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100 Cards in this Set
- Front
- Back
3 components of a manufacturing company's inventory |
1. raw materials (direct or indirect) 2. Work in Process 3. Completed goods (ready for sale) |
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manufacturing vs merchandising balance sheet inventory |
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 |
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3 types of manufacturing costs |
1. direct labour 2. direct material 3. manufacturing overhead |
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direct material & 2 examples |
raw material that can easily and conveniently be traced to the finished product ex: flour in cookie or wood in table |
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direct labour |
salaries, wages, & fringe benefits |
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3 components of manufacturing overhead |
1. indirect material 2. indirect material 3. other costs |
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indirect material & 2 examples |
materials that support the production process but do not end up as part of the final product ex: cleaning supplies, factory |
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indirect labour & 2 examples |
employees who do not directly work on products ex: sales team, security guard |
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4 examples of other costs in manufacturing overhead? |
1. plant & equipment depreciation 2. property tax 3. insurance 4. utilities |
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how to divide total overhead into different pieces? |
perform a cost allocation |
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2 classifications of manufacturing costs |
1. prime cost (direct materials + direct labour) 2. conversion cost ( direct labour + manufaturing overhead) |
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why is prime + conversion an inefficient way to find total product costs? |
overcounting: both prime and conversion include direct labour |
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2 ways to count cost that don't overcount product cost? |
1. prime + overhead 2. direct materials + conversion |
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how to classify costs by behaviour? |
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 |
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total variable costs |
-change with the cost driver -upward sloping graph as activity level increases |
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variable costs per unit |
-constant over wide ranges of activity -horizontal graph per unit |
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total fixed costs |
-remain the same as cost driver changes -unaffected by changes in activity level -horizontal graph |
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fixed costs per unit |
-decrease as activity level increases -same amount of fixed cost spread out over multiple units -downward sloping graph |
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what type of cost are direct material, direct labour, and overhead costs (indirect labour & indirect material) ? |
product costs |
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2 types of fixed costs |
1. committed 2. discrectionary |
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committed fixed cost |
cannot be altered in the long run ex: depreciation on buildings and equipment, real estate tax |
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discretionary fixed cost |
can be changed or altered ex: advertising, research and development |
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classifying costs by traceability |
1. Identify cost object 2. can the cost be directly traced to a single cost object? yes: direct cost no: indirect cost |
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classifying costs by controllability |
1. controllable cost 2. non-controllable cost |
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controllable cost |
regulated by manager |
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non-controllable cost |
not regulated by manager |
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what does the degree of control over costs depend on? |
level of management -the higher up, the more control |
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2 questions to determine if a cost is relevant or not |
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 |
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why are sunk costs irrelevant to decisions? |
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 |
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why are out-of-pocket costs relevant to decisions? |
out-of-pocket decisions require a future outlay of cash so they need to be considered -they can affect our decision |
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why is opportunity cost relevant to decisions? |
represents the potential benefit given up by making a choice -differs depending on the option -involves future benefit |
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decentralization |
freedom to make decisions -delegating specific decisions to lower levels |
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5 benefits of decentralization |
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 |
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5 disadvantages to decentralization |
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 |
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responsibility accounting |
use of responsibility centers to measure performance and provide info so rewards, evaluations and motivations can be based on what a performance manager controls |
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4 responsibility centres |
1. cost center 2. revenue center 3. profit center 4. investment center |
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cost center & 2 types |
improve efficiency by minimizing costs and waste can be discretionary or engineering |
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revenue center |
sales related activities |
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profit center |
maximize revenue & minmize expenses |
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investment center |
maximize returns on invested captial decisions that influence cost, revenue and investments |
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margin formula |
margin = operating income / sales |
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turnover formula |
sales/ average operating assets |
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Return on Investment (ROI) Formula |
ROI = Operating income (EBIT) / Average operating assets |
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3 ways to increase ROI |
1. increase sales (revenues) 2. decrease expenses 3. decrease assets (make denominator smaller to make ROI bigger) |
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4 elements of cost allocation |
1. cost pool 2. cost objects 3. cost driver 4. allocation volume |
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cost pool |
total cost that we need to allocate |
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cost objects |
items/entities that we allocate the costs in the cost pool to |
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cost driver (allocation basis) |
attributes that we measure for each cost object -based on causal relationship to cost |
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allocation volume (denominator volume) |
sum of the cost of the driver amounts across all cost objects |
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controllable measures are informative but informative measures are not always controllable |
true because informativeness principle is informative if it provides info about a manager's even if the manager cannot control it |
