BEC NOTES

Session 1

Testlet 1 Testlet 2 Testlet 3 Testlet 4

24 M/C 24 M/C 24 M/C 3 Written communication

M/C 85% Written 15%

ONLY 3 HOURS

Corporate Governance: 16-20%

Economic Concepts and Analysis: 16-20%

Financial Management: 19-23%

Information Systems and Communications: 15-19%

Strategic Planning: 10-14%

Operations Mgmt: 12-16%

Written communication: Each will have 5 sections

Situation and written response requirements

Instructions: called "reminder"

Salutation

Blank Space for Written Response (only requirement. the other parts are given)

Signature - in some cases

Either memorandum or Letter

Can go back and forth between the written tasks, Review the questions and do the one most
comfortable with first, then next most, then third
Determine what the specific subject is

What response is expected? (ID, describe, explain, etc)

Who writing to?

What is your role?

Write at least 3 paragraphs. More likely 5 or 6

Intro

1-4 technical content

Closing paragraph

Intro: describe why you are writing and what you are writing about (from situation). 1 or 2 sentences
long. Ex. This memorandum is to provide the information requested concerning... Those measures
are....

Technical content: number of paragraphs determined by question. If id or describe: write a paragraph

for each

Never write something that suggests unethical or illegal actions

Asking to ID, describe, compare : one for each

Asking to Explain or recommend: as many as needed

Closing: express hope or belief that you adequately addressed issue and that you are available for follow
up. 1 or 2 sentences. Ex. please let me know if i can provide additional information....

I hope the foregoing adequately describes.... If i can provide additional information please let me know

Score based on

Organization: Thesis, unified topic and supporting sentences, transitions between paragraphs

Development (evidence and clarity): definitions, details, examples, rephrasing to clarify

Expression: grammar, punctuation, wording, etc

MOD 1 Intro

COSO vs COSO ERM: questions that compare and contrast them

Corporate triangle: Base= stockholder, middle= BOD, top=officers

audit committee and responsibilities

SOX requirements for BOD and officers

SOX: Officers: certify establishing and maintaining internal controls (relevant info is known, controls
evaluated, conclusions on internal control effectiveness)

Code of ethics not required. Don't have one must explain why
Whistleblowers: audit committee is responsible to secure means for whistleblowers to communicate.
can get civil damages against company if retaliates

Perpetrators subject to criminal prosecution for retaliation against informant providing information on
any federal offense

Dodd-Frank (amended some of SOX): extended length of time for whistleblowers to file complaint to
180 days. permit whistleblowers to sue directly in federal district court. Can get twice amount of back
pay. can sue up to 3 yrs after they had right to sue and within 6 years of violation. extended right to sue
private subsidiaries if majority is public. bounty for sanctions in excess of 1 Million. whistle blowers
receive 10-30%

Most critical COSO model are 5 main control elements:

Control environment: tone at top

Risk assessment: specific to this organization

Info and communication: reporting

Monitoring: internal auditing

Control activities: actual controls that are implemented

COSO ERM: expands to organization objectives, risks and risk appetite. what makes it different from
original COSO?

Additional Elements of control: Strategic objectives, Event Identification, Risk response

MOD 1 Conclusion

Preventive controls: often "passive controls" that require little/no effort once in place

Detective controls: usually "active controls" that require constant or repeated monitoring. always paired
with corrective controls

Corrective controls: specify action(s) that should take place to mitigate the problem that occured

*Think of passive vs active when comparing*

General Controls: over design and operation of computer system as a whole. affects all applications.
often preventive controls
Application Controls: over data that is input into system, processed by system, and output by system.
applied to specific data items. often detective controls

17 principles of Internal Control: Higher likelihood of being tested

Know 5 major elements of COSO and the 17 relate back to those

Control Environment (5)

Integrity and ethics, independent BOD, mgmt hierarchy/structure, competence, accountability

Risk Assessment (4)

ID strategic objectives, assessment of risks/objectives, ID fraud risk, articulate change mgmt

Control Activities (3)

Reduce risks, control over technology risks, support policies and objectives and consistent w/
shareholders

Information and communication (3)

high quality (timely, relevant, accurate, reliable), internal communication, external

communication (enable inbound)

Monitoring (2)

ongoing and periodic evaluation, immediate action to address deficiencies

Maintenance of backup files is a corrective control

MOD 2 INTRO

In economics: y axis is price, x axis is quantity

Demand=Downward. Inverse relationship between price and quantity. Changes in price along curve

Shift in demand: changes in things other than price

Supply=Upward Direct relationship between price and quantity. Amount provided at a specific price

Shift in supply: changes in things other price of good. reduction in supply= left

Limits: maximize amount Floors: minimizes amount

Elasticity: % change in 1 market factor as a % change in another

(Change in quantity / Original quantity) / (Change in price / original price)

or % change in quantity / % change in price

Effect on Total Revenue when Price

ED Called Increases Decreases

<1 Inelastic Increases Decreases

=1 Unitary No change No Change

>1 Elastic Decreases Increases

Marginal Utility: declines with more units Total Utility: increases at a decreasing rate w/ more units

