CPA Core 2

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1. Initial costs in capital budgeting: capital expenditures, opportunity costs, tax
benefits arising from initial investments including CCA tax shield
2. after-tax operating cash flows - capital budgeting: incremental revenues, in-
cremental fixed costs, incremental variable costs, tax effects
3. working capital - capital budgeting: increases in working capital, reduction of
working capital at the end of project. Increase in working capital balance = cash
outflow, decrease in working capital balance = cash inflow
4. Credit assessment impact: Capacity demonstrates a customers ability to pay.

Condition is a measure of the state of the economy and industry and is impossible
to control by customer
5. 50 days out standing: The annualized cost of not taking the discount can be
calculated as
1+ (discount /0.98) ^365/n-discount term
1 + (0.02 /0.98) ^ 375/50 - 1
6. salvage value - capital budgeting: sale or disposal of assets including proceeds
and related costs, tax effects including loss on CCA tax shield. 3 tax effects; loss of
any future CCA tax shield, tax payable on recaptured CCA, tax payable on cap gains
when selling price is greater than original cost
7. CCA tax shield benefit: takes the present value of all CCA tax shield savings
PV of tax shield cca = ((Invest. x CCA rate x corp tax rate) / (CCA rate + discount
rate)) x ((1 + 0.5 x discount rate) / (1 + discount rate))... second part of the formula
is used to adjust for half year rule
8. salvage value tax shield on CCA: removes the half year rule. PV of lost tax
shield on CCA salvage = (salvage proceeds x CCA rate x corporate tax rate) / (CCA
rate + Discount rate)
9. nominal discount rate: used when cashflows are adjusted for inflation. (1+nom-
inal rate of return) = (1 x real rate of return) x (1 + inflation rate)
10. financial leverage: the use of debt in a firm's capital structure

=EBIT / (EBIT-INTEREST) = [Q(S-VC)-FC] / [Q(S-VC)-FC-I]

11. Even cash flow - payback period: payback period = initial investment / cash
flow per period ANNUITTY!!!
12. Uneven cash flow - pay back period: payback period = A + (B/C)..... A = is the
last period with negative cash flow. B = absolute value of cumulative cash flow at the
end of each period A (how much $ were spent since A) C = total cash flow during
the period right after A
13. Total Return on investment: Total return is equal to income returns and capital
gains returns. Fixed income returns = interest earned + captital gain/loss from sale
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of bond. Return on shares = dividend income received + capital gain/loss on sale of
investment
14. Employee stock options (ESO): ESO gives the right to an employee to buy a
share in the company at a specified exercise price within a specific period. THINK
ABOUT NET IMPACT FROM COMPANY AND EMPLOYEE
15. Calculation of total return: Bond bought for $1000 pays 3% interest annually
for 5 years. At the end of year 1 the FMV is $980. the total annual return on the bond
is = (interest + FMV) - principle / principle = [(30+980) - 1000] / 1000 = 0.01 = 1%
16. Expected return on single security: expected return represents the average
of possible returns for the next year weighted by their possibilities
17. Measurement of Risk for a single security: the amount of risk for an invest-
ment is measured by the variance and standard deviation (Square root of variance)
of the possible returns. Higher stnd dev = higher risk

steps:
1. Calculate the difference between the return and the expected return for each state
2. square the difference
3. multiply each squared difference by probability
4. total the weighted squared differences to calc variance
5. the stnd dev is the square root of the variance
18. Covariance and correlation: Covariance and correlation are used to measure
the relationship of returns of the two investments. Covariance is a statistical measure
of the degree to
which two random variables move together. Correlation is a statistical measure of
the degree to which the movements of the two variables are related. The correlation
will fall between -1 and +1. The higher the number, the more correlated the returns
of the two investments.
19. 2 main advantages for portfolio diversification: 1. risk management 2. port-
folio optimization
20. summary of stnd dev, correlation of portfolio and investments: Covariance
is a statistical measure of the degree to
which two random variables move together. Correlation is a statistical measure
of the degree to which the movements of the two variables are related. The
correlation will fall between -1 and +1. The higher the number, the more
correlated the returns of the two investments.
21. asset allocation: Asset allocation is the apportioning of a portfolio's assets
according to the investor's objective, risk tolerance, and investment horizon. Asset
allocation is
one way that portfolio diversification contributes to the risk management
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22. Portofolio optimization: An efficient portfolio is a portfolio in which:
1. the portfolio risk is the smallest for a given level of expected portfolio return;
or
2. it has the highest expected return for a given level of risk

PO = is the weighting of assets held in a portfolio to achieve the investment objective

23. Total risk how to measure: total risk is measured by standard dev that is made
up of systematic risk and unsystematic risk.

Unsystematic risk (also known as diversifiable risk, unique risk or asset specific risk)
is the portion of total risk that is unique to the security. risk that arises from mgmt.
decisions, financial and operating leverage, labour problems, raw material availabil-
ity, competition and other factors related to the company or industry. Unsystematic
risk can be eliminated by combining the security with others

Systematic Risk (non-diversifiable risk or market risk) is risk that impacts many
securities. Factors such as change in interest rates, inflation rates, and changes to
the overall economic outlook that affect all securities to some degree. Diversifiaction
cannot totally elimate these risks
24. Beta: measures the systematic risk of a portfolio. Investors should only be paid
based on the systematic risk of a portfolio. equals 1
25. CAPM: takes the market risk free rate and adds on a market premium to account
for the added level of risk. Preium is difference between risk free rate and expected
rate of return
26. Ranking risks of investments: lowest risk to highest risk

1. short term deposits

2. gov bond
3. corp bonds
4. preferred shares
5. common shares.
6. deriatives such as options and futures
27. Sharpe Ratio: ratio used to assess whether returns of a portfolio are in line
with risk taken. higher sharpe ratio better the portfolio is at maximizing risk-adjusted
returns. Negative sharpe ratio indicates that the portfolio has performed worse than
risk free
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28. Restricted Share Units (RSU): Restricted shares units (RSUs) and perfor-
mance share units (PSUs) represent a promise by the employer to issue a certain
number of shares in the future once certain vesting conditions have been met.
29. SARS Equity Settled: employee receives shares worth = (FMV at exercise -
benchmark) x # shares given. The employee will receive # of shares when exercised
= step 1 / FMV at exercise
30. SARS: SARs are a form of compensation based on the increase in the compa-
ny's share price over a specified benchmark price over a specified period of time.

If the share price falls below the benchmark price, the SAR is worthless and the
employee receives nothing after the vesting conditions are met
31. SARS Cash Settled: Cash = (FMV at exercise date - benchmark) x shares given
32. Objectives for Share-based Compensation: 1. to align employees' interests
with shareholders' interests to ensure decisions enhance shareholder value over
the long term
2. to attract and retain key personnel by using long vesting periods with forfeiture if
employees leave during the vesting period
3. to reduce the amount of cash required to pay for total compensation
4. to make part of the compensation not guaranteed but instead based on perfor-
mance of the company's share price
33. Intrinsic value of an option: intrinsic value of an option is equal to the market
share price less the exercise price.

