values - ANS-Mission - why
Vision - what
Core Values - how
Definition of ERM - ANS-CCPIS - to manage risk and create value
Culture (core values)
Capabilities
Practices
Integration with Strategy-setting and performance (mission and vision)
Frequency/likelihood by Severity(impact) chart (ARTS) - ANS-High F by High S - Avoid
High F by Low S - Reduce
Low F by High S - Transfer (buy insurance - share)
Low F by Low S - Self-insure (accept - chosen industry)
SOX Title III - Corporate Responsibility - ANS-Audit Committee:
no compensation
not related to issuer
otherwise indep
responsible for auditor
auditor reports to them
responsible for resolving issues between mgt and auditor
establish whistleblower hotlines
CEO/CFO representations:
internal control is their responsibility
evaluated IC in 90 days prior
they include conclusions about IC effectiveness
,IC have been designed to ensure that material information has been made available
SOX Title IV - Enhanced Financial Disclosures - ANS-Internal Controls (must be evaluated
within 90 days prior to the issuer's report)
Audit Committee Financial Expert (benefits of bringing expertise to the oversight function)
SOX Title VIII: Corporate and Criminal Fraud Accountability - ANS-Altering documents penalties
Whistle-Blower Protection
SOX Title IX - White-Collar Crime Penalty Enhancements - ANS-Sentencing details
SOX Title XI - Corporate Fraud Accountability - ANS-Tampering with records
Risk and return are _______________ related - ANS-directly
2 Broad categories of Risk (DUNS) - ANS-1. Diversifiable Risk
Unsystematic/nonmarket/firm-specific
2.Nondiversifiable Risk
Systematic/market
2 types of factors that impact exchange rate - ANS-1.Trade-Related Factors
Relative inflation rates
Relative income levels
Government controls (trade restrictions)
2.Financials Factors
Relative interest rates
Capital flow
Characteristics of Debt vs Equity - ANS-D is first and E is second
Flexibility - No, Yes
Tax Deductibility - Yes, No
EPS dilution - No, Yes
Increased financial risk - Yes, No
Security issuance costs - Low, High
Investor return - fixed, variable
only debt has obligation of income (interest)
only equity has an ownership interest in the corporation
Firm value calculation - ANS-= Free cash flow to the firm / Weighted average cost of capital
and if WACC goes down the value of the firm goes up
WACC calculation - ANS-= Cost of equity * Percentage equity + Weighted Average After-tax
cost of debt * percentage of debt in capital structure
,includes preferred stock
Weighted average interest rate calculation - ANS-effective annual interest payments / debt
outstanding
Weighted Average Cost of Debt - ANS-Step 1: Pretax cost
Step 2: After-tax cost of debt
Cost of Retained Earnings (CAPM) - ANS-risk free rate + beta (market return - risk free rate)
Risk Premium (RP) - ANS-Beta * market risk premium
Market Risk Premium (RPm) - ANS-Market Return - Risk-free rate
Growth Rate (g) formula - ANS-Retention ratio (rr) * Return on equity (ROE)
As leverage increases financial risk also increases - ANS-but expected returns also increase
all DIRECTLY related
Reorder Point (ROP) - ANS-when the quantity on hand of an item drops to this amount, the item
is reordered
safety stock + (lead time *sales during lead time)
Economic Order Quantity (EOQ) - ANS-the optimal order size to minimize the sum of ordering,
carrying, and stockout costs
E = Square root of (2SO/C)
ESOC
order size (EOQ)
annual Sales (in units)
cost per purchase Order
annual Carrying cost per unit
Net Present Value Method
Calculation (DCF) - ANS-Discounted Cash flow is the basis
1. Calc after-tax cash flows = annual net cash flaw * (1- tax rate)
2.Add depreciation benefit = depreciation * tax rate
3. Multiply result by appropriate present value of an annuity (if cash flows are annuity)
4. Subtract initial cash outflow
Interpretation of NPV Method - ANS-Positive Result = Make investment (profit)
Negative Result = Do not make investment (loss)
, Infer: IRR > hurdle
PI > 1
Which is superior? NPV or IRR - ANS-NPV is better because it is flexible enough to handle
inconsistent rates of return for each year of the project
Profitability Index Calculation - ANS-Higher is better
PV of Net future cash inflow/PV of net initial investment
Financing Decisions - ANS-If PV of the cost of the best source of financing is less than the PV
of the operating cash flows, then the project should be undertaken
NPV vs IRR - ANS-NPV highlights dollar amounts while IRR focuses on percentages
Payback period method calculation - ANS-net initial investment/annual net after-tax cash flow
the lower the better
PV Factor - ANS-1 / (1 + r)^n
FV Factor - ANS-(1+r)^n
Objectives of Cost accounting systems - ANS--product costing
-income determination
-efficiency measurements
Prime Cost - ANS-DL + DM
Traditional costing - Application of Overhead - ANS-1. Overhead rate = Budgeted overhead
costs / estimated cost drive
2. Applied overhead = actual cost driver * overhead rate
Operations costing - ANS-uses components of both job-order costing and process costing
Backflush Costing - ANS-accounts for certain costs at the end of the process in circumstances
where there is little need for in-process inventory valuation
Life Cycle Costing (LCC) - ANS-seeks to monitor costs throughout the products life cycle and
expand on the traditional costing system that focuses only on the manufacturing phase of a
products life.
