BEC CPA Notes Chapter 48 Partnership Summary

BEC CPA Notes
20072008 [THANKYOUFORUSINGMAGGIESCPANOTES]
Chapter 48 Partnership
SUMMARY
NATURE
i. Partnership vs. Corporation
Partnership Corporation

Liabilityofstockholders Unlimited Limited
Continuity Limitedduration Unlimited
Management Runequallybyallthepartners Utilizeprofessional
centralizedmanagers
Transferinterest Maynottransferinterest Readilytransferable

Initializeorganize Easilyandcheaply Musthavesufficient
capitalization,complicated
Governmentsupervision Less More
CanclaimBankruptcy Yes Yes

ii. Partnership vs. Joint venture

Ajointventureissimilartoapartnershipexceptthatitisformedforonlylimitedtransactions,rather
thanforageneralpurpose.
iii. Partnership vs. Sole proprietor

AdvantagesProprietor Disadvantages
Easilyandcheaplyformation,nofiling Unlimitedliability
Receiveallprofits Equityfinancingislimited;creditors
mayhavesignificantrestrictions
Controlandaccountabilityare Lackofexpertise
centralized
Durationisattheownerswill Nocontinuityofexistence,terminate
upontheproprietorsdeath
iv. Classification
1) Generalpartnership
2) LimitedpartnershipHowever, Limited partners are not prohibited from all voting
3) Silentpartner:unlimitedliabilitybutnomanagement,nodisclosure
4) OstensibleorNominalpartner:notactuallyapartner,butmaybecomeone
5) Dormantpartner(hiding)
6) Secretpartner
7) Limitedliabilitypartnership(LLP):affordliabilityprotectiontogeneralpartners
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20072008 [THANKYOUFORUSINGMAGGIES CPANOTES]
FORMATION
i. Determining partnership existence, the following does not consider as partners

Ofadebtbyinstallmentsorotherwise
Aswagesofanemployeeorrenttoalandlord
Asanannuitytoawidoworrepresentativeofadeceasedpartner
Asinterestonaloan,thoughtheamountofpaymentvarieswiththeprofitsofthebusiness
Astheconsiderationforthesaleofgoodwillofabusinessorotherproperty
Coownershipoftheproperties

Ifshareprofits,presumepartnership,notcreditor.
ii. Statute of Fraud

Writing generally not necessary.
If the partners want to enforce an agreement to remain partners for longer than one year, writing is
required under the Statute of Frauds. Also, transfer of real property
iii. New partners

Need unanimous consent (Consent of all partners)
Not personally liable for partnership debts prior to the admission
iv. Retiring partner

Retiring partner remains liable to existing partnership creditors unless the partnership enters into
Novation (usu. The correct answer unless recession is a choice) with creditors
Novation substitution of debtors with consent of creditors
ASSIGNMENT
Partner assigns her/his share of profits do not need other partners consent
Cannot assign asset (property) of partnership
Assignee is not a partner; existing partner does not stop being a partner
Not automatically grounds (causes) for dissolution
PARTNERS RIGHTS
ThingsrequireUNANIMOUSconsentoutsidetheordinarycourseofbusiness
Assign partnership property to others

Change nature of business
Confessing a judgment
Admitting a new partner
Sale of partnerships goodwill
Change the partnership agreement
Not require Unanimous consent: dissolution
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RELATIONSHIPS AMONG PARTNERS
i. Fiduciary
Duty of loyalty and the duty of care.
Those duties may not be waived or eliminated by the partnership agreement, but can establish
measurement to those duties.

ii. Mandatory rule - Agreementcannot:

9 Varytherequirementsforexecuting,filing,andrecordingpartnershipstatements,exceptthe
dutytoprovidecopiestoallthepartners
9 Unreasonablyrestrictpartnersorformerpartnersaccessrightstobooksandrecords
9 Entirelyeliminatethefiduciaryduties,ortheobligationofgoodfaithandfairdealing.
9 Unreasonablyreducethepartnersdutyofcarebelowthestatutorystandard
9 Bargainawaythetraditionalrulethateverypartnerhasthepowertowithdrawfromthe
partnershipatanytime.
9 Varytherightofpartnerstohavethepartnershipdissolvedanditsbusinesswoundup
9 Varytherightofacourttoexpelapartner
9 Varytherequirementtowindupthepartnershipbusinessincertaincases
9 VarythelawapplicabletoaLLP
9 Restricttherightsofthirdparties
iii. Actions between partner and partnership

Disputes between partners almost invariably involve a conflict as to partnership assets, which
necessitate an accounting of assets.
RELATIONSHIP WITH THIRD PERSONS
i. Authority to bind partnership

Express authority - Authority specifically set forth in an agreement among partners, or decisions

made by majority of partners
Implied authority - Not granted expressly, but arises from the nature and business of the
partnership. E.g. the HR partners has the power of hire/fire
Apparent authority Apparently, but not authorized.
Third party doesnt know that the partners lack of actual authority, all partnership is liable
Third party knows the dealing partners limitation of authority; the other partners are not liable.
Partnership could ratify (permit to be valid) the unauthorized act.
ii. Partnership Liability

Partners are jointly and severally liable for contracts and all actions in tort or fraud against any
partnership member where the partnership is not a limited liability partnership.

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iii. Notice to Third Party

Actual Notice must be given to third party with actual dealings
Constructive notice (newspaper) must be given to the rest third parties
DISSOCIATION (partner change)/ DISSOLUTION (business wind up)
i. Causes of Dissociation
Change in partners (withdraw / expel)
Partner goes bankrupt Dissociation of this partner from the partnership
Death of partner Not necessarily Dissolution of partnership
Bankruptcy in Partnership generally results in dissolution of a partnership.
Each partner has the power, but not necessarily the right to quit
Actual authority ends, but apparent authority continues until 3rd party is given notice.
Dissociated partners power to bind partnership continues for 2 years unless notice is given.
Liable if not notice 3rd party for debts incurred after dissociation.
ii. Power & Responsibility of Dissociation

If the agreement kept silence, the partner can dissolve himself at will (any time).
Dissociation may be accomplished either with or without violating the partnership agreement.
A dissociated partner is not liable for the debts of the continuing business simply because of
continued use of the dissociated partners name as a part of the partnership name.

iii. Death of Partner

By operation of law, death results in the dissociation of the deceased partner from the
partnership, but not necessarily the dissolution of the partnership unless the original partnership
had only two partners, leaving only one remaining partner.
The other partners have to purchase the dead partners interest; not inherent automatically
iv. Non-Causes of Dissolution

The attachment of a partners interest by a court does not dissolve the partnership.
One or more partners suing another partner for an accounting does not dissolve the partnership.
v. After Dissolution - Wind up

Even after termination, all partners are still liable to previously unknown liability
The right of the remaining partners to continue business after dissolution is all of the partners
[excluding the wrongfully dissolved partners] waive the right to have the business wound up.
Filing for Wind up:
After dissolution, any partner who hasnt dissociated wrongfully may file a stat. of dissolution on
behalf of the partnership. After 90 days, this notice gives constructive notice to creditors that
the apparent authority of the partnership is ended for all purposes except winding up.
vi. Distribution Priority

Creditors Loan to partners Capital contributions P&L
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LLC
9 A single individual may form an LLC
9 Liability Shield: Members may be involved fully in the business and not lose the liability shield.
9 An LLC may be managed by either a member or by a non-member manager
9 No tax at entity level, flow through
LIMITED PARTNERSHIPS

