CMA Final Paper 13 flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Relevant cost

A future cost that differs between decision alternatives. Sunk costs and allocated common fixed costs fail the test and must be excluded from incremental analysis.

Break-even point in units

Total fixed costs divided by contribution margin per unit. It shows the sales volume at which total contribution exactly covers fixed costs and profit is zero.

Contribution margin ratio

Contribution margin divided by sales revenue. It expresses the proportion of each revenue unit available to cover fixed costs and generate profit.

Opportunity cost in special orders

Contribution forgone on regular sales displaced by a special order. It is added to incremental costs whenever the order consumes scarce capacity.

Target costing

Allowable cost equals target selling price minus desired profit margin. Design and value engineering must close any gap between current cost and allowable cost.

Weighted average cost of capital

The blended required return on a firm's securities, weighting equity cost and after-tax debt cost by market value proportions of the capital structure.

Capital asset pricing model

Required equity return equals the risk-free rate plus beta multiplied by the market risk premium. Beta measures sensitivity of returns to market movements.

Free cash flow to firm

EBIT after tax plus depreciation, less capital expenditure and increases in net working capital. It is discounted at WACC to value the enterprise.

Gordon growth terminal value

Next year's free cash flow divided by WACC minus growth. The perpetual growth rate must be below long-run nominal economic growth.

Economic value added

NOPAT minus WACC multiplied by invested capital. A positive result means operating returns exceed the cost of the capital employed.

Hamada equation

Levered beta equals unlevered beta multiplied by one plus (1 minus tax rate) times the debt-to-equity ratio. It adjusts beta for financial leverage.

Segregation of duties

Splitting authorization, custody of assets, record keeping, and reconciliation among different employees so no single person controls a transaction end to end.

Residual risk

The exposure remaining after management has applied controls and risk responses. It is compared with the entity's risk appetite to decide further action.

Fraud triangle

Three conditions associated with fraud: pressure or incentive, opportunity, and rationalization. Controls mainly reduce opportunity through segregation and monitoring.

Three lines model

Management owns and manages risk in the first line, risk and compliance functions oversee in the second, and internal audit gives independent assurance in the third.

Recovery time objective

The maximum acceptable time to restore a business process after disruption. It drives backup, redundancy, and continuity investment decisions.

Preventive versus detective controls

Preventive controls stop errors before they occur, such as approvals and access restrictions. Detective controls identify errors afterwards, such as reconciliations and exception reports.

COSO internal control components

Control environment, risk assessment, control activities, information and communication, and monitoring activities. The control environment sets the tone at the top.

Conflict of interest

A situation where personal interest could improperly influence professional judgment. Disclosure and removal from the decision are the standard safeguards.

Agency problem

Divergence between principal and agent interests, where managers may pursue perquisites or empire building. Monitoring and incentive alignment reduce the divergence.

Auditor independence

Freedom from relationships or interests that could bias audit judgment. Financial interests, employment ties, and long association impair it and require safeguards.

Whistleblowing channel

A confidential reporting mechanism for misconduct, paired with anti-retaliation protection. It supports ethical culture and early detection of control failures.

Board independence

The extent to which directors are free of material relationships with the company. Independent directors and audit committees improve objective oversight of management.

Return on investment

Operating income divided by invested capital. It measures divisional profitability but can discourage projects earning above the cost of capital yet below current ROI.

Residual income

Operating income minus the required return multiplied by invested capital. It charges divisions for capital used and better supports goal congruence than ROI.

Balanced Scorecard perspectives

Financial, customer, internal process, and learning and growth. Each perspective links objectives, measures, targets, and initiatives to strategy.

Transfer pricing

The price charged between divisions for internal goods or services. Market-based prices preserve autonomy; cost-based prices are used when no market exists.

Flexible budget variance

The difference between actual results and the flexible budget restated for actual volume. It isolates price and efficiency effects from volume effects.

Goal congruence

Alignment of divisional manager incentives with overall corporate objectives. Poorly designed measures reward local optimization and create dysfunctional behavior.

Predictive analytics

Techniques that forecast future outcomes from historical patterns, such as regression or machine learning. Accuracy depends heavily on data quality and feature selection.

IT general controls

Controls over access management, program changes, and IT operations that support reliable application processing. Weak general controls undermine reliance on automated controls.

Cloud service models

IaaS provides infrastructure, PaaS provides development platforms, and SaaS provides finished applications. Responsibility for controls shifts toward the provider as the model moves up.

Data governance

Rules assigning ownership, stewardship, quality standards, and lifecycle management for data. It supports compliance with privacy laws and reliable analytics.