Job costing systems are best suited for - ANS-customized production environments:
-construction
Objectives - ANS-ORC
Operations
Reporting
Compliance
Internal Control Components - ANS-CRIME
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring Activities
Organizational Structure - ANS-EDOF
Entity Level
Division
Operating Unit
Function
Control Environment - ANS-EBOCA
Ethical
Board independent
Org structure
Commitment to competence
Accountability
Risk Assessment - ANS-SAFR
Specify objectives
Assess Changes
Fraud potential
Risk analysis
Information & Communication - ANS-OIE
Obtain and use information
Internally communicate information
External party communication
Monitoring Activities - ANS-SOD
Separate Ongoing evaluations
Communication of Deficiencies
,updating mission and vision as internal controls
Existing Control Activities - ANS-CATP
Control Activities selected and developed
Technology controls
Policies and procedures
Components of ERM - ANS-GO PRO (5 components)
Governance and culture
strategy and Objective-setting
Performance
Review and Revision
information, communication and reporting Ongoing
Principles of ERM - ANS-DOVES SOAR VAPIR SIR TIP (20 principles)
ERM principles of Governance and Culture - ANS-DOVES
defines Desired culture
exercises board Oversight
demonstrates commitment to core Values
attracts, develops and retain capable Employees
establishes operating Structure
ERM principles of Strategy and Objective-setting - ANS-SOAR
evaluates alternative Strategies
formulates business Objectives
Analyzes business context
defines Risk appetite
ERM principles of Performance - ANS-VAPIR
develops portfolio View
Assesses severity of risk
Prioritizes risk
Identifies risks (events)
implements risk Responses
ERM principles of Review and Revision - ANS-SIR
assesses Substantial change
pursues Improvement in ERM
Reviews risk and performance
ERM principles of Information, Communication, and Reporting Ongoing - ANS-TIP
leverages information and Technology
communicates risk Information
,reports on risk, culture and Performance
Principles based approach - ANS-requires management judgement
COSO Framework Document - ANS-COPS
Component evaluation
Overall assessment
Principal evaluation
Summary of IC deficiencies
Developing Value - ANS-CPER
Creation
Preservation
Erosion
Realization
Mission, Vision and Core Values - ANS-Mission - why
Vision - what
Core Values - how
Definition of ERM - ANS-CCPIS - to manage risk and create value
Culture (core values)
Capabilities
Practices
Integration with Strategy-setting and performance (mission and vision)
Frequency/likelihood by Severity(impact) chart (ARTS) - ANS-High F by High S - Avoid
High F by Low S - Reduce
Low F by High S - Transfer (buy insurance - share)
Low F by Low S - Self-insure (accept - chosen industry)
SOX Title III - Corporate Responsibility - ANS-Audit Committee:
no compensation
not related to issuer
otherwise indep
responsible for auditor
auditor reports to them
responsible for resolving issues between mgt and auditor
establish whistleblower hotlines
CEO/CFO representations:
internal control is their responsibility
evaluated IC in 90 days prior
they include conclusions about IC effectiveness
,IC have been designed to ensure that material information has been made available
SOX Title IV - Enhanced Financial Disclosures - ANS-Internal Controls (must be evaluated
within 90 days prior to the issuer's report)
Audit Committee Financial Expert (benefits of bringing expertise to the oversight function)
SOX Title VIII: Corporate and Criminal Fraud Accountability - ANS-Altering documents penalties
Whistle-Blower Protection
SOX Title IX - White-Collar Crime Penalty Enhancements - ANS-Sentencing details
SOX Title XI - Corporate Fraud Accountability - ANS-Tampering with records
Risk and return are _______________ related - ANS-directly
2 Broad categories of Risk (DUNS) - ANS-1. Diversifiable Risk
Unsystematic/nonmarket/firm-specific