9 Must have one general and one limited partner
9 Still need UNANIMOUS consent to sell general/limit partnership interests
9 May make minor decisions, vote on dissolution, act as surety, and do things unrelated to active or
physical management of the business.
9 A limited partner has all the rights of a general partner [inspect the books, demand an accounting,
dissolution and winding up] except that the partner has no right to manage or control the partnership.
9 A person may be a general partner and a limited partner at the same time.
9 Both limited and general partners may contribute services for a capital contribution.
9 Limited partners are not elected as general partners by a majority vote of limited partners.
9 If a limited partnership certificate contains a false statement, anyone who suffers a loss through
reliance thereon may hold all the partners liable.
9 However, Partner is not personally liable for the negligent act of other partners
9 Limited partners names cannot be identified with the business (partnership name)
9 Limited partner does not owe a fiduciary duty
9 Dissolution could be consent of all /withdrawal/death of a general partner (not limited partner)
i. The Limited Partnership Certificate must include

1) The partnerships name,
2) The address of the partnerships registered office and the name and business address of its
agent for service of process,
3) The name and business address of each general partner,
4) Its mailing address, and
5) The latest date on which the limited partnership is to dissolve.
Do not include: The limited partners names and business addresses
Voting Strength Profit / Loss Distribution
GP All partner equal Equal
LLP All general partner equal Equal
LP All general partner equal Based on capital contribution
LLC Based on Capital contribution based on capital contribution
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POINTS
Partnershipitselfisnottaxable;rather,eachpartnerpaysincometaxonher/hisshareoftheprofits
orlosses,regardlessofwhethercashorotherpropertyisreceived.
Partnershipmustcoowntheprofit,butnotnecessarilyalltheproperties.
Formostemploymentpurposes,apartnershipisregardedasaseparatelegalentity;itmust
withholdaportionofitsnonpartneremployeesincomesforFICAcontributions.
Partnersarepersonalliableforuptothetotalamountofpartnershipdebt,notjusttheshareofloss.
Creditors can proceed: 1) partnership first 2) the sued individual partners personal asset
Even if a partner is withdrawn from the partnership and be hold harmless for the past, present, and
future liabilities of the partnership, s/he is still personally liable for those liabilities of partnership
existing at the time of his withdrawal
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Chapter 49 Corporation
SUMMARY & POINTS

OVERVIEW
i. Directors only have power when act as a group
Corporate officers are fiduciaries and are ordinarily prohibited from engaging in self-dealing or
making a secret profit from contracts with the corporation. However, most states make an exception
where the self-interest is disclosed and fair to the corporation.
Directors can Repeal the bylaws, but cant amend the articles of incorporation
A corporations directors are elected by its shareholders.
The director him/herself will be liable for wrongful dividends declared
Like shareholders meetings, directors meeting is valid only if a quorum (majority) is present [6 out of
10]. Action can be approved by a majority of the directors present [4 out of 6 present], cannot vote by
proxy, have to be physically present the meeting.
ii. Officers have individual power

Officers are selected by the BoD
Do not require to be shareholders
Authority to contract (apparent authority)
Tort liability
Fiduciary duties
One officer is required for each corporation to record minutes.
iii. Ultra vires acts - Acts by the corporation or its management that are beyond the scope of corporate
authority as granted by its charter, bylaws, and state law.
The contracts are void

The ultra vires doctrine may not be asserted by either the corporation or a third party to nullify an
action or contract. However, it can be asserted by the shareholders of the ultra vires corporation.
iv. Corporate Veil

Officer, director or Individual shareholders may be held personally liable for the debts of the corporation.
The act of disregarding the shareholders general shield from liability for corporate debt is called
piercing the corporate veil.
Four factors that cause the courts to pierce the corporate veil are:
1) Committing fraud on existing creditors.
2) Inadequate corporations. [Undercapitalization]
3) Failure to act as a corporation.
4) Commingling personal and corporate assets to the extent that the corporation has no identity of its own.
FUNDAMENTAL CHANGES
Majority Board & shareholders approval necessary
Procedure: Majority Board resolution notice majority shareholder approval State filing of articles
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DAMS
1. Dissolution
Grounds of Dissolution
9 Board of directors fraud,
9 Waste, oppression, misapplication of corporate funds,
9 Deadlocks,
9 Inability of the corporation to conduct business in a manner advantageous to the shareholders
Voluntary dissolution
9 A vote by the BOD recommending dissolution
9 Approval of an absolute majority of shareholders (do not need unanimously)
2. Amend to the articles of incorporation
3. Merger / Consolidation procedure
a. Merger: A+B = A Both BOD and Shareholders of both companies majority approval
b. Consolidation: A+B = C Both BOD and Shareholders of both companies majority approval
c. Share Exchange: A issue stocks to acquire all shares of B Only Purchasing companys
Board approval
d. Merger of Subsidiary (short-form merger): merge >90% owned sub - Parents Board
makes decision unilaterally
9 Certificate issued
9 Appraisal rights: are available to dissenting shareholders for any fundamental change in
corporation.
Only have the right when shareholders have right to vote
Only the shareholders of the acquired (sub) company has the appraisal right.
4. Sales of a substantial part of the corporate assets
9 Purchasing company only needs boards approval
FORMATION
i. Incorporation
Promoter onewhoundertakestoformthecorporation
1) A promoter is liable to contracts he made even the corporation adopts the contract, unless
9 The promoter states in the contract that he is not personally liable
9 Novation
2) A promoter has fiduciary duty to not-yet-formed corporation, cannot make profits of it.
3) Usually, the incorporators and promoters are the same persons
Include in the Articles of Incorporations Need BOTH Board & Shareholders to amend
1) Name of the corporation
2) # of Capital stock authorized
3) Name & Address of the incorporators
4) The name and address of the registered agent
5) One or more classes of shares must be unlimited voting rights (C/S)
Incorporated by State Law instead of Federal Law
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Bylaws are the rules for running the entity.

Either the incorporators or the BoD may adopt the bylaws, the shareholders and BoD can
amend
ii. Defects in Formation

De Jure Corporation: any corporation that substantially complies with the mandatory statutory
requirements of incorporation. Such corporate status cannot be attacked by anyone, including the
state.

