DECA Finance Cluster Exam

Knowledge that appeared on past Finance Cluster Exams in the form of flashcards.

Competitive Analysis

Process of comparing a business's income statement with that of competitors to see how it is doing by industry standards.

Limited Partnership (LP)

Business owned by two or more parties made up of at least one general partner and one or more limited partners; most US states govern the formation of LPs and require registration of the entity

General Partner (GP)

Have full management control of the business & have unlimited financial liability for their financial obligations

Limited Partner

Have little to no involvement in management & liability is limited to the amount of their investment; pass-through entities that have little or no reporting requirements

Hurdle Rate

Lowest rate of return (RoR) a project/investment must achieve before a manager/investor deems it acceptable

Hurdle Rate Importance

Important when companies/investors make important decisions like pursuing a specific project - riskier projects generally have higher hurdle rates than those with less risk

Hurdle Rate Use

Investors use it in discounted cash flow analysis; companies sometimes use their WACC as the hurdle rate; private equity & hedge funds use it to measure when GPs are entitled to performance fees (GP can only charge performance fees, AKA carried interest, if the limited partner's RoR crosses pre-arranged hurdle rate)

Weighted Average Cost of Capital (WACC)

Represents a company's average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt; average rate that a company expects to pay to finance its business; likely to be higher if the stock is relatively volatile or if its debt is seen as risky, because investors will want greater returns to compensate them

WACC Use

Commonly used as hurdle rate against which companies and investors can gauge the desirability of a given project/acquisition; also used as discount rate for future cash flows

Discounted Cash Flow (DCF)

Valuation method that estimates the value of an investment using its expected future cash flow; attempts to determine the value of an investment today based on projections of how much money that investment will generate in the future; if DCF is higher than current cost of investment, the opportunity could result in positive returns & may be worthwhile

DCF Disadvantage

Reliance on estimations of future cash flows, which could prove inaccurate

Scenario Analysis

Process of estimating the expected value of a portfolio after a given period of time, assuming specific changes in the values of the portfolio's securities/key factors take place (ex. Change in interest rate)

Scenario Analysis Use

Both likely and unlikely worst-case events can be tested in this fashion often relying on computer simulations; can apply to investment strategy & corporate finance

Sensitivity Analysis

Determines how different values of an independent variable affect a particular dependent variable under a given set of assumptions; AKA what-if/simulation analysis; allows for forecasting using historical, true data

Sensitivity Analysis Use

Help make predictions in the share prices of publicly traded companies/how interest rates affect bond prices; determines how variables impact a single event, and more useful to determine many different outcomes for more broad situations

Cost-Benefit Analysis

Process used to measure the benefits of a decision/taking action minus the costs associated with taking that action; involves measurable financial metrics (ex. Revenue earned/costs saved as a result of the decision to pursue a project), can also include intangible benefits and costs/effects from a decision (ex. Employees morale, customer satisfaction); more benefit than costs will generally be a favorable project for the company to undertake (all else being equal)

Embezzlement

Form of white-collar crime in which a person/entity intentionally misappropriates the assets entrusted to them (breach of fiduciary responsibilities placed upon a person); a type of fraud (ex. Ponzi schemes, destroying employee records, pocketing company cash); Embezzler attains the assets lawfully and has the right to possess them, but the assets are then used for unintended purposes - embezzler has permission to handle an asset in a certain way, but not to take it - embezzler might create bills & receipts for activities that did not occur and then use the money paid for personal expenses

Fiduciary

Are legally bound to put their client's best interests ahead of their own; such duties appear in various business relationships (ex. Trustee & beneficiary, corporate board members & shareholders, executors & legatees)

Investment Fiduciary

Anyone with legal responsibility for managing somebody else's money; registered investment advisors and insurance agents have a fiduciary duty to their clients; Broker-dealers may be subject to less stringent standard set by SEC Regulation Best Interest

Executor (of an estate)

Individual appointed to administer the last will & testament of a deceased person; main duty is to carry out the instructions to manage the affairs and wishes of the deceased spelled out in their will/trust documents - assets are distributed to the intended beneficiaries; appointed by individual who makes the will before their death or by a court, in cases wherein there was no prior appointment

Rule Induction

Data mining technique used to deduce if-then rules from a data set; these symbolic decision rules explain an inherent relationship between the attributes and class labels in the data set

Patent

Safeguards an original invention for a certain period of time and is granted by US Patent and Trademark Office (USPTO)

Utility Patent

For creation of a new/improved product, process, or machine

Plant Patent

For new & unique plant's key characteristics from being copied, sold or used by others

Design Patent

For unique look of a manufactured item

Trademark

Protects words and design elements that identify the source of a product (ex. Brand names, corporate logos)

Copyright

Protect "original works of authorship" (ex. Writings, art, architecture, music - information); owner has sole right over the material

"Fair Use" Doctrine

Allows some degree of distribution of copyrighted material for scholarly, educational, or news-reporting purposes

Steward Function (of Financial-Information Management)

Ways that financial managers look out for the best interests of the business through their actions (ex. Reponsible use of resources

