BEC Study Guide

10/10/23, 2:31 PM BEC Study Guide
BEC Study Guide
Study Guide – BEC
B1 – Corporate Governance and Financial Risk Management

M1: Internal Control Frameworks
- Committee of Sponsoring Organizations (COSO)
o Independent private sector initiative
o Established in mid-80s to study factors that lead to fraudulent financial reporting
o Sponsoring organizations:
▪ American Accounting Association (AAA)
▪ American Institute of Certified Public Accountants (AICPA)
▪ Financial Executives Institute (FEI)
▪ Institute of Internal Auditors (IIA)
▪ Institute of Management Accountants (IMA)
- Framework provides confidence to external stakeholders that the organization has a system of internal control in
place that’s conducive to achieving its objectives
- Internal control objectives (ORC)
o Operating: effectiveness/efficiency of operations, financial/operational performance goals, safeguarding assets
o Reporting: reliability, timeliness, & transparency of financial/non-financial reporting
o Compliance: adhering to all applicable laws/regulations
- COSO cube -> 3 layers: objectives (ORC), internal control components (CRIME), and organizational structure (EDOF)
- Organizational structure components (“Engineers Destroyed Obsessed Feminists”)

○ E - Entity level
○ D - Division
○ O - Operating unit
○ F - Function
- Components of internal control (CRIME)

o Control Environment (EBOCA): processes that provide foundation for entity to establish internal controls
■ Commitment to Ethics and integrity
● Tone at the top, standards of conduct, adherence to those standards, and addressing deviations
■ Board independence & oversight
● Establishing oversight responsibilities, providing oversight for system of internal control
■ Organizational structure
● Establishing reporting lines, defining & assigning responsibilities appropriate to organization’s objectives
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■ Commitment to Competence
● Hire/develop/retain competent employees, evaluating competence & addressing shortcomings
BEC Study Guidefinancial reporting competence
○ Includes
■ Accountability
● Hold individuals accountable, establish performance measures, incentives & rewards
o Risk Assessment (SAFR) “Make entity SAFR”: identification/analysis of risks to the achievements of its objectives
■ Specify objectives
● Identify objectives that reflect mgmt. choices while complying w/ accounting standards, laws & regulatio
■ Identify and Assess changes
● Assess changes in external environment, business model, and leadership
■ Consider potential for Fraud
● Assess incentives and pressures, opportunities and attitudes, and rationalizations
■ Identify and analyze Risks
● Analyze internal/external factors, involve appropriate levels of mgmt, determine how to respond
o Information and Communication (OIE) “OIE that’s a lot of information”: support the identification, capture &
exchange of info in a timely and useful manner
■ Obtain and use information
● Generates/uses relevant info to support internal control; ID and define info requirements within IC
component level
■ Internally communicate information
● Internally communicate info, including relevant objectives & responsibilities; flow of information up,
down and across organization
■ Communicate with External parties
● Management should have open, two-way external communication channels
o Monitoring Activities (SO D) “Monitor SOD or grass won’t grow”: assess IC performance over time and take
necessary corrective actions
■ Ongoing and/or Separate evaluations
● Select, develop & perform ongoing/separate evaluations to make sure components of IC are
present & functioning; establish baseline understandings
■ Communication of Deficiencies
● Communicate deficiencies in timely manner to responsible parties, monitor corrective actions
o Existing Control Activities (CAT P) “Cat peed on existing rug”: e.g, segregation of duties
■ Select and develop Control Activities
● Integrate w/ risk assessment when selecting activities and considering entity-specific factors
■ Select and develop Technology controls
● Determine dependencies between use of technology in business processes and establishing relevant
technology infrastructure control activities
■ Deployment of Policies and Procedures
● Establish responsibility/accountability for executing policies/procedures & taking corrective action
-
- COSO “major deficiency”: material internal control deficiency (or combination of deficiencies) that significantly
reduces the likelihood that organization can achieve its objectives
- Internal control limitations:
o Human error/failure
o Biased judgment
o Issues relating to suitability of entity’s objectives
o External events
o Circumvention of controls through collusion
o Management override
- COSO Framework Document
o Overall assessment
o Component evaluation
o Principal evaluation
o Summary of internal control deficiencies
- **COSO sometimes referred to as Treadway Commission
- Notes from MCQs
o BOD acts as a fiduciary to the corporation (have to act in its best interests)
o Controls have to be both present and functioning
o “Strategic” = enterprise risk management, not internal controls
M2: Enterprise Risk Management Framework

- COSO issued Enterprise Risk Management (ERM) Integrated Framework in 2004
- Developed to assist organizations in developing a comprehensive response to risk management
- Risk
o The possibility that events will occur and affect the achievement of strategy & business objectives
- Value
oBEC Study Guide
Creation
■ Benefits exceed cost of resources used (people, financial capital, technology, process, brand)
o Preservation
■ Ongoing operations efficiently & effectively sustain created benefits
o Erosion
■ Faulty strategy & inefficient/ineffective operations cause value to decline
o Realization
■ Benefits created by organization are received by shareholders in monetary or nonmonetary form
- Mission
o Core purpose of entity, why it exists and what it hopes to accomplish
- Vision
o Aspirations of entity and what it hopes to achieve over time
- Core values
o Organization’s beliefs/ideals about what is good/bad, acceptable/unacceptable; influence organization’s behavior
- Enterprise risk management
o Culture, capabilities, and practices, integrated with strategy-setting and performance, that organizations rely
on to manage risk in creating, preserving, and realizing value
■ Culture → collective thinking of people within an organization related to core values
■ Capabilities → competitive advantage produces value for an entity
■ Practices → organizational practice continually applied to entire scope of business activities
■ Integration with strategy-setting & performance → strategy aligns with mission and vision, business
objectives flow from strategy, and business objectives drive activities of all business units/functions
● Mission & vision correlate with strategy and business objectives
- Risk capacity
o The maximum amount of risk entity is able to absorb in pursuit of strategy & business objectives
- Risk profile
o Composite view of the risk assumed at a particular level of the entity or aspect of the business;
positions management to consider types, severity, and interdependencies of risk & how they affect performance
- Portfolio view
o Composite view of risk the entity as a whole faces which positions management and board to consider types,
severity, and interdependencies of risk & how they may affect performance
-
- Components of ERM (GOPRO)
o Governance and culture (DOVES): forms base for all other ERM components, sets tone at the top
o Defines Desired culture
● Culture influences how organization identifies risk, what type of risk it accepts, and how it manages risk
o Exercises board Oversight
● Oversee entity strategy and carries out governance responsibilities to support management in achieving
objectives; maintain active & accountable role that’s independent & conscious of potential bias
o Demonstrated commitment to core Values
● Ensure support from top of organization so risk-inspired decisions are consistent with core values
o Attracts, develop & retains capable individuals (Employees)
● Starts with the board & its selection of executive leadership; HR assists mgmt. in assembling competent
BEC Study Guideconsideration of knowledge/experience and cost/benefit of different skill levels
people through
o Establishes operating Structure
● How the entity organizes & carries out day-to-day operations & contributes to alignment of risk
management practices with core values
o Strategy and Objective-setting (SOAR): consider internal/external factors and their effect on risk
o Evaluates alternative Strategies
● Evaluate strategy from 2 perspectives: possibility that strategy doesn’t align with
mission/vision/values, and the implications from the chosen strategy (risks & opportunities)
o Formulates business Objectives
● Develop steps to achieve strategy; should be specific, measurable/observable, attainable, and
relevant; set targets to monitor performance; Tolerance = Acceptable Variance in Performance
o Analyzes business context
● Consideration of potential effects of business context on risk profile
o Defines Risk appetite
● Define risk appetite in the context of creating/preserving/realizing value; can be qualitative or quantitat
o Performance (VAPIR): identify/assess risks that affect entity’s ability to achieve objectives
o Develop portfolio View
● Allows management/board to consider type, severity, & interdependencies of risks
o Assesses severity of risk
● Resources & capabilities are deployed to keep risk within entity’s risk appetite; severity assessed at
multiple levels (division, function, operating unit); severity relates to impact & likelihood
● Target residual risk = amount of risk entity prefers to assume knowing mgmt. will implement actions
● Actual residual risk = risk remaining after mgmt. has taken action
o Prioritizes risk
● Risks that result in entity approaching risk appetite are given higher priority
o Identifies risks (events)
● Identify new/emerging risks and reevaluated current risks
o Implements risk Responses
● Risk responses (“ARTS”)
o A - Avoid (remove risk – e.g., leave line of business)
o R - Reduce (mitigate)
o T - Transfer (reduce severity – e.g., insurance)
o S - Self-insure (accept) (no action taken)
o Pursue (take action to accept increased risk)
o Review and revision (SIR): determine how well ERM practices have increased value
o Assesses Substantial change
● Internal/external environmental changes related to business context, and changes in culture
o Pursues Improvement in ERM
● Improve efficiency and usefulness
o Reviews risk & performance
● Review entity performance and considers risk, including capabilities and practices of org
o Information, communication and reporting (Ongoing) (TIP): obtain info & share throughout entity
o Leverages information & Technology
● Use information & technology systems to support organization with relevant info to be more agile in
decision making & provide competitive advantage
o Communicates risk Information
● Communicate with internal/external stakeholders & board to support ERM
o Reports on risk, culture, and Performance
● Report at multiple levels across the entity; can be quantitative or qualitative and made to a wide
range of users (management, risk owners, assurance providers, external stakeholders, etc.)
M3: Sarbanes-Oxley Act of 2002

- Title III (Corporate Responsibility)
o Public companies must have an audit committee
o Directly responsible for appointment, compensation, and oversight of auditor – resolves disputes
o Members must be on board and be otherwise independent (no compensation for consulting & must not
have ability to influence financial decisions)
o Corporate responsibility (CEO & CFO)
o Sign annual/quarterly reports with assertions that they’ve reviewed, FS don’t contain untrue statements
or omit material info, assertions on effectiveness of internal controls, must disclose to auditor & audit
committee all significant deficiencies / material weaknesses in internal control, any fraud involving
management or other key roles, and any significant changes to internal controls
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o Internal Guide
controls must be evaluated within 90 days of report
- Title IV (Enhanced Financial Disclosures)
o Disclosures in periodic reports
o All material correcting AJEs should be reflected in FS, off-balance sheet transactions (operating leases,
contingent obligating relationships w/ unconsolidated subsidiaries), conformance of pro forma FS (no untrue
or omitted info, reconciled w/ GAAP FS), use of special purpose entities
o Disclosures of transactions with management. & principal stockholders
o Direct/indirect ownership of more than 10% - filed at time of registration, when person achieves 10%
ownership, and if there’s been change in ownership
o Management assessment of internal controls
o Code of ethics for senior officers – whether issuer has adopted one; if not, must give reason why
o Disclosure of audit committee financial expert or reason why they don’t have one
o Must have understanding of GAAP, experience in prep/audit of FS for comparable issuers, experience
with internal controls, can qualify through education or experience as CPA, CFO/controller/officer etc.
- Title VIII (Corporate & Criminal Fraud Accountability)
o Penalties for altering docs → fined or imprisoned not more than 20 years
o Failure to retain audit/review WPs for 7 years → fine or imprisoned not more than 10 years
o Whistle-blower protection → file complaint w/ Secretary of Labor, may receive compensatory damages
o Penalty for securities fraud → fined or imprisoned not more than 25 years
- Title IX (White-Collar Crime Penalty Enhancements)
o Attempt and conspiracy (same penalty as those who commit)
o Failure of officers to certify financial reports
o Reports filed w/ SEC must be accompanied by: statement that report fully complies with SEC Act of 1934, info
fairly represents, and must be signed by CEO and CFO
o If certify statement knowing it doesn’t comply → fined up to $1M or imprisoned up to 10 years
o If willfully certifies → fined up to $5M or imprisoned up to 20 years
- Title IX (Corporate Fraud Accountability)
o Tampering with documents to impede official proceeding → fined or imprisoned 20 years
o SEC has authority to require issuer to escrow potential penalty payments for 45 days
o SEC can prohibit persons from serving as officers/directors in cease-and-desist proceeding
o Retaliation against informants → fined or imprisoned up to 10 years
- Notes from MCQs
o Techniques to assess risk include:
o Benchmark data from comparable organizations
o Objective statistical data with estimated probabilities
o Subjective assumptions which take into account impact without probabilities
M4: Business Processes

- Segregation of duties - these duties should be kept separate (“ARC”)
o A - Authorization
o R - Record keeping
o C - Custody of assets
- Input edit checks - also called “constraints”
o Definition
o Preventive controls that assist in protecting the integrity of information and only allowing complete
transactions to be submitted for processing
o Common input edit check controls
o Consistent forms
● Use of consistent forms so the information gathered for each specific event is uniform
o Completeness check
● Verification that all required data has been input
o Reasonableness test
● Validates the logic of input values where fields are dependent or relevant to each other
o Field check
● Designates the character types that are allowed in the field (text, numeric, or alphanumeric)
o Size check
● Limits the amount of characters input into a field
o Limit or range check
● Limit checks establish either upper or lower limits for input data
● Range checks establish both upper and lower limits
o Sign check
● Designates if a numeric value can be positive or negative
o Referential integrity (validity) check
● Creates a framework so values in data entered into a foreign key field must first be entered in a
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corresponding table with the primary key
o Primary key = unique ID in a database
o A new customer must be given a unique primary key first in the customer database before
information can be put into the sales database. That’s what this check does
o Closed-loop verification
● Retrieves and displays information related to the input to verify accuracy
- Processing controls
o Definition
o Protect an organization against processed data from being incomplete or inaccurate
o Common processing controls
o Data matching
● Matching multiple items (PO, RR, vendor invoice) before processes are executed
o Input validation
● If transactions or activities are processed in batches, it is important to determine if all items were
processed correctly through the use of validation techniques such as utilizing record counts and
reconciling input totals to batch totals
o Sequence check
● The process of having prenumbered documents and verifying that no documents or transactions
are missing
o Cross-footing
● Testing the sum of a column of row totals to the sum of a row of column totals
o Standing data controls
o Definition
● Master files or general data files that contain long-term data that does not change often
o Standing data preventive controls
● Access and authorization control
o Standing data should be stored in a safe location with prescribed access rights to authorized
individuals
● Read-only rights
o Standing data should have read-only rights for the majority of users
o Insert, update, and deletion rights should be designated to key personnel whose activities are
segregated from users of the data
● Change control
o Whenever changes are made to standing data, they should be reviewed and approved by
appropriate personnel prior to implementation
● Regular backups
o Standing data should be backed up on a periodic basis
● Standing data detective controls
o Periodic reconciliation of changes to the data
o Verifies that any changes made to the data follow the established policies and procedure
o Review of employee access, authorization, and rights
o If changes occur
o Spreadsheet controls
● Preventive spreadsheet controls
o Access and authorization control
o Spreadsheets should be available only to those who need to utilize them
o Locked cells
o Cells that contain complex or required formulas should be locked so only spreadsheet
designers can modify them
o Data validation
o Establish validation requirements on input cells to allow certain types of input, or
where possible, utilize drop-down options
o Change control
o Whenever changes are made to the spreadsheet, they should be tracked, reviewed,
and approved by appropriate personnel prior to implementation
o Regular backups
o Spreadsheets and their contents should have regular backup procedures
o Detective spreadsheet controls
o Periodic reconciliation of changes to the spreadsheet structure
o Review of employee access, authorization, and rights
o Supervisory and monitoring controls
● Definition
o Allow for review, monitoring, and oversight of business process activities by management
● Preventive supervisory and monitoring controls
BEC StudyoGuide Organizational charts
o Describes the reporting structure of employees to management to establish a clear
chain of command
o Hiring guidelines
o Strict hiring guidelines so that only competent and capable employees are hired to
perform key business processes
o Supervision
o Verify that the necessary business functions have proper supervision
o Formal approval controls
o Major business processes should require proper authorization by management before
execution
● Detective supervisory and monitoring controls
o Process responsibility reviews
o Policies and procedures over reviewing various business process activities
o Review of key performance indicators
o Management should establish key performance indicators as measurements of
process performance and review them periodically
o Budgets and forecasts
o Comparing budgets and forecasts to actual results can assist in detecting anomalies in
business processes
o Performance reviews
o Formal performance reviews to determine whether employees are performing their
overall job functions as prescribed by policies and procedures and are appropriately
compensated
o Mandatory job rotation and/or vacations
o Require that employees take vacations and, during that time, have other employees perf
absent employee’s job functions to determine if there are any discrepancies in results
o Audits
o Periodic audits of business process activities
o Business resiliency controls
o Key requirements on business continuity, disaster recovery, and data backup requiremen
o Reconciliations
● Definition
o Detective controls that review changes in account balances due to business process activities or
the difference in ledger accounts and value provided by third parties, such as banks
● Example
o Bank reconciliation
o Verification controls
● Definition
o Preventive controls that utilize some methodology to verify the identity of authorized users
● Examples
o Assigned usernames, passwords, PINs, physical tokens such as key cards or log-in devices, biomet
- Process Documentation Techniques
o Process narratives
o Written documents that tell the story of the process
o Data flow diagrams
o Document the logical flow of data through a process
o Focus on where data comes from, how it is transformed, and its final destination
o Components:
● Data sources
● Data flows
● Processes
● Journals
● Data destinations
o Flowcharts
o Visual representations of how documents and information flow through a process
o Categories of symbols focus on the input of data, data processing, and data output
o System interface diagrams
o Demonstrate how users and functions, both internal and external to an organization, interface with the
organization's systems
- Benefits of Process Documentation
o Goal of process documentation is to communicate how the data processing cycle performs
o Entails providing written or visual representation of data input, processing, storage, and output
o Identify certain risks or threats to the data processing cycle
o Flowcharts can identify risk in the following ways:
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● Data input steps → input edit checks
● Manual processes → supervisory controls or reconciliation
● Computer processes → process integrity controls and logical and physical access controls
● Creation of documents, key decisions, or approvals need to be analyzed to determine if the designed
controls are functioning properly
● Descriptions of activities by department → segregation of duties
● Diagrams may indicate potential inefficiencies, waste, errors, or risks
- Notes from MCQs

o Pick ticket is a part of the revenue process
M5: Financial Risk Management: Part 1