The difference between the fair value of the option and its intrinsic value represents
the value of its future expectations (that is, the expectation that it might be worth
more in the future than it is worth now).

intrinsic value of the following:

stock option = current share price - exercise price
RSU = current share price
SAR = current share price - benchmark
34. Equity vs Cash settled attractiveness: Equity-settled is Attractive When:
- company is growing and has little cash available
- the amount of compensation expense is set at the time of the grant

Cash-settled is attractive when:

- existing shareholders do not want to dilute their holdings

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- the company can use a tax deduction - cash settled rewards tend to be cash
deductible
35. Phase 2 of SDLC: Requirements Analysis and Definition
second phase is an interactive process between stakeholders and the project team
where the specific resource and technical requirements for the system
being selected are determined.

Interaction between stakeholders and users can arise in this phase. this stage clearly
identifies the requirements of system and users involved
36. SDLC - Systems development Life Cycle: In order for companies to success-
fully acquire, design, develop, and/or implement software and hardware platforms,
they require a structured process called the systems development life cycle (SDLC).

There are typically seven phases of the cycle:

Phase 1: Initial feasibility study
Phase 2: Requirements analysis and definition
Phase 3: Application design/selection
Phase 4: Systems development/configuration
Phase 5: Preliminary testing
Phase 6: System implementation
Phase 7: Post-implementation evaluation
37. Phase 1 of SDLC: Phase 1: Initial Feasibility Study
The SDLC process begins when a need or an opportunity is identified, and a system
concept (an initial feasibility study), can be developed to address it.

Feasibility study objective is to conclude whether there is a feasible solution to the

problem. as a result a business case should be developed to determine whether the
solution determined is able to be implemented
38. Phase 5- SDLC: Preliminary Testing
Once the system is fully developed, the users of the system, including CPAs, perform
final user acceptance testing to determine whether the application is
operating as intended.
39. Phase 3 - SDLC: Application Design / Selection
Blue print is created based on requirements from definitions stage.

Some of the areas addressed in the design stage are:

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1. preparing system flow charts to show how information will flow through the system
2. documenting inputs and outputs, such as how the screen layouts will look and the
types of reports users will obtain
3. documenting how the system will process and compute data
4. documenting the database design
5. developing test plans
6. developing a data conversion plan, if there is an existing system to migrate from
developing an implementation plan

the functional specifications (provided to user) and the detailed systems specifica-
tions(provided to programmer) are created in this phase
40. Phase 4 - SDLC: Systems development / configuration - testing of system is
commenced

The main types of testing performed are as follows:

1. Unit testing — Each module is tested to make sure that it is designed in accor-
dance with the design document from phase 3.
2. System testing — The system as a whole is tested to ensure that the programs,
database, and other components are working properly together.
3. Interface testing — Any hardware or other applications that interact with the
new system are tested to make sure the "communication" is functioning

company decides to purchase an off-the-shelf system, the development phase

(phase 4) would be replaced by a "configuration" phase in which the company
requests that the software be tailored to the organization's requirements, and
documents these configuration requirements.
41. Auditors role in SDLC: the objective of the external auditor is to ensure
completeness and accuracy. auditor may use a mix of control procedures and
substantive based procedures to gain assurance of SDLC

the internal auditor would be interested in the effectiveness testing of each phase
of SDLC
42. Phase 6 - SDLC: System Implementation

Once all the testing has passed the user specifications and approval is obtained
from the appropriate stakeholders, the system is migrated (by moving all the
source code) to the live "production" environment.

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3 ways of system conversions:

1. Parallel Conversion - both new and old systems run at the same time with
actual transactions entered into both systems. PROS: lowest risk of errors, allows
comparison of new output and performance vs old system CONS: expensive and
time consuming/ inefficient double the work. confusing for staff to use 2 systems

2. Direct Cutover - new system takes over immediately after the initial testing is
successful. At this
point, the old system is shut down and no longer used. PROS - cost effective,
no redundancies, useful when live system is only option CONS - highest risk of
conversion errors, any issues must be resolved immediately to avoid outages and
cost interrupptions, data integrity issues

3. Modular or pilot study changeover - the new system is limited to a part of the
organization such as a department or branch PROS; limits the exposure risk from
errors and issues. Training is better employees who have new system can help
employees who are in the conversion process CONS: staff can face confusion and
control issues between new and old system. data integrity issues

Phased Changeover: new system and conversion is introduced in steps and in-
tervals PROS: allows staff time to become accustomed to the new system. Errors
can be quickly identified and resolved CONS: costly to maintain both systems -->
resource constraints or challenges, mix-ups may occur when new and old system
are used interchangeably
43. Phase 7 - SDLC: Post-implemtation

The post-implementation evaluation is generally conducted after the new system

has been used for a sufficient number of months/quarters. It is done to identify both
what was done well and areas for improvement throughout the entire SDLC
process. As well, it evaluates whether the system objectives, costs/benefits, and
milestones were met
44. Data Integrity: Data integrity refers to the accuracy and completeness of data
from the time it is
put into a system, while it is stored in a system, and finally when it is retrieved from
a system. Data integrity is integral in many applications. CPA focus is looking into
accounting records for accuracy and completeness
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45. General Controls: General controls refer to controls that have a pervasive
impact on the data. This includes the general control environment as well as IT
specific controls around: physical security, logical access(user ids, pw,fingerprint),
distributed computing (firewalls, virus protective security)
46. Generic Strategies: Low cost and differentiation

low cost --> operational excellence. strategy focuses on having lower costs then
competitors through cost mgmt and efficient operations

differentiation -->
1. customer intimacy: understand to individual customer needs better than competi-
tors through customer relationship management and customer service

2. product leadership --> offer unique / high quality products / services than com-
petitors. Through R&D and innovation
47. Mission Statement: The mission statement is a written declaration of an entity's
primary reason for existence. It may define the entity's high-level goals regarding
customers,
employees, and shareholders. Communicated to both internal and external audi-
ences
48. Vision Statement: A vision statement includes a vivid description of where the
organization is going. It is future-oriented, meant to inspire and give direction to an
internal
audience. It may describe an idealized future state for the organization. Purpose is
to provide motivation and inspiration to internal audience
49. Strategic Management: Strategic management is an ongoing process that
starts with the overall objective. As part of the planning phase, management creates
and/or revises an entity's vision, mission, and values to provide further guidance for
achieving the entity's overall objective. The next step in the strategic management
process is to formulate the entity's strategy.
50. Value statements: A values statement supports the mission and vision state-
ments by identifying the core beliefs, principles, and philosophies that are intended
to influence the
organizational culture
51. Strategic alternatives: created at the strategy formation stage and overall
objective.