De Facto Corporation: fails to comply substantially with mandatory requirements, the court still
recognize its existence as de facto if
1) A valid statute () under which the business could have been incorporated legally
2) Existence of a corporate charter
3) A good effort to incorporate
4) Some good faith business dealings in the corporate name

Corporation by Estoppel: absence of even a de facto corporation, but if the third party entered into a
contract believing s/he was dealing with a corporation
Noncorporation: fails to obtain any status mentioned above
FINANCING
Treasury Stock
9 It carries no right to vote or receive dividends.
9 It may be resold without regard to par value.
9 It may be distributed as a stock dividend.
Preferred Stock
9 A cash dividend on preferred stock becomes a legal debt of the corporation when the dividend
is declared, and the preferred shareholder becomes an unsecured creditor of the corporation.
Stock Issuance
9 Par value shares may not be issued for less than par value.
9 May accept contracts for future/past services as consideration for the issuance of stock;
9 A corporation may require a holder to offer the corporation the right of first refusal on a
repurchase of its stock before any sale is permitted to anyone else
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STOCKHOLDERS
Fiduciary duty
9 Generally, a shareholder owns no fiduciary duty to the corporation.
9 However, the majority /controlling shareholders cannot use that control to injure the minority
shareholders
Basic stockholder rights
1) Derivative action: Shareholders bring the law suit in behalf of corporation; recovery of the
derivative action goes to the entity instead of shareholders. A successful stockholders
derivative suit would most likely result in the officers and directors being held liable for abuse of
discretion.
2) Asset share on dissolution
3) Right to vote quorum present required (can use proxy)
Cumulative voting: # of shares*# of directors to be elected can vote all votes to one
director, increase minority shareholders chances.
1) Inspect books if have proper purpose
2) No Preemptive right unless articles state so [to subscribe to newly authorized stock in proportion to
existing holdings (not to treasury stock)]
Liability
1) Watered stock that was issued for less than par. The liability is the difference.
2) Dividends paid that causes a corporation to become insolvent are considered illegal
9 Generally is limited to her/his capital investment.
9 Treasury shares may be resold by the corporation for such price as may be determined by
the board of directors. They are not an issuance of stock, hence not "watered shares" if sold
under par.
FEDERAL INCOME TAX RAMIFICATIONS

Shareholders can contribute property to either type of corporation without being taxed.
i. C Corporation

Unless a corporation elects S corporation status, it is a C corporation
Stock dividends
9 Tax free to shareholders
9 No effect on earnings and profits for income tax purposes
Constructive Dividends
9 Corporations deduct unreasonable salaries to reduce income for tax purpose may be forced
to recharacterizing the salary into ordinary dividend by IRS (Internal Revenue Service)
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ii. S Corporation [Not Taxable at Entity Level]

Maximum 100 shareholders
Only one class of stock
Nonresident aliens, corporations, and foreign trusts may not be shareholders
Domestic International Sales Corporations, and corporations with members of affiliated groups,
80% subsidiaries are not eligible.
All current shareholders, plus any shareholders who held stock during the taxable year before the
election, must consent to the election
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AGENCY
An agency coupled with an interest: the principal gives the agent a property or security interest
in the subject matter of the agency. Commission does not count.
Actual and constructive notice - The corporation is liable for constructive notice (newspaper)
after actual notice to known dealing parties.
Respondeat superior: the principal is liable to agents wrongs. Even if the agent violated the
principals instructions in committing the tort, as long as its for the principals benefit, the principal
is liable unless agent violates the law.
An agent usually will not be liable under a contract made with a third party if the principal is
disclosed and if the agent acts within the scope of her/his agency. Agents for undisclosed
principals always have contract liability.
If agent makes, in good faith, a serious but honest mistake in judgment, he is generally not liable
to the corporation for damages caused.
POINTS
Foreign Corporation (require certificate of authority) vs. domestic corporation: The operation of
a plant in a state is strong evidence that a corporation is doing business there. The location of bank
accounts, shipments, or board of directors meetings in State Y is incidental to business operations.
Subscription Agreement - If A group of investors each agree to subscribe to corporate stock
dependent on the other parties also subscribing before the corporation exist, the subscription is
enforceable, but not between the corporation and each subscriber, but rather among the subscribers
themselves.
A subscriber who pays less than par or stated value for stock (watered stock) as well as a transferee
with knowledge of the deficiency are liable jointly and/or severally for the deficiency to creditors of
the corporation.
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Chapter 50 Economic Theory
SUMMARY & POINTS
DEMAND & SUPPLY
i. Factors Affecting Demand
Law of Demand: Price , Demand - movement along demand curve, not shift curve
Substitute: Price of A, Demand of B
E.g. Margarine and butter, Mayonnaise and Miracle Whip, Movies at theater and movie rentals,
Chicken and turkey
Complements: Price of A, Demand of B as demand of A
E.g. Peanut butter and jelly, Cameras and rolls of film, Razors and razor blades
Income: Income , Demand for Normal goods , Demand for Inferior goods
Future Price Expectations
Preference
Market Size
Group Action (E.g. Boycotts Demand)
ii. Factors Affecting Supply
Law of Supply: Price, Supply

Production costs E.g. wages, taxes, supplies
Technology: improvement in technology result in in S
Prices of Other Goods (Alternative production with the same resources)
In Price of alternative production, in supply of goods
Price Expectation: Anticipation of in price will cause in current S
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ELASTICITY
Measure the sensitivity or responsiveness of quantity D or S to a change in a determinant of D
or S
Coefficient > 1: Elastic

Coefficient < 1: Inelastic
i. Price Elasticity of Demand
Simple Method E (d) = (D2 D1) / D1

(P2 P1) / P1
Arc Method E (d) = (D2 D1) / [(D2 + D1) / 2]
(P2 P1) / [(P2 + P1) / 2]
Perfect Inelastic
Perfectly Unit Elastic

Price

Elastic

Perfect Elastic
Inelastic
Quantity
Elastic goods Inelastic
Luxuries Necessities
Large expenditures Small expenditures
Durable goods Perishable goods
Substitute goods Complementary goods
Multiple uses Limited uses
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ii. Price Elasticity of Supply
iii. Cross-Elasticity of Demand
9 If > 0, substitutes
9 If< 0, complements
9 If = 0, unrelated
iv. Income-Elasticity of Demand
9 If > 0, normal goods

9 If< 0, inferior goods
MARKET
9 Equilibrium (or Market) Price: Where S and D curves meet
9 Price ceiling: if ceiling below equilibrium shortage
9 Price floor: if floor above equilibrium surplus
UTILITY
Satisfaction derived from a good/service
9 Marginal utility: additional utility obtained from one more unit

9 Diminishing marginal utility: Each additional unit provides less satisfaction
9 Objective: Maximize utility given available income
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Indifference curve
9 Nonlinear
9 Parallel to each other
9 Negatively sloped
9 Convex to origin
ECONOMIC COST
Economic Cost: Difference from accounting is that accountants do not subtract the cost of
investors capital (opportunity (implicit) cost)
Economic Profit: Total Revenue All economic costs
Marginal Product: Additional output (#) obtained by adding one more unit of input
Marginal Revenue Product: Additional revenue ($) provided by use 1 more input
Marginal Resource Cost: Change in total cost of a resource from using 1 more unit
Maximum Profit: MR = MC
MRevP = MResC
MC = ATC (Avg. Total Cost) whenever ATC is at min or max.
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MARKET STRUCTURE
i. Pure Competition
9 Large # of buyers & sellers
9 Homogenous product
9 Free entry/exit
9 Perfect information
9 No Price control
9 No Non-price competition
9 SR: Producer is a price taker
9 LR: No economic profits, allocation of resources is optimal b/c Price = MC
ii. Pure Monopoly E.g. Telephone service in U.S.
9 Single seller
9 Unique product
9 Blocked entry
9 Perfect information
9 Significant price controls
9 Goodwill advertising
9 LR: Allow economic profit, Profit Maximization: MR = MC
9 Price is high and output is low
Nature monopoly: Technological / economic conditions permit only 1 efficient supplier
iii. Monopolistic Competition Cell phone service

9 Large # of firms
9 Differentiated products
9 Relatively easy entry into market
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9 Some price controls

9 Considerable non-price competition (brands, advertising)
9 PM: MR = MC
9 SR: Demand is more elastic than pure monopoly
9 LR: Allow normal profit, no economic profit
iv. Oligopoly - Airplane manufacturing / airline service

