Mos 1023 Midterm 2

Front 1

3 components of a manufacturing company's inventory

Back 1

1. raw materials (direct or indirect)

2. Work in Process

3. Completed goods (ready for sale)

Front 2

manufacturing vs merchandising balance sheet inventory

Back 2

merchandisers keep track of merchandise inventory and have cost of goods purchased

manufactures keep track of finished goods inventory and have cost of goods manufactured

Front 3

3 types of manufacturing costs

Back 3

1. direct labour

2. direct material

3. manufacturing overhead

Front 4

direct material & 2 examples

Back 4

raw material that can easily and conveniently be traced to the finished product

ex: flour in cookie or wood in table

Front 5

direct labour

Back 5

salaries, wages, & fringe benefits

Front 6

3 components of manufacturing overhead

Back 6

1. indirect material

2. indirect material

3. other costs

Front 7

indirect material & 2 examples

Back 7

materials that support the production process but do not end up as part of the final product

ex: cleaning supplies, factory

Front 8

indirect labour & 2 examples

Back 8

employees who do not directly work on products

ex: sales team, security guard

Front 9

4 examples of other costs in manufacturing overhead?

Back 9

1. plant & equipment depreciation

2. property tax

3. insurance

4. utilities

Front 10

how to divide total overhead into different pieces?

Back 10

perform a cost allocation

Front 11

2 classifications of manufacturing costs

Back 11

1. prime cost

(direct materials + direct labour)

2. conversion cost

( direct labour + manufaturing overhead)

Front 12

why is prime + conversion an inefficient way to find total product costs?

Back 12

overcounting:

both prime and conversion include direct labour

Front 13

2 ways to count cost that don't overcount product cost?

Back 13

1. prime + overhead

2. direct materials + conversion

Front 14

how to classify costs by behaviour?

Back 14

1. identify cost driver

2. use the cost driver to measure how total cost changes in response to business activities

2. separate costs into total variable costs and total fixed costs based on behaviour

Front 15

total variable costs

Back 15

-change with the cost driver

-upward sloping graph as activity level increases

Front 16

variable costs per unit

Back 16

-constant over wide ranges of activity

-horizontal graph per unit

Front 17

total fixed costs

Back 17

-remain the same as cost driver changes

-unaffected by changes in activity level

-horizontal graph

Front 18

fixed costs per unit

Back 18

-decrease as activity level increases

-same amount of fixed cost spread out over multiple units

-downward sloping graph

Front 19

what type of cost are direct material, direct labour, and overhead costs (indirect labour & indirect material) ?

Back 19

product costs

Front 20

2 types of fixed costs

Back 20

1. committed

2. discrectionary

Front 21

committed fixed cost

Back 21

cannot be altered in the long run

ex: depreciation on buildings and equipment, real estate tax

Front 22

discretionary fixed cost

Back 22

can be changed or altered

ex: advertising, research and development

Front 23

classifying costs by traceability

Back 23

1. Identify cost object

2. can the cost be directly traced to a single cost object?

yes: direct cost

no: indirect cost

Front 24

classifying costs by controllability

Back 24

1. controllable cost

2. non-controllable cost

Front 25

controllable cost

Back 25

regulated by manager

Front 26

non-controllable cost

Back 26

not regulated by manager

Front 27

what does the degree of control over costs depend on?

Back 27

level of management

-the higher up, the more control

Front 28

2 questions to determine if a cost is relevant or not

Back 28

1. is it a future cost or benefit

2. will future cash flow change due to decision?

must answer yes to both questions to determine if relevant

Front 29

why are sunk costs irrelevant to decisions?

Back 29

sunk costs are incurred in the past and cannot be avoided or changed

-does not provide future cost/benefit, or affect future cash flow

-we need to look to the future for things we can change

Front 30

why are out-of-pocket costs relevant to decisions?

Back 30

out-of-pocket decisions require a future outlay of cash so they need to be considered

-they can affect our decision

Front 31

why is opportunity cost relevant to decisions?