based on overall objective entity will determine strategic alternatives that will set out
the resource allocation to achieve its goals
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52. Corporate level strategy - integration: integration consists of the level that
the industrys value chain should be included in business model. It considers both
forward and backward vertical integration and horiztional integration
53. Corporate level strategy - diversification: diversification strategy considers
what products and services a firm should offer as well as what markets it should
operate in.
54. types of diversification: Types of diversification include concentric, horizontal,
and conglomerate

Concentric diversification (complementary) refers to diversifying the business

through the addition of new products or services that are related to the current
business in the sense that they build on the same skills and expertise

Horizontal diversification refers to diversifying the business through the addition of

new products or services that are not related to the current product but that are likely
to appeal to the same target market

Conglomerate diversification refers to diversifying the business through the addition

of new products or services that are completely unrelated to the current
product offering.
55. Corporate level strategy's - intensive: Intensive strategies are undertaken to
grow the current business by increasing sales volume through marketing strategies.
used when company is looking to grow and to create the highest return with
the lowest risk and will likely build on firms current strengths and experiences. 3
strategies market penetration, market
development, and product development

market penetration strategy seeks to obtain or increase market share through

decreasing selling price or increasing perceived value

Market development involves increasing sales by entering a new market or region,

or by finding a new use for an existing product and thereby creating a
new market

Product development strategy involves improving or modifying an existing product.

This strategy usually requires a focus on research and development.
56. Corporate level strategy's - defensive: Defensive strategies are undertaken
when an entity needs to respond to external conditions, usually in the form of
competitive pressures. 2 types divestiture and retrenchment
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Divestiture occurs when a business segment is closed or sold off (the company
divests itself of that segment).

Retrenchment refers to a reorganization of business activities to reduce assets and

expenses, usually in response to economic difficulties
57. business level strategy - customer value proposition: The customer value
proposition is a statement that answers the question "Why does my ideal customer
buy this product or use this service rather than those of
the competitor?" The goal for the business is to identify a customer value proposition
that profitably uses the organization's resources and capabilities to meet customer
needs.
58. business-level strategy: Business-level strategies are those at the busi-
ness-unit level, profit-centre level, and/or product-line level. They include attention
to customers and products or
services, and they involve analysis of target markets and alternative markets.
Business-level strategies require a deep understanding of what customers want
and need.
59. Service/support cost allocations drawback: service costs are often allocated
using an allocation base that is not a cost driver — partly because cause-and-effect
relationships may be difficult to identify for support services, and partly because
the cost might exceed the benefit of creating and maintaining a more accurate
cost-accounting system.
60. Purpose of Service department allocation: - absorption costing for financial
reporting and/or tax reporting
- calc. external cost reimbursement
- calc. revenue under cost-based contracts
- encouraging efficient delivery of support services
- avoiding sub-optimal decisions around the use of support services by operating
departments
- providing cost information for internal decision making
61. transfer price formula: Minimum transfer price = Variable costs up to
the point of transfer + Opportunity cost to
the selling division

if the selling division has no idle capacity then the transfer price would be the market
price. this is because the OC would be equal to the contribution margin foregone by
not selling externally
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if the selling division HAS idle capacity then the transfer price would be the VARI-
ABLE COST this si because the selling division has no opportunity cost foregone

for buying division the max. price willing to pay would be the external market price
62. Goal of transfer pricing: The goal of transfer pricing should be to motivate each
division to act in its best interest and ultimately the best interest of the company as
a whole.
63. transfer pricing - market based: Prices are set based on the prices to external
market conditions or charged to external parties

Under this method, optimal decision making is met when the 3 conditions are
satisfied.
optimal decision-making when
three conditions are satisfied:
1. The immediate market must be perfectly competitive and information readily
available.
2. Interdependencies between the departments must be minimal.
3. There must be no additional costs or benefits to the organization as a whole in
using the external market instead of transacting internally.

Pros - simple if external market prices readily available, if selling division is operating
at full capacity it will encourage transfer only if they are beneficial for the whole
company
CONS - external market prices may not be readily available, suboptimal decisions
could be made if the seller has excess capacity
64. 3 Common methods of transfer pricing: 1. cost-based transfer pricing
2. market-based transfer pricing
3. negotiated transfer pricing
65. Transfer pricing - negotiated transfer pricing: the seller and buyer work
together to come up
with an internal transfer price for the product or service

PROS - involves divisions in the pricing decisions, leads to more independent and
control over decisions affecting them. divisions build relationships with one another.
price usually benefits org overall

CONS - time consuming, price is determined by departments negotiating ability

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66. Cost based transfer pricing: Under cost-based transfer pricing, transfer prices
are based on a formula applied to some measure of the product's cost. Full-cost
bases measure the full absorption cost of the product being
transferred plus a markup.*
Variable costs measure the variable cost of the product being transferred plus
a markup.*

PROS - simple, useful when market prices aren't available or even it is too costly to
gather info, appropriate when selling division acts as a cost centre
CONS - can lead to divisions from buying division and selling division that are not
beneficial to the company as a whole "sub-optimal decisions". Profits may not be
shared equally when there is a guaranteed margin set which encourages production
inefficiencies
67. Prime costs and Conversion Costs: Within product costs, referred to either
prime or conversion costs

Prime costs include all direct costs — typically, direct materials and direct labour.

Conversion costs include the costs to convert direct materials into a finished product
— including direct labour and manufacturing overhead

direct labour is classified as both prime and conversion cost

68. Product Cost: Product costs (manufacturing costs) are all of the costs associ-
ated with the purchase or production of a product. Product costs is what is captured
in cost of inventory until the product is sold and then goes to COGS

Direct Materials - raw materials easily traceable to the individuals parts of the
product/service

Direct labour: all labour costs that can be directly traced to the manufacturing of a
product (for example, assembly line workers and the
supervisor of the assembly line)

manufacturing overhead — all manufacturing costs except direct labour and direct
materials (for example, general supplies, plant cleaning staff, and utility
costs for the plant

depreciation expense is product cost

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69. Period Cost: Period costs are non-manufacturing costs. They are expensed as
incurred and flow directly to Income stmt
70. High Low Cost Formula: high and low observation points within a relevant
range to determine the cost function. used to determine the variable cost

The steps are as follows:

1. Select the high and low points of activity.
2. Determine the variable cost by calculating:
Change in total cost ÷ Change in activity level
3. Determine the fixed cost by using either the high or low activity level to solve the
cost function.
4. Determine the cost function.

!!high low based on hours used not $$!!

71. Cost Function: Cost function is a formula to determine total cost and different
activity levels within a relevant range

TC = VC × X + FC

benefits of classifying costs is the ability to present information in a way that

increases the usefulness for management and other decision makers.
72. Cost of Goods Manufactured: The value of the goods transferred from WIP to
finished goods is referred to as the cost of goods manufactured (COGM).