- Interest rate risk (yield risk)
o Fluctuations in the value of the instrument in response to changes in interest rates
o Fixed coupon / (1 + r)
● As (1 + r) goes up, value goes down As interest rate increases, value of fixed income goes down
- 2 broad categories of risk (“DUNS”)
o D - Diversifiable risk
o U - Unsystematic risk (non-market/firm-specific)
o N - Non-diversifiable risk
o S - Systematic risk (market)
● Market risk = systematic/non-diversifiable risk
o Risk inherent in operating within the economy
● Non-market risk = firm-specific/diversifiable risk
o Random causes that can be eliminated through diversification
- Credit risk
o As credit rating goes down, credit risk goes up
o As credit risk goes up, cost of borrowing goes up
- Default risk
o Affects lenders - possible that debtors may not repay the principal or interest due on their indebtedness on a
timely manner
- Liquidity risk
o Lender/investor wants to sell security, but can’t do so in timely manner or when material price concessions
have to be made to do so
- Price risk
o Exposure investors have to decline in value of their individual securities/portfolios
o Is diversifiable
- Interest rates
o Stated interest rate (SAR) → rate of interest charged before any adjustment for compounding or market factors
o When they say nothing, it’s an annual rate
o Effective interest rate → actual finance charge after reducing proceeds for charges/fees
o Periodic rate
● Could be annualized, but also could be semi, quarterly, monthly
o Formula
● Interest paid per period / Net proceeds of loan
o [(Principal x SAR) / # periods] / Net proceeds of loan
o Annual percentage rate (APR)
o Non-compounded
o Calculate
● Effective periodic interest rate x # of periods in a year (non-compounded)
o Effective APR → stated interest rate adjusted for # of compounding periods per year
o Calculate
● (1 + effective periodic rate)^# of periods - 1
o Simple interest → Total interest over life of loan
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o Interest Guide
paid only on the original amount of principal without regard to compounding
o Calculate
● Principal x SAR x # years
o Compound interest → interest earnings based on original principal + any unpaid interest
o Interest based on the original principal plus any unpaid interest earnings or expense
o Calculate
● Principal x (1 + effective periodic interest)^total # of periods
o Required rate of return
o Lender’s required return = borrower’s cost of borrowing
o Calculation steps
● Step 1 = Nominal risk-free rate
o Real risk-free rate + Expected inflation rate
● Step 2 = Required return
o Nominal risk-free rate + Risk premiums
o Risk premiums
● Maturity risk premium
o Risk increases with the term to maturity
● Purchasing power risk or Inflation premium
o Used to calculate nominal risk-free rate
● Liquidity risk premium
o Risk that an investment security cannot be sold on a short notice without making significant
price concessions
● Default risk premium
o Risk that the issuer of the security will fail to pay interest and/or principal due on a timely basis
o Derivatives
o A financial contract that derives its value from the performance of another asset or financial contract
o Can provide gains to the investor when the market declines
● Short selling is a strategy that provides returns when the market declines
o Diversification → assets uncorrelated or inversely correlated
- Notes from MCQs
o Short-term financing → increased interest rate risk
o Long-term financing → decreased credit risk
M6: Financial Risk Management: Part 2
-
- Domestic currency appreciation: domestic currency appreciates and becomes more expensive in terms of foreign
currency
o Outflows decline as exports become more expensive = gain
o Inflows increase as imports become cheaper = loss
- Domestic currency depreciation: domestic currency depreciates and becomes less expensive in terms of foreign curre
o Outflows rise as exports become cheaper = loss
o Inflows decrease as imports become more expensive = gain
- Translation exposure
o Risk that assets, liabilities, equity or income of a consolidated organization that includes foreign subsidiaries will
change as a result of changes in exchange rates
o Degree of foreign involvement
● Translation exposure increases as the proportion of foreign involvement by subsidiaries increases
o Locations of foreign investments
● The more stable the exchange rate, the lower the translation risk
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● The more volatile the exchange rate, the higher the translation risk
- Futures hedges
o Denominated in standard amounts
o Usually are used for smaller transactions
- Forward hedges
o Contracts between business & banks (customized, private over-the-counter)
o Normally larger transactions
- Money market hedge → use domestic currency to purchase foreign currency at current spot rates & invest them in
securities timed to mature at same time as related payable
o Step 1: Determine amount of payable
o Step 2: Determine amount of interest that can be earned prior to settling payable
o Step 3: Discount amount of payable to net investment required
o Step 4: Purchase amount of foreign currency = to net investment required and deposit in MM vehicle
o
- Currency option hedges
o Buy call option → cap on cost (import/AP)
o Use profit on the call to offset the loss on the payable
o Calculate
● Break-even point = Strike price + Premium on option
o Buy put option → floor on revenue (export/AR)
o Use profit on the put to offset loss on the receivable
o Calculate
● Break-even point = Strike price - Cost on option
- Mitigating long-term transactions
o Long-term forward contracts
o Currency swaps (swap borrowings)
o Two firms with coincidental needs for international currencies may agree to swap currencies
o Parallel loans
- Alternative hedging techniques
o Leading and Lagging
o Transactions between subsidiary/parent → related parties
● Leading → entity that is owed may bill in advance
● Lagging → wait until exchange rate is favorable before settling
o Cross-hedging
o Hedging one instrument’s risk with a different instrument by taking position in related derivatives contract
● Done when:
o There is no derivative contract for instrument being hedged, OR
o Contract exists but highly illiquid
- Certainty equivalent = point at which investor is indifferent to risk
- Notes from MCQs
o Freely fluctuating exchange rates automatically correct a lack of equilibrium in the balance of payments
o A “short” position in a derivatives contract is the correct position to take when a company has sold goods and
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payment Guide
is coming due in a foreign currency
B2 – Financial Management
M1: Capital Structure: Part 1
- Commercial paper
o Unsecured, short-term debt issued by a corporation
o Matures in 270 days or less (usually 30 days or less)
o Must be used to finance current assets
- Debenture
o Unsecured obligation, holder has status of general creditor in event of default
- Subordinated debenture
o Bond that’s unsecured & ranks behind senior creditors in liquidation
o Higher interest rates
- Junk bonds frequently used to raise capital for acquisitions & leveraged buyouts
- Leasing
o GR: Must record ROU Asset and Lease Liability on BS
o Operating lease → lease expense on IS represents interest & amortization of ROU asset
o Finance lease → interest expense & amortization expense accounted for separately
o Criteria for finance lease classification (“OWNES”)
● O - Ownership transfer at end of lease
● W - Written purchase option that lessee is reasonably certain to exercise
● N - NPV of all lease payments/guaranteed residual value = or substantially exceeds underlying asset’s FV
● E - Economic life of asset is primarily encompassed within lease term
● S - Specialized asset; no alternative use to lessor
o **If none of above are met OR lease is 12 months or less → operating lease
- Equity financing
o Advantage: Variable cost with no maturity risk, so credit worthiness increases
o Disadvantage: ROE goes down
- Debt vs. Equity
o
- Weighted-Average Cost of Capital
o If WACC < ROIC → positive NBV
o The optimal capital structure is the mix of financing instruments that produces the lowest WACC
o Firm value = FCFF / WACC
o Calculating WACC
o WACC is determined by weighting the cost of each specific type of capital by its proportion to the firm’s
total capital structure
o The % equity and % debt in the capital structure is calculated using the market
values of the outstanding debt and equity
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o
- Weighted Average Cost of Debt
o Lender’s required return dictates borrower’s cost of borrowing
o Step 1: Weighted average interest rate (pre-tax cost of debt) = Effective annual interest payments / Debt
outstanding
o Step 2: After-tax cost of debt = Pre-tax cost of debt (effective rate) x (1 - Tax rate)
- Cost of preferred stock
●
○ Net proceeds of preferred stock are proceeds net of flotation costs (issuance costs)
■
- Cost of Retained Earnings
o 3 common methods of computing the cost of retained earnings
o Capital asset pricing model (CAPM)
● Cost of retained earnings = Risk-free rate + [Beta x (Market return - Risk-free rate)]
BEC Study Guide o Beta coefficient is a numerical representation of the volatility (risk) of the stock relati
volatility of the overall market (% change in stock price / % change in market price)
▪ B = 1 → as risky
▪ B > 1 → riskier
▪ B < 1 → less risky
■
o Discounted cash flow (DCF)
o
o Bond yield plus risk premium (BYRP)
● Cost of retained earnings = Pre-tax cost of long-term debt + Market risk premium
o
o Notes from MCQs
● A capital investment whose rate of return exceeds the rate of return associated with the firm’s beta
factor will increase the value of the firm
● The overall cost of capital is the rate of return on assets that covers the costs associated with the
funds employed
● Commercial paper
o Generally does not have an active secondary market
o Market
o Provides a broad distribution for borrowing
o Accrues a benefit to the borrower because its name becomes more widely known
o Avoids the expense of maintaining a compensating balance with a commercial bank
● Floating-rate bonds are likely to maintain a constant market value because they automatically adjust the
return on a financial instrument to produce a constant market value for that instrument
● Market rate of interest on a 1-year T-bill = risk-free rate + inflation premium
● Market capitalization = FV shares x # shares outstanding
● If given basis points
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o Take basis points divided by 100 to get a %
o Take that % x (1 - tax rate) = net after-tax cost of debt
● Total value of equity using sector P/E = Net income × P/E multiple
M2: Capital Structure: Part 2

- Optimal cost of capital
o Ratio of debt to equity that produces the lowest WACC
- Application to capital budgeting
o Historic weighted-average cost of capital may not be appropriate for use as a discount rate for a new capital proje
unless the project carries the same risk as the corporation and results in identical leveraging characteristics
- Growth rate
o DPS / EPS = Payout
o 1 - Payout = Retention rate
o
o Retention also = RE / Net income
o Growth rate (g) = ROE x Retention
o ROA x Degree of financial leverage = ROE
o
● As debt goes up, risk assumed goes up, but ROE and g also go up
● As equity goes up, risk assumed goes down, but ROE and g also go down
- Profitability
o Return on sales = Income before interest income, interest expense, and taxes / Net sales
o Return on investment = Net income / Average invested capital
o Average invested capital = Assets - Operating liabilities
o Return on assets = Net income / Average total assets
o Return on equity = Net income / Average total equity
- Leverage and risk

o General rule
o As leverage goes up, risk goes up but expected returns go up
● Leverage is an amplifier of risk return
o Operating leverage
o Definition
● Degree to which company uses fixed operating costs rather than variable
o Implications
● High operating leverage → must produce sufficient sales revenue to cover high fixed costs
o % change in EBIT / % change in sales
● High operating leverage → greater risk but greater possible returns
● High operating leverage → may struggle to cover fixed costs when sales decline
o However, beyond the breakeven point, a company with higher fixed costs will retain a higher
percentage of additional revenues as operating income
o % change in sales x DOL = % change in EBIT
o Calculate
● ****Operating leverage = Fixed costs / Variable costs
● OR
● % change in EBIT / % change in sales
o % change in sales x DOL = % change in EBIT
o Financial leverage
o Definition
● Use of debt rather than equity
o Implications
● High financial leverage → Must produce sufficient EBIT to cover fixed interest costs
o However, once fixed interest costs are covered, additional EBIT will go straight to net income and
BEC Study Guideleverage → Relatively small change in EBIT will have a greater effect on profits and
● High financial
shareholder value
● High financial leverage → Interest costs are tax deductible, whereas dividend payments are not
o Calculate
● % change in EBT or EPS / % change in EBIT
o % change in EBIT x DFL = % change in earnings
o Value of a levered firm
o Definition
● A levered firm is a company that has debt in its capital structure
● An unlevered firm has only equity (and no debt) in its structure
o Calculate
●
- Impact of Capital Structure on Financial Ratios
o Total Debt Ratio
o Calculate
● Total liabilities / Total assets
o High ratio
● Risk and DFL go up, but ROE goes up
o Reward for assuming more risk
o Low ratio
● The greater the level of solvency and the greater the presumed ability to pay debts
o Debt-to-Equity Ratio
o Calculate
● Total liabilities / Total equity
o High ratio
● Risk goes up, but ROE goes up
o Low ratio
● Risk goes down, but ROE goes down
o Equity Multiplier
o Calculate
● Total assets / Total equity
o Interpretation
● A greater percentage of debt utilized by the firm results in more assets allocated to debt relative to
equity and a higher equity multiplier
o Times Interest Earned Ratio
o Calculate
● EBIT / Interest expense
o Interpretation
● Measures the ability of the company to pay its interest charges as they come due
● Measure of long-term solvency
BEC Study Guide
M3: Working Capital Metrics
- Working Capital
o Definition
o Managing cash so that a company can meet its short-term obligations
o Calculate
o Working capital = CA - CL
o Interpretation
o As WC goes up, risk goes down, but ROA goes down
o As WC goes down, risk goes up, but ROA goes up
- Working Capital Ratios
o Current ratio
o Calculate
● Current assets / Current liabilities
o Interpretation
● Short-term solvency
● Firm’s ability to generate cash to meet its short-term obligations
o Analysis in terms of risk
● Deteriorating current ratio → Higher risk
● Improving current ratio → Lower risk
o Quick ratio
o Calculate
● (Cash and cash equivalents + ST marketable securities + Net receivables) / Current liabilities
o Interpretation
● More rigorous test of liquidity
o Analysis
● The higher the quick ratio, the less risk
o Cash conversion cycle
o Calculate
● Days in inventory + Days sales in AR - Days payables outstanding
o Interpretation
● Number of days needed to generate cash from core business
● Length of time from the date of the initial expenditure for production to the date cash is collected
from the customers offset by the length of time it takes to pay vendors
o Elements of the cash conversion cycle formula
● Inventory turnover
o Calculate
o COGS / Average inventory
o Interpretation
o Measure of the effectiveness of an entity’s inventory management
● Days in inventory
o Calculate
o Ending inventory / (COGS / 365)
● AR turnover
o Calculate
o Net sales / Average or net AR
● Days sales in AR
o Calculate
o Ending net AR / (Net sales / 365)
● AP turnover
o Calculate
o COGS / Average AP
● Days of payables outstanding
o Calculate
o Ending AP / (COGS / 365)
▪ Don’t pay too fast unless given an incentive
BEC Study Guide
o
o Analysis
● A company should minimize the amount of time it takes to convert inventory to cash while
maximizing the amount the time it takes to pay vendors
● The lower the cash conversion cycle, the better
o Working Capital Turnover
o Calculate
● Sales / Average working capital
o Interpretation
● Turnover = activity = efficiency → the higher, the better
● How effective a company is at generating sales based on funds used in operations
M4: Working Capital Management: Part 1

- Inventory Valuation
o LIFO → lower of cost or market (middle value of NRV, NRV - normal profit margin, and replacement cost)
o FIFO/Weighted-average → lower of cost or NRV
- Periodic vs. Perpetual Inventory Systems
o Periodic
o Inventory quantities are determined by physical counts performed at least annually
● Beginning inventory + Purchases = CGAFS - Ending inventory = COGS
o Perpetual
o Inventory balance is updated for each purchase and each sale
- Cost Flow Assumptions
o Specific identification
o FIFO
o LIFO
o If prices are rising → highest COGS, lowest ending inventory, lowest net income
o Weighted-average
o Requires periodic system
o Moving-average
o Requires perpetual system
- Inventory Management Strategies
o Sales forecasts are the most important item
o Not too much → surplus = increased carrying costs
● Carrying costs are storage costs, insurance costs, opportunity costs of inventory management, lost
inventory due to obsolescence, cost of capital invested in the inventory
o The lower the carrying costs, the more inventory companies are willing to carry
o Not too little → lost sales
o Optimal levels of inventory
o Affected by:
● Usage rate of inventory per period of time
● Cost per unit of inventory
● Cost of placing orders for inventory
● Time required to receive inventory
o Safety Stock
o Ensure that manufacturing or customer supply requirements are met
● Depends on:
o Reliability of sales forecasts
o Possibility of customer dissatisfaction resulting from back orders
o Stockout costs (costs of running out of inventory)
o Lead time
o Seasonal demands on inventory
o Reorder point
BEC Study
o Definition Guide
● Inventory level at which a company should order or manufacture additional inventory to meet demand a
avert incurring stockout costs
o Calculate
● Safety stock + (Lead time x Sales during lead time)
o
o Economic Order Quantity (EOQ)
o Definition
● Approaches orders at the point where carrying costs equate nearest to restocking costs in order to
minimize total inventory costs
o Ordering costs
● Costs of labor associated with order placement
o Entering PO
o Processing receipt of inventory
o Inspecting inventory to ensure goods received are acceptable
o Processing of vendor invoice & payment
o Economic Order Quantity assumptions
● Demand is known & constant throughout year
● Doesn’t consider stockout costs or safety stock
● Assumes carrying costs per unit & ordering costs per unit are fixed
o Calculate
● When I say “two,” you say “SOC”
▪
- Other Inventory Management Issues
o JIT (pull approach)
o Benefits
● Tying production scheduling with demand
● More efficient flow of goods between warehouses/production
● Reduced setup time
● Greater employee efficiencies
● Eliminates non-value-added operations (assumes that inventory does not add value)
o Potential problems
● Low-quality inventory could cause shortages
● Loss of quantity discounts could be more than the cost of handling and purchasing larger lots of invento
● Actual lead time for material orders could be longer than expected
oBEC
KanbanStudy Guide
inventory control
o Gives visual signal that a component required in production needs replenished
● Time to order
o Computerized inventory control
o Real-time communication links between cashier and stock room
o Purchases and returns are recognized instantaneously
o Computers alert inventory managers to reorder, can do so instantaneously
- Supply Chain Management/Integrated Supply Chain Management (ISCM)
o Supply Chain Operations Reference (SCOR) Model → generic model for supply chain analysis
o “Poor Scott Makes Dinner”
● P - Plan
o Properly balance demand and supply
o Demand requirements
o Ability of the suppliers to supply resources
o Plan inventory levels
● S - Source
o Procure the resources required to meet demand
o Selecting vendors
● M - Make
o Turn the raw materials into finished goods that are produced to meet a planned demand
o Production process
o Manufacturing
o Testing
o Packaging
● D - Deliver
o Activities of getting the finished product into the hands of the ultimate consumers to meet their
demand
o Managing of orders
o Forecasting
o Pricing
o Transportation
o Shipping
o Labeling
- Accounts Payable Management
o Trade credit
o Largest source of short-term credit for small firms
o Accruals
o Another common form of short-term credit
o Discounts
o Effective annual interest cost can be extremely high if discounts are offered and foregone
o
o Use of EFT
o Expedite deposits, thus $ balance goes up
o Optimal vendor payment schedule
o If a company is a regular buyer and/or a large volume buyer from a particular vendor, it may be able to negot
more favorable terms in order to either take advantage of discounts or extend payment periods
● EX: The discount period is 10 days → the company will want to pay on the 10th day. If the overall payme
due in 30 days and the discount is not taken, the company should pay on the 30th day
o Methods to delay disbursements → thus cash balance goes up
o Defer payments
o Line of credit
● Extends the company’s trade credit by paying off the company’s trade accounts with borrowed funds an
allowing the company a longer period to pay back that loan to the bank
BEC Study Guide
- Notes from MCQs
o A draft is working capital technique that increases the payable float and, therefore, delays the outflow of cash
o Concentration banking, a lock-box system, and a PO box system accelerates the flow of cash
M5: Working Capital Management: Part 2

- Cash and credit management
o Motives for holding cash
o Transaction
o Speculative (take advantage of temporary opportunities)
o Precautionary (“cushion”)
o Disadvantages of lots of cash
o Interest obligation > interest income (negative arbitrage)
o Takeover target
o Investor dissatisfaction (no dividends paid)
- Management of AR
o Cost of offering discounts is very high (see effective APR last module)
o AR ratios
o AR turnover
● Calculate
o Net sales / Average net AR
● Interpretation
o Number of times a company is converting its receivables into cash
o Days sales in AR
● Calculate
o 365 / AR turnover
o Ways to speed collections
o Customer screening and credit policy
o Prompt billing
o Payment discounts
o Ways to expedite deposits
o EFTs
o Lockbox systems
o Concentration banking
o Definition
● Designation of a single bank as a central depository
o Advantages
● Improved controls over inflows and outflows of cash
● Reduced idle balances
● Improved effectiveness for investments
o Factoring
o Definition
● Turning over the collection of AR to a third-party in exchange for a discounted short-term loan
o Example
●
- Corporate Banking Arrangements
o Letter of credit
o Lowers cost of borrowing
o Third-party guarantee, generally by a bank
BEC Study an
o Represent Guide
external credit enhancement used by a company issuing otherwise unsecured debt to
enhance its credit, or can be required by a creditor to ensure payment
o Line of credit
o Represents a revolving loan with a bank that is up to a specific dollar maximum amount for a defined term
and is renewable upon the maturity date
● Any outstanding balances under the line of credit reduce the future availability of funds that may be
drawn by the company under that line
o Borrowing capacity
o The amount of money that a given lender is willing to extend to the company
● Affected by credit rating, income level, and stability
o Goes up the lower the debt-to-equity ratio
o Debt covenants
o Lending agreements
● Can be positive or negative covenants
● Protects borrower’s credit rating
o Violation → technical default → creditor can demand repayment of the entire principal
- Financing Decisions and Working Capital
o Short-term financing
o Characteristics
● Rates tend to be lower than long-term
● Require current asset levels to be sufficient to meet short-term obligations
o Advantages
● Increased profitability
● Decreased financing cost
o Disadvantages
● Increased interest rate risk
o Interest rates may abruptly change, and given shorter maturities, may require greater financing c
than anticipated on future refinancing
● Decreased capital availability
o Lender evaluation of creditworthiness may change
o Long-term financing
o Characteristics
● Rates tend to be higher than short-term
● Extent of use depends on both the amount of current assets company maintains and the
risk tolerance of management
● Increases financial leverage
o Advantages
● Decreased interest rate risk
● Increased capital availability
o Disadvantages
● Decreased profitability
● Increased financing costs
o Interest rates changing in the future vs. the locked-in long-term rate
- Notes from MCQs
o If a seller extends credit to a purchaser for longer than the purchaser’s operating cycle, then the seller is financing
more than inventory
M6: Financial Valuation Methods: Part 1
- Security Valuation
o Present value of annuity
o Calculate
●
o Assumptions
● Recurring amount of the annuity
o More payments → increased PV
● Appropriate discount rate
o More risk → lower PV
● Duration of the annuity
BEC StudyoGuide More payments → increased PV
● Timing of the annuity
o Beginning or end of period
o Perpetuities (zero growth stock)
o Definition
● Company is expected to pay the same dividend each period in perpetuity
o Calculate
●
o P = stock price
o D = dividend
o R = required return
o Example
●
- Constant growth dividend discount model (Gordon growth model):
o Economic return
o (Change in price + Dividend Income) / Beginning price
o Per-share valuation with assumed growth
o Value (price) of equity formula (dividend growth model)
● Calculate
o
▪ P1 = current price (price at period “t”)
▪ D(t+1) = dividend one year after period “t”
▪ R = required return
▪ G = sustainable growth rate
o Determining the required rate of return
● Calculate
▪
o Examples
BEC Study Guide
o
o Discounted cash flow analysis
o Models
● Dividend discount models (DDM)
● Free cash flow models
o Free cash flow to the firm (FCFF)
▪ The amount of cash that a business generates after taking into account reinvestments in
non-current assets
▪ Calculate
● Net income + Noncash expenses - Increases in working capital - Capital expenditu
o Free cash flow to equity (FCFE)
● Residual income models
o Net income - Required rate of return
- Relative valuation models
o Definition
o Use the value of comparable stocks to determine the value of similar stocks
o Examples
o Price-earnings ratio
● Most widely used multiple when valuing equity securities
● Price today is based on future performance
● Calculate
o
● Example
BEC Study Guide
o
● Trailing vs. forward P/E
o Trailing → earnings for the past four quarters are used for the denominator
o Forward → expected earnings for the next year are used for the denominator
o Advantages and disadvantages to both
o PEG ratio
● Definition
o Effect of earnings growth on a company’s P/E, assuming a linear relationship between P/E and gro
▪ Lower PEG ratios are more attractive to investors
● Calculate
o
● Valuing equity with the PEG ratio
o P0 = PEG x E1 x G
● Example
o
o Price-to-sales ratio
● Can be used when earnings are very low
● Calculate
o
● Valuing equity with the price-to-sales ratio
o P0 = (P0 / S1) x S1
o Price-to-cash-flow ratio
BEC Study Guide
● Calculate
o
● Valuing equity with the price-to-cash-flow ratio
o P0 = (P0 / CF1) x CF1
o Price-to-book ratio
● Calculate
o
● Valuing equity with the price-to-book ratio
o P0 = (P0 / B0) x B0
● Example
BEC Study Guide
o Relative valuation
o Target trading at a multiple < peers → relatively undervalued or lower growth potential
o Target trading at a multiple > peers → relatively overvalued or higher growth potential
M7: Financial Valuation Methods: Part 2