9 Few sellers
9 Barriers to entering the market
9 Rivals actions are observed
9 Differentiated or standardized products
9 Price Leadership (Sticky prices): one drops price, all have to lower price
v. Monopsony - One buyer exists for all sellers
vi. Five Factors affect the competitive environment (Michael Porter)

1) Barriers to entry
2) Market competitiveness
3) Existence of substitute products
4) Bargaining power of the customers e.g. Walmart
5) Bargaining power of the suppliers
MACROECONOMIC MEASURES
i. *GDP (Gross Domestic Product)
Total market value of all final goods/service produced within a particular country
Include goods produced by foreign companies as well as US companies as long as the
goods are produced within the US
Output (Income & Cost) Approach: The sum of wages, interest, rent, profits,
depreciation, and indirect business taxes.
Input (Expenditure) Approach: The sum of Government purchases, Gross private
domestic Investment, Personal consumption, Net Exports
ii. *NDP (Net Domestic Product) = GDP Depreciation
iii. *GNP (Gross National Product)

Total market value of all final g/s produced with resources from a specific country
US GNP includes g/s produced outside the US, but using US resources
iv. NI (National Income)

= NDP + US net income earned abroad indirect business taxes (like sales tax)
v. PI (Personal Income)
= NI corporate income tax & undistributed profits social security contributions + transfer
payments (social security benefits & dividends)
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vi. *DI (Disposable Income) = PI Personal income taxes for consume or save
vii. Per-Capita Output = GDP / Population, adjusted for inflation
BUSINESS CYCLE
Indicators
9 Leading indicators: Used to forecast future trends
9 Trailing (Lagging) indicators: change after the change in the phase of cycle
ECONOMIC ANALYSIS THEORIES
i. Classical Model of Economic Analysis

Equilibrium occurs only at full employment, and if not, it will correct itself
Self-regulated market: competition (driving force) moves economy towards equilibrium
9 No unsold inventory b/c price will decrease accordingly
9 All saving is invested b/c of flexible interest rates
9 Competition between workers eliminates unemployment
ii. Keynesian Model

Economy can get stuck at equilibrium with significant levels of unemployment
Economy cannot take care of itself; government has a responsibility to pull the economy
out of a recession
iii. Unemployment
= Natural Frictional unemployment is due to labor market mechanics. In other words, some individual will

Rate of be unemployed between being laid off by employer A and learning about and being hired by
Unemployment employer B, even if employer B has a job opening when the individual is laid off by employer A.
= Full Structural: Aggregate demand is equal to aggregate labor supply, but the nature of the supply
employment
doesnt match the nature of the demand due to skill set, geographic
Seasonal
Cyclical: Aggregate demand is less than aggregate labor supply during low points in the
economic cycle.
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iv. Difference in Theories

MPC (Marginal Propensity to Consume)
Change in consumption spending / Change in DI
MPS (Marginal Propensity to Save)
Classical Keynes
Saving Planned saving depends entirely on Consumers saving habits are based
the interest rate primarily on their income
Investment Interest rate Profit expectation
Multiplier (k) Effect

K = 1/MPS = 1 / (1 MPC)
K * in expenditures = in GDP
MONEY
Money Multiplier = 1 / Reserve ratio
Money Multiplier * in net deposits = in Money Supply
Monetary management
Open Market Operations:
9 Purchase of securities to encourage an expansion of money supply
9 Sale of securities leads to a contraction of money supply
Reserve requirement
9 Lower reserve requirement Money supply
Discount rate interest rate at which depository institutions borrow from Federal Reserve Banks
9 Rate Money supply
Prime rate rate for best collateral to borrow from commercial banks
INFLATION CAUSED BY SUPPLY & DEMAND SHIFTS
CPI (Consumer Price Index)

Limitations:
9 Measures the relative change in the cost of living, not actual
9 Not a completely pure price index
9 Quality improvements problem
9 Upward bias of 1-2%
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PPI (Producer Price Index) measure of the average prices received by producers and
wholesalers
GOVERNMENT
Private goods: buyer enjoy the benefit
Public goods: the ones do not buy still have the benefits
Direct taxation: payer has the benefit, e.g. income tax, sales tax
Indirect taxation: payer does not have the benefit. E.g. employers share of Social Security
and unemployment taxes
Progressive: the higher income, pay more tax as a proportion of income

Regressive: the higher income, pay less tax as a proportion of income
Budget deficits
9 Financing budget deficits: financed by government borrowing, affects interest rate
9 Cyclical budget deficit: caused by temporary low activity, recession / contraction
9 Structural budget deficit: not caused by temporarily low economic activity, but by
structural imbalance between government spending and revenue
Incidence: taxes may be paid by one entity, but borne by another. E.g. landlords may increase
rents to cover property taxes
Federaldeficits:Theexcessoffederalgovernmentspendingoverrevenuesin1year
Transferpaymentispossibletoresultinanaggregateshiftofdemandbetweentheprivateand
publicsectors,butlesslikelythanthereallocationofconsumptionwithintheprivatesector.
INTERNATIONAL ECONOMICS
Absolute & Comparative Advantage
Trade price = between Opportunity cost of production in 2 countries
Foreign exchange
9 Appreciated & Depreciated based on relative inflation & interest rate
9 Floating Exchange Rate vs. Fixed Exchange Rate vs. Managed Float
9 Premium: If Forward rate > Spot rate Market expect this currency to appraise
9 Premium: Domestic rate > Foreign interest rate, forward sells for a premium
Current account
9 Balance of goods and services: imports (debit) less exports (credit)
9 Net interest and dividends
9 Net unilateral transfers
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Balance of trade
9 Imports (debit) less exports (credit)
9 Excludes services
Capital account
9 Results from exchange of fixed or financial assets
9 Balance of Payment
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Chapter 51 Financial Management
SUMMARY & POINTS
WORKING CAPITAL
Unless indicated otherwise, assume net working capital is positive
i. Cash
Motives for Holding Cash - Cash is the Special Toilet Paper of the Future
1) Compensation balance compensate bank for services provided
2) Speculation unplanned bargain purchases
3) Transactions routine everyday transaction
4) Precautionary measure contingency for uncertainty of forecasts
5) Future cash requirements special outlays such as dividends/debt/tax payments
Float is the time between when a customer mails a payment and when it becomes
available in the firms bank account
1) Mail float: customer mail company receive
2) Processing float: company receive check deposit
3) Check-clearing float: check deposit Funds available
Speed up Cash Inflows DELAW
1) Decentralized collection centers

2) Electronic Data Interchange (EDI)
3) Lockbox system an arrangement between a company and a bank whereby the bank
empties a special post office box for payments, deposits the funds for the company, and sends
the remittance advices to the company, check-clearing process begins before the check-
processing process
4) Automated Clearing Houses (ACH) Electronic networks operated by the Federal
Reserve, electronic depositary transfer checks are used to move funds from 1 bank to another
and the funds are available for use within 1 day.
5) Wire transfers and depositary transfer checks move funds quick, costly
Typical Question:
Benefits = Daily Cash receipt * Days reduced * annual market rate
- Cost bank charges
Net Benefits
Slow Down Cash Disbursements

1) Pay by draft (checks/use of float)
2) Payable-through-drafts drafts, but not checks, can incur interest
3) Zero-balance checking account NSF, cost may be high for bank charge
4) Pay beyond normal credit terms risk ill will, incur interest charges
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Cash Management invest excess cash in liquid assets