COGM = Beginning WIP + DM used + DL used + OH applied - Ending WIP

73. Job costing - variable costing method: This is a method of inventory valuation
in which only variable OH costs are included as inventoriable costs. All fixed and
all non-manufacturing costs are classified as period costs and expensed during the
specific time period in which they are incurred. NOT ACCEPTED UNDER ASPE OR
IFRS.... ex. depreciation is a period cost and not included in inventory
74. Cost of Goods sold: COGS = Beginning finished goods + COGM - Ending
finished goods

where COGM = Beginning WIP + DM used + DL used + OH applied - Ending WIP

75. Job Costing: Job costing is used by organizations whose products or services
are able to be uniquely identified.
76. Process Costing: Process costing is used by organizations whose products are
mass produced. It generally does not apply to services, as most services are more

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personal in
nature.
77. Job costing - absorption costing method: Absorption costing is when the
inventoriable costs include both fixed and variable costs. Supporters of this approach
stress that items like plant and equipment (and, subsequently, depreciation) are
required to produce inventory
78. Job Costing - Spoilage: Spoilage must be accounted for in a job costing
system, either as an additional cost of jobs or as a separate cost (process).

Normal spoilage occurs as a regular part of operations and cannot be attributed to

any particular job. charge to OH and remove spoilage cost from WIP
Normal spoilage in a particular job cost should remain in the specific job and not
charged to OH

Abnormal spoilage occurs under atypical and abnormal circumstances. If abnormal

spoilage occurs, then the cost should be removed from inventory and
recorded as a period expense

abnormal spoilage: attributable to a particular job then charge the costs to the job
and cost remains in WIP for the job
79. Equivalent Units - FIFO: Two methods to account for EU: 1. weighted average
and FIFO
80. Equivalent Units - Weighted Average: EU produced = Units transferred to next
process of finished goods + EU in ending WIP

The five-step guide to process costing is as follows:

Step 1: Compute units to be accounted for (WIP beg + started in production)
Step 2: Compute output in terms of EU
Step 3: Compute costs to account for
Step 4: Compute cost per EU (step 3 / step 2)
Step 5: Assign total costs to units completed (step 2 x step 4) and to ending WIP
81. Equivalent Units - Weighted Average: DM Cost per EU = total DM costs/ (units
finished +EU DMWIP)

conversion cost EU = (conversion costs / finished + EU conversion WIP

total cost per unit = DM cost per EU + conversion cost EU

Under the weighted-average method, the cost per EU includes beginning inventory.
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Under the FIFO method, the cost per EU includes only the work performed during
the period.
82. Joint Costs - physical output method: joint costs are allocated based on a
physical
measure such as volume, weight, length, or count.

volume produced of product / total volume x split off costs

83. Process costing - spoilage: normal spoilage:
- include in costs transferred out
- increases COGS
- attention not drawn to the cost, does not encourage quality improvements

abnormal spoilage:
- charge to the period
- spoilage cost is removed to WIP inventory and is assigned to a loss account related
to the process
- draws attention to the cost
84. Governance Structure: Corporate governance is the connection between a
company's executive management, Board of Directors, shareholders, and stake-
holders. It provides the
framework by which the strategic objectives of the company are set and the moni-
toring and measurement of those objectives.

The purpose of governance is:

1. to reduce ambiguity and confusion in the organization
2. to enhance the effectiveness of strategy, risk management, resource allocation,
monitoring, and overall organizational effectiveness
3. to enhance relationships between management and principals (owners and20
85. Joint costs - Sales Value at Split-Off Point Method: Under the sales value at
split-off point method, joint costs are allocated based on the relative sales value at
the split-off point.

pros - simple to understand

cons - doesn't work for products not sold at the split-off point

step 1: calculate volume sold. (total volume in production / can produce at a given
time) x units of product 1

step 2: calculate sales. volume sold x selling price

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step 3: calculate weighting based on total sales. Repeat steps 1 and 2 for different
product

step 4. allocate split off costs based on weighting in step 3

86. Joint costs - NRV: Under the net realizable value (NRV) method, joint costs are
allocated based on relative total NRV, where the NRV for each product is calculated
as the final
selling price, less separate costs

pro- focuses on products ability to pay for costs

con - complex

step1. determine volume sold = sold volume (total volume in production / can
produce at a given time) x units of product 1) X (input/output)

step 2: expected sales from fully processed: volume in 1 x selling price

step 3: separable costs
step 4: estimated NRV = step 2 - step 3
step 5: weighting based on est. NRV
step 6: allocate split off cost x weighting in step 5
87. Joint costs - waste: waste that is incurred before split off is included in joint
costs

waste incurred after split off is included in separable costs

88. Agency issue: when there is a conflict of interest between executive mgmt. and
BOD
89. Key players in corp gov structure: 1. shareholders
2. BOD
3. executive mgmt
90. Board member qualities: Board members must have certain qualities to effec-
tively carry out their responsibilities.

1. they should have experience in the industry of

the organization. They should also understand their responsibilities within a system
of corporate governance.
2. board members must possess is the willingness to challenge management's de-
cisions. If board members are complacent or are influenced, perhaps because there
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is a member of executive management on their board, they are not carrying out their
responsibilities of oversight, allowing for poor decision making or mismanagement
of organizational resources
91. Audit Committee: all public companys required to have audit committee

responsibilities include:
1. It deals directly with both the internal and external audit functions and is respon-
sible for ensuring that appropriate systems of internal control have been
established to prevent fraud.
2. It is responsible for evaluating the external auditors' qualifications and indepen-
dence, and for monitoring their performance.
3. It ensures that the financial reporting process complies with legal regulartory
requirements
4. reviews risk assessment
5. members should be financially literate, independent and must have at least 3
members
92. organizational ethics: Organizational ethics must reflect the values of the
organization and the standards of society, not the individualistic views of any one
employee. To
standardize acceptable corporate behaviour, an organization will adopt a code of
conduct.
93. Chairman of the BOD: responsibilities include:
1. calling meetings of the board and setting the agenda for the meeting
2. ensuring that the board meetings are efficient
ensuring that the board is following the bylaws or any other procedural regulations
3. meeting regularly with the CEO to adjudicate matters that should be brought to
the board for discussion
94. Centralized Structure: appropriate when one or two leaders at the top. the
impact on mgmt. is that leaders can feel that their compensation is based on metrics
out of their reach as they are not empowered to make decisions on them. innovation
is not rewarded and can cause fricition

PROS; decisions can be made quick, cheaper due to less layers of ppl
CONS: culture of complacency which can stunt future growth, no collaboration
95. Organizational Structure: framework in which a group is organized.
Specifically, it determines how decision-making authority and responsibility is dele-
gated, as well as specifies the formal lines of communication and reporting within
an organization

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96. influences on organizational structure: Economic environment: org may be
under pressure in a decline market to become lean