Marginal Cost, Average Total Cost, Average Variable Cost= all U shaped

Short Term: ATC will begin to increase due to margin of diminishing returns

Long Term: ATC will begin to increase due to economy of scale

US economy is mix of market types

Profit/loss relates to ATC and price. In long run, only monopolies and oligopolies can make economic
profit

GDP measured by: Expenditures approach or Income Approach

Nominal GDP: at current prices

Real GDP: adjusted for price changes. Use GDP deflator index based on prices. Divide by deflation and
multiply by 100
Business Cycle: Peak, Trough, Expansionary and Contractions (look at factors that change aggregate
demand)

Consumer Price Index (CPI): index of cost of basket of consumer goods prepared by BLS. Uses 82-84 as
base = 100

Monetary Policy: management of money supply to achieve objectives

FED: banking reserve requirement, open market operations (buy/sell treasury debt), discount
rate (interest rate charged to a financial institution)

Fiscal Policy: use of government taxing and spending to achieve objectives (and transfer of payments:
Social security, welfare, unemployment, disability)

Absolute advantage: more efficiently than another

Comparative advantage: produce with lower opportunity cost than another

When given 2 options: get it on a per unit measure and compare

Direct Exchange rate: domestic price of foreign currency 1 Euro : $1.30

Indirect exchange rate: foreign price of domestic unit $1 : .77 Euro

Currency Strengthens: when $1 will get more of a foreign currency

Transaction risk: change in exchange will be unfavorable impact on transactions and balances in foreign
currencies

Translation risk: change in exchange will be unfavorable impact on F/S

Economic risk: change in exchange rate will have unfavorable impact on future activity

Transfer pricing: recognize more profit in lower tax jurisdictions

High Tax rate: low revenue, low transfer price, lower profit, lower tax

Low tax rate: high revenue, high transfer price, high profit, lower tax

MOD 2 CONCLUSION

Most emphasis in economic section

Change in price cause a change in quantity demanded

MOD 3 INTRO

20-25% of exam

WACC:

Amount of capital / Total capital * Cost = Weighted Cost Then Sum weighted cost of each

Debt->PS-> CS (least to most expensive capital)

Ordinary Annuity = payment at end

Annuity Due/Annuity in Advance = payment at beginning

PV = amount / (1+ rate)^n

Ordinary annuity due can be adjusted to annuity due.

Take value from 1 less period and add 1 to it

Interest Rate

Real Risk Free Rate (inflation free)

+ Inflation premium

+ Default premium

+ Maturity premium ( longer = more)

+ Liquidity premium ( illiquid = more)

+ Special premium/discounts

Nominal (quoted) interest rate

Effective rate= annual interest rate implicit in relationship between net proceeds from loan and annual
interest cost

EI = Cost of Loan / Net Proceeds

APR for less than 1 Yr

APR = Effective Interest * number of fractions in a year

APR for more than 1 yr

Normally EI = APR EI/APR > stated rate

CAPM

RR= RFR + B (ERR - RFR) RR= required rate, ERR = Expected RR, RFR= risk free rate

Approaches for valuation:

Market Approach, Income approach, asset approach

Payback period:

Investment / annual net CF

Accounting Rate of return. Based on accounting results, not CF. depreciation effects it, no time value

AAR= (average annual incremental revenues - average annual incremental expenses)/ Initial
investment

NPV= PV of cash inflows - PV cash outflows (if a positive number, accept)

IRR = PV of cash inflows * x% = PV of cash outflows

(solve for x, can't be used for positive & negative CFs)

Profitability Index: inflow per $ invested

PF of net cash inflows / Project Cost

Pledging AR = using as security Factoring AR = selling

Cost of debt = Interest rate * (1-TR)

Cost of PS = Current Dividend / Current Stock Price

Cost of CS = (Dividend 1st year/market price) + growth rate (assume constant growth rate)

Cost of RE = lower that cost of CS because of flotation costs (origination fees)

Hedging principle or Self Liquidating debt: fund ST with ST and LT with LT

Ratio Names:

"Return" = Income

"On", "Per", "To"= divide

IF Ratio uses Income Statement and BS account:

Use average BS amount

MOD 3 CONCLUSION

Treasury Bill only includes RFR + Inflation premium

ARR= Average Return / Initial (or Average if depreciating) Investment

Cost of Preferred stock= (coupon * par) / (market price - issuing cost)

Cost of common stock = (dividend / price) + expected growth rate

Payback period: Depreciate is not a CF item so ignore

investment cost / annual cash inflows = payback period

Valuation is based on Exit Price. Exit price: received when selling asset or pay to get rid of liability

MOD 4 Intro

Topics tested: estimated 40-50%

controls

system: accesses, aka general controls. lessons: Logical access and physical access

Data: aka application controls. lessons: 1.input and orginiation controls, 2. processing, file, and
output controls

, Operations:

hardware, software, processing lessons: 1. data structures, SW and database 2. Info Sys
Hardware 3. Transaction processing 4. computer networks and data communication

Internet related

types of cyber crime lessons: computer crime/attack/etc..

e-business/e-commerce (EDI,EFT, shopping) lessons:1. intro to e- 2. e-com applications

Segregation of duties/responsibilities of each person

Backup restoration

Planning and disaster recovery

Real time processing is using "random" sequence

Pay attention to protocols and acronyms

Know the type of processing software (TPS, ERP, etc..)