Instrument Typical Maturities Marketability
U.S. Treasury bills 91 days; 182 days; 52 Highly marketable
weeks
Federal agency issues Days to years Highly marketable
(Federal xxx)
Short-term municipal 1 month to 1 year Not as marketable as the
securities above 2
Negotiable certificates of Week to 18 months Fairly good secondary
deposit (CD) market, offered by
commercial banks
Commercial paper Can be over 1 year Usually issued by large
(Unsecured) firms, smaller firms has to
go to broker, pay high than
CD, cheaper for borrower
than a regular bank, more
risk and weak secondary
market
Repurchase agreements Day to several months Limited; borrower agrees to
(Repos) repurchase securities at a
fixed amount on a fixed
date; Relatively high risk,
uncommon investment for
cash
Bankers acceptances 30-180 days Relatively safe, guaranteed
by bank
Eurodollar deposits 1 day 6 months Developing, US dollar-
denominated deposits in
European banks
Money market mutual Redeemable upon demand Similar to checking
funds account, higher interest
rates
Bank money market Redeemable upon demand Higher risk, longer
accounts (possible withdrawal notice) maturities, higher yield
Cash flow cycle = Average age of inventory Payable + Receivable

As cash is merely an inventory of money; the economic order quantity (EOQ) model may be
used to determine when to "order cash, or in other words, when to convert marketable
securities into cash.
Float is the difference between the time when a check is in the depositors book and cleared by
the bank
What is short selling?( Short selling involves borrowing shares from a broker, selling them,
and repaying the loan with securities bought on the open market; it is done by investors that
speculate that the securities will have a dramatic price decrease.)
24

ii. Accounts Receivable
Sales = 360 days

Avg. AR ACP (average collection period)
Pre-tax cost of carrying additional investment in receivables

= in AR * Cost of sales (VC) * return rate
Average daily credit sales * ACP (days) = Average AR
iii. Inventory
Order cost
1) Quantity discounts lost
2) Shipping costs
3) Purchasing costs
4) Set-up costs
Carrying costs
1) Handling costs
2) Interest on invested capital
3) Storage costs
4) Obsolescence
Stockout cost cost of unable to fill an order
1) Lost sales
2) Rescheduling production
3) Expediting special orders
EOQ: Size of each order
Reorder point - At which inventory level should place an order: Lead Time * Daily demand
Safety Stock buffer: Refined ROP = Lead time * Daily demand + safety stock
iv. Short-term Debt
Annual Financing Cost (AFC) cost of not taking the discount, assuming we would otherwise
borrow money to pay within the discount period
AFC implied by cash discount

9 Simple Interest
25
= Disc% 360 days .

(1-Disc %) (Full credit period Discount Period)
E.g. 1/15, n30: Implied rate = 1%/99%*360/ (30-15)
9 Compound Interest
= [1 / (1 Disc %)] (360/Disc period) - 1
= (100/99) (360/15) 1
Financing Cost = All Costs (Interest + transaction cost)

Net Proceeds available Net of transaction costs
= Interest Payment in compensation acct*Checking int %
Net Proceeds (compensation required - Usual compensation required)
Week 3 Page 18 question drills
Trade credit (accounts payable) is called a spontaneous financing source because it originates
automatically from purchasing transactions.
Factoring involves using receivables as collateral. (secured)
A floating lien is secured by property, typically inventory, of which the particular components may
change.
Commercial paper, lines of credit, and revolving credit typically are debts without collateral.

Derivatives
Future contracts differ from forward contracts in that exchange clearinghouses standardize future
contracts and mark them to market daily. The daily mark to market decreases counterparty risk.
Counterparty risk is the risk that the other party to a contract will be unable to meet its obligations on
the maturity date.
SECURITY VALUATION
Stock Price = d1 / (k g)
D1: dividends one year from now
K: required rate of return
G: growth rate
Expected C/S Dividend = EPS * Payout ratio
26

CAPITAL STRUCTURE
Optimal: mix of financing at which the companys stock price is maximized
DFL (Degree of Financial Leverage) the degree to which a firm uses fixed financial costs
(debts)
DFL = % in EPS / % in EBIT
DFL = EBIT / [EBIT I Prefer Dividends / (1 Tax)]
DOL (Degree of Operating Leverage) the degree to which a firm uses fixed operating
costs (e.g. fixed salary vs. commission) if > 1 , employing operating leverage, a higher leverage
implies greater risk (higher sales, more profits, lower sales, much less profits)
DOL = % in EBIT / % in Sales
DOL = CM / EBIT
DCL (Combined Leverage) = DFL*DOL
i. Cost of debt
Ki = kd (1 T)
Kd = interest rate on debt being issued
T = tax rate
ii. Cost of Preferred Stock

Kp = Dp / Net issuance price
Dp = dividend on preferred stock
iii. Cost of Equity

Ke (internal) = D1 / P0 + g
D1 = dividends in 1 year from now
P0 = price of c/s now
G = growth rate
CAPM - cost of RE
Ke = rf + bj(rm rf)
Rf = risk free rate
Bj = Beta co-efficient, correlation b/w the variation of a single stocks price and stock market
volatility
Rm = market required rate of return
Cost of new common stock issue

Ke(new external) = D1 / Pnet +g
Pnet = net receipt of stock issue (net issuance price)
27

CAPITAL BUDGETING
i. Payback period
ii. Accounting rate of return (ARR)
Average NI / Initial Investment
iii. Internal rate of return (IRR) - Assumption: cash flows are reinvested at IRR
Find the rate on the table closest to the undiscounted payback period.
iv. NPV - Assumption: cash flows are reinvested at required rate of return
Net cash outflow = cost of new (all costs) +/- / in WC Cash proceeds on sale of old (net of tax)
Net cash inflow = after tax cash flow on operation + depreciation (net of tax) + cash proceeds on sale
of new (net of tax)
v. PI (Profitability Index)
vi. ROI (Return on Investment) short-term focus, bias to long term investment
ROI = NI / Average Total Assets = Margin (NI / Sales) * Asset Turnover
vii. RI (Residual Income)
viii. Economic Value Added
POINTS
Life Cycle: Infancy Growth (Increase in sales) Maturity Decline
To maximize shareholder wealth, management should focus on total return per share.
Financial market
I. Money (short-term) vs. Capital Markets (Long-term)

II. Mortgage vs. Consumer Credit Markets (Credit card)
III. Primary (newly issued) vs. Secondary Markets (previously issued)
Facilitated Transfers: Indirect transfers through a middleman.
28
Over-the-Counter (OTC) Markets (Make a Market)

Underwriting involves an investment banker purchasing a new security issue from the issuer and
then resells than issue to subsequent investors.
The underwriting spread is the difference between the price that the investment banker pays and
the price that a subsequent investor pays, rather than a commission or discount.
29
Chapter 52 Decision Making
SUMMARY & POINTS

COST FUNDAMENTAL
DM + DL + OH applied (not actual)
Prime cost Conversion Cost
BWIP + DM + DL + OH Applied EWIP = Cost of goods manufactured
Absorption costing - GM
All manufacturing costs, both variable and fixed
Direct (Variable) costing - CM

Only variable manufacturing costs are considered, fixed manufacturing costs are treated as
period cost
Absorption Direct
Produce more than sell More profit Less profit
Produce less than sell Less profit More profit
30