- Option Pricing Models
o Definition of an option
o Entitles the owner (holder) to buy (call option) or sell (put option) at a given price within a stated period of
time
● American-style → can be exercised at any time prior to expiration
● European-style → can be exercised only at the expiration date
o Black-Scholes Model
o Calculation
● Value of option = Stock price - PV of strike price
o PV of strike price = Strike price / (1 + r)
o Inputs
● Current price of underlying stock (higher price → higher option value)
● Option exercise price (lower price → higher option value)
● Risk-free interest rate (higher rate → higher option value)
● Current time until expiration (longer time → higher option value)
● Some measure of risk for the underlying stock (higher risk → higher option value)
o Assumptions
● Stock prices behave randomly
● Risk-free rate & volatility are constant
● No taxes or transaction costs
BEC Study Guidealthough model can be adapted for dividends
● No dividends,
● Options are European-style (exercisable only at maturity)
o Limitations
● Due to the model’s assumptions, results generated from the Black-Scholes model may differ from real
prices
o Binomial Model discrete time periods
o Overview
● Considers underlying security over period of time instead of point in time like Black-Scholes
o Assumptions
● Perfectly efficient stock market
● Underlying security price will move up or down at certain points in time during the life of the option
o Benefits
● Useful for valuing American-style options (exercisable over period of time)
● Can be used for dividend-paying stocks without modifying model
- Valuing Debt Instruments
o Overview
o The value of a bond is equal to the present value of its future cash flows, discounted using a single interest
rate or multiple interest rates aligned with the degree of risk for each cash flow
● C = coupon
o Example
o
- Valuing Tangible Assets PP&E
o Methods (“CALM”)
o C - Cost method
● Original cost paid to acquire the asset, adjusted for depreciation
o A - Appraisal method
● Professional appraiser determines the value of the asset
o L - Liquidation value
● Value if the asset had to be sold today
o M - Market value method
● Replacement cost method → what it would cost to replace the valued asset
● Net realizable value method → selling price - costs to sell
- Valuing Intangible Assets
o Methods - (“MIC”)
o M - Market approach
● Actual arm’s length transactions
● Preferred approach, but relative trading infrequency presents challenges
o I - Income approach
● Future expected cash flows over the estimated useful life of the intangible asset are discounted to PV
using discount rates reflecting the level of risk (asset, industry, and market)
o C - Cost approach
● Replacement cost
● Reproduction cost
o In either method, costs include materials, labor, overhead, legal and other fees, development
costs, production costs, and opportunity costs
o Valuation Using Accounting Estimates
o Items that are valued using estimates
● AR, inventory, fixed assets, contingent liabilities
o Preparing accounting estimates
● Management must consider the following factors:
o Historical information
o Market information
o Expected usage
o Estimates from experts
BECDecision
M8: Financial StudyModels:Guide Part 1
- Cash Flows Related to Capital Budgeting
o Cash flow effects
o Accept if profitable → sum of future cash flows (inflows) > today’s cost (net outflows)
● Direct effect → paying out and receiving cash
● Indirect effect → Depreciation x Tax rate = $ saved (inflow because tax deduction = more cash in pocket)
● Net effect → PVFCFs
o Stages of cash flows
o 1. Inception of the project (time period zero) (today)
● Both direct (acquisition cost) and indirect (working capital requirements or disposal of the replaced asse
effects
o Additional working capital requirements (cash outflow)
▪ Increased payroll, expenses for supplies, inventory requirements
o Reduced working capital requirements (cash inflow)
▪ JIT inventory
o Disposal of the replaced asset (cash inflow)
▪ SP - NBV = Gain x Tax rate = Tax paid outflow
▪ SP - NBV = Loss x Tax rate = Tax savings inflow
o 2. Operations
● Pre-tax cash inflow x (1 - Tax rate) = Cash inflow
● Depreciation x Tax rate = Cash inflow
o 3. Disposal of the project
● If asset is sold → direct effect for cash inflow, indirect effect for taxes due (gain) or saved (loss)
● Direct expenses for disposal (severance pay)
● Tax savings if the net tax basis is greater than 0
● Working capital commitment that was recognized as an indirect cash outflow at the inception of a
project is recognized as an indirect cash inflow at the end of the project when the working capital
commitment is released
o Calculation of Pre-tax and After-Tax Cash Flows
o Pre-tax cash flows = EBT
o After-tax cash flows = Pre-tax CF (EBT) x (1 - Tax rate) = Inflow
● Initial cash outlay for the project is often the largest outflow of the investment’s life
o
- Discounted Cash Flow
o Objective and Components of Discounted Cash Flow as Used in Capital Budgeting
o Rate of return desired for the project
● Hurdle rate
● Compensation for all risk assumed
o Limitation of discounted cash flow
● Simple constant growth assumption → thus NPV superior to IRR
- Net Present Value Method (NPV)
o Sum of PVFCFs - Cost = NPV → “economic value added”
o Calculation
o Steps
● Calculate the after-tax cash flows → Annual net cash flow x (1 - Tax rate)
● Add depreciation benefit → Depreciation x Tax rate
● Multiply result by appropriate present value of an annuity
● Subtract initial cash outflow
BEC Study● ResultGuide
→ NPV
o Interpretation
o Positive result = Profit → Make investment
● Infer IRR > hurdle rate
● Infer PI > 1
● Infer discount rate < IRR
o Negative result = Loss → Do not make investment
● Infer discount rate > IRR
o Interest rate adjustments for required return
o Adjustments to rate
● Risk → Discount rates may be increased to further factor differences in risk into the analysis
● Inflation → Rates may be raised to compensate for expected inflation as compensation for loss in
purchasing power
o Differing rates
● May be used for different time periods using the NPV method
o Example of NPV
BEC Study Guide
o
o Advantages of NPV method
o Flexible
o Can be used when there is no constant rate of return required for each year of the project
o Disadvantages of NPV method
o Doesn’t provide the true rate of return on the investment
o Capital rationing
o Describes how limited investment resources are considered as part of investment ranking and selection
decisions
● Unlimited capital
o Positive NPV → Infer IRR > hurdle rate → Same decision
▪ All investment alternatives with a positive NPV should be pursued
o Negative NPV → IRR may give different rating
▪ If capital is limited and must be rationed, managers will allocate capital to the
combination of projects with the maximum NPV
o Profitability index
o Calculate
● PV of future cash flows / Cost (PV) of initial investment
o Application
● Measures cash-flow return per dollar invested
o The higher the profitability index, the more desirable the project
o Limited capital resources are applied in the order of the index until resources are either
exhausted or the investment required by the next project exceeds remaining resources
BEC Study Guide
o
- Notes from MCQs
o Sunk costs are always irrelevant in decision-making
o Fixed costs are not considered in the cash flow calculation
M9: Financial Decision Models: Part 2
- Lease vs. Buy
o Investment decision
o Discount the after-tax operating cash inflows at the firm’s WACC
o Financing decision
o Discount cash flows specific to each financing option at the after-tax cost of debt → YTM x (1 - Tax rate)
● ****The preferred financing option is that with the lowest NPV of cost
● Relevant cash flows
o Buy asset
▪ 1. Purchase cost or PV of lease payments (outflow)
▪ 2. Tax savings from depreciation (inflow)
▪ 3. Scrap proceeds (inflow)
● Sum of 2 and 3 PVFCFs offset initial outflow
o Lease asset
▪ 1. Lease payments (outflow)
▪ 2. Tax savings on lease payments (inflow)
● Sum of 1 and 2 = Net cost = After-tax payment x PV factor
o Example
BEC Study Guide
o
- Internal Rate of Return (IRR)
o Overview
o Expected rate of return of a project
o Determines PV factor (and related interest rate) that yields a NPV equal to 0
o Focuses on discount rate at which PV of inflows = PV of outflows
o Interpreting IRR
o Targeted rate of return or hurdle rate is predetermined and is compared with the computed IRR
● IRR > Hurdle rate (usually WACC) → Accept IRR < Hurdle rate → Reject
o Limitations
o Unreasonable reinvestment assumption (assumes all CFs reinvested at IRR)
o Less reliable than NPV when several alternating periods of inflows & outflows or amounts differ significantly
o Doesn’t consider dollar impact of project (only %)
- Payback Period Method
o Overview
o Time required for net after-tax operating cash inflows to recover initial investment in project
o Emphasizes liquidity & risk
o Often used for risky investments – shorter payback period = better
o Calculate
o
o Example
BEC Study Guide
o
o Advantages
o Easy to use and understand
o Emphasis on liquidity
o Limitations
o Time value of money is ignored
o CFs after initial investment is recovered are not considered
o Reinvestment of CFs is not considered
o Total project profitability is neglected
- Discounted Payback Method
o Overview
o AKA “break-even time method”
o Discount CFs by project’s cost of capital
o Focus on liquidity and (some) profit
● Focuses decision makers on the number of years needed to recover the investment from discounted
cash flows
o Evaluation term
● Begins → Project team is formed
● Ends → Initial investment has been recovered
o Advantages
o Easy to use and understand
o Emphasis on liquidity
o Uses the time value of money
o Disadvantages
o CFs after initial investment is recovered are not considered
o Reinvestment of CFs is not considered
o Total project profitability is neglected
o Example
BEC Study Guide
o
- Calculating time value of money without factors
BEC Study Guide
o
- Notes from MCQs
o The rankings of two mutually exclusive investments determined using the IRR and NPV methods may be
different if the two projects have unequal lives and the size of the investment for each project is different
o The higher the PV factor, the lower the IRR
o Increases to the investment or decreases to the cash flows serve to increase the PV factor
B3 – Operations Management: Cost Accounting & Performance Management

M1: Cost Accounting: Part 1
- Cost Objects
o Objective of cost accounting
o Measuring cost objects
● Most frequent objectives (“PIE”)
o P - Product costing (inventory and COGM and COGS)
o I - Income determination (profitability)
o E - Efficiency measurements (comparisons to standards)
o Product costs
o All costs related to manufacture of product
● Includes direct materials, direct labor, and manufacturing overhead applied
o Inventoriable - not expensed until product sold
o Period costs
o Do not relate to the manufacture of a product
● Expensed in the period incurred - not inventoriable
BEC Study oGuide
Includes selling, general, and administrative expenses as well as interest expense
- Tracing Costs to Cost Objects
o Direct costs
o Definition
● Can be easily traced to a cost pool or object
o Include
● Direct materials
o Costs of materials purchased
o Freight-in
o Less: purchase discounts
o Plus: normal scrap
▪ Abnormal scrap = period cost
● Direct labor
o Directly related to the production of a product or performance of a service
o Plus: expected “downtime”
▪ Breaks, setup, training
o Indirect costs
o Definition
● Costs that are not easily traceable to a cost pool or object
o Overview
● In the factory → product cost → overhead
● In the office → period cost → SG&A
o Include
● Indirect materials
o Materials not used specifically or could not be traced to the completed product with ease
● Indirect labor
o Labor not easily traceable to a particular product
o Supports the manufacturing process but does not work directly on the specific job
● Other indirect costs in the factory
o Depreciation, rent, maintenance, property taxes, insurance, rent, utilities, all in the factory
- Prime costs = Direct Materials + Direct Labor
- Conversion costs = Direct Labor + Manufacturing Overhead
o Overhead application using cost drivers:
o Step 1
● Overhead rate = Budgeted overhead costs / Estimated cost driver
o Step 2
● Applied overhead = Actual cost driver x Overhead rate (from Step 1)
- Cost Behavior (fixed vs. variable)
o
o Variable cost
o Behavior
● Changes proportionally with the cost driver
o Amount
● Constant per unit, total varies
o Long-run characteristics
● The short-run and long-run effects of variable costs are the same within the relevant ranges
o Fixed cost
o Behavior
● Does not change when the cost driver changes
o Amount
● Varies per unit, total remains constant
o Long-run characteristics
● Given enough time (and a long enough relevant range) any cost can be considered variable
o Semi-variable costs (mixed costs)
o Contain both fixed and variable components
o Cost behavior
BEC Study Guide
o
o Relevant range
o The range of production over which cost behavior assumptions are valid
● When the cost driver activity is not in the relevant range, the assumptions cannot be used to allocate co
- Cost Accumulation Systems
o Job costing
o Custom order
o Used when relatively few units & each is unique / easily identifiable
o Process costing
o Mass-produced, homogeneous products
o Operations costing
o Uses components of job-order & process costing
o Backflush costing
o Accounts for certain costs at end of process in circumstances where there’s little need for in-process
inventory valuation
o Life-cycle costing
o Monitor costs throughout product’s life cycle & expands on traditional costing systems that focus only on
manufacturing phase of a product’s life
- Cost of Goods Manufactured & Cost of Goods Sold:
o Cost of Goods Manufactured
o Accounts for the manufacturing costs of the products completed during the period
● Manufacturing costs → DM, DL, FOH
● Manufacturing costs are increased or decreased by the net change in WIP inventory to equal COGM
o Cost of goods sold
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o
- Job-Order Costing
o Cost objective is the job (or unit)
o Cost is allocated to a specific job as it moves through the manufacturing process
o Job-cost records (AKA job-cost sheets or job orders)
o Include
● Materials requisition (what materials were requested)
● Labor time tickets (time cards with rate & hours)
o Overview
o
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- Process Costing
o Units and costs collected on a production report
o Costs incurred for a period as well as all units produced during that period are accumulated on a
production report that accounts for the physical flow of units
● Unit (quantity) accounting
o The number of units accounted for must equal the number of units charged to the
department (or separate process)
● Cost accounting
o The amount of costs accounted for must also equal the amount of costs charged to the
department (or separate process)
o Flow of inventory from beginning RM to ending FGI
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●
o Production report
●
o Equivalent units
o Overview
● Costs must be attached to the completed units as well as to the units that are partially complete at
the end of each period
o Definition
● An equivalent unit of DM, DL, or CC = the amount of DM, DL, or CC necessary to complete one unit of
production
o
o Process costing assumptions
● Transfers-in are 100% complete
● Timing of addition of DM
o DM added at the beginning of or during a second or later process may either be 100% complete
partially complete
o DM added at the very end of a process will not be in WIP at month-end
o Calculations of average unit costs
o Averaging of costs from prior month’s WIP
● Frequently, costs from the previous month’s WIP inventory are different from costs of the current month
o These costs must be averaged
o Cost flow assumptions
● FIFO or Weighted-average
o Calculation of equivalent units using FIFO
o Overview
● Ending inventory is priced at the cost of manufacturing during the period, assuming that the
beginning inventory was completed during the period
o Equivalent unit components
● Equivalent units are composed of 3 elements
o Completion of units on hand at the beginning of the period
▪ Beginning inventory x (1 - % already completed)
o Units started and completed during the period
▪ Units completed - Units in beginning WIP
o Units partially complete at the end of the period
▪ Ending inventory x % completed
o Example
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●
o Calculation of equivalent units using weighted-average
o Overview
● Averages the cost of production during the period with the cost in beginning WIP
o Equivalent unit components
● Equivalent units are composed of 2 elements
o Units completed during the month
▪ Beginning WIP + Units started and completed during the month
o Units partially complete at the end of the period
▪ Ending WIP x % complete
o Example
●
o Equivalent units calculation comparison
o FIFO
● Beginning WIP x % to be completed
● + (Units completed - Beginning WIP)
● + Ending WIP x % completed
● = Equivalent units
o Weighted-average
● Units completed
● + Ending WIP x % completed
● = Equivalent units
o Cost per equivalent unit comparison
o FIFO
● Current cost / Equivalent units
o Weighted-average
● (Beginning cost + Current cost) / Equivalent units
o Additional example problem
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o Spoilage (or shrinkage)

o Normal spoilage (inventory cost)
● Computation
o Per unit cost is automatically increased as a result of spoilage because actual costs are spread
over fewer equivalent good units rather than actual units produced
● Accounting treatment
o Normal spoilage is capitalized as part of inventory cost, allocated to good units produced
o Abnormal spoilage (period expense)
● Computation
o Per unit cost is based on actual units
o Equivalent units of production include spoiled units
● Accounting treatment
o Cost of abnormal spoilage is normally expensed separately on the IS as a period expense
o Example
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- Activity-Based Costing
o Overview
o Assigns cost based on activity’s consumption of resources
● More precise allocation of FOH to products
o Terminology
o Activity → any work performed inside a firm
o Resource → element that is used to perform an activity
o Cost drivers → activity vases that are closely correlated with the incurrence of FOH costs
● Choose cost driver with highest correlation coefficient
o Other factors that should be considered in the selection of cost drivers
▪ Cost of measurement
▪ Behavioral effects
o Resource cost driver → amount of resources that will be used by an activity
o Activity cost driver → amount of activity that a cost object will use
● Used to assign the costs to the cost objects
o Activity centers → operation necessary to produce a product
o Cost pool → group of costs or a specially identified cost center in which costs are grouped, assigned, or collec
o Engineered cost → a cost that bears an observable and known relationship to a quantifiable activity base
o Characteristics of ABC
o Can be part of a job order system OR process cost system
o Takes long-term viewpoint and treats production costs as variable
o Cost driver is usually a non-financial variable
o May be used for internal but NOT external reporting purposes
o Removes much of the cost distortion caused by traditional, volume-based overhead systems
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o Normally Guide in substantially greater unit costs for low-volume products than is reported by traditional
product costing
o The greater the total percentage of total costs that are considered “indirect,” the greater the need for
appropriate cost allocations for each activity
o Focuses on cost/benefit of activities
o Value-added activities
● Usefulness is added to the product
o Support activities directly support value-added activities
o Non-value-added activities
● Do not increase product value or service
● Targeted for elimination
o EX: warehousing
o Effects of ABC
o Standard cost systems → natural extension of ABC
● Standards are set at activity levels based on cost drivers & variances are calculated (actual vs. standard)
o Service costs allocation using ABC
o Direct method
● Each service department’s total costs are directly allocated to the production departments without reco
that service departments themselves may use the services from other service departments
o Step-down method
● Service department costs are also allocated to other service departments as well as production departm
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- Joint Product Costing and By-Product Costing

o Terminology
o Joint products → 2 or more products generated from the same input
o By-products → minor products of small value that incidentally result from manufacture of main product
o Split-off point → point in the production process at which the joint products can be recognized as
individual products
o Joint costs → costs incurred in producing products up to the split-off point
o Separable costs → costs incurred on a product after the split-off point
o Allocation by unit volume relationships
o
o Relative NRV at split-off point
o Sales price quotations available at split-off
● Assigns costs to the separate joint products in relation to their market values
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o
o Sales values not available at split-off
● NRV = Final selling price of units produced - (separable) Identifiable costs incurred after split-off
o
o Service departments cost allocation to joint products
o Unit-volume relationship
●
o By-Products
o Revenue accounting can be done one of 2 ways:
1. Applied to main product
o Proceeds from sale of by-products are reduction to common (joint) costs for joint product costing
revenue earned is credited to joint costs incurred at time of production or sale
2. Miscellaneous income
o Revenue from sale of by-products can be credited to miscellaneous income
M4: Performance Management: Part 1

- Financial and Non-financial Performance Measures
o Financial measures
o Profit, costs of quality, ROI, ROA, ROE, residual income, economic value added
o Non-financial measures
o External benchmarks: productivity (ratio of outputs achieved to inputs of production) measures
● Total Factor Productivity Ratios
o Reflect quantity of all output produced relative to the cost of all inputs used
▪ Output / Total costs
● Partial Productivity Ratios (most frequently used)
o Reflect quantity of output produced relative to the quantity of individual inputs used
BEC Study ▪Guide
Output / Specific quantity of material or labor
●
o Internal benchmarks: techniques to find and analyze problems/defects
● Control charts
o Plots comparison of actual results by batch
▪ Show if trend toward improved quality conformance or deteriorating quality conformance
o
● Pareto diagrams (histogram)
o Used to determine quality-control issues that are most frequent & demand greatest attention
▪ Demonstrates frequency of defects from highest to lowest frequency
o
● Cause-and-Effect (Fishbone) Diagram
o Provides framework for managers to analyze problems that contribute to occurrence of defects
▪ Used to identify sources of problems in production process by resource and take corrective action
o
- Financial Scorecards
o Types of responsibility segments (strategic business units - “SBUs”)
o Cost
● Responsible for controlling costs
o Revenue
● Responsible for generating revenues
o Profit
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● Responsible for both revenues and costs
o Investment
● Responsible for return on assets
o Areas of accountability in financial scorecards (segment reporting)
o Product lines
o Geographic areas
o Customer (most significant)
o Contribution reporting
o Contribution margin
● Revenue - Variable costs
o Controllable margin
● Contribution margin - Controllable fixed costs (e.g., advertising & sales promotion)
o Allocation of common costs
● Not controllable
o Employees are more motivated to achieve corporate goals if they believe that common costs
do not represent an arbitrary burden
- Balanced scorecard
o Definition gathers info defined by critical success factors: (“FICA”)
o F - Financial perspective
● Profit up, growth up
o I - Internal business process perspective
● Efficient production, defects down
o C - Customer perspective
● Customer surveys, new markets
o A - Advancement of innovation & HR development (learning and growth) perspective
● Learning and growth, retention of key employees, innovation
o All factors (financial and non-financial) are critical to accomplishment of business objectives
- Costs of Quality (“AP IE”)
o Conformance costs
o P - Prevention costs
● Definition
o Incurred to prevent production of defective units
● Examples
o Employee training, preventive maintenance, redesign of product, redesign of process, high-
quality suppliers, inspection (pre-production)
o A - Appraisal costs
● Definition
o Incurred to discover/remove defective parts before shipped to customer or next department
● Examples
o Statistical quality checks, testing, inspection (post-production), maintenance of lab
o Non-conformance costs
o I - Internal failure
● Definition
o Costs to cure defect discovered before product sent to customer
● Examples
o Rework, scrap, tooling changes, disposal costs, cost of lost unit, downtime
o E - External failure
● Definition
o Costs to cure defect discovered after product sent to customer
● Examples
o Warranty costs, cost of returns, liability claims, lost customers, reengineering an external failure
o Quality reporting
o Inverse relationship between conformance and non-conformance costs
● Increased investment in conformance → decreases in non-conformance costs
M5: Performance Management: Part 2

- ROI/ROA
o Return on Investment
o Calculation
● Net income / Investment capital (average assets, average PP&E + average working capital)
● OR
● Profit margin (net income / net sales) x Investment turnover (net sales / average assets)
o Components of ROI
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● Cash flow is ignored - from a company perspective
●
o Return on assets
o Calculation
● Net income / Average total assets
o ROI/ROA issues
o Variations on asset valuation
● Net book value
o Skewed by age and method of depreciation
● Gross book value
o Skewed by only age
● Replacement cost
o Not skewed
● Liquidation value
o Selling price
o Limitations of ROI
● Short-term focus
o ROI inadvertently focuses managers purely on maximizing short-term returns (“investment myop
● Disincentive to invest
o Profitable units are reluctant to invest in additional productive resources because they
could reduce ROI in the short-term
- Return on Equity and the DuPont Model
o Calculation of ROE
o Net income / Average total equity
o DuPont analysis
o Components of DuPont ROE
● Net profit margin
o Net income / Net sales
● Asset turnover
o Net sales / Average total assets
● Financial leverage
o Total assets / Total equity OR 1 + (Debt / Equity ratio)
o Calculating DuPont ROE
● ROA x Financial leverage

o Extended DuPont model
● Breaks out net profit margin into three distinct components
o Tax burden
BEC StudyoGuide ▪ Net income / Pre-tax income
Interest burden
▪ Pre-tax income / EBIT
o EBIT margin
▪ EBIT / Sales
● Extended DuPont ROE formula
o Tax burden x Interest burden x EBIT margin x Asset turnover x Financial leverage
● (Net income / Pre-tax income) x (Pre-tax income / EBIT) x (EBIT / Sales) x (Sales
/ Assets) x (Assets / Equity)
o
- Residual Income
o Overview
o Measures value added for stockholders in dollars
● Hurdle rate may be WACC, cost of equity, or another measure
o Calculation
o Residual income = Net income - Required return on equity (NBV equity x Hurdle rate)
o Interpretation
o Positive residual income → performance is meeting standards
o Negative residual income → performance is not meeting standards
o
o Benefits of residual income performance measures
o Ease of measurement of actual dollars earned by an investment above its required amount
o Realistic target rates
● Historical WACC is often used as the target or hurdle rate
● *****Optimal rate is target return set by management******
o Focus on target return and amount (advantage over ROA/ROI)
● Encourage managers to invest in projects that generate income in excess of the target or calculated
rate, thereby improving company profits and promoting the congruence of individual and corporate
goals
● Division with high rates of return do not avoid investments that demonstrate strong residual income
performance
o Weaknesses of residual income performance measures
o Reduced comparability
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o Target ratesGuide
require judgment
- Economic Value Added

o Overview
o Measures the excess of income after taxes (not counting interest expense) earned by an investment over
the return rate defined by the company’s WACC
● The amount used to represent income after taxes is the firm’s net operating profit after taxes (NOPAT)
o Calculation
o Net operating profit after taxes (NOPAT) [EBIT x (1 - Tax rate)] - Required return (Investment x WACC)
o Interpretation
o Positive EVA → performance is meeting standards
o Negative EVA → performance is not meeting standards
o EVA component issues
o EVA can be refined using investment or income adjustments to produce a more accurate analysis of
economic profit
● Investment valuation issues
o Capitalization of R&D
o Current valuation of the BS
● Income determination
o NOPAT may be adjusted to eliminate the effect of certain transactions
▪ Adjustments to the BS affect the IS
▪ Deferred taxes are ignored
o
- Notes from MCQs
o The selection of the denominator in the ROI formula is critical to the measure’s effectiveness. Shareholder’s equit
as the denominator is criticized because it combines the effects of operating decisions made at one level of the
organization with financing decisions made at another organization level
B4 – Operations Management: Planning Techniques