Competitive industry: org look to address themselves with competitors/industry

products/services: products/service may require alignment to support their offerings

such as financing

regulatory environment - gov may dictate certain requirements to org to operate

97. 4 buckets of environmental costs: 1. prevention
2. assessment
3. control
4. failUre costs
98. organizational structure - types: 1. simple structure: the owner, sole-share-
holder or small group of senior mgmt. make all decisions
PRO- decisions are centralized and can be made quickly. are made with the strategic
objectives. CONS: employees do not feel empowered and as a result leads to job
dissatisfaction increased employee turnover. as company grows may not be able to
change its structure which can lead to decrease in profits

2. Functional Structure: specialized departments are defined by their purpose

and staffed accordingly. PROS: promotes learning and economies of scale allows
employees to progress within their function which increases motivation. CONS
interdepartmental communication can be limited and can create silos

3. Divisional Structure: org is divided into divisions and each division has its own
resources and is managed as a separate business. PROS focus on product/service
and each division has its own culture CONS can create a org wide culture of
competition

4. Matrix structure: where functional and business unit structures are combined at
the same level of org. employees report to both a BU mgmr and functional mgmr.
best when external envir is complex and changing
PROS: promotes collaboration which results in higher employee morale, communi-
cation across functions and BU is higher decisions can be made faster CON unclear
line of leadership, more mgmr is more $, mgmr competition increases as there is
more
99. Decentralized Structures: teams have own leader to make decisions. facilitates
growth due to greater empowerment, collarboration, compensation bonus based on
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team efforts creates motivation

PROS: greater job satisfaction, reduced turnover, mgmt. time focused more on
critical issues rather than operational or non-critical events
CONS: individuals can become competitive, decisions may not be aligned with
corporate strategy
100. Strategic Control: Strategic control includes setting and monitoring progress
toward goals. Some strategic controls, including policies and procedures and codes
of conduct, are designed to limit certain behaviours and promote others. Strategic
controls are necessary to address risks that threaten achievement of the entity's
strategies

input control = budget, employee goal setting, policies and procedures

output control = examine results of activities. variance analysis to budget. standards

developed for cost or minimum hiring standards
101. Performance Management: Strategic performance management requires
that an entity move from visions and highlevel goals to specific actions.
102. KSF - VRINE: vrine is used to determine what KSF is for a company.
VRINE = Valuable, Rare, inimitable/non-substitutable, exploitable

if resource or capability processes mets all 4 criterias then it is a strength and KSF
103. Value Chain Analysis: An analysis of the value chain can help an entity identify
KSFs. The value chain highlights the internal activities that help a business gain a
competitive
advantage. Activities are typically separated into primary activities that relate directly
to the production and delivery of goods and/or services to customers and support
activities that include all other functions.
104. Balance Score card: balanced scorecard is a performance measurement and
management system that is put in place to assist management with the execution
of a chosen strategy.

focused around 4 perspectives.

1. Financial - how is the business seen by owners and investors
2. Customer: how is business seen by customer and market
3. Internal process; what the business must excel at executing
learning and growth: skills and capabilities the business must develop or create
105. Pricing methods - cost based: cost plus mark up pricing
106. 3 major influences on pricing decisions: Customers, costs and competitors
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107. Pricing methods - variable product costs: selling price is created by adding
a mark-up (% or $ amount) to the variable costs

suitable for non-competitive markets and not appropriate for company's with high
fixed costs
108. Pricing Methods - Full Absorption costs: Includes both variable and fixed
costs to ensure that the product costs are being recovered with the price set

PROS; easy to use, all costs are captured and no need to split between vc and fc.
required for GAAP
CONS: method is based on budgets where risk of inaccuracy. it ignores competition
and increases risk that company will turn down opportunities that would have still
provided a positive contribution margin
109. Pricing methods - life cycle costs: The life cycle of a product goes through
five stages: development, introduction, growth, maturity, and decline. A pricing
decision based on life-cycle costing
factors must take into consideration the fact that 80% to 90% of a product's lifecycle
cost will be incurred during the pre-production stages, when the product
has not been released to the market and is earning no revenue

The objective of product life-cycle management is to maximize profits over a prod-

uct's entire life cycle, rather than to maximize revenues and minimize costs
for each stage of the life cycle
110. Pricing methods - target based pricing: Some market-based pricing strate-
gies start with a target price — the estimated price for a product or service that
customers are potentially willing to pay.

Customers and competition is important bc:

1. Competition from lower-cost producers is continually restraining prices.
2. Products are on the market for shorter periods of time.
3. Customers are more knowledgeable and demanding.
111. Pricing methods - target based pricing calc steps: here are the steps in
calculating target price.

Step 1: Develop a product that satisfies the needs of potential customers

Step 2: Choose a target price.
Step 3: Derive a target cost per unit by subtracting target operating income per unit
from the target price.
Step 4: Perform cost analysis to target cost reduction.
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Step 5: Perform value engineering to achieve target price, reducing costs and
achieving desired quality levels
112. demand based pricing - predatory pricing: occurs when company purposely
prices below its cost in an effort to drive out competitors and restrict supply. Goal to
achieve short term losses from long term profits

Key tactics
1. Deliberate price cutting or offers of "free gifts/products"
2. Forces smaller/weaker rivals out of business or prevents new entrants
3. Works in the short term but not in the long term
4. Anti-competitive and illegal if it can be proven, but very difficult to prove
113. demand based pricing - penetration pricing: occurs when the price is set low
in order to attract customers and gain market share. The price will be raised once
the market share is gained. Difference in penetration vs predatory is that is focused
in the short term goal of gaining market share and not eliminating competition

Key points:
1. Price set to "penetrate the market"
2. Low price to secure high volumes
3. Intent is to lower costs over the long term by gaining production and distribution
economies of scale before competitors
4. Suitable for products with long product life
5. May be useful if launching into a new market
114. demand pricing - price skimming: in price skimming goods are placed at
higher prices initially so that fewer sales are needed to breakeven. Over time the
price is lowered and demand widens.

usually used in electronic markets and used to target early adopters of products/ser-
vices

Key points:
1. High price, limited volumes
2. Short window of opportunity
3. Suitable for products that have short life cycles or that will face competition at
some point in the future (such as after a patent runs out)
115. demand pricing - bundling: Price bundling consists of offering several prod-
ucts or services for sale as one combined product

Key points:
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1. Offered when customers purchase more than one product or service from a
company
2. The more you buy, the less you pay
3. Package deals
116. Demand pricing - peak loading pricing: Peak-load pricing involves the prac-
tice of charging a higher price for the same product or service when demand
approaches physical capacity limits

Key points:
1. Prices adjusted to demand and volume
2. The higher the demand, the higher the price
117. Demand pricing - loss leader pricing: Loss leader pricing is a strategy where
a product is sold at a price below its market cost to stimulate the sales of other, more
profitable goods or services

loss leader is usually a product that customers purchase frequently so they know
it is a price that goes to a bargain. seller prices low frequently so customer comes
back and retailer limits quantity customer can purchase

Key points:
1. Products sold below market price
2. Customer draw to stimulate sales of more profitable goods or services
3. Purchases of other items more than cover "loss" on item sold
118. demand based pricing - tender/contract pricing: Tendering or contracting is
the process of making an offer, bid, or proposal, or expressing interest in response
to an invitation or request for tender.
Organizations will seek other businesses to respond to a particular need, such as
the supply of goods or services, and select an offer or tender that meets their
needs and provides the best value for money.