Back 31

represents the potential benefit given up by making a choice

-differs depending on the option

-involves future benefit

Front 32

decentralization

Back 32

freedom to make decisions

-delegating specific decisions to lower levels

Front 33

5 benefits of decentralization

Back 33

1. top management free to concentrate on strategy

2. decision-making authority increases job satisfaction

3. lower level management gain experience making decisions (good training ground)

4. lower-level managers can use better information

5. lower level managers respond to customers quickly

Front 34

5 disadvantages to decentralization

Back 34

1. duplication of costs and efforts

2. might have lack of coordination among autonomous managers

3. lower level managers may make decisions without seeing bigger picture

4. lower level managers may have different objectives than the organization (lack of goal congruence)

5. may be difficult to spread innovative ideas in the organization

Front 35

responsibility accounting

Back 35

use of responsibility centers to measure performance and provide info so rewards, evaluations and motivations can be based on what a performance manager controls

Front 36

4 responsibility centres

Back 36

1. cost center

2. revenue center

3. profit center

4. investment center

Front 37

cost center & 2 types

Back 37

improve efficiency by minimizing costs and waste

can be discretionary or engineering

Front 38

revenue center

Back 38

sales related activities

Front 39

profit center

Back 39

maximize revenue & minmize expenses

Front 40

investment center

Back 40

maximize returns on invested captial

decisions that influence cost, revenue and investments

Front 41

margin formula

Back 41

margin = operating income / sales

Front 42

turnover formula

Back 42

sales/ average operating assets

Front 43

Return on Investment (ROI) Formula

Back 43

ROI = Operating income (EBIT) / Average operating assets

Front 44

3 ways to increase ROI

Back 44

1. increase sales (revenues)

2. decrease expenses

3. decrease assets (make denominator smaller to make ROI bigger)

Front 45

4 elements of cost allocation

Back 45

1. cost pool

2. cost objects

3. cost driver

4. allocation volume

Front 46

cost pool

Back 46

total cost that we need to allocate

Front 47

cost objects

Back 47

items/entities that we allocate the costs in the cost pool to

Front 48

cost driver (allocation basis)

Back 48

attributes that we measure for each cost object

-based on causal relationship to cost

Front 49

allocation volume (denominator volume)

Back 49

sum of the cost of the driver amounts across all cost objects

Front 50

controllable measures are informative but informative measures are not always controllable

Back 50

true because informativeness principle is informative if it provides info about a manager's even if the manager cannot control it

Front 51

controllable measure

Back 51

reflects consequences taken by decision maker

holds decision makers accountable only for the costs and benefits they can control

Front 52

discretionary vs engineering cost center

Back 52

discretionary:

no clear relationship between inputs & outputs

-subjective evaluations

-often have fixed budget

-likely to deal with intangible outputs

engineering:

clear relationship between inputs & outputs

Front 53

sales tax audit

Back 53

-performed by government

-randomly performed

-random check to see if correct amounts are being paid and remitted

-firms must comply

Front 54

payroll tax audit

Back 54

-deducted from paycheck

-look at T4 slip, Canada Pension, Employment Insurance

-random

Front 55

income tax audit

Back 55

check to see if taxable income is different than net income

temporary differences vs permanent differences

Front 56

4 benefits of internal auditing

Back 56

1. improves efficiency & effectiveness of operations

2. increases reliability and integrity of financial and operational information

3. safeguards assets

4. ensures compliance with laws, regulations, contracts

Front 57

why do we use external auditing

Back 57

-performed by neutral third party

-overcomes conflict of interest between companies preparing their own financial statements to be used by financial decision makers

Front 58

3 benefits of external auditing

Back 58

1. lend credibility to info

2. reduce risk of misleading info

3. allows capital resources to be effectively allocated

Front 59

do auditors prepare financial statements?

Back 59

no

they check the information on them but do not make them

Front 60

how to auditors express their opinion

Back 60

after verifying financial info they make an audit report

Front 61

4 types of audit opinions

Back 61

1. unmodified

2. qualified

3. adverse

4. disclaimer of opinion

Front 62

when does an audit fail

Back 62

an audit fails when there is insufficient evidence to support the opinion

-need reasonable assurance

Front 63

what is business risk & do auditors report it?