M1: Projection and Forecasting Techniques: Part 1
- Projection Techniques
o Overview
o Projections are prepared to show multiple, hypothetical (“what-if”) scenarios and courses of action
o Projections are the precursors to actual forecasts (used internally)
o Sensitivity analysis
o Definition
● Experimenting with different parameters and assumptions
o Risk management tool used in the budgeting process to determine which variables are the
most sensitive to change
o Scenario analysis
o Definition
● Preparing multiple different scenarios which represent alternative possible outcomes, then assigning
BEC Study Guide
probabilities to them to come up with weighted totals
- Forecasting Techniques
o Overview
o Forecasting is driven by historical data and actual expectations
o Forecasts are prepared for both internal and external purposes
o Forecasting techniques can be broken out into qualitative and quantitative methods
o Forecasting analysis
o Purpose
● Forecasting revenues
o Sales are a dependent variable that may be a by-product of independent variables such as expectation
regarding the economy, personal income, product competition, growth of the industry, etc.
● Forecasting expenses
o Total costs are a by-product of specific independent variables such as overall fixed costs and
per-unit variable costs
▪ Total costs = fixed costs + variable costs
▪ y = a + bx
- Regression Analysis
o Simple linear regression model
o Overview
● Simple regression involves only one independent variable
● Multiple regressions involve more than one independent variable
o Components of the simple linear regression model y = a + bx
● y = dependent variable (total costs)
● x = independent variable (total activity)
● a = y-intercept (total fixed costs)
● b = slope of regression line (variable cost per unit)
o Statistical measures to evaluate regression analysis
o Coefficient of Correlation (r)
● Measures strength of linear relationship between independent & dependent variables
o Goes from -1.00 to + 1.00
o 0 = not correlated, movement in x can’t be used to predict movement in y
o Coefficient of Determination (R2)
● Proportion of total variation in y explained by x
o Will be between 0 and 1 – higher = better fit of the regression line
- High-Low Method
o Overview
o Used to estimate the fixed & variable portions of cost
o Procedures
o Gather data
● Compare the high and low volumes and costs (ignoring any obvious aberrations)
o Outliers are eliminated
o Analyze data
● Divide the difference between high & low dollar total costs by difference in high & low volumes to
obtain variable cost per unit
● Use either the high volume or low volume to calculate variable costs by taking volume * VC per unit
● Subtract total calculated VC from total costs to obtain fixed costs
o Formulate results
● May be used to estimate total costs at any volume
o Flexible Budget Formula (AKA high-low method, AKA total cost formula)
o Flexible budget
● A series of budgets that are prepared for a range of activity levels rather than a single activity (FC
held constant, VC adjusted to level of activity)
o Formula
● Total cost = Fixed Cost + [VC per unit x Number of units]
● y = a + bx
- Learning Curve
o Overview
o Based on the premise that as workers become more familiar with a specific task, the per-unit labor hours
will decline as experience is gained and production becomes more efficient
o In order for learning curve analysis to be applied, the activity itself must be repetitive in nature, involve
intense labor, and have little to no labor force turnover or breaks in production
o Effects
o Variable costs per unit will decline until a steady-state period is achieved (labor hrs/unit will be constant)
o As cumulative production doubles, cumulative average time per unit falls to a fixed % of previous average t
BEC Study Guide
M2: Projection and Forecasting Techniques: Part 2

- Cost-Volume-Profit Analysis (aka “breakeven analysis”)
o Assumptions
o All costs can be separated into either variable or fixed costs
o Volume is the only relevant factor affecting cost
o All costs behave in a linear fashion in relation to production volume
o Cost behaviors are anticipated to remain constant over the relevant range of production volume because
there is an assumption that the efficiency of production does not change
o Costs show greater variability over time
● Longer time period → greater % of variable costs
● Shorter time period → greater % of fixed costs
o Use of a single product → model assumes that the product mix remains constant
o Contribution approach is used
o Selling price remains unchanged
- Absorption approach vs. Contribution approach
o Absorption approach
o Overview
● Required for GAAP
● Doesn’t segregate fixed & variable costs
o Calculate
● Revenue
● - COGS
● = Gross margin
● - Operating expenses
● = Net income
o Contribution approach
o Overview
● Uses variable costing (AKA direct costing)
● Doesn’t represent GAAP, but useful for internal decision making
o Calculate
● Revenue
● - Variable costs DL, DM, variable OH, shipping/packaging, variable selling expenses
● = Contribution margin
● - Fixed costs Fixed OH, fixed selling, most G&A expenses
● = Net income
o Unit contribution margin
● Unit sales price - Unit variable cost
o Contribution margin ratio
● Contribution margin / Revenue
o Absorption approach vs. Contribution approach
o ***Difference lies in treatment of fixed factory overhead
● Absorption approach → product cost
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o Fixed FOH is a product cost & included In inventory/COGS
o Inventory/COGS includes both fixed costs and variable costs
● Contribution approach → period cost
o Fixed FOH is a period cost & expensed in period incurred
o Inventory/COGS only include variable manufacturing costs
o Treatment of SG&A expenses
● Absorption approach
o Both variable and fixed SG&A expenses are part of operating expenses, separate from COGS
● Contribution approach
o Variable SG&A expenses are part of the total variable costs for the contribution margin calculation
o Effect on income
o If all production is sold every period, both methods produce the same operating income figures
o Production > sales
● Some units are added to ending inventory
● Income is higher under absorption costing
o Fixed FOH is included with each unit in ending inventory under absorption costing, whereas it is
expensed as a period cost with variable costing
o Sales > production
● Ending inventory < beginning inventory
● Income is lower under absorption costing
o Fixed FOH carried over from a previous period is charged to COGS under absorption costing, wher
those costs were expensed in a prior period under variable costing
o ****Computing the difference
o Step 1 → Compute fixed cost per unit
● Fixed FOH / Units produced
o Step 2 → Compute the change in income
● Change in inventory units x Fixed cost per unit
o Step 3 → Determine the impact of the change in income
● No change in inventory → Absorption net income = Variable net income
● Increase in inventory → Absorption net income > Variable net income
● Decrease in inventory → Absorption net income > Variable net income
o Benefits and limitations of each method
o Absorption Costing:
● Benefits
o Required by IRS & GAAP
● Limitations
o Level of inventory affects net income
o Net income is less reliable because cost of product includes fixed costs
o Variable/Direct Costing:
● Benefits
o Variable/fixed costs are separate and can be easily traced
o Net income is more reliable for use in performance evaluations because product does
not include fixed costs
o Isolates contribution margins in FS to aid in decision making
● Limitations
o NOT GAAP or IRS approved
- Break-even Analysis
o Overview
o Determines the sales required (in $ or units) to achieve 0 profit or loss from operations
●
o Break-even point in units
o Calculate
● Total fixed costs / Contribution margin per unit
BEC Study Guide
o
o Break-even point in dollars
o Calculate
● Unit price * Break-even point (in units)
o
● OR
● Total fixed costs / Contribution margin ratio
o
o Required sales volume for target profit:
o Calculate
● Sales (units) = (Fixed cost + Pre-tax target profit) / Contribution margin per unit
o
o Sales dollars needed to obtain desired profit
o Calculate
● Sales dollars = Variable costs + Fixed costs + Pre-tax profit
o
● OR
● Sales = [ Fixed cost + Pretax profit ] / Contribution margin ratio
o
o Predicting profits based on volume
o After break-even has been achieved, each additional unit sold will increase net income by the amount of
the contribution margin per unit
●
o Setting selling prices based on assumed volume
o Calculate
● Sale price per unit = (Fixed costs + Variable costs + Pre-tax profit) / # units sold
BEC Study Guide
o
o Margin of safety concepts
o Overview
● Margin of safety is the excess of sales over break-even sales
o Sales dollars
● Calculate
o Margin of safety ($) = Total sales ($) - Breakeven sales ($)
o Percentage
● Calculate
o Margin of safety (%) = Margin of safety ($) / Total sales
- Target Costing (used for target pricing)
o Overview
o Target costing is a technique used to establish the product cost allowed to ensure both profitability
per unit and total sales volume
o Cost determination
o Market circumstances creating target costing costing
● As competition sets prices, any change in price could easily cause a customer defection
o Target cost computation
● Target cost = Market price - Required profit
o Implications of target costing
o If management commits to a target cost, serious measures must be employed to reduce costs
● Compromised quality
● Increased marketing and downstream costs (to differentiate and create brand loyalty)
● Increased complexity in cost measurement
● Product redesign
- Notes from MCQs
o When deciding on which single product to use, pick product with highest contribution margin ratio
M3: Ratio Analysis of Forecasts and Projections

- New ratios to me
o Operating cash flow ratio
▪ Calculate
● Cash flow from operations / Ending current liabilities
o Working capital turnover
▪ Calculate
● Net sales / Average working capital
o Operating cycle (NOT cash conversion cycle)
▪ Calculate
● Days in inventory + Days sales in accounts receivable
M4: Marginal Analysis

- Terms Related to Marginal Analysis
o Relevant revenues and costs
▪ Revenues and costs are relevant only if they change as a result of selecting different alternatives
● Relevant costs can either be fixed or variable
● Relevant costs are usually specifically traceable to cost objects that may change as a result of
selecting different alternatives
▪ Examples of (generally) relevant costs
● Direct costs → costs that can be identified with or traced to a given cost object
● Prime costs → DM and DL
● Discretionary costs → costs arising from periodic budgeting decisions by management to spend in
areas not directly related to manufacturing
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o Costs to maintain landscaping
● Incremental costs → marginal costs, differential costs, or out-of-pocket costs. Additional costs incurred t
produce an additional amount of the unit over the present output
o All variable costs and any avoidable fixed costs associated with a decision
● Opportunity costs → cost of foregoing the next best alternative when making a decision
o Costs related to a special device that is necessary if a special order is selected
o Costs associated with alternative uses of plant space
● Controllable costs → costs that are authorized by the manager or decision maker
o Only relevant if they will change as a result of selecting different alternatives
● Avoidable costs and revenues → costs and revenues that result from choosing one course of action
instead of another, and as a result, the firm avoids the cost and revenue associated with the course of
action not selected
▪ Examples of irrelevant costs
● Costs that do not differ among alternatives
● Sunk costs → costs that are unavoidable because they were incurred in the past and cannot be
recovered as a result of a decision
● Uncontrollable costs → costs that were authorized at a different level in the organization
● Unavoidable costs → costs that are the same regardless of the chosen course of action
- Special Order Decisions
o Determining relevant costs
▪ Presumed excess capacity
● Compare the incremental costs of the order to the incremental revenue generated by the order
o SP > VC per unit → accept
o SP < VC per unit → decline
▪
▪ Presumed full capacity
● Opportunity cost of producing special order (contribution margin that would’ve been produced if
special order were not accepted) should be included in analysis
▪
o Strategic factors should also be considered
- Make vs. Buy
o Overview
▪ Select the lowest cost alternative
oBEC Study
Determining Guide
relevant costs and other make-or-buy issues
▪ Excess capacity
● Cost of making product internally is cost that will be avoided if product is not made
o This will be maximum outside purchase price
▪
▪ No excess capacity
o Cost of making product internally is cost that will be avoided if product is not made PLUS
opportunity cost associated
- Sell or process further

o Overview
▪ Decision is made based on profitability
o Joint costs
▪ Costs of a single process that yields multiple products
● Sunk costs that are not relevant to decisions of whether to sell or to process further
o Separable costs
▪ Costs incurred after the split-off point
● Relevant to decisions of whether to sell or to process further
o Deciding factors to sell or process further
▪ Decision is made by comparing the incremental revenue and the incremental cost generated after the
split-off point
● Incremental revenue > incremental cost → process further
● Incremental revenue < incremental cost → sell at the split-off point
BEC Study Guide
▪
- Keep or Drop Segment
o Classification of costs
▪ Fixed costs associated with the segment must be identified as either avoidable (relevant) or unavoidable
(irrelevant) even if the segment is discontinued
o Decision factors
▪ Compare the fixed costs that can be avoided if the segment is dropped to the contribution margin that will
be lost
● Lost contribution margin > avoided fixed costs → keep the segment
● Lost contribution margin < avoided fixed costs → drop the segment
BEC Study Guide
o
M5: Budgeting: Part 1

- Operational and Tactical Planning
o Overview
o Process of determining the specific objectives and means by which strategic plans will be achieved
o Single-Use Plans
o Developed to apply to specific circumstances during a specific time frame
o Annual budget
o Translate the strategic plan and implementation into a period-specific operational guide
- Budget Policies
o Management participation in formulation
o Budget guidelines
o Evaluation of current conditions
● Consideration of the changes to the environment since the adoption of the strategic plan
● Organizational goals for the coming period
● Operating results YTD
o Management instructions
● Setting the tone for the budget
● Corporate policies
- Standards and Benchmarking
o Ideal and currently attainable standards
o Standards are often set below expectations to motivate productivity and efficiency
o Ideal standards
● Overview
o Represent the costs that result from perfect efficiency and effectiveness in job performance
o No provision is made for normal spoilage or downtime
● Advantage
o Emphasis on continuous quality improvement
● Disadvantage
o Demotivation of employees
o Currently attainable standards
● Overview
o Represent costs that result from work performed by employees with appropriate training
and experience
● Advantage
o Perception that standards are reasonable
● Disadvantage
o Use of judgment and potential manipulation
o Authoritative and participative standards
o Authoritative standards
● Overview
o Set exclusively by management
● Advantage
o Implemented quickly
o Will likely include all costs
● Disadvantage
BEC StudyoGuide
o Participative
Workers might not accept imposed standards
standards
● Overview
o Set by both managers and the individuals who are held accountable to those standards
● Advantage
o Workers are more likely to accept
● Disadvantage
o Slower to implement
- Master Budgets
o Overview
o Normally includes an operating (non-financial) budget as well as a financial budget that outlines the
sources of funds and detailed plans for their expenditure
o Purpose
● Provide comprehensive and coordinated budget guidance for an organization consistent with overall
strategic objectives
o Components
● Pro forma FS
o Ultimate output of the business plan
● Assumptions
o Supported by schedules that reflect the underlying assumptions that produce the FS
o Limitations of the annual plan
● Master budget confined to one year at a single level of activity
o May exaggerate variances due to seasonal or volume fluctuations
▪ Flexible budget is for any production level within a relevant range
● Reporting output
o May not be useful for decision making
o Mechanics of master budgeting
o Operating budgets
● Established to describe the resources needed and the manner in which those resources will be acquired
● Include:
o Sales budget
o Production budget
o SG&A budget
o Personnel budget
o Financial budgets
● Define the detailed sources and uses of funds to be used in operations
● Include:
o Pro forma FS
o Cash budget
-
- Order of Preparation
o Sales budget prepared first → production budget → DM, DL, OH budgets → COGS budget
- Operating Budgets: Sales budget
o Overview
BEC Study Guide
o Foundation of the entire budget process
o Represents the anticipated sales of the organization in units and dollars
o Sales forecasting and budgeting
o Sales budget is based on the sales forecast
o
- Operating Budgets: Production Budget
o Overview
o Made up of the amounts spent for DM, DL, and FOH
o Based on the amounts of inventory on hand and the inventory necessary to sustain sales
o Establishing required levels of production
o Budgeted sales + Desired ending inventory - Beginning inventory = Budgeted production
●
o Direct materials budget
o Direct materials purchases budget
● Number of units to be purchased
o Units of DM needed for production period + Desired ending inventory - Beginning inventory
● Cost of DM to be purchased
o Units of DM to be purchased for the period x Cost per unit
o Direct materials usage budget
● Cost of DM used
o Beginning inventory at cost + Purchases at cost - Ending inventory at cost
o Direct labor budget
o Total wages
● Step 1
o Budgeted production in units x Hours required to produce each unit = Total # of hours needed
● Step 2
o Total number of hours needed x Hourly wage rate = Total wages
BEC Study Guide
o
o Factory overhead budget
o
o Cost of goods manufactured and sold budget
o Cost of goods sold
● Beginning finished goods inventory + Cost of goods manufactured - Ending finished goods inventory
o
- Operating Budgets: SG&A Expense Budget
o SG&A costs are not inventoried and are budgeted as period costs
o Matched in their entirety against budgeted sales
- Notes from MCQs
o The best basis upon which cost standards should be set to measure controllable production inefficiencies is
engineering standards that are based on attainable performance
o Both mass production and service companies can use standard cost systems
o Budgeted income statement must come before budgeted balance sheet
M6: Budgeting: Part 2
- Financial Budgets: Cash Budget
o Overview
BEC Study
o Cash budgetGuide
represents detailed projections of cash receipts and disbursements
o Derived from the other budgets
o Divided into 3 categories:
● Cash available
● Cash disbursements
● Financing
o Cash available
o Overview
● Balances available at the beginning of the period + cash collections
o Cash balances
● The amounts of cash on hand that can be used to liquidate expenses
o Limited by management policies relative to minimum cash on hand and compensating balance
agreements
o Cash collections
● The amounts of cash that will be received from sales, based on the sales budget and from anticipated
loan proceeds
o % of credit sales and collection speed is important factor
o Cash disbursements
o Purchases
● Cash purchases for the current period
● Credit purchases (AP) for the current period
● Cash disbursements required to pay AP during the period
o Operating expenses
● Cash budget eliminates non-cash operating expenses (i.e., depreciation)
● Includes:
o % of prior month expenses to be paid in the current month
o Current month expenses for which disbursement is deferred until the following month
o Current month expenses paid in cash in the current month
BEC Study Guide
●
o Financing
o Financing budgets consider the manner in which operating (line of credit) financing will be used to
maintain minimum cash balances or the manner in which excess/idle cash will be invested
o Cash budget formats
o
- Financial Budgets: Pro Forma Financial Statements
o Pro forma income statement
o Includes the data described in the operating budgets:
● Sales budget
● COGS budget (derived from production budget)
● SG&A budget
● Interest expense budget (taken from cash budget)
BEC Study Guide
o
o Pro forma balance sheet
o Displays the balance of each BS account in a manner consistent with the income statement and cash budget
o Pro forma statement of cash flows
o Derived from the budgeted income statement, the current and previous budgeted balance sheets, and then
reconciled to the cash budget
- Capital Budgets
o Overview
o Allow management to evaluate the capital additions of the organization, often over a multi-year period
o Detail the planned expenditures for capital items
o Highly dependent on the availability of cash or credit
o Pro forma balance sheet
o Planned additions of capital equipment and related debt from the capital budget are added to the BS
o Pro forma income statement
o Planned additions of capital equipment are considered in developing budgeted depreciation expense
o Interest expense associated with planned financing is included as an expense
o Cash budget
o Planned financing expenses and principal repayments are included as disbursements on the cash budget
- Flexible Budgeting
o Overview
o A flexible budget is a financial plan prepared in a manner that allows for adjustments for changes in productio
sales and accurately reflects expected costs for the adjusted output
● Revenues and expenses are adjusted to display anticipated levels for achieved outputs
o Assumptions and uses
o Include consideration of:
● Revenue per unit
● Variable costs per unit
● Fixed costs over the relevant range
o Yield
● Flexible budgets consider the amount of cost per unit allowed for units of output
o Variance analysis
● Flexible budgets derive the expenses and revenues allowed from the output achieved for purposes of
comparison to actual activity and performance evaluation
o Benefits and limitations of the flexible budget
o Benefits
● Flexible budgets can display different volume levels within the relevant range to pinpoint areas in which
efficiencies have been achieved or waste has occurred
o Limitations
● Flexible budgets are highly dependent on the accurate identification of fixed and variable costs and the
determination of the relevant range
BEC Study Guide
M7: Variance Analysis