Breakeven
Margin of Safety
A direct labor overtime premium that is attributable to the heavy overall volume of work is
regarded as part of manufacturing overhead, which is borne by all units produced.
A direct labor overtime premium should be charged to a specific job when the overtime is caused
by the Customer's requirement for early completion of job
31
Cost-Volume-Profit Analysis
32

Chapter 53 Costing Accounting
SUMMARY & POINTS
COST ACCOUNTING SYSTEM
i. Job-order approach
DM & DL are based on actual amounts incurred on the job
Overhead is applied based on a predetermined rate
When DM & DL occur
Dr. WIP
Cr. Material inventory / wages payable
When apply OH
Dr. WIP
Cr. OH applied
When actual OH
Dr. Overhead control
Cr. Stores inventory (indirect material)
ii. Process approach: for mass production
Three- Step Process Weighted Average

1) Account for all units
BWIP EWIP
+ Started this month + Finished units
Units to account for + Spoiled
Units accounted for
2) Calculate equivalent finished units (EFU) - Separately for Material & Conversion
Finished (Units*100%)
+ EWIP (Units*x%)
+ Abnormal spoilage (units*x%)
EFU
3) Calculate unit costs Separately for Material & Conversion
(BWIP + Current added) / EFU
Three- Step Process FIFO

1) Account for all units
Same as weighted average
2) Calculate equivalent finished units (EFU) - Separately for Material & Conversion
Finished (Units*100%)
+ EWIP (Units*x%)
- BWIP (Units*x%)
EFU
3) Calculate unit costs Separately for Material & Conversion
Current cost only / EFU
33

Spoilage
1) Normal spoilage
9 Cannot be prevented
9 Product cost, usually ignored
9 Rework cost: assume charged to factory OH unless otherwise stated
2) Abnormal spoilage
9 Could have been prevented
9 Period cost
Dr. Loss from abnormal spoilage
Cr. WIP control
9 Add to EFU calculation as a separate item to FG & WIP
iii. ABC
DM & DL are the same
OH is handled differently
9 Identify activities that add value to the product
9 Eliminate non-value added activities (e.g. storage)
9 Identify cost drivers
STANDARD COST ACCOUNTING
i. Material Variance
Price Variance [Quantity Purchased] = AQ*AP AQ*SP
Usage Variance [Quantity Used] = AQ*SP SQ*SP
ii. Labor Variance

Price Variance = AH*AP AH*SP
Efficiency Variance = AH*SP SH*SP
iii. OH Variance
9 Fixed OH Volume Variance =FOH Budget FOH Applied (unit*rate) (U if +)
1) Two-Way Variance
Controllable OH Variance = Actual OH cost (Budget FOH + SH*SR)
Volume (Capacity) OH Variance = (Budget FOH+ SH*SR) OH Applied(SH*TotalR)
Volume Variance consists only a fixed element.
ActualCost SHFlexibleBudget OHApplied
ControllableVariance VolumeVariance
2) Three-Way Variance
Spending Variance = Actual OH cost (Budget FOH + AH*SR)
Controllable
Efficiency Variance =AH*SR SH*SR (ofAHFlexible&SHFlexibleBudget)
34
Volume (Capacity) OH Variance = (Budget FOH + SH*SR) OH Applied

AHFlexibleBudget SHFlexibleBudget OHApplied
ActualCost
VolumeVariance
SpendingVariance EfficiencyVariance
ControllableVariance
3) Four-Way Variance
Spending divided into fixed and variable
Actual FOH Budget FOH
Actual VOH AH*SR
iv. Sales Variance

SalesVariance
SellingPriceVariance SalesVolumeVariance
(AP BP)AQ (AQ MBQ)B CM
SalesMixVariance SalesQuantityVariance
(ASMa BSMa) Total AQ(a+b) BCMa (Total AQ Total MBQ) BSMa BCMa
MarketShareVariance MarketSizeVariance
(AMSH BMSH) AMSI(units) BCM (AMSI BMSI) BMSH(%) BCM
9 A = Actual; B=Budget
9 MB = Master Budget; FB = Flexible Budget
9 CM = Contribution Margin
9 Q = Quantity sold; P = Selling Price
9 SM = Sales Mix
9 MSH = Market Share (%); MSI = Market Size (in unit)
Relative sales value deduct separable costs from sale price

Sometimes, the NRV of By Products are used to deduct joint cost
35

Service Costs
Service Costs - Costs of the most widely used service department (D1) (or the department with the
greatest total cost) are first allocated to all other departments.
New D2 allocation base = D1*(D2s % in D1) + D2
Cost = D1*(Xs % in D1) + New D2* (Xs% in D2 / Rest % other than D1 in D2)
36

Chapter 54 Planning and Control
SUMMARY & POINTS
STRATEGIC MANAGEMENT
i. Environmental analysis
External environment
1) General (societal) trends
E.g. Aging of population, Percent of baby boomers in the market, More email use
2) Industry-specific trends
E.g. concern over food additives
Internal environment
1) Corporate culture
2) Corporate chain of command
3) Corporate resources
ii. Strategy development

Mission: Purpose of entitys existence
Vision: What the company seeks to become in the future
Growth
1) Vertical: suppliers or distributors
2) Horizontal: increasing market share within same industry
Diversification
1) Concentric: expand in related industry
2) Conglomerate: expand into a unrelated industry
iii. Strategy implementation

Developing programs, budgets, and procedures to implement the strategy
iv. Evaluation & Control

Monitor
Corrective action
STRATEGIC ANALYSIS
i. Regression analysis
Simple: 1 dependent variable and 1 independent variable
Multiple: 1 dependent variable and > 1 independent variable
ii. Coefficient of correlation
Perfect positive correlation +1
Perfect negative correlation 1
No relationship 0
37

PERFORMANCE MEASURES
i. Balanced Scorecards
1) Customer
2) Learning and Growth, Innovation
3) Strategic (Internal business process)
4) Financial
ii. Quality Control Programs
Cost Management Systems
A. Traditional
9 Base production on forecast sales.
9 Standard cost systems
9 Using variances without discretion may lead to dysfunctional behavior. (For example,
an extreme emphasis on the materials price variance may encourage the purchaser
to obtain the lowest price without regard for quality or warehousing costs.)
B. Process Value Analysis (PVA, or value chain analysis , JIT system) - Attempts to reduce
all non-value added costs, keeping costs low and high flexibility to customer requirements
1) Suppliers
9 Negotiate long-term contracts with a limited number of vendors
9 By only working with suppliers who deliver quality raw materials on a timely
basis, less raw material inventory is required as a safety stock.
9 Value-Added Focus
9 By eliminating non-value-adding work (for example, materials handling) and
costs (for example, warehousing costs), throughput time is minimized,
9 Pull system -> Customer demand Produce
9 Push system-> Produce Push to customers
2) Quality Focus
9 Rework and reshipping costs are minimized
9 Customer satisfaction is maximized.
Inventory Tracking Systems
A. Sequential Costing (or synchronous)

9 Attempt to time entries with physical production events.
9 Expensive
B. Backflush Costing (Delayed / Endpoint costing)
9 Eliminate the need to record WIP inventory by delaying recording production
changes until finished goods (or sales) occur.
9 Standard costs are used to allocate manufacturing costs to FG.
9 Frequently appears with a (JIT) inventory system.
38

9 (a) Simple accounting system, (b) have a standard cost for each product, and (c)
achieve about the same end results with back flush costing as with sequential
tracking.
Quality Measures
1) Aesthetics
2) Conformance Degree to which a product meets standards
3) Durability
4) Features
5) Perceived Quality
6) Performance
7) Reliability
8) Serviceability
iii. Best Practices

Organization
9 Structure work so that it can be completed by one individual or one team.
9 Eliminate the time wasted and potential for error that occurs in hand-off of tasks from one
individual to another
Data Capture
9 Data is captured once, accurately.
9 Two of the major forms of waste in transaction processing are multiple entry of data due to
lack of integration of the information system
Controls
Data Integration
9 Users create, maintain, and use data for decision making.
9 Having the accounting department integrate and analyze transactionsto be a stewardnot
to originate transactions;
Concurrent Operations
9 Work in parallel instead of sequence, and then integrate results.
Geographical Integration
9 Treat geographically dispersed resources as one.
9 Shared databases, telecommunications networks, and standardized processing systems
Online Processing
9 Speed transactions through online approvals.