Back 63

the risk that a business will fail to achieve objectives due to technological changes, economic changes, poor management or bad luck

-no auditors are only concerned with financial info

Front 64

what is information risk

Back 64

the risk that the financial info does not reflect the economic substance of business activity

-auditors can mitigate the risk of unreliability in their reports

Front 65

2 types of information risk

Back 65

1. accounting risk: methods used for estimations in GAAP accounting not disclosed properly

2. audit risk: not enough evidence

Front 66

3 components of audit risk

Back 66

1. inherent risk: probability of material misstatements on financial statements

2. control risk: internal controls fail to prevent or detect material misstatements

3. detection risk: auditor fails to detect material misstatements

Front 67

control risk vs detection risk

Back 67

control: internal controls fail to detect/prevent

detection: auditor fails to detect

Front 68

how to meet CAs

Back 68

1. competence

2. due care

3. objectivity

Front 69

Due care

Back 69

level of professionalism:

check to see if audit was done properly by comparing to what other professionals would have done

Front 70

objectivity

Back 70

unbiased auditing

Front 71

competency

Back 71

level of skill and knowledge required to audit effectively

Front 72

3 examination standards

Back 72

1. plan & supervise

2. understand internal controls

3. design procedures to detect fraud

Front 73

objective of an audit

Back 73

to express an opinion about how well financial statements are prepared in terms of complying to GAAP and reliability

back opinions with evidence

Front 74

why is an unmodified opinion the best kind?

Back 74

it means that the company is following rules and that their info reflect their economic reality

Front 75

qualified opinion

Back 75

when there is something we dont like but only in one area

Front 76

adverse opinion

Back 76

a bunch of small things add up or one big thing

Front 77

disclaimer of opinion

Back 77

abstain from opinion

Front 78

4 elements of fraud

Back 78

1. material misstatement

2. knowledge that statement is false

3. reliability on material misstatement

4. damages result from reliance on false statement

Front 79

4 types of financial crime

Back 79

1. larceny: petty theft

2. conversion: sell or fence stolen item

3. embezzlement: violate position of trust to steal

4. breach of fiduciary duty: supposed to act in someone's best interest but dont

Front 80

auditing vs fraud examination

Back 80

auditing:

recurring, general scope, aim to provide opinion, nonadverarial, presumption of professional skepticism

fraud examination:

onrecurring, sepcific scope, aim to affix blame, adversarial, presumption of proof

Front 81

4 steps in the fraud theory approach

Back 81

1. analyze the available data

2. create a hypothesis

3. test the hypothesis

4. revise and amend hypothesis

Front 82

order of finding information

Back 82

bullseye approach:

start from the outside in!

1. document analysis

2. neutral 3rd party

3. corroborative witnesses

4. coconspirators

5. suspect

Front 83

why is predication needed at every step?

Back 83

predication: reason to believe fraud has, or will occur

need predication to continue investigation & tells you when to revise hypothesis and test a new one

Front 84

sutherland's theory of differential association

Back 84

-crime is learned from intimate personal groups

-we learn criminal rationalizations, motives, mindsets from our environment

Front 85

donald cressey's fraud triangle

Back 85

1. pressure (nonshareable financial need)

2. opportunity

3. rationalization

all 3 need to be present

Front 86

violation of ascribed obligations

Back 86

people in trusted positions are embarrassed of their situation so they steal

Front 87

personal failure

Back 87

person in trusted position feels like situation is their fault so they fix it by stealing

Front 88

business reversals

Back 88

person knows they are not at fault so they steal to fix situation

Front 89

physical isolation

Back 89

no one to turn to so they steal to fix their problem

Front 90

status gaining

Back 90

feel the need to improve their status; greed

Front 91

employeer-employee relations

Back 91

poor relationship with employer:

feels underappreciated, underpaid, etc but cant talk about it so steal in secret

Front 92

2 components of perceived opportunity

Back 92

1. general info

2. technical skills

Front 93

cressey's 3 offender types

Back 93

1. independent business man

2. long term violator

3. absonder

Front 94

absconder

Back 94

take money & run

usually lonely/ no family

blame outside influences or personal defects

Front 95

long-term violator

Back 95

feel like they're just borrowing

use it to protect family

feel like company is cheating them

Front 96

independent businessman

Back 96

"borrowing"

think funds are really theirs

Front 97

steve albrecht's fraud scale

Back 97

1. situational pressures (ex: debt, living beyond one's means)

2. perceived opportunities (poor controls)

3. personal integrity

Front 98

holligner-clark study

Back 98

found high correlation with job dissatisfaction & fraud

Front 99

holligner's conclusions

Back 99

1. employee perception of controls is best deterrent

2. increased security can hurt perception

3. pay attention to young workers

4. management needs to be sensitive to young workers

5. people who abuse usually have other deviations

Front 100

what is the best deterrent for fraud?

Back 100

employee perception of controls