- Actual vs. Plan
o Variance analysis is a tool for comparing some measure of performance to a plan, budget, or standard for that
measure
o Performance report
o Usefulness is limited by the existence of budget variances that may be strictly related to volume
o Use of flexible budgets to analyze performance
o Flexible budget allows managers to identify how an individual change in a cost or revenue driver affects the o
cost of a process
●
- Variance Analysis Using Standards
o Standard costing systems
o Standard costs measure the costs the firm expects that it should incur during production
o Calculations
● Direct costs
o Standard direct costs = Standard price x Standard quantity
● Indirect (overhead) costs
o Standard indirect costs = Standard (pre-determined) application rate x Standard quantity
o Variance calculations using standards
● Evaluating results
BEC Study oGuide
Actual cost < standard cost → Favorable variance
o Actual cost > standard cost → Unfavorable variance
● Evaluating control
o Variance from standard could have been prevented → Controllable variance
o Variance from standard could not have been prevented → Uncontrollable variance
o Product costs subject to variance analysis
● DM, DL, VFOH, FFOH
o Direct materials and direct labor variance
o DM price variance
● (Standard price - Actual price) x Actual quantity purchased
o DM quantity variance
● (Standard quantity allowed - Actual quantity used) x Standard price
o DL rate variance
● (Standard rate - Actual rate) x Actual hours worked
o DL efficiency variance
● (Standard hours allowed - Actual hours worked) x Standard rate
o Examples
- Manufacturing Overhead Variance
o Overview
BEC Study actual
o Compares Guide overhead incurred to overhead applied
o Underapplied and overapplied overhead
o If OH is underapplied (unfavorable) → overhead account will have net debit balance
o If OH overapplied (favorable) → overhead account will have net credit balance
o Remaining balance eventually gets applied to COGS (credit = good, debit = bad)
o Equations
o VOH rate (spending) variance
● (Standard rate - Actual rate) x Actual cost driver
o VOH efficiency variance
● (Standard cost driver allowed for actual production volume - Actual cost driver) x Standard rate
o FOH budget (spending) variance
● Actual fixed overhead - Budgeted fixed overhead
o FOH volume variance
● Budgeted fixed overhead - Standard fixed overhead cost allocated to production
o Based on Actual production x Standard rate
o Favorable = volume higher than anticipated (more units produced using same amt of fixed resource
o When standard costing is used, the application of overhead is accomplished in 2 steps
o Step 1: Calculated overhead rate
● Budgeted overhead costs / Estimated cost driver
o Step 2: Applied overhead
● Standard cost driver for actual level of activity x Overhead rate (from step 1)
BEC Study Guide
▪
o Sales and contribution margin variances
o Sales price variance (sales revenue flexible budget variance)
● [(Actual selling price / unit) - (Budgeted selling price / unit)] x Actual sold units
o
o Sales volume variance
● (Actual units sold - Budgeted sales units) x Standard contribution margin per unit
BEC Study Guide
o
- General variances
o Flexible budget variance = difference between Actual and Flexible budget @ Actual
o Volume variance = difference between Flexible budget @ actual and Master budget
- Mnemonic to remember all this stuff
o SAD PURE DADS DADS
▪ SAD – Standard – Actual = Difference
▪ Price = Difference x Actual
▪ Usage = Difference x Standard
▪ Rate = Difference x Actual
▪ Efficiency = Difference x Standard
B5 – Economic Concepts and Analysis

M1: Economic and Business Cycles
- Economics
o Science that studies human behavior as the relationship between ends and scarce means that have alternative us
- Business Cycles
o Introduction
o Business cycles refer to the rise and fall of economic activity relative to long-term growth trends
● The growth in economic activity is not stable, but rather characterized by fluctuations
● Business cycles vary in duration and severity
o Measuring economic activity (Gross Domestic Product)
o GDP = total market value of all final goods & services produced within the borders of a nation in a
particular period
● Nation’s output of goods & services
● Includes all final goods and services produced by resources within a country regardless of who owns
the resources
o Summary composition of business cycles
o Expansionary phase
● Rising economic activity (GDP) an growth
o Economic activity is rising above its long-term growth trend
o Firm profits are rising
o Employment is going up
o Prices are going up
o Peak
● High point of economic activity, marks the end of expansionary phase and beginning of contractionary p
o Firm profits are at highest levels
o Firms face capacity constraints and input shortages (RM and labor), leading to higher costs and high
overall price levels
o Inflation is going up
o Contractionary phase
● Falling economic activity and growth
o Firm profits are falling from their highest levels
o GDP is down
o Employment is down, prices are down
o Trough
● Low point of economic activity
o Firm profits are at their lowest levels
o Significant excess production capacity, leading to unemployment and prices going down
o Recovery phase
● Economic activity begins to increase and return to its long-term growth trend
o Firm profits are stabilizing as the demand for goods and services begins to rise
BEC Study Guide
o
o Terminology used in describing business cycles
o Recession
● Definition
o Economy experiences negative economic growth
o Defined as 2 consecutive quarters of falling national output
● Characteristics
o GDP below long-term average
o Real GDP, output, employment < potential GDP
o Firms incur losses
o Firms have excess capacity
o Unemployment is high
o Depression
● Definition
o Very severe recession
o Long period of stagnation in business activity
● Characteristics
o High unemployment rates
o Firms have excess capacity
o Reduced demand for goods and services
o Many firms go out of business
- Economic Indicators
o Leading indicators (before the fact)
o Average new unemployment claims
o Building permits for residences
o Average length of the workweek
o Money supply
o S&P 500 stock index
o Orders for goods, price changes of materials, index of consumer expectations, interest rate spread, index
of supply deliveries
o Lagging indicators (after the fact)
o Prime rate charged by banks
o Average duration of unemployment
o Commercial and industrial loans outstanding, consumer price index for services, consumer debt-to-income
ratio, changes in labor cost/unit of manufacturing output, inventory-to-sales ratios
o Coincident indicators (change at approximately the same time as the whole economy, show current state)
o Industrial production
o Manufacturing and trade sales, GDP, personal income less transfer payments
- Market Structures and Pricing (inverse relationship between competition and profit margin)
o Perfect (pure) competition
o In a perfectly competitive market, no individual firm can influence the market price of its product, nor shift
the market supply sufficiently to make a good scarcer or more abundant
o Assumptions and market conditions
● A large number of suppliers and customers act independently. Firms are small relative to the industry
● No barriers to entry
● Homogeneous products
● Firms are price takers (price is set by the market)
● Firms control only the quantity produced
● Demand is perfectly elastic
● Economic profits are 0 in the long-run, firms earn a normal rate of return
o Strategies under perfect competition
● Maintain market share and responsiveness of sales price to market conditions
o Monopolistic competition
o Exists when many sellers compete to sell a differentiated product into a market in which the entry of new
sellers is possible (brand-name cosmetic products)
● Numerous firms with differentiated products. Firms are small relative to the industry
● Few barriers to entry to exist (not 0)
BEC Study
● Firms Guide
exert some influence over the price and market through differentiation
● Differentiation results in a highly (not perfect) but downward-sloping demand curve
● In the long run, monopolistically competitive firms will earn 0 economic profits. In
the short run, if profits are positive, firms will enter and drive profits to 0
o Strategies under monopolistic competition
● Maintain market share but also enhance product differentiation and allocate resources to advertising,
marketing, product research, etc.
o Oligopoly
o A few sellers dominate the sales of a product and entry of new sellers is difficult
● Relatively few firms with differentiated products. Firms are large relative to the industry
● Significant barriers to entry, but not insurmountable
● Products are differentiated and firms have control over both the quantity produced and the price charge
● Firms are strongly interdependent (collude)
● Kinked demand curve because firms match price cuts of competitors but ignore price increases
o
● Economic profits are positive in the long run
o Strategies under oligopoly
● Focus on market share and appropriate amount of advertising (product differentiation)
● Adapt to price changes
o Monopoly
o Concentration of supply in the hands of a single firm
o Assumptions and market characteristics of monopoly
● Single firm with a unique product
● Insurmountable barriers to entry
● Price setters
● No substitute products. Demand is inelastic
● Economic profits are positive in the long run
o Natural monopoly → Economic and technical conditions permit only one efficient supplier
o Strategies under monopoly
● Ignore market share
● Focus on profitability from production levels that maximize profits (control supply to keep price high)
o Market assumptions and conditions
o Regardless of the model that represents the industry, the firm will operate best when marginal
revenue = marginal cost
● Ignore fixed or sunk costs
o Summary
BEC Study Guide
- Impact of Changes in Fiscal Policies, Monetary Policies, Regulations, and Trade Controls
o Fiscal policy
o Overview
● Expansionary policy goals = AD up, GDP up, employment up, stimulate GDP, prevent prolonged recession
● Restrictive policy goals = AD down, prices down, cool overheated economy, prevent bubble, reduce infla
o Impact of government spending
● Increased production, lower unemployment, and higher consumer spending
o Impact of taxation
● Decreased taxes → higher net income and profits → increased compensation, dividends, discretionary
income
● Increased taxes → opposite effect
o Monetary policy
o Open market operations
● Government buying and selling government securities
o Buying → increases money supply and expands the economy
o Selling → decreases money supply and contracts the economy
o Discount rate
● Increase in discount rate (rate the Fed charges its member banks) → increases interest rates,
discourages borrowing, and reduces the money supply, which contracts the economy
BEC Study Guide
● Decrease in discount rate → decreases interest rates, encourages borrowing, and increases the
money supply, which expands the economy
o Required reserve ratio
● Higher required reserve ratio (how much money a bank is required to hold it its vault or on deposit
with a Federal Reserve bank) → decreases the money supply, which contracts the economy
● Lower required reserve ratio → increases the money supply, which expands the economy
o Impacts of monetary policy
● Higher interest rates → negative impact, reduced consumer activity
● Decreased interest rates → more economic activity, increased production, reduced unemployment, low
cost of capital
o Regulations
o More restrictive regulations → more difficult and more costly to maintain compliance, small/mid-size firms
are more difficult to operate
o Regulations may provide benefits by protecting industries and entities from unfair competition or from
actions by employees who undermine company guidelines
o Trade controls
o Export controls
● Tariffs
o Taxes on imports → increase prices of foreign goods → less competitive relative to domestic goo
● Quotas
o Limits on the quantity of a good that can be imported over time → protect specific industries
● Embargoes
o Prohibit the importing or exporting of certain goods from a specific country
o Pros
● May help to prevent “dumping” (foreign firms selling below FMV to both foreign and domestic)
● Protect specific industries and workers
o Cons
● Potential detriment to the world economy
● Limitations on free trade,
● Restrictions on foreign entities that operate more efficiently than their domestic counterparts
M2: Market Influences on Business: Part 1

- The Laws of Supply and Demand
o Demand
o Demand curve
● Maximum quantity of a specific good that consumers are willing and able to purchase at any given price
● Similar to aggregate demand curve, except that the x-axis here is quantity and not GDP
● Downward sloping
o Quantity demanded
● Quantity of a good individuals are willing and able to purchase at a given price
● Price up, quantity demanded down
o Change in quantity demanded (movement along the demand curve)
● Change in the amount of good demanded resulting solely from a change in price
● Sliding around on the demand curve
o Change in demand
● Price of a product and quantity demanded of that product are inversely related - why?
o Substitution effect
▪ People substitute one similar good for another when the price of a good they usually
purchase increases
o Income effect
▪ As prices are lowered with income remaining constant, people will purchase more or
all of the lower-priced products
● Consumer can purchase more of all goods
o Factors that shift demand curves (factors other than price) (“WRITEN”)
● W - Changes in wealth
o Wealth up → demand up
● R - Changes in the price of related goods (substitutes and complements)
o Substitute price up → demand up
o Complement price up → demand down
● I - Changes in consumer income
o Income up → demand up
● T - Changes in consumer tastes or preferences for a product
o Tastes → change demand
● E - Changes in consumer expectations
o Price in future up → demand up (buy now)
● N - Changes in the number of buyers served by the market
BEC StudyoGuide Number of buyers up → demand up
o Change in quantity demanded vs. change in demand
●
o Supply
o Definitions
● Price and quantity are positively related (price up, quantity supplied up)
● Supply curve
o Maximum quantity of a specific good that sellers are willing and able to produce at any given pric
o Similar to aggregate supply curve, except the x-axis here is quantity and not GDP
● Quantity supplied
o Amount of a good that producers are willing and able to produce at any given price
● Change in quantity supplied (movement along the supply curve)
o Change in the amount producers are willing and able to produce resulting solely from a change
in price
o Sliding along the supply curve
● Change in supply (movement of the supply curve)
o Change in the amount of a good supplied resulting from a change in something other than the
price of the good
o Shift the supply curve
o Factors that shift supply curves (“ECOST”)
● E - Changes in price expectations of the supplying firm
o Prices decreasing in the future → supply up (sell now)
● C - Changes in production costs (price of inputs)
o COGS down → profits up, supply up
● O - Changes in the price or demand for other goods
o We sell down → supply this good up
● S - Changes in subsidies or taxes
o Increased subsidies or decreased taxes → supply up
● T - Changes in production technology
o Improvement in technology → shift supply curve right → supply up
● e
o Market equilibrium
o Market is in equilibrium when there are nor forces acting to change the current price/quantity combination
● Equilibrium price and output quantity = point where supply and demand curves intersect = “market
clearing price”
BEC Study Guide
●
o Changes in equilibrium
● If supply and/or demand curves shift, the equilibrium price and quantity will change
o
o Government intervention in market operations
o Price ceilings
● Definition
o Maximum price that is established below the equilibrium price
▪ Causes shortages to develop (QD > QS)
● Examples
o Rent control
o Price floors
● Definition
o Minimum price set above the equilibrium price
▪ Causes surpluses to develop (QS > QD)
● Examples
o Minimum wage
BECofStudy
- Elasticity DemandGuide
and Supply
o Elasticity → measure of how sensitive the demand for, or the supply of, a product is to a change in price
o Price elasticity of demand
o Calculate
● % change in quantity demanded / % change in price
o In a normal demand curve, the price elasticity of demand is usually negative
● Price goes up, quantity demanded goes down (inverse relationship)
o
o Price inelasticity
● Demand for a good is price inelastic if the absolute price elasticity of demand is less than 1.0
● If price elasticity is 0 → perfectly inelastic → vertical demand curve
o Price elasticity
● Demand is price elastic if the absolute price elasticity of demand is greater than 1.0
o Unit elasticity
● Demand is unit elastic if the absolute price elasticity of demand is equal to 1.0
o Factors affecting price elasticity of demand
● More substitutes → more elastic
● Longer time period → more elastic (more choices are available)
o Price elasticity effects on total revenue
● Effects of price inelasticity on total revenue
o Increased price → decreased quantity, increased revenue
● Effects of price elasticity on total revenue
o Increased price → decreased quantity, decreased revenue
● Effects of unit elasticity on revenue
o No effect
o Price elasticity of supply
o Calculate
● % change in quantity supplied / % change in price
o
o Price inelasticity
● Supply is price inelastic if the absolute price elasticity of supply is less than 1.0
● If price elasticity is 0 → perfectly inelastic → vertical supply curve
o Price elasticity
● Supply is price elastic if the absolute price elasticity of supply is greater than 1.0
o Unit elasticity
● Supply is unit elastic if the absolute price elasticity of supply is equal to 1.0
o Factors affecting price elasticity of supply
● Feasibility of producers storing the product (high ability → high supply elasticity)
● Time required to produce and supply (longer production time → lower price elasticity)
o Cross elasticity
BECo %Study
change inGuide
the quantity demanded (or supplied) of one good caused by the price change of another good
o Calculate
● % change in the number of units of X demanded (supplied) / % change in price of Y
o Substitute goods
● If the coefficient is positive (price Y up, demand X up) → goods are substitutes
o Complementary goods
● If the coefficient is negative (price Y up, demand X down) → goods are complements
o Unrelated goods
● If the coefficient is 0 → goods are unrelated
o
o Income elasticity of demand
o Measures the percentage change in quantity demanded for a product for a given percentage change in incom
o Calculate
● % change in number of units of X demanded (supplied) / % change in income
o Positive income elasticity
● If income elasticity of demand is positive (demand up as income up) → normal (luxury) good
o Negative income elasticity
● If income elasticity of demand is negative (demand down as income up) → inferior good
o
- Effect of Inflation on Price, Investments, Debt, and Future Expenses
o Effect of inflation on price
o Inflation = sustained increase in the general prices of goods and services
o Inflation has an inverse relationship with purchasing power (price level up, purchasing power down)
o Monetary assets and liabilities
● Cash, AR, notes payable
● Fixed in dollar amounts regardless of changes in specific prices or the general price level
o Price goes up → value goes down
o Non-monetary assets and liabilities
● Buildings, land, machinery, rent collected in advance
● Fluctuate with inflation and provide reduced variability when price levels change
o Price goes up → value goes up
o Effect of inflation on investments
o As inflation goes up:
● Required return goes up
● Value of most fixed-rate debt and equity investments goes down
o Alternative investments
● May be used to hedge against inflation:
o Real estate
o Commodities
o Hedge funds and private equity investments
o Treasury Inflation-Protected Securities (TIPS)
BEC Study● Coupon Guide
and principal adjust for inflation
o Effect of inflation on debt
o If you think rates will go up → issue (borrow) at a fixed rate → FMV of liability goes down
o If you think rates will go down → issue (borrow) at variable rate → interest expense goes down
o Regardless of the payment mechanism, principal payments will be lower in real terms when price levels are ri
o Real cost of borrowing
● Future value / (1 + Inflation rate) ^ n
●
o Future expenses
o In an inflationary environment, the costs of production (labor, capital, natural resources, etc.) will increase
●
- Pricing strategies
o Dual pricing → assigning different prices to the same product in different market settings
o Predatory pricing → lower prices to external customers than competitive pricing
o Collusive pricing → higher prices to external customers than competitive pricing
o Transfer pricing → charge made between affiliates for products or services
M3: Market Influences on Business: Part 2
- Factors That Influence Strategy
o General types of factors that influence strategy
o SWOT analysis (strengths, weaknesses, opportunities, threats)
● Internal factors (strengths and weaknesses)
o Innovation of product lines
o Competence of management
o Core competencies
o Influence of high-level managers, Capital improvements, Leadership in R&D, cohesiveness of
the values of the organization, marketing effectiveness (brand loyalty), effectiveness of
communication, clarity of the strategic vision
● External factors (opportunities and threats)
o Factors that affect the overall industry and competitive environment of the industry
▪▪ The economy
▪▪ Regulations and laws
Demographics of the population
▪▪ Social
Technological advances and existing technology
values
Political values
o Factors that affect the competitive environment of the firm
▪▪ Existence of substitute products
▪▪ Barriers to market entry (entrants)
Market competitiveness (rivals)
▪ Bargaining power of customers (buyers)
Bargaining power of suppliers
- Porter’s Five Forces (“SERBS”)
o S - Existence of substitute products
o If substitutes are readily available to consumers, have equal performance, and are priced at or below the
price of the firm’s products, these effects will be very large
o Effect is further intensified when the costs of the buyer switching to the substitute product are low
o E - Barriers to entry (entrants)
o Types of barriers to entry
● Government regulation, supplier access, high up-front capital requirements, pre-existing customer prefe
and loyalties, economies of scale, learning-curve issues, patents, trade barriers
o When new companies will attempt to enter
● Barriers to entry are low, potential high profits exist in the market, and the risk of retaliation by other
firms is low
o Firms will continue to enter until profits fall to a competitive level
o The simple threat of new entrants can scare existing firms into keeping their prices at
competitive levels
oBEC Study
R - Market Guide (intensity of competition) (rivalry)
competitiveness
o Ability of rival firms to respond to change
o Advertising of rival firms
o R&D of rival firms
o Alliances of rival firms and suppliers
o Other factors increasing competition
● Market is not growing fast
● Several equal-sized firms exist in the market
● Customers do not have strong brand preferences
o B - Bargaining power of buyers
o Large volume of a firm’s business (high buyer concentration)
● If one group of customers makes up a large volume of the firm’s business, the bargaining power of
the customer will significantly affect the competitive environment of the firm
o Availability of information
● The more information that is available to the buyer, the more the buyer will be able to compare and
contrast features of a product and choose one over another
o Buyer’s low cost of switching products
o High number of alternative suppliers
o S - Bargaining power of suppliers
o Firm is unable to change suppliers
● Few substitutes
● High switching costs
o Reputation of supplier and demand for its goods
● Quality of its product is excellent and crucial to the success of the firm’s product
● Demand for supplier’s goods is high
- Types of Competitive Strategies
o Competitive advantage in general
o The overall competitive advantage of a firm is determined by the value the firm offers to its customers less
the cost of creating that value
o Cost leadership advantage
● Firm is able to produce and sell its product for less than its rivals
o Build market share
o Match the price of rivals
o Differentiation advantage
● Customer perceives the firm’s product to be superior in some way to those of its rivals, and thus are
willing to pay a higher price for its uniqueness
o Build market share
o Increase price
o Five basic types of competitive strategies
o Cost leadership focused on a broad range of buyers
o Cost leadership focused on a narrow range of buyers
o Differentiation focused on a broad range of buyers
o Differentiation focused on a narrow range of buyers
o Best cost provider (combination)
o Cost leadership strategies
o When cost leadership strategies work well:
● Buyers have large amounts of bargaining power and are able to switch between competitive products
without incurring significant cost
● Heavy price competition where firms can increase their customer base simply by cutting the price of
the product for a period
o When cost leadership strategies fail:
● Firms focus too much on cutting costs
● Overlook technical advances
● Overlook the fact that customers may want improvements to the product
o Product differentiation strategies
o When differentiation strategies work well:
● Customers are able to see value in a product
o When differentiation strategies fail:
● Firms fail to create value
● Firms focus too much on one area (or the wrong area)
● Firm is in a market in which customers do not care about differentiation and hare happy with paying a
lower price for a more generic product
o Best cost strategies
o Combines the cost leadership strategy with the differentiation strategy
o When best cost strategies work well:
BEC Study Guide
● Generic products are not acceptable to buyers, but buyers are still sensitive to the value that they are
receiving for the money they are spending
o When best cost strategies fail:
● Losing customers to other firms using cost leadership strategies or those that are specifically focused
on differentiation
● Best cost strategies, in general, fail because while the company is a jack-of-all-trades, it is ultimately a
master of none, which very few customers seek out
o Focus/niche strategies
o Focus on market niches where consumers have specialized news and preferences
o When focus strategies work well:
● Niche has a large enough demand to create a profit for the firm
● Few firms are focusing in an area
o When focus strategies fail:
● Firm is not easily responsive to change (flexible)
M4: International Business Operations