39
iv. Benchmarking Techniques

Internal vs. External Benchmarks
Measures Aside from the obvious measure of monetary units, other measures provide insight into
processes. Cycle time is a common measure.
Value Classifications
9 Value added, or real value added, refers to activities that are essential in meeting customer
expectations.
9 Business value added refers to activities that are essential to conducting business but do not
add value from the customers viewpoint.
9 No value added refers to activities that are essential neither to meet customer expectations
nor to conducting business.
Process Map A tool to illustrate the manner in which information, documents, and materials are
moved through a business process.
The profit strategy is to support profits during a period of declining sales by limiting short-term
discretionary expenditures; in other words, treating the companys problems as temporary so as not
to alarm stakeholders.
The no-change strategy often is employed in a stable market with no obvious threats or
opportunities.
A divestment strategy involves selling a product line.
Termination of the company is involved in a liquidation strategy.
A turnaround strategy involves streamlining the company in two stages: contraction (cuts in size
and costs designed to improve cash flow) and consolidation (implementation of stabilization
programs).
The captive company strategy typically involves a long-term contract with a strong customer
involving a majority of product; some supporting functions, such as marketing, are reduced because
of the long-term contract, but the company is dependent on that customer.
A sell-out strategy involves selling a business and exiting an industry entirely.
40

Chapter 55 IT
SUMMARY & POINTS
OVERVIEW
CPU
1) Arithmetic logic unit
2) Control unit
3) Primary memory (ROM)
Data: all raw facts
Information: produced with facts
NETWORK
i. Star network - PC Host
ii. Ring network - LAN
iii. Bus network - LAN
iv. Hierarchical network Tree trunk
v. File Transfer Protocol (FTP) is one set of rules establishing how files are transferred.
1) Parallel Transmission All of the bits of a byte are transmitted at once along parallel lines, with
one bit on each line, such as on a bus to or from the CPU. Generally, parallel transmission is
practical only for short distances; the public infrastructure capable of accommodating parallel
transmissions is limited.
2) Serial Transmission Each bit is transmitted one at a time (single file). A serial port is an outlet
designed for cable that transmits one bit at a time.
3) Circuit Switching involves a dedicated channel for the duration of the transmission. The sender
signals that it will send a message. The receiver acknowledges the signal. The sender then sends
the entire message. Voice and data may use the same line with no special data protocols. The two
communicating devices must be compatible.
4) Packet Switching divides a message into packets which may be transmitted separately through
different paths. Transmission Control Protocol / Internet Protocol (TCP/IP) is a set of packet-
switching protocols for the Internet.
FILES
i. File organization
1) Records table
2) Fields column
3) Characters cell
ii. Data file types
Master Files analogous to ledger (balance) file, e.g. B/S
Transaction / Activity Files analogous to journals e.g. I/S
History / Archive Files old data
Reference Files contain information needed by other files or for processing, e.g. chart of
accounts, price list, & customer list
Suspense Files files awaiting further processing
41

iii. Data File Access Methods

Sequential / Serial access
Direct/Random access (RAM) Index is the key
DATABASE
i. Organization
1) Hierarchical DBMSs
Tree and branches approach
A parent record may have many child records, but a child record has only one parent
record
Ranking the relationship, influenced by anticipated user queries
System may end up limiting user access
2) Network DBMSs
Superior to the hierarchical method
Allows multiple access points to each record
User must know the databases physical structure
3) Relational DBMSs
Superior to the network method
Use tables
Data from different tables can be combined to create new relationships
Drawbacks: duplication, require more computational power
4) Object-Oriented DBMSs
Superior to relational database
Contain instructions in addition to data
Can be used to do audio and video applications
Drawback: require considerable computation power
ii. Data query commands

1) QBE (Query by example)
Fill in the blanks
Popular on many if not most internet web sites
Use key words
Disadvantage: result may not be reliable
2) SQL (Structured Query Language)
Used by programmers, require great precision in the replies to their queries
Drawback: require learning the structure
iii. Summary of DBMS

Advantages Disadvantages
Redundancy: is eliminated or reduced Cost: A database administrator is usually required
Easy to maintain and make changes Reliance: when the database id sown, the entire
system is down
Storage cost : b/c of redundancy reduction
Data integrity: is improved b/c of reduced
keypunching
Data is maintained independently of the application
programs, making it available for more purposes
42
SYSTEM DEVELOPMENT
i. System analysis (Including Feasibility study)
Determine user needs, organization objective
Afeasibilitystudydetermineswhetheraproposedsystemispracticablefromtechnical,
operational,andeconomicalstandpoints.
ii. System design

1) Data design: what data needs to be captured
2) Process design: how the data will be processed
3) User interface design: how the users will be able to input the data and retrieve output
9 Software and hardware are identified
9 A recommendation is made
iii. Implementation
9 Testing & Training
9 Debugging
9 Convert to new system
iv. Maintenance
9 Post-implementation review
9 Monitoring
9 Evaluating
9 Modifying
v. Transaction process modes

1) Batch
9 Least expensive
9 The master file is current only right after the batch is run
2) Online (not really real time, can still be updated daily) & Online Real-Time (OLRT)
9 e.g. online purchase information
9 online real-time requires an appropriate input device
3) Distributed
9 Processing task is divided among multiple computers
9 Used for complex processing
vi. System Documentation

1) Flowcharts
2) DFD (Data flow diagrams)
9 Flowcharts present the physical & logical characteristics of a system; DFD focus on the
logical characteristics
9 Flowcharts present more detail, but need to be updated when system hardware changes;
DFD dont
9 DFD is easier to understand
DSS (Decision support system, a.k.a. expert system) is usually in a form of interactive system.
EIS (Executive information system) provide w/ immediate access to info, no decision provided.
43

BUSINESS INFORMATION SYSTEM

i. Benefits
Consistently process large volumes of data
Improved timeliness of reporting
Facilitates analysis
Reduced control risks
ii. Disadvantages
Perpetuation of processing errors: if there is an error in a program, the IT system will
likely not recognize it
Control circumvention by persons with access to the system is difficult to detect
Programs eventually become outdated and it is costly to update programs
Unintentional data loss/destruction occurs more often and intentional unauthorized data
loss/destruction can be perpetrated and concealed more easily than in a manual system
iii. Management reporting
Usually as exception reports
Ad hoc reports are typically one-time reports in response to a query w/o programmer
CONTROL
i. Internal control components (CRIME)
Control Activities policies and procedures
Risk Assessment
Information and Communications
Monitoring
Control Environment managements attitude
ii. Control activities