Cost Accounting

Reporting and analysis of a company's cost structure; involves assigning costs to cost objects that can include a company's products, services, and any business activities; distinct from general financial accounting which is designed for outside audiences and heavily regulated, do not need to follow GAAP

Cost Accounting Use

Can identify where a company is spending its money, how much it earns, and where money is being lost; have clear idea of the costs associated with running a business makes it easier for management to boost profitability

Type of Costs in Cost Accounting

Direct cost, variable cost, operating cost, indirect cost, fixed cost

Opportunity Cost

A benefit one could have received but gave up to take a different course of action

Sunk Cost

Already incurred & cannot be recovered (not typically considered when deciding new choices)

Indirect Cost

Not directly accountable to a good, service or project

Direct Cost

Directly associated with a good, service or project

Variable Cost

Increases/decreases with production volumes

Fixed Cost

Keep a company running and don't fluctuate with sales & production volumes

Operating Cost

To run day-to-day operations of the company; can be fixed/variable; not usually traced back to a manufactured product

Cost Allocation

Process of identifying and assigning costs to activities, people, projects, departments, etc.

Cost Allocation Goal

Spread costs fairly across departments, to calculate profitability and derive transfer prices

Cost Allocation Steps

1. Identify shared facilities or support services, 2) Identify costs to be allocated, 3) Determine the allocation factors/methodology to distribute the cost equitably, 4) Allocate the costs

Marginal Analysis

Examination of additional benefits of an activity compared to the additional costs incurred by that same activity; "Marginal" - focus on cost/benefit of the next unit/individual; operate until marginal benefit equals marginal costs, often the most efficient use of resources

Marginal Analysis Use

Decision-making tool to help maximize their potential profits; ex. A manufacturer wishes to expand its operations, either by adding new product lines/increasing volume of goods produced from the current product line, a marginal analysis of the costs and benefits are necessary

Variance Analysis

Refers to the difference between a planned and actual budget

Variance Analysis Use

Managerial Accountant use it to see how accurate their budgets are

Variance Analysis Disadvantage

May involve too much of a time delay

Neural Networking

(Data-mining) Method in AI that teaches computers to process data in a way inspired by the human brain; type of machine learning (deep learning) that uses interconnected modes/neurons in a layered structure that resembles the human brain

Neural Networking Result

Creates adaptive system that computers use to learn from their mistakes and improve continuously; attempts to solve complicated problems (ex. Summarizing documents/recognizing faces with greater accuracy); help computers make intelligent decisions with limited human assistance - can learn and model relationships of input & output that are nonlinear and complex

Governance, Risk Management, Compliance (GRC)

Intended to correct "silo mentality" that leads to departments within an organization to hoard information & resources from each other; integrated into every department for great efficiency; overall purpose is to reduce risk, costs and duplication of effort

Governance/Corporate Governance

overall system of rules, practices, and standards that guide a business's management

Risk/Enterprise Risk Management

Monitoring the opportunity for loss for a business

Compliance/Corporate Compliance

Verification that a vendor meets the requirements of accepted practices, regulations, legislation, rules, standards and/or the terms of a contract

Internal Controls Use

Helps companies to comply with laws and regulations, and prevent fraud; help improve operational efficiency by ensuring budgets are adhered to, policies are followed, capital shortages are identified, and accurate reports are generated for leadership

Internal Controls

Mechanisms, rules, procedures (ex. Internal audits play a critical role in a company's internal controls & corporate governance; whistleblower policy, segregation of duties, managerial oversight)

External Control

Any sort of influence from outside of an organization that affects how it operates; specifically focus on regulating governance policies such as hiring policies & safety procedures; include direct rules (government regulations) and indirect pressure (scrutiny from media)

External Control Effect

Create consistent industry standards, improving work conditions, promoting transparency, uphold corporate responsibility

Risk Management Information System (RMIS)

Database that assists in consolidating property values, claims, policy, and exposure information and providing the tracking and management reporting capabilities to enable the user to monitor and control the overall cost of risk management

RMIS Liability Section

Information about current and historical claims, exposure bases (payroll, # of employees, # of company vehicles, etc.) and liability insurance coverages & coverage terms

RMIS Exposure Section

Listing of company's properties, information about company vehicles, loss records, property insurance policies data

Risk Measure

In financial mathematics, risk measure is used to determine the amount of an asset/set of assets (traditionally currency) to be kept in reserve

Risk Measure Purpose

Make risks taken by financial institutions, such as banks and insurance companies, acceptable to the regulator

Reserve Requirement

Amount of funds a bank holds in reserve to ensure it is able to meet liabilities in case of sudden withdrawals

Risk Control

Tactics to mitigate a perceived risk; include loss prevention, loss avoidance, loss reduction

Loss Prevention

Stop loss from occurring

Loss Avoidance

Do not Take part in risky activities

Loss Reduction

Lessen impact of loss after it occurs

Risk Retention

Risk management strategy that involves a party assuming the responsibility for a certain level of risk/losses; financing loss through self-insurance & other methods; may also refer to the amount of risk that a party is willing to accept before transferring it to another party

Risk Retention Group (RRG)