- Motivations for International Business Operations
o Comparative advantage
o Specialization in the production and trade of specific products produces a comparative advantage in
relation to trading partners
o Imperfect markets
o Resource markets are often deemed to be imperfect
● The ability to trade freely between markets is often limited by the physical immobility of the
resources or regulatory barriers
o In order to retrieve more resources, companies must trade outside their borders
o Product cycle
o Product cycle theory predicts that domestic success will result in domestic competition, encouraging the
export of products or services to meet foreign demand
● Foreign success will in turn promote foreign competition
o Entity is then motivated to establish a business outside its boundaries to differentiate itself
more effectively and to compete with foreign business rivals
- Methods of Conducting International Business Operations
o Multinational operations are structured in any number of ways
o Franchising
● Entities whose marketing service or delivery strategy provides training and related service delivery
resources in exchange for a fee
o International trade
● Exporting/importing products and services
o Licensing
● Right to use processes or technologies in exchange for a fee
o Joint venture
● Take advantage of comparative advantage of one or both of the participants
o Direct foreign investment
● Purchasing a foreign company as a subsidiary or starting a subsidiary operation within the borders of
a foreign country
o Global sourcing
● Synchronization of all levels of product manufacturing, including R&D, production, and marketing, on
an international basis
o Implemented through a range of organizational and business arrangements
- Relevant Factors of International Business Operations
o Political and legal influences (repatriation restrictions = restricted from bringing invested money back to home country)
o Potential for asset expropriation
o Taxes and tariffs
o Limitations on asset ownership or joint venture participation
o Content or value-added limits
o Foreign trade zones
o Trade zones in which tariffs are waived until the goods leave the zone
o Economic systems
o Centrally planned economies
● Factors of production (capital, land, etc.) are owned by the government
o Market economies
● Factors of production are owned by individuals
o Conglomerates
● Self-sustaining entities that are integrated and interrelated
oBEC
CultureStudy Guide
o Shared values and attitudes of a group
● Individualism vs. collectivism
● Uncertainty avoidance
● Short-term vs. long-term orientation
● Acceptance of leadership hierarchy
● Technology and infrastructure
- Inherent Risks of International Business Operations
o Exchange rate fluctuation
o Transaction risk
● AR/AP denominated in foreign currency
o Economic risk
● If currency goes up, goods and services become more expensive to foreigners, but imports become chea
o Translation risk
● Subsidiaries
o Foreign economies
o The state of the foreign economy in which the company operates is highly significant to risk evaluation
● Foreign demand
o Demand is directly affected by the health of the economy of the country in which it operates
o Weakening demand may cause the foreign government to implement tariffs or other
regulatory measures that reduce foreign penetration
● Interest rates
o Higher interest rates are indicators of slower economic growth and reduced demand
o Lower interest rates are indicators of increased economic growth and demand
● Inflation
o Higher inflation reduces purchasing power, making imported goods more expensive and
reducing local demand
o Lower inflation increases the purchasing power for imported goods, resulting in higher local dem
● Exchange rates
o Weak local currency
o Reduces demand for imported goods
o Increases demand for exported goods
o Strong local currency
o Increases demand for imported goods
o Reduces demand for exported goods
o Political risk
o Represent non-economic events or environmental conditions that are potentially disruptive to financial
operations
● Expropriation of productive resources is the most extreme political risk
● Bureaucracies
● Corruption
● The host government’s attitude toward foreign firms
● The attitude of consumers toward foreign firms, Inconvertibility of foregin currency, War
- Transfer pricing
o Applicable in a situation in which two companies that are owned by the same parent company engage in
transactions with each other
o Profits are maximized when the company selling the good has a lower tax rate than the company
purchasing the good
-
M5: The Economic Effect of Significant Transactions
- Business combinations
o Types of business combinations
o Horizontal combination
● Companies in the same industry that produce the same goods or provide the same service (competitors
together under single management/leadership
o Reduced competition
o Economies of scale
o Expertise at various levels of production
o Minimized overproduction
o Maximized profits
o Vertical combination
● Combination of companies at different stages of the production process
o Assure the supply of raw materials (backward integration)
o Provide a stable market for products sold (forward integration)
o Circular combination
● Different business units with relatively remote connections come together under single management
BEC Study oGuide
Reduces overall administrative and other operational costs
o Diagonal combination
● A company that engages in an activity integrates with another company that provides ancillary support (
shipping) for that primary activity
o Ancillary support is delivered in a timely and effective manner
o Transactions
o Merger
● Two or more entities combine to form a single new corporation, with the stocks of all merging companie
surrendered and replaced with new stock
o Acquisition
● Only the acquirer remains after the acquisition
● The acquired firm may retain its legal structure and name, or it may be subsumed by the acquirer and
cease to exist
o Tender offer
● Company makes an offer directly to shareholders to buy the outstanding shares of another company,
which the shareholders can accept or reject
o Purchase of assets
● A portion (or all) of the larger selling company’s assets are purchased by the smaller acquiring company
● Shareholder approval must be obtained
- Divestiture
o Involves the partial or full disposal of a component or business of a company
o Sell-off
o Outright sale of a subsidiary
● Subsidiary’s core competencies do not align with the overall company’s
● There is a lack of synergy between the company and its subsidiary
o Spin-off
o Creates a new, independent company by separating a subsidiary business from a parent company
● Unit is less profitable and/or unrelated to the core parent business
● Operations of the unit after a spin-off are expected to have more value than they did as part of the
larger operation
o Equity carve-out
o Subsidiary is made public through an IPO
● Sale of shares in the new company generates cash for the parent and gives the parent a controlling inter
B6 – Process Management and Information Technology

M1: Process Management
- Introduction to Business Process Management
o Approaches
o BPM → management approach that seeks to coordinate the functions of an organization toward an ultimate
continuous improvement in customer satisfaction
o Activities
o Design
● Identification of existing processes
● Conceptual design of how processes should function once they have been improved
o Modeling
● Introduces variables to the conceptual design for what-if analysis
o Execution
● Design changes are implemented
● Key indicators of success are developed
o Monitoring
● Information is gathered and tracked and compared with expected performance
o Optimization
● Using the monitoring data and the original design, the process manager continues to refine the process
o Techniques
o Define
● The original process is defined as a baseline
o Measure
● The indicators that will show a change to the process are determined
o Analyze
● Simulations and models are used to determine the targeted or optimal improvement
o Improve
● Improvement is selected and implemented
o Control
BEC Study Guide
● Monitor the improvement in real time and apply the data to the model for improvement
o Plan, Do, Check, Act (PDCA)
o Plan
● Design the process improvement
o Do
● Implement the process improvement
o Check
● Monitor the process improvement
o Act
● Repeat
o Measures
o Can be financial or non-financial
o Should correlate directly to the managed process
o Benefits
o Efficiency
o Effectiveness
o Agility
- Shared Services, Outsourcing, and Offshore Operations
o Shared services
o Seeking out redundant services, combining them, and then sharing those services within a group or organizat
● Advantage
o Efficiency
● Risks
o Service flow disruption
o Create waste in the transition, rework, and duplication
o Increase the time it takes to deliver a service
o Failure demand
o A task must be performed for a second time because it was incorrectly performed the
first time
o Outsourcing
o Contracting of services to an external provider
● Advantage
o Efficiency
● Risks
o Quality risk
o Outsourced product might be defective
o Quality of service
o Poorly designed agreements may impede the quality of service
o Productivity
o Real productivity may be reduced
o Staff turnover
o Staff whose jobs have been outsourced may leave the organization
o Language skills
o Language barriers may reduce the quality of service
o Security
o Security of information may be compromised
o Qualifications of outsourcers
o Credentials may be flawed
o Labor insecurity
o Increases when jobs move to an external service provider
o Offshore operations
o Outsourcing of services to an external party in a different country
- Selecting and Implementing Improvement Initiatives
o Selecting improvement initiatives
o Irrational
● Irrational methods are intuitive and emotional. They lack structure and systematic evaluation
o Rational
● Rational assessments are structured and systematic. They involve the following:
o Strategic gap analysis
o External and internal assessments are performed
o Review competitive priorities
o Review of price, quality, or other considerations
o Review production objectives
o Review of performance requirements
o Choose improvement program
BEC Study Guide o Determine how to proceed for improvement
o Implementing improvement initiatives
o Internal leadership
● Senior management must provide direction and commit resources
o Inspections
● Ongoing implementation must be monitored and measured
o Executive support
● Executive management must be visibly supportive
o Internal process ownership
● The individuals most deeply involved must be committed
- Business Process Reengineering
o BPR → techniques to help organizations rethink how work is done to dramatically improve customer
satisfaction and service, cut costs of operations, and enhance competitiveness
o Seeks radical change
o Fresh start
o Reassess how business is done from the ground up (radical change)
● BPM is only an incremental change, but BPR is a radical change
o Current status
o Used to be really popular but it isn’t anymore
- Management Philosophies and Techniques for Performance Improvement
o Just-in-Time (JIT)
o Scheduling the deployment of resources just-in-time to meet customer or production requirements
o Overarching concept → inventory does not add value
o Requires employee empowerment
o “Pull” system (not a push-through system)
o Benefits
● Synchronization of production scheduling with demand
● Arrival of supplies at regular intervals
● Improved coordination with suppliers
● More efficient flow of goods between warehouses and production
● Reduced setup time
● Greater efficiency in the use of employees with multiple skills
o Total Quality Management (TQM)
o Organizational commitment to customer-focused performance that emphasizes both quality and
continuous improvement
o 7 critical factors
● Customer focus
o Each function of the corporation exists to satisfy the customer
● Continuous improvement
o Quality is not just the goal; it is embedded in the process
● Workforce involvement
o Team approaches and worker input to process development and improvement
o Quality circles → small groups of workers that use team approaches to process improvement
● Top management support
o Top management must actively describe and demonstrate support for quality
● Objective measures
o Measures must be unambiguous, clearly communicated, and consistently reported
● Timely recognition
o Compensation and general recognition
● Ongoing training
o TQM training should occur on a recurring basis
o Quality audits and gap analysis
o Quality audits
● Management assesses the quality practices of the organization
● Produce the following:
o Analysis that identifies strengths and weaknesses
o Strategic quality improvement plan
o Gap analysis
● Determines the gap between industry best practices and the current practices of the organization
● Produces the following:
o Target areas for improvement
o Common objective database
o Lean manufacturing
o Requires the use of only those resources required to meet the requirements of customers and nothing else
o Invest resources only in value-added activities
o Waste reduction
BEC Study
● Focus Guide
of lean is on waste reduction and efficiency (not quality)
o Continuous improvement (Kaizen)
● Occurs at the manufacturing stage, continuous efforts to improve efficiency and effectiveness
o Process improvements / Activity-based management
● Focuses on costs for each activity in a process
o Demand flow
o Manages resources using customer demand as the basis for resource allocation
o Contrasts with resource allocations based on sales forecasts or master scheduling
o Relationship to JIT
● Kanban systems visually coordinate demand requirements
o Relationship to lean
● Designed to maximize efficiencies and reduce waste
o Theory of Constraints (TOC)
o Organizations are impeded from achieving objectives by the existence of one or more constraints
● Either work around or leverage the constraint
o Maximization of throughput by identification and alleviation of constraints
o Constraints
● Anything that impedes the accomplishment of an objective
o Internal constraints → market demands more than the system can produce
o External constraints → system produces more than the market requires
o Five steps
● Identification of the constraint
● Exploitation of the constraint
o Planning around the constraint
● Subordinate everything else to the above decisions
o Management directs its entire efforts to improving the performance of the constraint
● Elevate the constraint
o Add capacity to overcome the constraint
● Return to the first step
o Reexamine the process to optimize the results. Inertia can be a constraint
o Buffer
● Managers add buffers before and after each constraint to ensure enough resources to accommodate
the constraint exist
o Six Sigma
o Definition
● Uses rigorous metrics in the evaluation of goal achievement
● Continuous quality-improvement program
o Existing product and business process improvements (DMAIC)
● D - Define the problem
● M - Measure key aspects of the current process
● A - Analyze data
● I - Improve or optimize current processes
● C - Control
o New product or business process development (DMADV)
● D - Define design goals
● M - Measure CTQ (critical to quality issues)
● A - Analyze design alternatives
● D - Design optimization
● V - Verify the design
M2: IT Governance
- Understanding and Defining IT Governance
o IT governance framework outlines how leadership accomplishes the delivery of mission-critical business capabilit
using IT strategies, goals, and objectives
o Data governance policies focus on effective management of data
● Data must:
o Be available to users
o Have proper integrity
o Be in a usable format
o Be secure
o A strong IT governance model will have practice and policies with the following components:
● Availability
o Available to the right employees at the right time
o Info must not be secured in a way that creates unnecessary hurdles for those who need i
● Architecture
BEC Study oGuide
Job roles and IT applications should be designed to fulfill governance objectives
● Metadata
o Data describing other data
o Must be robust in terms of breadth and specificity
● Policy
o Translate management and governance objectives into practice
● Quality
o No anomalies (missing/duplicate/transposed values or mismatched records)
● Regulatory compliance and privacy
o Personally identifiable information (PII), personal health information (PHI), and other regulatorily
constrained data should be secured
● Security
o Secure preservation, storage, and transmission of data
o Governance frameworks
o COSO Internal Control--Integrated Framework
● Control activities
o Principle 11 → there should be general controls over technology to achieve organizational object
● Information and communication
o Principle 13 → organizations should acquire, create, and use quality information to support
internal controls
● Principle 14 → effective communication of information is necessary to support internal controls
o ISACA’s Control Objectives for Information and Related Technology (COBIT) framework
● Governance stakeholders
o COBIT distinguishes between governance and management, recognizing them as two unique disc
that exist for different reasons and require different sets of organizational resources
o Organizational governance → responsibility of board of directors, focus on organizationa
structure
o Management → responsible for daily planning and administration of operations
- Aligning IT Governance with Organizational Objectives
o Vision
o Company’s aspiration and goals
● IT governance should be designed in a way that facilitates the achievement of that vision
o Corporate strategy
o Way in which an organization achieves the goals and objectives established by its vision
● Must be supported by an appropriate IT strategy and IT governance
o IT strategy
o Aligning IT strategy with corporate strategy objectives will optimize achievement of those objectives
o Documentation of the strategy and architecture will give management a strong understanding of the organiza
capabilities, which play a key role in defining the activities in which the organization should engage
o Following factors may impact a company’s corporate strategy
● Virtual/physical network design
o Companies that have consistent power needs → invest in a physical network with equipment on-
o Companies that have demands that intermittently experience sharp spikes → have access to virtu
computing power to save costs and have access to as much computer as it needs during any given
spike
● Centralized/decentralized network design
o Range of locations → decentralized network design that permits the other sites to continue to fu
in the event one site fails
o Control is a concern → centralized design
● Cybersecurity
o More of a concern if large regulatory burden or compliance
● Disaster recovery and business continuity
o Speed can vary greatly with companies based on the industry in which they operate
● Available IT personnel
o Staffing for IT needs can be insourced, outsourced, or a combination
o Support functions play a key role in determining IT strategy
● HR, marketing, legal, internal audit, function
o Size of the company in terms of employees, customers, assets will determine the level of IT expertise needed
- Structuring and Executing IT Governance
o People
o Decision makers and drivers of the way IT governance is structured, all levels must be represented
● Board of directors
o Evaluate IT governance policies to ensure they meet the strategic and operational needs of
the organization
● Executive management
BEC StudyooGuide Make key strategic decisions
Responsible for ensuring an IT governance structure is in place and is executed effectively
o Set a clear tone at the top
o Ethical climate/attitude towards policies, act as a guide for all members of the organizatio
● Middle management
o Carry out governance policies
o Make sure that subordinates are doing the same
o Ensure IT projects and processes have appropriate resources and support
● IT support staff
o Strategic or executive-level IT staff
o Daily planning of governance policies and/or carrying out these policies
o Network engineers
o Design and maintain a company’s network
o Help desk and lower-level IT support
o First responders when end users have troubleshooting needs or IT problems
o Cybersecurity staff
o Ensure the safe and secure usage of company data and IT assets
o Function-specific staff
o Present in large organizations
● Accountants
o Stewards of accounting information systems (AIS)
o Members of project development teams
o Testers
● End users
o Best equipped to understand the day-to-day technology needs for organizational activities
o Responsible for following the processes and procedures
● External stakeholders
o Customers or vendors drive how organizations utilize online commerce platforms
o Auditors or regulators may drive change in the IT governance structure
o Processes for governance execution
o Project development teams
● Formed for new IT projects
● Include management, IT systems personnel, accountants, and system users
● Responsible for project planning and tracking, IT infrastructure design, change management, and monito
performance
o Steering committees
● Responsible for the oversight of the information systems function --- permanent body, not just for
one project
● Consists of high-level management and experts
● Responsibilities include the following:
o Setting governing policies for the various information systems within the company
o Developing and communicating strategic goals
o Reviewing the IT budget and the allocation of IT costs
o Providing ongoing guidance and addressing big-picture issues
o Ensuring management engagement and participation
o Monitoring the project development team’s progress
- Assessing IT Governance Risks
o Can be done by performing a business impact analysis (BIA)
o Identifies the business units, departments, and processes that are essential to the survival of the entity
o Identify how quickly essential business units and/or processes can return to full operation following a disaste
o Identify the resources required to resume business operations
o Identify IT resource
o Identify what IT resources and assets exist so that the organization determine the base resources it needs
to sustain minimum operations
● Accomplished by inventorying all IT assets
o Evaluate the impact and likelihood of risks
o Impact
● High impact → the department:
o Cannot operate without this resource
o May experience a high recovery cost
o May fail to meet the organization’s objectives or maintain its reputation
● Moderate impact → the department:
o Could partially function temporarily
o May experience some cost of recovery
o May fail to meet the organization’s objectives or maintain its reputation
● Low impact → the department:
BEC StudyooGuide Could operate for an extended period of time
May notice an effect on achieving the organization’s objectives or maintaining its reputation
o Likelihood
● High likelihood
o Risk is highly probable, has occurred recently, can occur frequently, or controls to prevent it are
ineffective
● Medium likelihood
o Risk could occur, but controls are in place that may impede successful exercise of the vulnerability
● Low likelihood
o Risk is improbable, or controls are in place to prevent or significantly impede successful exercise
of the vulnerability
o Evaluate outcomes
o High action
● Take corrective action as soon as possible
o Medium action
● Implement corrective actions within a reasonable time frame
o Low action
● Take no corrective action and accept the level of risk
o Implement the response
o Identify mitigation recommendations
o Evaluate mitigation recommendations
o Cost-benefit analysis
o Choose, plan, and implement
M3: The Role of IT in Business