Preventive (least expensive)
Detective (Appraisal)
Corrective (Internal & External Failure)
iii. Segregation of duty (ARC)

Authorization
Record
Custody
44

Never combine
9 Computeroperatorsvs.computerprogrammer
9 Securityadministratorsvs.computeroperatorsandcomputerprogrammers
iv. Application controls

Input control
1) Event-processing rules assure that data is processed reliably
E.g. harsh totals, record counts, financial totals
2) Data entry verification
Limit and reasonableness test, control totals
3) Edit checks
Valid field/character test, sequence check, missing data test, check digit
Process controls (file control)
Documentation control
1) Operations ~
2) Problem definition ~
3) Systems ~
4) Operator ~
5) User ~
6) Program (application) ~
CONTINUITY
1) Mirror site
2) Clustered sites multiple sites are used to process data
If one of the sites goes down, the other sites can pick up the load
There is limited redundancy
3) Vaulting/Shadowing Replicating
Off-site electronic vault, e.g. bank, stock, simultaneously data transfer
4) Hot site
5) Cold site
45

EDI
1) Uniform standards worldwide - mapping
2) Usually in batches
3) Through Internet or VAN (value added network)
4) Intended to improve accuracy and timeliness of information sharing
5) Compresses the business cycle
6) Unsafe / personal data vulnerable
POINTS
Multiprogramming involves the operating system (OS) processing switching from programs.
Ideally, no interruption occurs that is discernable to the user, so multiple programs appear to run
simultaneously.
Multiprocessing involves the OS using multiple CPUs to run multiple programs simultaneously.
Heuristic is used to describe a computer program that can modify itself in response to the user,
for example, a spell check program that allows the user to add words or voice recognition software
that adapts to an individual users speech.
A multiplexer (or multiplexor) is a device for communications that converts several low-speed
transmissions into one high-speed transmission and back again.
A concentrator combines multiple communication channels into one.
Job control language (JCL) is a command language that launches applications, specifying
priorities, program sizes, running sequences, databases used, and files used.
A network firewall protects the network as a whole.
An application firewall, providing additional defenses to each application, resulting in incremental
cost/installation and authentication
Client/server applications operate on a three-tiered architecture:
1) Desktop client, 2) Application, 3) Database
A database administrator ordinarily is responsible for 1) Assigning passwords for database access
2) Database design 3) Database operation
Accounting Information system is a subsystem of Business/Management Information System
Data mining involves distilling previously unknown relationships from information in an existing
database. Pattern recognition is the key.
Encryption performed by a physically secure hardware device is more secure than encryption
performed by software.
The CPA WebTrust symbol on a web site indicates that the sponsering organization meets AICPA
business practice disclosures, transaction integrity, and information protection criteria.
EDIFACT is an international EDI format
A private-key encryption system uses a key that is intended to be kept secret and known only
by the sender and intended recipient of encrypted messages. The sender encrypts messages with
the same key that the recipient uses to decrypt messages.
A parity check is an extra bit attached to the end of a string of bits to detect errors resulting from
electronic interference when transmitting the string.
Check Digit (Self-Checking Digit) Digit (determined according to a prespecified mathematical
routine) that is added to the end of a piece of numeric data to permit the numeric data to be
checked for accuracy during input, processing, or output.
For example, a customer account number may be 1234. A check digit could be formed by
adding the first and third digits and using the sum. Since the sum of the two digits is 4 (i.e., 1 +
3), the check digit is 4. It is added to the end of the number that is assigned to the customer.
Utility programs are used to perform tasks such as copying, sorting, merging, and printing. This
type of software is usually easily accessible and can lead to unauthorized changes if not
properly controlled.
46

The most likely output from an online sales order edit checks processing system is a file of all
rejected sales transactions.
Abandonment ratios are based on the number of visitors who start, but dont complete,
transactions. Information on the point at which visitors abandon their selections provides feedback
to the web site sponsor.
Limit (or reasonableness) checks generally are not adapted to specific situations in personal
computer systems since most small system software is purchased off the shelf.
A time-sharing center has a computer remotely accessed by a number of different users, who
are unaware of each other.
An emulator is a device that allows one system to imitate another; the first system uses the same
data and programs to obtain the same results as a second system.
Echo Check CPU sends a signal to activate an input or output device in a certain manner. The
device then sends a signal back to verify activation. The CPU then compares the signals.
Access time is the time that it takes for data to be retrieved from memory from the time that the
control unit calls it.
Normalization is the process of separating data into logical tables.
Test deck (test data) use auditor data on client computer (test invalid conditions)
Parallel simulation use client data on auditors computer
Integrated test facility test data is commingled with live data
47

BEC CPA Notes Chapter 48 Partnership Summary

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ii. Partnership vs. Joint venture

iii. Partnership vs. Sole proprietor

i. Determining partnership existence, the following does not consider as partners

ii. Statute of Fraud

iii. New partners

iv. Retiring partner

Assign partnership property to others

RELATIONSHIPS AMONG PARTNERS

ii. Mandatory rule - Agreementcannot:

iii. Actions between partner and partnership

RELATIONSHIP WITH THIRD PERSONS

i. Authority to bind partnership

ii. Partnership Liability

iii. Notice to Third Party

DISSOCIATION (partner change)/ DISSOLUTION (business wind up)

ii. Power & Responsibility of Dissociation

iii. Death of Partner

iv. Non-Causes of Dissolution

v. After Dissolution - Wind up

vi. Distribution Priority

i. The Limited Partnership Certificate must include

Do not include: The limited partners names and business addresses

Voting Strength Profit / Loss Distribution

GP All partner equal Equal

LLP All general partner equal Equal

LP All general partner equal Based on capital contribution

LLC Based on Capital contribution based on capital contribution

SUMMARY & POINTS

ii. Officers have individual power

The contracts are void

iv. Corporate Veil

Bylaws are the rules for running the entity.

ii. Defects in Formation

Noncorporation: fails to obtain any status mentioned above

FEDERAL INCOME TAX RAMIFICATIONS

ii. S Corporation [Not Taxable at Entity Level]

Chapter 50 Economic Theory

SUMMARY & POINTS

DEMAND & SUPPLY

i. Factors Affecting Demand

Complements: Price of A, Demand of B as demand of A

ii. Factors Affecting Supply

Law of Supply: Price, Supply

Coefficient > 1: Elastic

i. Price Elasticity of Demand

Simple Method E (d) = (D2 D1) / D1

Perfectly Unit Elastic

Elastic goods Inelastic

ii. Price Elasticity of Supply

iii. Cross-Elasticity of Demand

iv. Income-Elasticity of Demand

9 If > 0, normal goods

9 Marginal utility: additional utility obtained from one more unit

MC = ATC (Avg. Total Cost) whenever ATC is at min or max.

iii. Monopolistic Competition Cell phone service

9 Some price controls

iv. Oligopoly - Airplane manufacturing / airline service

v. Monopsony - One buyer exists for all sellers

vi. Five Factors affect the competitive environment (Michael Porter)

ii. *NDP (Net Domestic Product) = GDP Depreciation

iii. *GNP (Gross National Product)