Key points:
1. Proposal submitted for a contract/job
2. Aims to cover materials and labour costs, and generate a profit
3. Often undisclosed and in competitive markets
119. Value based pricing: Value-based pricing is the practice of setting prices
based on a trade-off between the perceived value to the consumer and the produc-
er's incentive to produce the product (which is a function of price and cost).

With value-based pricing, the price set could be high in relation to the costs of the
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product due to the perceived value by the customer, especially when
products are sold on emotion, such as in the fashion apparel industry or with
products in a niche market. In these instances, sellers begin with high prices with
the option of reducing the prices as competition builds.

Key points:
1. Focuses on a single market segment
2. Compares based on the next best alternative
3. Focuses on differentiated features, not the brand
120. Pricing Considerations: must consider the following before setting the price.

1. structure of industry (monology, extremely competitive)

2. product life cycle
121. Product life cycle - Maturity Phase: maturity phase is the most important
phase to prolong and lengthen from a financial perspective. During the maturity
phase, a product is at its height in demand and is highly profitable for the company.
HOWEVER PROFITS ARE NOT INCREASING(GROWTH). In maturity stage there
are many competitors that consume a portion of the market share, leading to slowing
sales growth.

Most companies would benefit from extending the

maturity phase with strategies such as:

1. increasing product demand within the existing customer base with special exclu-
sive offers
2. encouraging trial versions of the current product so that new customers may be
introduced to the product
3. enhancing current product features or usability to make the product more attractive
4. offering special incentives and promotions to attract customers who use alterna-
tive brands
122. Ways to Assess risk: techniques to assess risk that include but
are not limited to the following:
1. benchmarking: external comparison to industry peers or other industries
2. probabilistic models: using past data and artificial intelligence to make predictions
about future performance
3. sensitivity models: surveying the results of a number of variables to study the
uncertainty of those inputs
4. scenario analysis: the what-if analysis determining what the impact would be if a
scenario were to happen
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TWO IMPORTANT FACTORS IN RISK ASSESSMENT: THE LIKELIHOOD THAT

RISK EVENT WILL OCCUR AND THE IMPACT IT WILL HAVE ON THE ORGANI-
ZATION
123. Types of Risk: Strategic risk — The risk associated with ineffective strategic
decisions, improper application of decisions made by management, or lack of
responsiveness by management to the changing business. Strategic risk is also
linked to a company's mission and objectives

Operational risk — The risk resulting from ineffective operations, failed practices,
large swings in the rate of returns, and inadequate allocation of resources (capital
and human)

Reporting risk — The risk associated with misleading or inaccurate information

being reported

Compliance risk — The risk resulting from the failure to comply with current or
changing laws and regulations
124. Risk Planning: is known as Contingency planning
step 1 - identify the risks - identify all risks
step 2 - prioritize the risks - based on likelihood and impact to organization
step 3 - develop a plan
step 4 - maintain the plan
125. Risk Response: The possible responses management can take include the
following:
1. Avoidance — The company doesn't take on the risk and forfeits the potential
benefits. This is a good strategy when the benefits are small or infrequent,
given the potential risks and costs.
2. Reduction — The company takes the risk, but tries to reduce the total exposure
to the risk. This is done by introducing controls or processes.
3. Transferring — The company accepts the risk, but does not bear the entire risk
on its own. The organization will transfer or share the risk with other
parties. Common risk-sharing techniques include purchasing insurance products,
pooling risks, engaging in hedging transactions, or outsourcing an activity.
4. Acceptance — The company takes on the risk and accepts the potential conse-
quences, as the company has evaluated that the potential benefits outweigh the
costs.

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126. Code of Conduct: Sets the tone an organization, as it comprises the rules by
which all employees are to handle themselves
127. PESTEL: Policitical --> taxes, fiscal policy, trade, policital stability
Economical --> interest rates, exchange rates, or inflation are of significant concern
Societal --> consumer preferences, age, gender, demographic
Technological --> automation, R&D, innovation
Environmental --> climate, weather, geography
Legal --> consumer laws, safety standards, human rights
128. Environmental costing: Environmental costing has two main categories,
managerial (internal use) and financial (external use
129. SWOT: Strength/ weakness --> internal
opportunities/threats --> external
130. Porters 5 Forces - supplier power: Supplier power is determined by factors
such as the following:
number of suppliers
size of suppliers
uniqueness of supplier service
an organization's ability to substitute
cost of changing suppliers
131. Porters 5 Forces - buyer power: Buyer power looks at customers, who might
be individuals or other organizations. The ability of customers to exert power is
determined by factors
such as the following:
number of customers
size of each order
competitor differences
price sensitivity of customers
cost to customers of changing suppliers
132. Porters 5 Forces - threat of substitution: Threat of substitution refers to the
ease and ability of your customers to switch
products, and is determined by factors such as the following:
performance of substitute products/services
cost for customers to adopt a substitute
133. Primary two reasons why cost of capital is required: There are primarily
two reasons why the cost of capital must be determined.

1. the entity is looking to assess a new investment and requires a discount rate to
use for capital budgeting purposes.

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2. understand the impact on the entity's overall cost of capital as changes in its
capital structure are made.

Cost of capital is used as a benchmark rate of return, or hurdle rate. The cost of
capital for a project or
investment relates to the riskiness of the investment. high risk = higher cost = higher
return
134. Porters 5 Forces - threat of new entry: threat of new entry is a measure of
how easily competition can arise by:
time and cost of entry
specialized knowledge or processes
economies of scale
cost advantages
technical advantages
patent protection
barriers to entry
135. Cost of Debt: the cost of debt = interest rate company pays on borrowed
amount. Cost of debt related to LT debt and ST debt is excluded from calc as well
as provisions and pension obligations are excluded
136. Weighted Average Cost of Capital (WACC): The average of the after-tax
financing costs of all these sources of capital (both debt and equity),
weighted for the proportion of each in the capital structure, is called the weighted
average cost of capital (WACC). An entity's WACC is the return
required on all the net assets of the entire firm and represents the cost of capital for
the entity's current lines of business.

also use WACC as the discount rate unless the investment is riskier/less risky then
the investments used to determine the WACC. IF this is the case then adjust the
WACC by adding the premium or discount

= D/V (Rd)(1 - T) + PS/V (Rp) + ECS/V (Re)

**only DEBT is calculated after tax

137. Cost of debt with a fixed rate of interest: company has fixed-rate debt, the
required current yield on this debt will change as interest rates fluctuate in the
marketplace and as the company's credit risk (credit rating) increases or decreases.