- IT Infrastructure
o Definition → Multiple, inter-connected technological components
o Core infrastructure involves a combination of on-premise and outsourced hardware, software, and specialized
personnel
o Hardware
o Definition → Physical components of computers and computer-related accessories
o Computer hardware
● Microprocessors, graphics and sound cards, hard drives, RAM, power supply, motherboard
o External hardware devices
● Mouse, keyboard, speaker, microphone, disk drives, memory devices, network cards, monitors,
printers, scanners, networking equipment
o Infrastructure housing
● Facilities and the safeguards on those facilities that contain hardware (data center, office, ventilation,
climate control)
o Networking devices
o Definition → Enables connectivity and communication between devices on a computer network
o Routers
● Manage network traffic by connecting devices to form a network
● Determine the most efficient path through the network for the packet to travel
● Link between a modem (connects a network to the internet), and the organization's switches or the
user’s device
o Switches
● Connect and divide devices within a computer network
● Do not perform as many advanced functions as a router (i.e., they don’t assign IP addresses)
o Gateway
● A computer or device that acts as an intermediary between different networks
● Transforms data from one protocol (a rule or set of rules that governs the way in which information is
transmitted) to another to facilitate network movement
o Servers
● Physical or virtual machines that coordinate the computers, programs, and data that are part of the
network
● Client/server model → client sends a request to the server, and the server then provides a response
or executes some action
o Firewall
● Software applications or hardware devices that protect a person’s or a company’s network traffic by
filtering it through security protocols with predefined rules
● Intended to prevent unauthorized access into the organization and to prevent the downloading of
malicious programs or accessing restricted sites
● Types
o Basic packet-filtering firewalls → analyze network traffic that is transmitted in packets (data
BEC Studycommunicated)
oGuide
and determine whether that firewall software is configured to accept the data
Circuit-level gateways→ control traffic by verifying the source of a packet and meet rules and pol
o Stateful multilayer inspection firewalls → combine packet filtering and network addresses to spe
approved external sources
o Network address translation firewalls → assign an internal network address to specific approved
external sources so that those sources are approved to be inside the firewall
o Next-generation firewalls → can assign different firewall rules to different applications as
well as users
o Software
● Applications, procedures, or programs that provide instructions for a computer to execute
● Controlled by a user interacting with a program, which in turn gives instructions to the physical
computer’s operating system
● Firmware
o Software that is embedded in hardware that instructs the hardware how to operate
o Rarely updated
o Networks
● Group of computers and other machines that are interconnected electronically using a series of network
devices (i.e., routers, switches) so that one group of users may securely share resources
● Can be wired or wireless
o Local area networks (LAN) → provide network access to a limited geographic area
o Wide area network (WAN) → provide network access to a larger geographic area
o Connect other networks such as LANs together
o EX: the internet
o Mobile technology
● Technology that travels with the user
● Allows organizational activities to occur in real time
● IoT (internet of things) devices
o Require either Bluetooth or an internet connection to access a larger network
- The Role of Management Information Systems
o MIS enable companies to use data as part of their strategic planning process as well as the tactical execution of
that strategy
o Provides users with predefined reports that support effective business decisions
o Accounting Information System (AIS)
o Collects, records, and stores accounting information, then compiles that information using accounting rules to
report both financial and non-financial information to decision makers
● Well-designed AIS creates an audit trail for accounting transactions
o AIS subsystems
● Transaction processing system (TPS)
o Converts economic events into financial transactions and distributes the information to support d
operations functions
o Sales cycle, conversion cycle, expenditure cycle
● Financial reporting system (FRS) or general ledger system (GLS)
o Aggregates daily financial information to enable timely regulatory and financial reporting
● Management reporting system (MRS)
o Provides internal financial information to solve day-to-day business problems
o Function of an AIS
● Collect, record, and store data and transactions
● Transform data into information through compilation and reporting
● Safeguard and maintain data integrity
o Referential integrity maintains data accuracy in recorded transactions
o Sequence of events in an AIS
● Transaction data from source documents is entered into the AIS by an end user
● Original source documents, if they exist, are filed
● Transactions are recorded in the appropriate journal
● Transactions are posted to the general and subsidiary ledgers
● Trial balances are prepared
● Adjustments, accruals, and corrections are entered as needed
● Financial statements and reports are generated
o Decision Support System (DSS)
o Interactive tools to support day-to-day decision making
● “What-if” scenarios
o A DSS is often used for forecasting activities of managerial importance such as production plannin
expense and revenue projections, and expected growth based on assumptions of potential industry
organizational changes
● Artificial intelligence
o Expert system → A DSS that relies heavily on AI
o Designed to mimic the knowledge and decision-making abilities of the users who
BEC Study Guide employ them so that decisions can be automated
o AIS vs. DSS and EIS
o Data in an AIS is often processed and aggregated to become inputs to a DSS and an EIS
o Executive Information System (EIS)
o Provide senior executives with immediate and easy access to internal and external information to assist in
strategic decision making
o Often present data in high-level reports and visualizations that allow for big-picture decision making to
ensure alignment with overall strategic objectives
o Customer Relationship Management System (CRM)
o Software that enables organizations to monitor and manage interactions between the organization and its
past, current, and potential customers
o CRM objectives
● Enhance existing customer satisfaction
● Attract new customers
● Enhance targeted marketing and promotions
● Anticipate customer needs
● Enable cross-selling and upselling
● Forecast sales and manage sales staff
● Manage sales leads
o CRM strategies
● Collecting and capturing information about customers to create customer profiles
o Collected directly from customers utilizing loyalty cards, reward programs, and satisfaction survey
o Derived indirectly through data mining of social media and online reviews
● Creating personalized experiences and promotions
● Using business intelligence to automate recommendations and cross-selling opportunities
o CRM benefits
● Increased customer satisfaction → increased revenues and profitability
o CRM makes offerings that are perceived to be tailored and unique to customers’ interests
o Types of CRM
● Operational CRM
o Goal is to generate leads and convert those leads into customers
● Analytical CRM
o Collect and analyze customer information and provide insights to management to aid in the decis
making process
● Collaborative or strategic CRM
o Provides collaboration and sharing of customer information across functions such as sales, marke
service, and support teams
o Inventory management
o Assist with tracking, procurement, and distribution of inventory items
o Usually connected to a POS system so that each time a unit is sold, one unit of that item is removed from
the inventory count
o Knowledge Management System (KMS)
o Any IT system that disseminates knowledge related to the organization
● FAQs, training guides, discussion forum
o Supply Chain Management (SCM)
o SCM characteristics
● Unifies business processes beginning with the original supplier and ending with the customer,
o Purchasing, materials handling, production planning and control, logistics and warehousing, inven
control in product distribution and delivery
● Concerned with sales - what, when, where, and how much
o Objectives and functions
● Achieving flexibility and responsiveness in meeting the demands of customers and business partners
● SCM systems generally incorporate the following functions:
o Planning
o Sourcing
o Making
o Delivery
o SCM benefits
● Enhanced quality control
● Reduced cash tied up in inventory
● Increases cash flow and its predictability
● Improved forecasting for procurement, delivery, and production
o Enterprise Resource Planning (ERP)
o Cross-functional systems that are utilized to support business functions and allow for the integration of
information across departments
BEC Study Guide
● Real-time communication between systems
● Centralized database and user interface
● Number of modules
o ERP benefits
● Stores information in a central repository
o Data entered only once
● Acts as the framework for integrating and improving an organization's ability to monitor and track
sales, expenses, customer service, distribution, and other business functions
● Provides vital cross-functional Information quickly to managers
● Improves customer service
● Allows greater access controls
o ERP disadvantages
● The time to successfully implement an ERP system can be significant
● Can be extremely cost-prohibitive
● Integration of all the business units can be complex
● ERP implementation causes significant changes to business processes which can lead to errors, user
resistance, and low adoption rates
o Enterprise Performance Management (EPM)
o AKA business performance management (BPM) or corporate performance management (CPM)
o Designed to help executives make strategic decisions
o EPM is more management process focused whereas ERP is more focused on operational processes and
IT integration
o E-commerce
o Facilitate the sale of goods and services using the internet
o Types of e-commerce
● Business-to-business (B2B)
o Buying and selling of goods and services between business entities
● Business-to-consumer (B2C)
o Allows businesses to interface and sell goods to their customers
o Done online via retail websites that are either stand-alone or integrated
● Consumer-to-business (C2B)
o Consumers offer their goods or services to a business
● Consumer-to-consumer (C2C)
o Online marketplace in which individual consumers buy and sell goods with each other
● Government e-commerce
o Between the government and any other entity -- taxes/regulatory requirements
o E-commerce payment methods
● EFT
o Use an online network and a variety of technologies to transact credits among banks
o Often provided by a third-party vendor which acts as the intermediary between the company
in the banking system
o EFT security is provided through various types of data encryption
o Blockchain networks
▪ Use a distributed ledger to account for transactions and digital currencies
o Communication
● Most companies use email as their internal and external core communication platform
o There are, obviously, other additional methods that are used
- IT Outsourcing and Cloud Computing
o Cloud computing
o Renting storage space, processing power, proprietary software, or a combination of the three, on remote serv
from another company rather than buying and building those components
● Infrastructure elasticity, renting only as much as needed on a minute-to-minute basis
● Cloud service provider performs all maintenance and tech support on the hardware
● Cloud service providers have superior skills and experience managing their own infrastructure
o Infrastructure-as-a-Service (IaaS)
● Organization outsources any of its servers, storage, hardware, networking services, and networking
components to a third-party provider
o Generally build on a per-user basis
o Platform-as-a-Service (PaaS)
● Organization rents tools or solutions remotely that are used to fulfill a specific business purpose
o Software-as-a-Service (SaaS)
● A company delivers and hosts subscription-based software services to customers through licensing or
service delivery
o Access via the Internet
o Provider is responsible for upgrades security enhancements and other support functions
o IT outsourcing advantages
o Lower costs
BEC Study Guidecan pay for what they need
● Organizations
o Expertise
● Gives organizations access to IT experts on a fractional cost basis
o Resources
● Access to specialized and high-quality resources
o Enhanced focus on the core business
o IT outsourcing disadvantages
o Less control
● Outsourcing company loses some control over how the IT functions are performed
● Grants the outsourced firm access to sensitive information
o Quality control
● Service providers may not perform up to the expectations and quality desired
o Immediate access to IT support
● Perceived lack of access to IT personnel
o IT outsourcing risks
o Security and privacy practices
● Inadequate controls are ineffective implementation of controls
● Misuse or abuse of an organization's data by the service provider’s employees
o Data accessibility
● Concern that data will become inaccessible, overwritten, or lost either due to malicious actions,
unintentional behavior, or through some other type of this event, such as a natural disaster
o Data disposal
● Possibility that customer’s confidential data is not effectively deleted it and can be inappropriately
accessed in the future
o Vulnerability for attacks
● An attack on any one organization could impact the others who utilize the same IT environment
o System and Organization Controls (SOC)
o SOC 1
● SOC 1 reports provide assurance that the service organization’s controls are designed and operating
effectively so that the financial statements are not negatively impacted
o Type 1 report
▪ Fairness of the presentation of management’s description of the service organization sys
and suitability of the design of the controls
o Type 2 report
and suitability of the design and operating effectiveness of the controls
o SOC 2
● For users who need attestation concerning controls as they relate to security, processing integrity,
availability, and privacy
o Type 1 report (same as SOC 1)
and suitability of the design of the controls
o Type 2 report (same as SOC 1)
and suitability of the design and operating effectiveness of the controls
o SOC 3
● For users who need attestation concerning controls as they relate to security, processing Integrity,
availability, and privacy
o This report is for companies that do not have the knowledge required to make effective use of
a SOC 2 report
- Checks
o Sequence check
o Testing a list of items or records for correct ascending or descending order
o Check digit
o Adding numbers or codes (EX: the account number) to verify the accuracy of the document that is
processed or transmitted
o Capacity check
o Used to determine if the selected storage (computer) system has the capability of storing a certain amount
of input data
o Reasonableness check
o Used to verify the data input before acceptance by a system
● For a payroll system, a reasonableness check validates the proper entry of hours worked for each of
the company’s employees
M4: Data Management and Analytics
- The Evolving Role of Big Data in the Decision-Making Process
oBEC Study
Defining Guide
data and information
o Data → a fact, occurrence, or an otherwise measurable observation
o Defining big data
o Big Data → corporate accumulation of massive amounts of data that can be used for analysis, commonly
referred to as “data analytics”
o Data is collected in a variety of ways and can be done so actively, passively, by a person, or using technology
● Active collection → the capture of data from a device or person who has given consent
● Passive collection → the capture of data from sources that may be indirect, ancillary, or otherwise
generated from some passive activity a device or person engages in
o Dimensions of big data (“five v’s”)
o Volume
● Quantity or amount of data points
● May also factor in the size of the data in terms of its storage requirements
o Velocity
● Speed of data accumulation or data processing
o Some data points are created on a continuous basis and, therefore, have a higher velocity than
other data points
o Variety
● Range of data types being processed or analyzed
o Structured data
▪ Data with defined organizational format that has specific parameters
● Numerical or alphabetical figures only, fixed field length and size, or some other
predefined parameter (EX: relational database)
o Unstructured data
▪ Data that does not have predefined parameters and generally lacks organization (EX:
online product review)
o Semi-structured data
▪ Hybrid of structured and unstructured data (EX: CSV file)
o Veracity
● Reliability, quality, or integrity of the data
o High quality → both accurate and timely
▪ Data is cleansed of irregularities, including duplicate fields, missing fields, incorrect form
characters, transposed fields, or incorrect labeling
o Value
● The insights that Big Data can yield
o Big Data governance
o Big Data confidentiality
● Confidential information must be safeguarded to protect it from unauthorized access and exploitation
o Appropriate access controls must be in place
o Big Data privacy
● Customer and patient data must also be safeguarded from unauthorized access to meet consumer
privacy expectations as well as regulatory requirements
o Organizations must implement strong governance practices regarding what type of data can be
collected, what disclosures to make as the data is collected, and what controls must be in place
to protect that data
o Big Data ethics
● Make sure authorized personnel are granted the minimum level of access to the data necessary to
perform their job functions
● Eliminate bias in the algorithms applied in decision support models
o Governance responsibility
● Governance program should be led by a designated individual, such as a chief privacy officer, a
corporate compliance officer, or some other equivalent title
● Design of the program should have input from leaders across the organization
● Program should be periodically updated as necessary
- Data Management
o Storing data in relational databases
o Most efficient and effective method to store data
o Allow data to be stored in different tables
● Tables are linked through relationships using key fields
o Relational database concepts
o Tables (files)
● Establish columns and rows to store specific types of data records
o EX: Customer table
o Attributes (columns)
● Describe the characteristics or properties desired to be known about each entity
o EX: “Last Name”
o Records (rows)
BEC Study Guide
● Contains information about one entity within the table
o Record in the Customer table provides certain information about a single customer
o Fields
● Space created at the intersection of a column and row
o Data values → information placed inside the field
o Data types
● Tell us the category of data
o Numerical (integers), text (single character or a string of characters), Boolean (yes/no or true/fals
o Database keys
● Keys act as unique identifiers and create relationships within relational databases
o Primary key
▪ Unique identifiers for a specific row within a table and are made up of one or
more attributes
● Each row in a table must have a unique primary key
● Composite key → a primary key that is made up of one or more attributes
o Foreign key
▪ Attributes in one table that are also primary keys in another table
● The link between a primary key in one table and a foreign key in another tab
what creates a “relationship” between tables
o Relationships
● Result from a link between a primary key in one table and a foreign key in another table
o Data dictionary
● Provides information about the data in a database
● Typically lists each attribute and denotes the features and limitations of that attribute
o Database view
● Logical database view → how the data appears to the user (what they see)
● Physical database view → how the data is actually stored within the database
o Data queries and reports
● Extracting data is typically done via query tools
o Done using SQL
▪ Common commands include SELECT, FROM, and WHERE
- Extract, Transform, and Load (ETL)
o E - Data extraction
o Can take the form of an automated process, semi-automated process, or manual extraction
o The native source and the means of accessing the data must be determined in the initial ETL setup phase
● This will dictate the tools needed for designing the overall process of extraction
o Data identification
● Understand the issue the business is trying to address to ensure the data request has the proper scope t
resolve it
o Obtaining the data
● If the ETL process is automated, an application programming interface (API) will most likely be designed
o Requesting the data
▪ The recipient of the request must be provided with full details on what is needed,
including the data file type, format, time period, and required attributes
▪ Process to validate the output to verify no data was lost during the transmission
o Manual extraction
▪ A person may have to use specialized data mining software or write customized queries
obtain the data
o T - Transforming data
o Entails taking the often-unstructured data, cleaning it, and validating it to ensure it is accurate and ready
for analysis
o Cleaning data
● Determine the desired output
o Knowing what attributes are needed and the formatting of those attributes
● Deduplicate data points, remove inaccurate data, and account for outliers
● Address missing fields
● Remove all attributes that will not provide value to the analysis
● Ensure the data is reasonable by performing spot checks
● Remove sensitive information if it is not needed for analysis
● Split data for analysis (data parsing) (splitting a full name attribute into first name and last name attribut
● Use trimming tools to remove unneeded or extra spaces
o Validating data
● Needed after transformation to ensure data is not lost or inappropriately modified in the cleaning proce
o Visual review, basic statistical tests (min, max, sum, average)
o L - Loading the data
o Load the data into a software program for analysis or into a data storage location
o Data storage
● Operational data store
o Used to capture ongoing operational activities from a variety of input systems
BEC Study Guide
● Data warehouse
o Very large data repositories that are centralized and utilized for reporting and analysis rather
than for transaction purposes
▪ Pull data either directly from enterprise systems with transactional data or from an ODS
● Data mart
o Like a data warehouse, but is more focused on a specific purpose (such as marketing or logistics)
o Often a subset of a data warehouse
● Data lake
o Like a data warehouse, but it contains both structured and unstructured data
o Data is mostly in its natural or raw format
o The structure of the data (its “schema”) is implemented when the data is first accessed by a
user (data warehouses have predefined schema)
o Data storage requirements
● Entity integrity
o Each table must have a unique primary key as a record identifier
● Referential integrity
o A change to a primary key in one table must also cause a change to any related foreign key in a
table that is linked
o Data storage attributes
● Relevance
o Defining the purpose helps users understand a repository’s relevance
● Elements to be included and excluded
o Donating which attributes are included outlines the universe of data points housed within a
repository
▪ Data mart → more narrowly focused repository → limited list of attributes
▪ Larger data sets → more attributes are often needed
● Relationship between elements include validity, completeness, ad accuracy
o Validity
▪ Data is entered in the correct manner
o Completeness
▪ No data is missing from the data set
o Accuracy
▪ The data entered is true and free from errors
o Types of loading
o Initial (full) loading
● Entire data set is loaded into a repository
o Initial load → data being loaded does not have any prior iterations in the repository
o Incremental loading
● Only the differences between existing data and new data are added to the data repository
o May be done in either real time (streaming) or in batches
o Full refresh loading
● An entire data set is loaded into the repository, replacing the previous load
o Load verification
o Vital to validate the data once it is loaded to ensure no data was lost in the process
- Data Analytics
o Definition
o The process of taking raw data, identifying trends, and then transforming that knowledge into insights that
can help solve complex business problems
● Once the ETL has been performed, data analytics can be utilized for a variety of tasks, including
validation, planning, insights, risk mitigation, and decision support
o Types of data analytics
o Descriptive analytics
● Indicate what happened
● Summarizes the activity that has occurred within a given attribute or attributes
o Observing summary statistics such as a dataset’s minimum, maximum, mean, median, mode,
record count, and sum
o Sorting the data to reveal ranges or patterns
o Analyzing the data based on age, location, time, income, or other distinguishing characteristics
o Diagnostic analytics
● Why an event happened
● Attempts to uncover correlations, patterns, or relationships within a data set to explain why an
event or result occurred
o Drill-down analysis → mining underlying data to answer questions
o Cluster or profile analysis → determine if any similar groupings of variables reveal insights or
unknown answers to questions
o Correlation analysis between two or more variables → explain why certain data points changed
Sequence checks → see if there are any gaps or duplication issues
BEC Studyoanalytics
o Predictive Guide
● Help forecast future data points by transforming insight into foresight, predicting what will
happen based on historical data
o Regression analysis
▪ Uses a mathematical model to determine the relationship between a dependent variabl
one or more independent variables
o Classification analysis
▪ Uses already labeled data points and allocates them into similar groups, which can then
used to make predictions about the future
● Works to predict a category (or class) using predefined criteria that is
based on past activities
o Decision trees
▪ Rely on the probability of outcomes
o Prescriptive analytics
● Reveal how to achieve a desired event by “prescribing” what the next course of action should be in
order to reach that outcome
● Take the probability learned from predictive analytics and turn that into recommendations and
optimal paths to take with a high likelihood of favorable outcomes
o Artificial intelligence and machine learning
▪ Self-learning adaptive computer model not reliant on human input
▪ Can provide employees with the most likely outcome given any combination
of circumstances
o Scenario modeling (“what-if” analysis)
▪ Range of outcomes that will occur with a probability assigned to each
o Uses of data analytics
o Customer and marketing analytics
● Build consumer profiles and analyze spending preferences → optimize marketing strategies
o Managerial and operational analytics
● Usually run in real time to maximize efficiencies and production within an organization
o Risk and compliance analytics
● Monitor transactions through continuous auditing, continuous monitoring, and continuous
reporting to ensure all are good with compliance and adhere to controls, covenants, etc.
o Financial analytics
● Monitor financial performance through data mining and ratio analysis on a continuous basis
o Audit analytics
● Assessing risk, providing assurance around certain operations, establishing thresholds and
expectations, improving the quality of the audit by testing the full population
o Tax analytics
● Organize tax information and guidelines, improve tax planning, and monitor tax performance indicators
- Data Visualizations
o Types of data
o Qualitative data
● Non-numerical, categorical
o Nominal data → cannot be ordered or ranked
o Ordinal data → not quantitative, but can be ranked in a meaningful way
o Quantitative data
● Numerical
o Discrete data → whole numbers and can only have certain values
o Continuous data → can be any value (including decimals) within a given (finite or infinite) interva
o Types of data visualizations
o Line chart
● Best used when showing quantitative trends over time
●
o Column chart
● Effective at showing comparisons
BEC Study Guide
●
o Stacked column chart
● Each column is stratified to show additional details
● Effective when you want to have total comparisons as well as percentage breakdowns of the whole
●
o Scatter plot
● Demonstrate relationships between 2 variables
●
o Boxplot
● Show lower and upper extremes, lower and upper quartiles, and the median data point
●
o Dot plot
● 2D mapping of observances onto a coordinate plane, with one dimension representing the frequency of
observations of the other dimensions
●
o Geographic maps
● Demonstrate values of a geographic map
BEC Study Guide
o Symbol map
● Use of symbols to help users compare and contrast values
o Pie chart
● Show respective proportions of a whole value
●
o Pyramid
● Understanding underlying foundations or building blocks. Most helpful when the bottom layer represen
action or a target
●
o Flowchart
● Map out a process that has beginning and ending steps and a series of steps in between
●
o Waterfall chart
● Shows the cumulative effect of a series of data points that make up a whole
BEC Study Guide
●
o Directional chart
● Highlights key events or milestones over time
●
o Considerations for design
o Scale appropriately
● The scaling of the x- and y-axis should not be misleading
o Use legends appropriately
● If there are more than 4-5 colors, avoid using a legend because it could be difficult to follow
o Avoid bias
● Do not direct a reader towards a specific conclusion
o Use consistent time periods
● Do not compare results from a longer period with those from a shorter period
o Use colors that can be easily seen and follow cultural norms
● Red is a “negative” color in the US, green is a “positive” color
o Use clear and easy-to-read titles and labels
● Labels should be used sparingly, only when accuracy is necessary
M5: System Development and Change Management