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controllable measure |
reflects consequences taken by decision maker holds decision makers accountable only for the costs and benefits they can control |
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discretionary vs engineering cost center |
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 |
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sales tax audit |
-performed by government -randomly performed -random check to see if correct amounts are being paid and remitted -firms must comply |
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payroll tax audit |
-deducted from paycheck -look at T4 slip, Canada Pension, Employment Insurance -random |
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income tax audit |
check to see if taxable income is different than net income temporary differences vs permanent differences |
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4 benefits of internal auditing |
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 |
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why do we use external auditing |
-performed by neutral third party -overcomes conflict of interest between companies preparing their own financial statements to be used by financial decision makers |
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3 benefits of external auditing |
1. lend credibility to info 2. reduce risk of misleading info 3. allows capital resources to be effectively allocated |
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do auditors prepare financial statements? |
no they check the information on them but do not make them |
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how to auditors express their opinion |
after verifying financial info they make an audit report |
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4 types of audit opinions |
1. unmodified 2. qualified 3. adverse 4. disclaimer of opinion |
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when does an audit fail |
an audit fails when there is insufficient evidence to support the opinion -need reasonable assurance |
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what is business risk & do auditors report it? |
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 |
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what is information risk |
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 |
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2 types of information risk |
1. accounting risk: methods used for estimations in GAAP accounting not disclosed properly 2. audit risk: not enough evidence |
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3 components of audit risk |
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 |
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control risk vs detection risk |
control: internal controls fail to detect/prevent detection: auditor fails to detect |
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how to meet CAs |
1. competence 2. due care 3. objectivity |
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Due care |
level of professionalism: check to see if audit was done properly by comparing to what other professionals would have done |
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objectivity |
unbiased auditing |
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competency |
level of skill and knowledge required to audit effectively |
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3 examination standards |
1. plan & supervise 2. understand internal controls 3. design procedures to detect fraud |
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objective of an audit |
to express an opinion about how well financial statements are prepared in terms of complying to GAAP and reliability back opinions with evidence |
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why is an unmodified opinion the best kind? |
it means that the company is following rules and that their info reflect their economic reality |
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qualified opinion |
when there is something we dont like but only in one area |
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adverse opinion |
a bunch of small things add up or one big thing |
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disclaimer of opinion |
abstain from opinion |
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4 elements of fraud |
1. material misstatement 2. knowledge that statement is false 3. reliability on material misstatement 4. damages result from reliance on false statement |
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4 types of financial crime |
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 |
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auditing vs fraud examination |
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 |
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4 steps in the fraud theory approach |
1. analyze the available data 2. create a hypothesis 3. test the hypothesis 4. revise and amend hypothesis |
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order of finding information |
bullseye approach: start from the outside in! 1. document analysis 2. neutral 3rd party 3. corroborative witnesses 4. coconspirators 5. suspect |
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why is predication needed at every step? |
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 |
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sutherland's theory of differential association |
-crime is learned from intimate personal groups -we learn criminal rationalizations, motives, mindsets from our environment |
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donald cressey's fraud triangle |
1. pressure (nonshareable financial need) 2. opportunity 3. rationalization all 3 need to be present |
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violation of ascribed obligations |
people in trusted positions are embarrassed of their situation so they steal |
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personal failure |
person in trusted position feels like situation is their fault so they fix it by stealing |
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business reversals |
person knows they are not at fault so they steal to fix situation |
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physical isolation |
no one to turn to so they steal to fix their problem |
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status gaining |
feel the need to improve their status; greed |
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employeer-employee relations |
poor relationship with employer: feels underappreciated, underpaid, etc but cant talk about it so steal in secret |
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2 components of perceived opportunity |
1. general info 2. technical skills |
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cressey's 3 offender types |
1. independent business man 2. long term violator 3. absonder |
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absconder |
take money & run usually lonely/ no family blame outside influences or personal defects |
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long-term violator |
feel like they're just borrowing use it to protect family feel like company is cheating them |
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independent businessman |
"borrowing" think funds are really theirs |
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steve albrecht's fraud scale |
1. situational pressures (ex: debt, living beyond one's means) 2. perceived opportunities (poor controls) 3. personal integrity |
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holligner-clark study |
found high correlation with job dissatisfaction & fraud |
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holligner's conclusions |
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 |
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what is the best deterrent for fraud? |
employee perception of controls |