Steps To determine a company's current cost

of debt:
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1. look at the yield on the debt if it is publicly traded.
2. If the company's debt is not publicly traded, then the yield on publicly traded
debt with similar credit risk (credit rating) and term to maturity can be used as an
approximation.
138. Compute cost of debt with calc: looking for the current cost of debt. bond
outstanding with a market value of $950, a face value (maturity value) of $1,000,
and a coupon rate of 5% with semi-annual coupon payments. The bond matures in
six years

step 1. PV = -950
FV = 1,000
PMT = 5% x 1000 / 2 = $25
N = 6 x 2 = 12
CPT I/Y = 3%
3% (annual) x 2 = 6% semi-annual

or use RATE FORMULA IN EXCEL = (N,PMT,-PV,FV)

139. Debt with variable interest rate: if org has debt with variable interest rate then
the current yield is current base plus premium
140. Factors lenders assess with a companys debt: Lenders assess RRR based
on risk of default. Investors consider the following

1. how much debt the company currently has. high amounts of debt = higher risk
2. how volatile entity's CF more volatile = more risk of default
3. is there collateral used for security
4. are there covenants that can be enforced
5. what is the length of the term loan
141. cost of equity - Preferred shares: Cost of P/S Formula = total annual pre-
ferred share dividend pmt / total value of all preferred shares outstanding

or on a P/S per unit = total annual dividends paid per P/S / current market price per
P/S
142. Financial Leverage: Financial leverage refers to the proportion of debt in
relation to the proportion of equity that has been used to finance a company. The
greater the financial
leverage is, the higher will be the proportion of debt. higher ratio = higher risk for
investors

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143. cost of Common Equity: more complex than debt b/c it does not pay a set of
returns to its investors. Most common approach is the Capital asset Pricing model
(CAPM)
144. CAPM: CAPM premise is that the investor needs to be compensated based on
the TMV and the risk
Cost of equity!!
= Risk-free return (Rf) + Risk premium related to risk of investment
= Risk-free return (Rf) + Beta (ß) × Market risk premium (RPm)
145. Factors that impact the cost of equity: impacted by the entitys level of
operating risk and financial risk

operating risk is assessed by reviewing the volatility of an entity's operating cash

flows. This can be further broken down into the volatility of cash inflows
from sales and the volatility of cash outflows for expenses. also generally more fixed
costs = higher operating risk

Financial risk arises with the use of debt financing and relates to having a higher
probability of financial distress. The more debt an entity has, the higher the
financial risk, which increases the cost of equity required by the shareholder.
146. Tax implications with cost of capital: capital. The interest paid on debt is tax
deductible, while dividend payments are not. The higher a company's income tax
rate is, the higher will be the tax benefit arising from the deduction of
interest
147. Impact on leverage on cost of equity: As debt is added to capital structure,
the risk to the equity investors increases by an amount known as financial risk.

This is because debtholders must be paid

their interest and principal payments first, leaving the amounts remaining for the
shareholders more variable. Variable returns increase risk for the equity
investors, and the cost of equity increases accordingly.
148. Factors that influence the amount of debt company can afford: 1. level of
volatility in operating cash flows
2. the amount of assets owned
149. Formula to show the impact on capital structure of a company when
debt is added assuming no new investments that debt is used to pay back
equity: VL = VU + TD

VL = the value of the levered firm

VU = the value of the firm in the unlevered state (all equity-financed)
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T = the corporate tax rate
D = the amount of borrowed debt

The premise behind this formula is that as debt is added to the capital structure,
interest must be paid. This interest charge is the interest rate (i) times the amount
of debt (D) = i × D. The interest cost is tax deductible, so a tax benefit equal to the
income tax rate times the interest charge is realized. This can be shown in a formula
as T × i × D.
150. M&M Formula - to determine how the cost of equity changes with debt
when their is no probability of financial distress: Re = Ru + D/E(Ru — Rd)(1 —
T)

Re = the cost of equity

Ru = the cost of equity when the entity is unlevered (no debt and represents the
return for op. business risk).
Rd = the entity's cost of debt
D/E= the existing debt-to-equity ratio for the company based on market values, not
book values.
151. ordinary annuity vs annuity due: ordinary annuity = pmts at the end
annuity due = pmts at the beginning
152. Tax benefit from adding more debt: Assuming that the debt is outstanding
in perpetuity the value of the company will increase by the present value of all the
future amounts of the tax benefits to be received. The discount rate to reflect the risk
of
making these interest payments is equal to the interest rate, so the present value of
the tax benefit due to the interest deduction in perpetuity is as follows:
Tax benefit / discount rate = (T × i × D) / i = TD
153. steps in determining impact on capital structure when debt is added
(financial distress no relevant): step 1: use VL = VU + TD formula
to determine what the new value of the company is
Step 2: determine new $ value of equity: Enew = Vl - Dnew
Step 3: determine new cost% when debt is added
Re = Ru + D/E(Ru-Rd)(1-T)
Step4: determine new WAAC
Wacc = D/Vl(D%(1-TR)+Enew/Vl(Re)
154. Present Value of a Perpetuity: A perpetuity is an annuity in which the periodic
cash flows never end — they go on forever into infinity. The cash flows are the same
every period.

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PV = PMT / i
155. Present value of a constantly growing perpetuity: If the payment increased
by a constant growth rate, then the formula would be modified as follows

PV = PMT / i - g
156. Mortgages: mortgage rates are always semi-annually and usually made
monthly. N = period till amortization period to maturity

step 1: calculate the effective annual interest rate = (1 +r/n)^n-1

step 2: calculate the effective monthly interest rate = (Effective annual rate + 1)^1/12
—1
step3: calculate monthly pmt using amortization period
PMT =? PV = - mortgage value n= amortization period x 12 interest = step 2
157. price skimming: charging the highest possible price that buyers who want the
product will pay
158. investment center: a business segment whose manager has control over cost,
revenue, and investments in operating assets
159. ROI =: net operating income / average operating assets