- Evolving IT Infrastructure
o Organizations update their IT infrastructure over time to keep pace with these shifts or to be early adopters
- Change management overview
o Defining change management
o The policies, procedures, and resources employed to govern change in an organization
o The change management process
o Identify and define the need for change
o Design a high-level plan including goals to be achieved as a result of the change
o Obtain approval from management for the change
o Develop an appropriate budget and timeline
o Assign personnel responsible for managing the change
o Identify and address potential risks that could occur
o Provide an implementation road map
o Procure necessary resources, including IT, and train the appropriate personnel
o Test the change
o Execute the implementation plan
o Review and monitor change implementation and test as needed to verify effective implementation
- Change Management Risks
o Selection and acquisition risks
o Lack of expertise
● Risk that the purchasing agent does not have the expertise or organizational perspective to purchase
software that meets the needs of the organization
o Lack of formal selection and acquisition process
● Risk that an organization either does not have, or does not follow, a formal selection and acquisition
process as it pertains to software
o Software/hardware vulnerability and incompatibility
● Risk that proper safeguards and security features that are needed to adequately protect and
organization from unauthorized use do not exist
● Risk that newly acquired hardware and software are incompatible with each other or with existing
resources that will remain in production
o Integration risks
o User resistance
● Resistance to adoption of the change by employees
BEC Study
o Lack Guide support
of management
● Management does not provide both resources and adequate support
o Lack of stakeholder support
● Stakeholders involved (employees, suppliers, customers) may have an adverse reaction or disposition
toward change
o Resource concerns
● Appropriate resources may not be made available for the change
o Business disruption
● Potential for brief or even prolonged information system failures
o Lack of system integration
● Legacy systems that do not effectively adapt or integrate with more modern systems
o Outsourcing risks
o Lack of organizational knowledge
● Could leave the organization vulnerable because it must rely on the third party to fully comprehend
the organization’s business model and needs
o Uncertainty of the third party’s knowledge and management
● Risk that the external party has ineffective or weak management, inexperienced or underqualified
staff, and a lack of technology expertise
o Lack of security
● Risk that an external organization does not have sufficient or effective safeguards to make sure that
client, customer, employee, or operational information is kept secure
- Change Management Controls
o Change management and new systems controls
o Controls are designed to minimize the possibility that the inherent risks will cause business disruptions or
negatively impact IT systems
● Policies and procedures
o Clear change management guidelines are needed to outline how the change management proces
be executed, from selection to integration and maintenance
● Emergency change policies
o Separate contingency policies and procedures provide direction for emergency change situations
● Standardized change requests
o Using consistent forms and request protocols
● Impact assessment
o Documentation noting the effect a change will have on the organization’s business activities as w
any potential disruptions
● Authorization
o Requiring designated levels of authorization for changes
● Separation of duties
o Properly separating job roles will help protect against assets or information being utilized improp
● Conversion controls
o Help minimize data conversion errors related to the impacted IT assets and resources
● Reversion access
o Some changes may cause unexpected complications, so it is important to have the ability to rever
the prior system or process that existed before the change
▪ Can be accomplished using parallel implementation
● Pre-implementation testing
o Determine if the change is functioning properly and there are no irregularities
● Post-implementation testing
o Reconciling transactions processed in the new environment against the same transactions that w
processed in the previous environment
● Ongoing monitoring
o Continuous periodic reviews
o Outsourcing controls
o Outsourcing policies and procedures
● Establishing firm rules regarding outsourcing procedures, including the protocol for service
organization selection, approval, and review
o SOC reports
● Request and review SOC reports of employed service organizations on an ongoing basis
o Utilize KPIs
● Establish and agree on KPIs with outsourced vendors
- Managing Risks of System Development
o Systems development life cycle
o 7 key steps - regardless of whether acquire a new system or choose to develop a new system in-house
● Plan
BEC StudyooGuide
Organization evaluates the need for a new or improved information system
Establish and compile what business objectives the information should achieve
o Feasibility analysis is performed
● Analyze
o Information is gathered from all vital stakeholders
o Compile and analyze all the needs of the end users to establish specific and detailed goals to be
accomplished by the project
● Design
o Start with high-level conceptual design (diagrams)
o Creation of the technical implementation plan
o Individual technologies are evaluated and selected including logical data organization, physical
data storage architecture, programming languages, integration with third-party services, and/or
deployed hardware
o Three parts
▪ Conceptual design → broad translation of business requirements into technical requirem
▪ Logical design → hardware and software specifications
▪ Physical design → more granular platform and product specifications
● Develop
o Buildings and rooms are prepared
o Hardware is purchased and delivered
o Programmers create proprietary software to run the company’s new product, if applicable
● Test
o System is checked for adherence to the business requirements
o Backward-looking testing → tests against the initial requirements
o Forward-looking testing → how well employees and customers can perform tasks (user-
acceptance testing)
● Deploy
o Plunge or big bang
▪ Entire new system is immediately delivered to all customers and clients
▪ Lowest cost, highest risk
o Ramped (rolling, phased) conversion
▪ Portions of the new system replace parts of the old system, one piece at a time
▪ Above-average cost, below-average risk
o A/B testing (pilot, canary)
▪ A subset of users gets the new system while the old system is still in use. After successful
deployment to the subset of users, the new system is deployed to the remaining users
▪ Average cost, average risk
o Blue/green ( or other pair of colors) or shadow
▪ The new system is fully deployed in parallel with the old system. Once the new system is
all the traffic, the old system is deactivated
▪ Highest cost, lowest risk
● Maintain
o Ongoing adjustments and improvements
o Waterfall model
● Different teams of employees performing separate tasks in sequence
o Challenges
▪ Requires a great deal of time to complete
▪ Benefits are not realized until complete
▪ No customer input
▪ Change can be difficult to manage
▪ Some employees may be idle before or after their SDLC step
o Systems development and new systems risk
● Resource risk
o System development is both expensive and time-consuming
o Risk that allocation of resources related to finance, labor, or time is insufficient
● Scheduling risk
o Uncertainty pertaining to the timeline and schedule
o Project management team will typically establish a completion data and work backwards to estab
milestones in the timeline
● Technical risk
o Systems development is driven by the need for new or updated technology that requires
technical knowledge
o Companies may not be adequately staffed to handle problems that require strong technical
knowledge
o If the technical design and functionality do not align with user needs and the organizational strate
● Project management risk
o Project management team does not have clearly defined leadership, team member roles, respon
and project goals
● User resistance risk
o Risk that employees will not accept the system
o Refusal to use the new system, treating the system as a scapegoat for any issues that arise, or bla
damaging components of the system
BEC Study
- Managing Guide
Risks of Legacy Systems
o Legacy systems → outdated technology or systems already in service
o Reasons for persistence of legacy systems
o Costs
● The cost to purchase or develop a new system can be extremely high
● Organizations may view the sunk cost of money they have already invested in the current system as a
rationale for continuing to use it
o Time
● Implementing a new system means allocation of employee time to assist with the implementation
and for system tracing
o User resistance
● Users within the organization may be comfortable with the existing system and resistant to change
o Features and customization
● Existing systems may be customized to meet the organizational needs or provide built-in features that
may be difficult to replicate
o Risk of information loss
● Risks of having existing data and information corrupted or lost in the transition
o Risks of legacy systems
o Security vulnerability
● Some legacy systems may be extremely vulnerable regarding security
o Vulnerabilities are more widely known because the system has been in production for a longer pe
o Less sophisticated security measures
o Organizations may be slow to install patches or new patches may not be available
o Sometimes paired with new systems or other legacy systems that leave openings for attack
o Lack of vendor support
● Eventually, support will end, and new vulnerabilities may not be discovered in a timely manner
o Compatibility issues
● Many legacy systems are incompatible with modern systems → competitive disadvantage
o Lack of efficiency and effectiveness
● Some legacy systems will not be able to compare with the speed or reliability of a modern system
o Mitigating risks of legacy systems
o Isolating the system
● Isolating a risky legacy system from other system in a separate physical or virtual environment
o May create problems with access or compatibility
o Hardening
● Turning off any unnecessary features of the legacy system
o Virtual patches
● Could be applied at the network level if no security patches are directly available
o Monitoring
● Frequent review and monitoring of legacy systems
- Information System and Change Management Testing Strategies
o Testing should involve the acquired software, any developed software, and the change management process
o Purpose of testing
o Determines whether the software is operating as expected
o Discovers errors, defects, missing components, and gaps in the software
o Verifies that the end product meets the business and user requirement
o Software testing process
o Establish a testing plan (roles, responsibilities, timelines)
o Identify and prioritize the key areas of the software to test
o Determine which type of test to run and specify the test objectives
o Execute the tests
o Log the results and identify defects
o Report the findings and fix the defects in a timely manner
o Guidelines for successful testing
o Develop a test plan that emphasizes rapid cycle testing → identify major bugs early on
o Build robust software that allows for automated testing
o Conduct formal technical reviews
o Develop a continuous testing approach
o Types of tests
o Testing works from the smallest units of the system to eventual full system testing by end users
o Unit tests
● Validate the smallest components (units) of the system
● Goal is to isolate each part of the program and show that individual parts are functioning properly and
as described
BEC Study
o Integration Guide
tests
● Determine if the units, once they are combined, function as designed together
o System tests
● Evaluate the system as a whole
● Determine whether it meets the functional and technical specifications in addition to any specified
quality standards
● Functional tests
o Focus on testing the functions performed by the system
o Realistic business scenarios are run through the system to validate that they are working effective
and efficiently
● Black-box testing
o Functional test in which there is little information about how the product is designed
o Testers focus on testing the system in the same manner an end user would validate outcomes
● White-box testing
o Provides the user with many details
o Focused on code and design improvement
● Exploratory tests
o Utilized for the less-common or exception-based solutions with no specified test cases
● Performance testing
o Test the run-time (speed) performance of software when processing the required workload
● Recovery testing
o Checks the system’s ability to recover from failures
● Security testing
o Verifies that system protection mechanisms prevent improper penetration or data alteration
o Validate that authorized access levels function appropriately
● Regression tests
o Rerun previous test cases within the entire application after new features or functionalities have
been incorporated
● Stress testing
o Check to see how well the system deals with abnormal resource demands
● Sanity testing
o Exercises the logical reasoning and behavior of the software to determine whether system
logic is functioning as designed
o Acceptance tests
● Determines whether the software works correctly for the intended user in the normal work environmen
● QA team has a set of prewritten scenarios and test cases that are used to test the application
● Alpha test
o Initial version of the completed software is tested by the customer under the supervision of the
developer at the developer’s site
● Beta test
o Later version of the complete software is tested by the customer at his or her own site without
the developer present
o Change management testing
o Both within and outside the organization
o Inspecting the change management policies and procedures
o Reviewing the change management controls and test whether they are designed and operating effectively
o Testing the change
● Organizations may test the actual change
o Testing outsourced changes
● If the change management process was outsourced, then the same testing that would be performed for
internally performed change should be executed
M6: IT Risks and Responses
- Understanding IT Risks
o Security life cycle
o Identify
● Determine what assets exist
● Identify and document the risks associated with those assets
o Assess
● Determine the likelihood of the risk materializing
● Determine the level of the impact of that threat to the organization
o Protect
● Mitigation strategies must be put in place
● Developing and communicating security policies and procedures
● Developing and implementing controls
o Monitor
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● Continually monitor for new risks
● Ensure that current risk mitigation efforts are still effective
- Identifying IT risks
o Technology risk
o Risk of disruption to business as a result of any IT activity
o Security risk
● Unauthorized access or use of an organization’s IT (external or internal)
o Availability risk
● Organization will not be able to access and utilize its IT as needed
o Operational risk
● Organization is unable to operate effectively or efficiently due to issues concerning IT
o Financial risk
● Risk of losing financial resources as a result of them being misused, lost, wasted, or stolen
o Compliance risk
● IT does not sufficiently meet the requirements of regulatory bodies
o Strategic risk
● Risk of misalignment of business and IT strategies
o Information risk
● Loss of data integrity, incomplete transactions, hackers
o Types of IT threats
o Natural and political disasters
o Errors in software and equipment malfunction
o Accidental actions
o Intentional actions
o Risk management
o To successfully manage risks, organizations must meet the following three objectives:
● Integrate the management of IT risk into the overall risk management of the enterprise
● Make well-informed decisions about the nature and extent of the risk, the risk appetite, and the risk
tolerance of the enterprise
● Develop a response to the risk
o IT risks defined
● IT risk → business risk associated with the use, ownership, operation, involvement, influence, and
adoption of IT within an enterprise
o Consists of IT-related events that could potentially affect the business
o IT risk mitigation strategies and roles
o Mitigation of IT risks starts with the people within the organization
● Management must determine what the overall risk appetite is for the organization and in turn develop a
strategy that includes policies and procedures to align that risk appetite with information systems and info
technology
o Confidentiality, integrity, and availability triangle
● Organization must include controls designed to safeguard confidentiality, integrity, and availability of dat
o Management’s risk philosophy
● Organization must determine its risk appetite in order to build its information security policies and proce
o Establishing a security policy
● Organization’s security policy is a document that defines how an organization plans to protect its IT
infrastructure and resources, including its tangible and intangible information assets
o Security policy goals
● To require individuals to protect the IT infrastructure and information
● Address the issues of confidentiality, privacy, information integrity, and system availability
o Security communication
● Vital that the security policy is communicated to everyone within an organization
● Receipt and understanding of the security policy typically require either an assessment or acknowledgem
of responsibility and recognition
- The Role and Categorization of IT Controls
o Categories of IT controls
o General controls
● Ensure that an organization’s control environment (people, processes, and IT) is stable and well-manage
o Application controls
● Built into typical business processes that use computer applications
● Ensure that transactions and data processed through computer applications are:
o Accurate
o Complete
o Valid
o Authorized
o Nature of IT controls
BEC Study
o Manual Guide
controls
● Control performed by a person without making direct use of automated systems
o Automated controls
● Control performed by an automated system, without interference of a person
o IT-dependent manual controls
● Relies on an individual performing a control function with some use of an IT component
(i.e., an IT-generated report)
o Function of IT controls
o Preventive controls
● Take precautions to prevent problems in the future
o Detective controls
● Find and reveal issues or deficiencies not averted by preventive controls
o Corrective controls
● Identify, repair, restore, and recover from issues that cause damage to a system or processes
- System Access and Segregation of Duties
o Defense in-depth approach → multiple layers of security controls are implemented to ensure that mitigating
controls are in place if other controls fail
o Logical access controls
o Overview
● Utilize software and protocols to monitor and control access to information and an organization's IT
infrastructure
● Built-in to enforce security measures for access rights
o User access controls
● Identify which users access the system and track their activity while using the system
o Each user needs a unique identity
o Authentication controls
● Process to verify the individual who is accessing and utilizing the system
o Passwords
o PIN
o Biometrics
o Physical tokens → physical device the user possesses that either has an embedded chip or
visual barcode that can be scanned
o Push notifications → verification on a separate device
o Multi-factor authentication → requires more than one form of authentication, combination of
the above methodologies
o Managing passwords
● Password requirement → every account must have a password
● Password length → longer passwords are more effective (8 or more characters is the general rule)
● Password complexity → complex passwords are more secure
● Password age → passwords should be changed frequently to be effective
● Password reuse → passwords should not be reused until a significant amount of time has passed
o Access control list
● Restricts access and actions of authenticated users based on granted permissions
o Create (or write) access → users can add content
o Read only → users can only read information
o Update access → users can only update existing information
o Delete → users can remove information
o Personnel changes
● Important that access, authentication, and authorization is modified as appropriate
o Effort should be documented in procedures
o HR should generate the request (information security officer may also be needed)
o Must be a mechanism to disable accounts when an employee leaves an organization
o Network security
● Security in place to protect the private network from unauthorized access
● Packet-filtering firewall
o Uses a router to inspect the header information found in packets of data that travel between
the organization’s network and the internet
● Application-based firewall
o Allows for the exchange of information but not the direct exchange of packets
● Stateful inspections
o Monitor both the packet header and destination
● Intrusion detection system (IDS)
o Monitor network or system activities for malicious activities or policy violations and alert
BEC Studymanagement
o VulnerabilityGuide
controls
of perceived threats
● Hardening
o When applications or systems are first installed, their surface vulnerability should be reduced
by turning off features or functions that are not needed during operations
● Patch management
o As vulnerabilities are discovered, they should be addressed by patches (fixes)
● Anti-malware program
o Malware → malicious programs (worms, viruses)
o Implementing robust procedures around the uses of external devices, accessing certain
websites, and executing suspicious programs, in addition to installing malware controls to
monitor and identify threats
o Data encryption
● Encryption is an essential foundation for e-commerce
o Encryption involves using a password or a digital key to scramble a readable (plaintext)
message into an unreadable (ciphertext) message
▪ Intended recipient then uses another digital key to decrypt or decipher the ciphertext m
back into plaintext
● With encryption keys, the longer the length of the key, the less likely it is that the message of the transac
will be decrypted by the wrong party and that they key will be broken by a brute-force attack (attacker trie
every possible key combination until the right one is found)
● Symmetric encryption
o Sender and recipient use the same shared key
● Asymmetric encryption
o Uses two keys, one of which is public and the other is private
o Digital certificates
● Electronic documents that are created and digitally signed by a trusted party and that certify the
identity of the owners of particular public key
o The digital certificate contains that party’s public key
▪ “Public key infrastructure” (PKI) → the system and processes used to issue and
manage asymmetric keys and digital certificates
o Digital signatures vs. e-signatures
● Digital signatures
o Use asymmetric encryption to create legally binding electronic documents
● Web-based e-signatures
o An alternative and are provided by vendors as a software product, legally binding
o Physical controls
o Monitor and control the environment of the workplace and computing facilities
o Monitoring and controlling facility access
● Physical controls are often preventive controls that stop or deter unauthorized access into a facility
● Physical access controls can also be applied to specific assets that may be at risk if a building breach occ
o Segregation of duties
o Reduces opportunities for anyone to be in a position to both perpetuate and conceal errors or fraud in the
normal course of one’s duties
● Granting and/or restricting access to production programs, production data, and execution activities
● Areas that must be segregated:
o System programming
o End user transaction/data entry
o Data custody and storage
o Authorization responsibility and monitoring
o System analysts vs. computer programmers
● Analysts → hardware
● Programmers → software
o Security administrators vs. computer operators and computer programmers
● Security administrators → restricting access to systems, applications, or databases
● If the security administrator were also a programmer for that system, that individual could gain access to
unauthorized areas as well as give access to another person
- Risks and Controls of Critical, Confidential, and Private Information
o Critical information
o Any information that is vital for the organization to perform its essential functions and achieve its strategic
objectives
o Confidentiality
o The efforts to keep information within or about the organization from being misused or accessed without
authorization
o Privacy
o The rights of employees and customers to keep their personal information safe and to understand how
their information will be collected, used, and disclosed to others
oBEC Study
Identifying and Guide
classifying information
o Organizations must first identify what data and information is stored in all their data repositories
o Then, must categorize the data as confidential, private, and/or critical
o Then, determine what risks exist and how those risks will be mitigated and controlled
o Confidentiality risks
o Inappropriate and/or unauthorized access
o Misuse or theft
o Legal and regulatory concerns
o Privacy risks
o Privacy risks directly impact the data of an organization’s employees, customers, and users
o Insufficient disclosure of collection, or collection without consent
● Violation of personal privacy and law
o Inappropriate use or disclosure of private information
● Risk that the information is not securely protected, could be stolen, or is used for inappropriate
purposes, such as discriminatory practices, unfair marketing schemes, or selling without permission
o Risks of not fully adhering to regulations and laws
o Reputational risks
● When customers’ private data is leaked or disclosed
o Safeguarding information
o Policy management and training
● Policies must be put in place that require users within an organization to adhere to strict guidelines
concerning safeguarding confidential and private information
● Organizations must have a robust training program covering these policies
o Document physical security controls
● Leaving private and confidential information in paper form or in visible digital output at a workspace dur
evening or any time the employee is away from the workspace can result in unauthorized access
o Document access controls
● Access controls should be put in place to ensure that only authorized users have access to and the
capability for reading, using, and modifying confidential and private information
o Third-party controls
● Organization may request a SOC 1 report to verify that the appropriate controls are in place and are
operating effectively
o Incident response
o “Incident” → any breach of access that is unauthorized or theft or misuse of critical, confidential, or
private data
o Cyber Incident Response Team (CRIT) → the team that is alerted and handles responses and is responsible fo
discovering issues, stopping the spread of the impact, implementing recovery steps, and tracking the outcomes
o When an incident occurs:
● Determine the source and ensure mitigation measures are put in place to immediately stop the
breach and avoid additional breaches
● Try to secure the information lost
● Assess the magnitude of the breach
● Notify specific entities based on existing federal and state laws
● Revisit the cause of the breach and ensure that long-term, effective controls are put in place to avoid
future breaches
- System Availability and Business Resiliency
o System availability risks
o Failure of IT infrastructure
● Use of outdated infrastructure
● Lack of system maintenance
● System infected with malware
● Physical damage occurring to systems
● Cyberattacks that purposely overload and cause damage to the systems
o Insufficient capacity and resources
● System availability may be slowed down or disrupted if the IT infrastructure of an organization is
unable to meet the processing or storage needs of current operational demands
o Lack of business resiliency
● Organizations must have a comprehensive business resiliency program in order to recover from
system disruptions
o Business resiliency
o Integration of system availability controls, crisis management, disaster recovery plans, and business
continuity plans into a central set of procedures to ensure that a business can continue to operate or quickly
return to operations without irreparable harm to its people, information, or assets
o System availability controls
o Activities to prevent system disruptions and loss of information as well as procedures to continue
BEC StudyorGuide
operations provide quick recovery from an incident
o Physical controls
● Controls must be put in place to deter damage to the IT infrastructure, including:
o Physical access controls
o Fire alarms and sprinklers
o Facility design to protect against flooding and overheating
o IT infrastructure controls
● Mitigation of malicious attacks and other actions that can compromise systems
o Anti-malware software and patch management
o Periodic reviews of IT infrastructure components
o Network security controls
o Access and authorization logical controls
o Uninterrupted power supply (UPS)
● Device that maintains a continuous supply of electrical power to connected equipment
o Used to prevent a system from shutting down inappropriately during an outage
o Can prevent data loss and can protect the integrity of a backup
o NOT a backup standby generator; the battery will run out sooner or later
o Redundancy
● Organizations may choose to have redundant hardware, software, and storage as a normal part of
their operations
● Redundancy can also apply to data storage and backup
o Backup files
● Necessary both for recovery in a disaster scenario and for recovery from processing problems
● Organizations must also decide what types of backups to perform in order to recover lost data
o Full backup
▪ Exact copy of the entire database
▪ Time consuming
o Incremental backup
▪ Copying only the data items that have changed since the last backup
o Differential backup
▪ Copies all changes made since the last full backup (cumulative)
o Archive
▪ Moves entire sets of data that are no longer actively used from software outputs, datab
or master files to a location that is separate from the main operations as a way to indefinit
store them
o Crisis management plans
o Crisis → unexpected, large-scale incident that can cause major negative effects
o Decisions can be difficult if an organization does not have clearly defined roles, responsibilities, and procedur
o Crisis management policies should address the following:
● Risk assessment of what potential crises the organization could face and how to properly respond
● Steps management and employees must perform to put the plan into operation
● Crisis response command center → where the directives come from (can be physical or virtual)
● Roles and responsibilities must be set
● Internal and external communication lines must be established
● Employees must be properly trained on the crisis management policies and procedures
o Disaster recovery plans
o Entity’s plans for restoring and continuing its IT function in the event of the destruction of not only
program and data files, but also computer processing capability
o Steps in disaster recovery
● Assess the risks
● Identify mission-critical applications and data
● Develop a plan for handling the mission-critical applications
● Determine the responsibilities of the personnel involved in disaster recovery
● Test the disaster recovery plan
o Use of alternative processing facilities
● Cold site
o Off-site location that has all the electrical connections and other physical requirements for
data processing, but it does not have the actual equipment
▪ Cheapest, slowest
● Hot site
o Off-site location that is equipped to take over the company’s data processing, as these
locations are not only pre-wired for use, but also include the necessary hardware and office
equipment
▪ Expensive, quickest
● Warm site
o Between cold and hot -- already has hardware installed but does not have the processing capabil
o Business continuity plans
o Focused on keeping the business operational
o More comprehensive than disaster recovery plans
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o Contain Guide and mitigation procedures around all business processes
contingency
o Must consider the following:
● Identify the organization’s key business processes
● Identify the risks that exist in key business processes
● Determine the acceptable downtime for key business processes
● Implement mitigation and contingency plans to address risks and downtimes
o Business resiliency services
o Organizations are relying more heavily on cloud computing and Software-as-a-Service (SAAS) to operate
their core business processes
● In line with this, service providers offer multiple business resiliency services such as:
o Disaster recovery as a service
o Backup as a service
o Business continuity as a service
o Advantages
● Allow organizations to utilize companies with specialized knowledge and resources to take on their
resiliency efforts
o Disadvantages
● Over reliance
● Loss of control
● Higher cost
● Risks of effectiveness
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BEC Study Guide

Study Guide – BEC

B1 – Corporate Governance and Financial Risk Management

- Organizational structure components (“Engineers Destroyed Obsessed Feminists”)

- Components of internal control (CRIME)

M2: Enterprise Risk Management Framework

M3: Sarbanes-Oxley Act of 2002

M4: Business Processes

- Notes from MCQs

M5: Financial Risk Management: Part 1

M6: Financial Risk Management: Part 2

- Cost of preferred stock

M2: Capital Structure: Part 2

- Leverage and risk

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M4: Working Capital Management: Part 1

M5: Working Capital Management: Part 2

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M7: Financial Valuation Methods: Part 2

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B3 – Operations Management: Cost Accounting & Performance Management

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o Spoilage (or shrinkage)

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M3: Cost Accounting: Part 3

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- Joint Product Costing and By-Product Costing

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M4: Performance Management: Part 1

M5: Performance Management: Part 2

● ROA x Financial leverage

- Economic Value Added

B4 – Operations Management: Planning Techniques

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M2: Projection and Forecasting Techniques: Part 2

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M3: Ratio Analysis of Forecasts and Projections

M4: Marginal Analysis

o Strategic factors should also be considered

- Make vs. Buy

- Sell or process further

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M5: Budgeting: Part 1

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M6: Budgeting: Part 2

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M7: Variance Analysis

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B5 – Economic Concepts and Analysis

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M2: Market Influences on Business: Part 1