2.Nondiversifiable Risk
Systematic/market
2 types of factors that impact exchange rate - ANS-1.Trade-Related Factors
Relative inflation rates
Relative income levels
Government controls (trade restrictions)
2.Financials Factors
Relative interest rates
Capital flow
Characteristics of Debt vs Equity - ANS-D is first and E is second
Flexibility - No, Yes
Tax Deductibility - Yes, No
EPS dilution - No, Yes
Increased financial risk - Yes, No
Security issuance costs - Low, High
Investor return - fixed, variable
only debt has obligation of income (interest)
only equity has an ownership interest in the corporation
Firm value calculation - ANS-= Free cash flow to the firm / Weighted average cost of capital
and if WACC goes down the value of the firm goes up
WACC calculation - ANS-= Cost of equity * Percentage equity + Weighted Average After-tax
cost of debt * percentage of debt in capital structure
,includes preferred stock
Weighted average interest rate calculation - ANS-effective annual interest payments / debt
outstanding
Weighted Average Cost of Debt - ANS-Step 1: Pretax cost
Step 2: After-tax cost of debt
Cost of Retained Earnings (CAPM) - ANS-risk free rate + beta (market return - risk free rate)
Risk Premium (RP) - ANS-Beta * market risk premium
Market Risk Premium (RPm) - ANS-Market Return - Risk-free rate
Growth Rate (g) formula - ANS-Retention ratio (rr) * Return on equity (ROE)
As leverage increases financial risk also increases - ANS-but expected returns also increase
all DIRECTLY related
Reorder Point (ROP) - ANS-when the quantity on hand of an item drops to this amount, the item
is reordered
safety stock + (lead time *sales during lead time)
Economic Order Quantity (EOQ) - ANS-the optimal order size to minimize the sum of ordering,
carrying, and stockout costs
E = Square root of (2SO/C)
ESOC
order size (EOQ)
annual Sales (in units)
cost per purchase Order
annual Carrying cost per unit
Net Present Value Method
Calculation (DCF) - ANS-Discounted Cash flow is the basis
1. Calc after-tax cash flows = annual net cash flaw * (1- tax rate)
2.Add depreciation benefit = depreciation * tax rate
3. Multiply result by appropriate present value of an annuity (if cash flows are annuity)
4. Subtract initial cash outflow
Interpretation of NPV Method - ANS-Positive Result = Make investment (profit)
Negative Result = Do not make investment (loss)
, Infer: IRR > hurdle
PI > 1
Which is superior? NPV or IRR - ANS-NPV is better because it is flexible enough to handle
inconsistent rates of return for each year of the project
Profitability Index Calculation - ANS-Higher is better
PV of Net future cash inflow/PV of net initial investment
Financing Decisions - ANS-If PV of the cost of the best source of financing is less than the PV
of the operating cash flows, then the project should be undertaken
NPV vs IRR - ANS-NPV highlights dollar amounts while IRR focuses on percentages
Payback period method calculation - ANS-net initial investment/annual net after-tax cash flow
the lower the better
PV Factor - ANS-1 / (1 + r)^n
FV Factor - ANS-(1+r)^n
Objectives of Cost accounting systems - ANS--product costing
-income determination
-efficiency measurements
Prime Cost - ANS-DL + DM
Traditional costing - Application of Overhead - ANS-1. Overhead rate = Budgeted overhead
costs / estimated cost drive
2. Applied overhead = actual cost driver * overhead rate
Operations costing - ANS-uses components of both job-order costing and process costing
Backflush Costing - ANS-accounts for certain costs at the end of the process in circumstances
where there is little need for in-process inventory valuation
Life Cycle Costing (LCC) - ANS-seeks to monitor costs throughout the products life cycle and
expand on the traditional costing system that focuses only on the manufacturing phase of a
products life.
Job costing systems are best suited for - ANS-customized production environments:
-construction