Parallel implementation: expensive. run 2 at a time and then phase out old

Pilot implementation: portion of system (payroll, then AP, then AR...)

Phased implementation: implement all of system at 1 location at a time

Cold Turkey: sink or swim. start all at once

System and application programmers are different and segregate those duties

Librarian: custody of programs not in use. check out when in use

symmetric encryption: single key encryption (security measures)

asymmetric encryption: public/private key encryption (security measures)

digital signature: authentication (less secure, where its coming from, not who)

digital certificate: authentication (most secure)

EFT, Electronic check presentment, automated clearing house = cash receipt

Single key encryption: symmetric. must know key

Public/Private: asymmetric (certificate authority stored on servers, encrypt and send message with
their public key, recipient has private key to decrypt)

Data control clerk: (operations) run computer, work with data

Batch control total: detect data entry errors. compare pre v post
Closed loop verification: data entry errors. enter data and returns verification

Parity check: extra bit added to each byte so total is odd or even, compares totals (byte is 1 character,
usually 7 bits (0s and 1s) so 8th is parity bit)

Echo check: sending info and have receiving send back and sender compares

Read-After write: echo check but involves disk not another computer

Hardware-> Op. System->Middleware->Application->User

Computers make systemic errors. Any time and every time it will be wrong. frequent and consistent

Clerical errors are reduced with computers

Flat file is alternative to database file. Doesn't link things together so has redundancy in each file. can be
processed by many different systems

Planning & feasibility (proposal submitted, evaluated, approved), analysis (approved proposal analyzed
to determine inputs, outputs, processing, hardware requirements), design & development
(programmers code and test), implementation (moved from test to production)

MOD 5

A lot of content, few points assigned to it (not VAR, not equivalent units) (more like break even,
manufacturing cost flows)

BOLD IS infrequent.

Absorption and direct costing

Job order and process costing

Variance analysis

Overhead variance analysis

count on: manufacturing cost, spoilage, cost, and inventory flow, cost behavior patterns, joint and by
product costing, forecasting techniques (definitional most often), cost volume profit analysis
(breakeven), relevant cost (1 question)
Absorption Costing: for external, required for GAAP

All manufacturing costs above the line (variable and fixed for units sold) to get GM

All SGA costs below GM (variable SGA for units sold only)

Direct Costing:

All variable costs above the line (variable manufacturing and variable SGA for units sold) to get CM

All fixed costs below CM (Fixed manufacturing costing for units produced)

Only difference to bottom line is difference in fixed manufacturing costs for units produced vs fixed
manufacturing costs for units sold

to calculate difference: (difference between units produced vs. units sold) x fixed
manufacturing costs per unit

Units sold= units produced = incomes equal

Units sold> produced = Absorption < Direct Costing

Units sold< produced= absorption > direct costing

Equivalent units (FIFO)

Beg WIP * remaining %

+ Started into production - completed units (or completed & transferred - BI)

+ Spoilage Units (if any)

+ Ending WIP * % completed

Equivalent FIFO Units

Equivalent Units (Weighted Average)

Completed Units

+ Ending WIP * % completed

Weighted Average Units

Breakeven:

Sales = (# units x VC per unit) + Fixed cost

or

Fixed costs / CM per unit = break even units

Fixed costs / (CM /revenue) = break even dollars

Breakeven units * CM ratio CM ratio= Percentage of each CM $ to cover fixed cost

Accept/reject decisions: only consider avoidable and variable costs when making decisions. ignore fixed
or unavoidable costs

MOD 5

Manufaturing cost flows

Direct labor

Direct material WIP Finished Goods COGS

Overhead

Basic tool for analysis

Beginning balance

+ additions* *purchases for (raw materials), Units started, materials issued, DL dollars,
Amount to account for Applied OVH (WIP), Units completed (FG), Units Sold (CGS)

-Deductions** ** Materials issued (Raw Materials), Units Completed (WIP), Units sold (FG)

Ending Balance
Variance Analysis

QTY Rate Total

Standard ________ x __________ = ___________

- Actual ________ x __________ = ___________

=Difference ________ __________ ___________ Stand - Actual = negative= unfavorable

Price/Rate Variance= Different rate * actual quantity

Quantity/Efficiency Variance= Different quantity * standard rate

Absorption Variable

Sales Sales

-Var Man. -Var Man.

-Fixed Man. -Var SGA

Gross Profit Contribution margin

-Var SGA. -Fixed Man

-Fixed SGA -Fixed SGA

Net Income Net Income

Only difference to bottom line is difference in fixed manufacturing costs for units produced vs fixed
manufacturing costs for units sold

to calculate difference: (difference between units produced vs. units sold) x fixed
manufacturing costs per unit

Units sold= units produced = incomes equal

Units sold> produced = Absorption < Direct Costing

Units sold< produced= absorption > direct costing