Roi tends to focus on the short term performance and may cause managers to reject
profitable options if it will lower ROI
160. Management by Objectives (MBO): set of procedures involving both man-
agers and subordinates in setting goals and evaluating progress. In MBO top mgmt
provides the mission of the org and individuals set their own goals. The con to this
is that it increases the amount of paperwork and may leave mgmrs less time to do
their actual work
161. balanced scorecard:
162. Enterprise Resource Planning (ERP): Program that runs off one database in
order to integrate all departments and functions across an organization. Purpose is
to have one integrated computer system which will facilitate error free transactions
and production
163. cost standard - attainable standards: Assume production process that is as
efficient as practical under normal operating conditions. It allows for occurrences as
occasional machine breakdowns and normal amounts of raw material waste
164. Cost standards - historical data analysis: Minor change in the way a product
is manufactured may make historical data almost completely irrelevant
165. Cost standards - management by exception: Only significant deviations
from expected performance are investigated
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166. Cost standards - task analysis: Sets a standard by analyzing the production
process in order to determine what the product should cost which is reasonable for
a new product
167. theoretical capacity: Considers how much a company can produce when
working at full efficiency all of the time!! Assumes nothing goes wrong such as
no machine breakdowns or employee vacation/errors. ALWAYS CALC OFF OF 24
hours * 365 days
168. Activity based budget: Develops master budget using info from an ABC
analysis. The process is as follows: forecasting the products or services to be pro-
duced and the customers to be served 2. Determine the activities that are necessary
to produce products 3. Quantify resources necessary. Also used to quantify process
improvement savings into future budgets
169. zero based budget: allocates resources as if each budget was brand new.
Mgmrs start from ground up and every cost needs to be justified
170. Efficiency: The percentage of the input work that is converted to output work
171. Effectiveness: Considers the relationship between inputs and the achieve-
ment of final objectives
172. appraisal costs: costs of activities designed to ensure quality or uncover
defect. These costs could include expenses for field tests and inspections
173. Total Quality Management (TQM): A companywide effort to continually im-
prove the ways people, machines, and systems accomplish work.
174. Total Quality Management (TQM): all activities involved in getting high-quality
goods and services into the marketplace
175. control limits: the maximum allowable deviation from a standard.
176. Lean Management: Reducing waste in a methodical manner to optimize
processes and maximize customer value
177. Costs of Quality: Prevention Costs - training
Appraisal Costs- inspection
Internal Failure Costs - reworking defective
External Failure Costs - product repairs
178. substitution effect of a price change: reflects the way that a change in the
price of a good affects relative prices
179. Oligopoly: a market structure in which only a few sellers offer similar or
identical products
180. Monopoly: A market in which there are many buyers but only one seller.
181. perfect competition: a market structure in which a large number of firms all
produce the same product
182. monopolistic competition: a market structure in which many companies sell
products that are similar but not identical
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183. Excludability: Sellers can keep people who do not pay for a product from
obtaining its benefits
184. marginal revenue: the change in total revenue from an additional unit sold.

Marginal revenue = revenue $ new - revenue $ old / (quantity new - quantity old)
185. lagging indicators: measures of economic performance that usually change
after real GDP changes. Example average prime rate
186. Strategic Management: process of helping an organization maintain an effec-
tive alignment with its environment
187. intensive strategies: market penetration, market development, product devel-
opment
188. corporate strategy: determines the overall mission of the firm and the types of
businesses that the firm wants to be in. Also decides the industry firm will compete
in
189. Business Strategy: The major actions by which a business competes in a
particular industry or market. How will the firm compete in the industry
190. functional strategy: a strategy that determines how employees will implement
and achieve a tactical plan. Implementation of strategic objectives at the lowest
levels of the firm
191. Industry strategies: Cost Leadership, Differentiation, Cost Focus, and Focus
differentiation
192. focused cost leadership strategy: seeks the lowest costs of operations within
a special market segment
193. strategic alliance: a partnership formed to create competitive advantage on a
worldwide basis

An entry stratefy
194. joint venture: a partnership established for a specific project or for a limited
time

Entry strategy
195. Licensing: Entering foreign markets through developing an agreement with a
licensee in the foreign market

Entry strategy
196. Piggybacking: The process of connecting to a wireless network without the
permission of the owner of the network.

Entry strategy
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197. Broad span of controls: Means that the organization structure is flat and there
is large teams with less managers. This organization structure would reduce costs
in comparison to a narrow span of control
198. narrow span of control: more levels are created; need more managers;
needed with newly hired personnel as less employees on team. Provides more
opportunities for promotion because this lends itself to a taller organization structure
with more hierarchy levels. Provides greater deal of specialization In teams due to
smaller size and can destined for specific purposes
199. Operational Risk: results from the firm's business operations. Arise from
choices about how strategy will be implemented including environmental issues
200. Strategic Risk: refers to uncertainty regarding the firm's financial goals and
objectives. Changes in government funding is a listed example or a political problem
that transcends into the companies operations
201. Strategic Management: The process of planning, controlling, and organizing
an organization or department. Used to provide organization with long term benefit.
Pros it helps improve communication and improves the likelihood of obtaining good
outcomes.
202. Seven s: Strategy
Systems
Style
Staff
Superordinate goals the values that go beyond stmt goals and objectives in deter-
mining firms destiny
Skills attributes and capabilities
203. Vision Statement: Expresses what the organization should become, where
it wants to go strategically. Describes what the organization is ultimately trying to
accomplish-a future desired state
204. mission statement: a short, specific written statement of the reason a busi-
ness exists and what it wants to achieve
205. objectives (goals): Results of a planned activity which are specific, have a
time frame for completion and should be quantifiable
206. Initial Public Offering (IPO): The first public offering of a corporation's stock
through the sale of securities to the public through the investment dealer/underwriter
process
207. Mergers: The joining together of two or more companies or organizations to
form one larger one.
208. private placement: sale of securities to a limited number of investors without a
public offering involves the sale or issuance of shares directly to a financial institution
or investor group
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 CPA Core 2
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209. secondary market: the market in which previously issued securities are traded
among investors
210. Operating Leverage: The relative amount of fixed and variable costs that make
up a firm's total costs.
211. loss leader: An item priced at or below cost to draw customers into a store.
212. predatory pricing: selling a product below cost for a short period of time to
drive competitors out of the market
213. product differentiation:
214. Free Cash Flow in capital budgeting: = EBID after tax + depreciation of tax
shield - capital invesment net of tax shield - investment in working capital

It represents the amount that could be distributed to all security holders of the
common
215. Internal Rate of Return (IRR): The discount rate that makes the NPV of an
investment zero.

Use excel rate formula!!

216. Vertical Common Size Statements:: I/S: Income statement account / Sales
B/S: Balance sheet account / Total Assets
217. Planning of short term and long term financing: Long term assets are
typically financed with long term liabilities that include long term debt and capital
stock. Lines of credit are a form of current liabilities that may be used to finance
current assets.

Permanent current assets should be financed with long term liabilities

218. lease payments: Minimum value of leave payments does not include mainte-
nance fees which is sold separately
219. Dividend Growth Model: The dividend growth rate, or the rate at which the
value of an investment grows.

= D * (1+g) / (r-g)
220. Stock Appreciation Rights (SARs): Grant employees cash or stock awards
based on the increase in the stock price over a specified time. Employee most likely
gets cash
221. cost of debt capital: = debt stated rate x (1- TR)
222. Cost of Preferred Equity: = preferred share dividend / FMV $
223. cost of common stock: = risk free rate + beta (IRR - risk free rate)

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224. systematic risk principle: the notion that the size of the risk premium is based
on market risk
225. unsystematic risk: risks associated with one particular investment and can be
reduced through diversification
226. prime rate: the lowest rate of interest at which money may be borrowed
commercially.

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