State-chartered insurance company that insures commercial businesses and government entities against liability risks

Data Normalization

Process of efficiently organizing data in a database; developing clean data, eliminating redundant and unstructured data, making data appear similar across all records and fields, reduce dependency within stored information, ensure data integrity, eliminate anomalies, transforming & scaling data to common format & range

Data Cleansing

Process of finding & removing errors, inconsistencies, duplications, and missing entries from data to increase data consistency and quality; AKA Data scrubbing/cleaning; occurs before data normalization

Data Cleansing Use

Maintain useful, relevant, accurate database; help an organization to process good information to make sound business decisions

Pre-Sales Touchpoints

Interaction between the brand and the customer before they engage in the actual buying process (ex. Advertising, demos, free trials, proposals, negotiations)

Post-Sales Touchpoints

Any interactions that happen after a customer purchases your product/service (ex. Customer service, follow-up class, feedback, surveys, upselling opportunities, shipping/delivery, installation)

Email Phishing

Delivered via email spam; attempt to trick individuals into giving away sensitive info/login credentials; most are "bulk attacks" - not targeted & sent in bulk to wide audience; goals can vary

Spear Phishing

Targeted - use personalized emails to trick a specific individual/organization into believing they are legitimate; often utilize personal info about the target to increase success; often target executives/those in financial departments with access to sensitive financial data & services - accounting and audit firms are particularly vulnerable due to value of info their employees access

Pyramid Scheme

Fraudulent and unsustainable investment pitch that relies on promising unrealistic returns from imaginary investments; early investors actually get paid those big returns, which leads them to recommend to others; investors' returns paid out of new money flowing in - rely on recruitment fees and not from the sale of actual goods or services with real value

Multi-Level Marketing Operations (MLMs)

Legitimate business programs where distributors earn money from sale of tangible goods, and from commissions on their recruited distributors' purchases & sales; Pyramid schemes often masquerade as MLMs but their focus is on fees from recruits, not revenue from product sales

Ponzi Scheme

Investment scam that pays early investors with money taken from later investors to create an illusion of big profits; promises high rate of return with little risk to investor; relies on word-of-mouth, as new investors hear about the big returns earned by early investors; some of new money is used to pay earlier investors, making the scam look legitimate and highly profitable but most of the money is pocketed by scam's operator

Risk Transfer

Risk management technique in which risk is transferred to a third party; purchasing insurance is a common example of transferring risk from an individual/entity to an insurance company

Risk Financing

Determining how an organization will pay for loss events in the most effective and least costly way possible; involves identification of risks, determining how to finance the risk, monitoring effectiveness of financing technique chosen; setting asset funds to pay for unavoidable losses

Legally Binding Contract

2 Requirements - Something of value must be exchanged, both parties must be in agreement with the terms of the contract; written & signed will make it easier to enforce but not required

Pump and Dump

Form of securities fraud that involves artificially inflating price of an owned stock through false & misleading positive statements (pump), in order to sell the cheaply purchased stock at a higher price (dump); once operators dump their overvalued shares, the price falls and investors lose their money; most common with small cap cryptocurrencies & very small corporations/companies ("microcaps")

Industrial Espionage

"Espionage" - revealing confidential info without the source/owner's permission & often associated with spying; refers to illegal and unethical theft of business trade secrets for use by a competitor to achieve a competitive advantage; often done by an insider or an employee who gains employment for the express purpose of spying and stealing info for a competitor

Job Rotation

Instructional method where employees are rotated periodically from one job to another to broaden their perspective of the business

Job Depth

Amount of control and decision-making authority one has

Job Scope

Number of tasks involved in job and frequency that they occur

Job automation

Method of operating/controlling a process in which tasks are completed by automatic means (ex. Tech); reducing human effort and labor

Segment Profitability

Practice of analyzing the profitability of products and services by customer/product line and then making modifications to increase profitability

Segment Margin

Amount of profit/loss produced by one component of a business; only takes into account the segment's revenue and expenses; helps to provide an accurate picture of where a company is performing well and where it's not by its strengths and weaknesses

Human Resources (HR) Management

Process of planning, staffing, leading, organizing employees; strategic & coherent approach to effectively and efficiently management of people in a company/organization such that they help their business gain a competitive advantage

HR Management Functions

Vary, typically include recruitment, compensation and benefits, training and development, and employee relations

Information Management

Process of collecting and analyzing data that be used in the strategic decision making process for a business

Financial Analysis

Evaluating an organization's financial statements to determine the profitability of the organization, a division within the organization or a specific event or project

Financial Analysis Internal Use

Help fund managers make future business decisions or review historical trends for past successes

Financial Analysis External Use

Help investors choose the best possible investment opportunities

Fundamental Analysis

A kind of financial analysis, use ratios & financial statement data to determine the intrinsic value of a security

Technical Analysis

A kind of financial analysis, assumes a security's value is already determined by its price, and focuses instead on trends in value over time

Tellers

Learns about all products & services that are available & work with customers on regular basis; effective tellers are often promoted to head teller when available and more into higher levels of management such as bank managers and supervisors

Advertising

A marketing function, promotes business's product