Term
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Definition
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-Tries to allocate overhead more accurately than traditional volume based system
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-Assigns overhead to products based on the activities that product requires (instead of based only on how many units are produced)
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Uses 2 stage process to assign overhead
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Term
Flaws of Traditional Volume Based Costing systems |
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Definition
- undercost low-volume products
- overcosts high volume products
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Term
ABC Costing
Process to assign overhead |
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Definition
- assign overhead to activities
- assign overhead to products
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Term
ABC Costing Activities
(PF CUB) |
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Definition
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Term
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Definition
Step 1: ID activities associated w/each product line
Step 2:
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Term
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Definition
Step 3: choose a cost driver for each cost pool
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Volume based cost drivers: Number of units, machine hours etc
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Non volume based Cost drivers: number of setups, design changes, quality inspections
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Will assign more overhead to products that require more time to set up, more quickly control, more engineering, etc
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Ex: Machining and installation pool-> machine hours
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Machine Set up-> number of set ups
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quality control-> activity cost drivers
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Term
Types of activity cost drivers |
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Definition
- Transaction Drivers
- Duration Drivers
- Intensity Drivers
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Term
Activity cost drivers
Transaction drivers |
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Definition
count how often an activity is performed |
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Term
Activity cost drivers
Duration Drivers |
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Definition
Count how often an activity is performed |
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Term
Activity cost drivers
Intensity Drivers |
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Definition
directly charge for the resources that are used each time for an activity performed |
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Term
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Definition
Step 4
Assign indirect costs (overhead costs)to products/services based on their activity usage |
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Term
2 methods of assigning indirect costs in ABC
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Definition
- Activity rate method
- similar to predetermined overhead rate calc
- Activity proportion method
- calculates a % for each product
-Either method, after all allocation of costs, make sure that:
total costs allocated= total cost in the pool that you started with |
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Term
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Definition
Total Activity Cost
Total Activity Driver
Multiply answer above w/ actual product activity driver to allocate overhead |
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Term
ABC
Activity Proportion Method |
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Definition
Product Activity Driver
Total activity driver
-Multiply answer w/total overhead cost assigned to that cost pool
Note: MUST have all information for ALL products to use this method |
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Term
Advantages of Activity Based Costing (ABC) |
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Definition
- calculates more accurate manufacturing costs for products
- considers factors other than volume in cost allocation
- good for businesses that have cost drivers other than production value
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Term
Disadvantages of Activity Based Costing (ABC) |
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Definition
- Time consuming
- tracking activities
- calculation
- Costly to implement
- Not helpful to businesses that make a single product or have a simple production process
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Term
When to apply Activity Based Costing (ABC) |
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Definition
- Willie Sutton Rule: "B/C that's where the money is"
- Go after large expenses in indirect and support resources
- When there is HIGH DIVERSITY
- Look for a situation where a large variety exists in products, customers, or processes
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Term
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Definition
- Determine number of units that must be sold or amount of revenue in order to cover all costs and have zero profit
- Uses contribution margin and contribution margin ratio
- The lower the number, the better-->Less risky
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Term
Formula to calculate
Break Even in Units |
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Definition
Total Fixed Costs + Target Profit
Unit Contribution Margin |
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Term
Formula to calculate
Break Even REVENUE |
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Definition
Total Fixed Costs
CM Ratio |
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Term
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Definition
- Determine number of units to sell or amount of revenue that must be earned to meet a specific profit goal
- Can use break even formulas
- but instead of profit being zero, add desired profit to fixed costs
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Term
Target Profit Analysis
Formula to calculate
Target Profit in Units |
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Definition
Total fixed costs + Target Profit
Unit Contribution Margin |
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Term
Target Profit Analysis
Formula to calculate
Target Profit REVENUE |
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Definition
Total Fixed Costs + Target Profit
CM Ratio |
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Term
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Definition
- Compares actual or expected sales to break-even points
- Monitors actual sales throughout the period and determines if theres a need for more advertising etc.
- Useful Planning tool when estimating future sales
- Determines how much revenue decrease can occur before the business incurs a loss (AKA Buffer zone or cushion)
- Higher=Better=Less Risky
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Term
Margin of Safety
Formula to calculate
Margin of safety in sales |
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Definition
Actual or Budgeted Sales*
- Break Even Sales
Margin of safety**
*Use this value when calculating Margin of Safety %
**Use this value when calculating margin of safety %
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Term
Margin of Safety
Formula to calculate
Margin of safety % |
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Definition
Margin of safety
Actual or Budgeted Sales |
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Term
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Definition
- Analyzes how fixed cost impact profits
- To the extent that fixed costs can be used to turn a small change in sales into a large change in profits
- Creates multiplier to estimate effect on profits based on changes in revenue
- Known as DEGREE OF OPERATING LEVERAGE (see formula)
- The higher the fixed costs, the more revenue is needed to generate profit
- The more risky the business, the higher the operating leverage
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Term
Operating Leverage
Formula for calculating
The Degree of Operating Leverage |
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Definition
Total Contribution Margin
Profits
*closer result is to 1, the less risky it is |
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Term
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Definition
- Assumption: Proportion of sales per product line or service is consistant
- Ex:50% of sales is attributable to Product A; 25%->Product B; 25%->Product C
- In order for CVP analysis to be accurate, it is assumed these percentages are the same under all scenarios
- Use either:
- Product Mix- % based off number of units sold
- Sales Mix- % based off total sales revenue
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Term
Multiproduct Analysis
(WAUCM)
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Definition
- Step 1: Calculate Unit Contribution Margin(CM) for each product
- Step 2: Calculate product mix percentages to each product
- Step 3: Multiply Each Products percentage by its specific CM
- Step 4: Add results of all products together to get the weighted average unit CM
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Term
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Definition
- Managers shouldnt have to choose between financial and operational measures
- A balanced presentation of both financial and operational measures provide a focus of attention on critical areas of the business
- Allows managers to look at business from 4 important perspectives
- Forces managers to focus on a handful of measures that are most critical to the business
- Brings together in a single report, the disparate elements of a company's competitive agenda
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Term
Balanced Scorecard
4 important perspectives managers can look at due to the scorecard |
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Definition
- Customer perspective- How do customers see us?
- Internal Business perspective- What must we excel at?
- Innovation and Learning Perspective- Can we continue to improve and create value?
- Financial Perspective- How do we look to the shareholders?
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Term
Balanced Scorecard
Disparate elements of a company's competitive agenda covered in the scorecard
MR QT CL |
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Definition
- Becoming customer oriented
- Shortening response time
- Improving Quality
- Emphasizing Teamwork
- Reducing new product launch times
- Managing for the long term
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Term
Balanced Scorecard
CUSTOMER PERSPECTIVE
List Customer Concern Catagories |
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Definition
Customer concerns tend to fall into one of these four catagories:
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Time
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Quality
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Performance & Service
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Cost
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Term
Balanced Scorecard
Internal Perspective |
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Definition
- Internal measures should come from the business processes that have the greatest impact on customer satisfaction
- Factors that affect cycle time; Quality; Employee Skills; Productivity
- Companies should decide what processes and competencies they must excel at and specify measures for each
- Cycle time measures should be taken to the lowest levels of the business and linked up to overall company goals
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Term
Balanced Scorecard
Innovation and Learning perspective
*Description
*Why companies need impoved abilities
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Definition
- Targets for success keep changing
- The ability to introduce entirely new products with expanded capabilities is required of companies that want to have global success
- Companies need improved abilities to:
- Launch new products
- create more value for customers
- Improve operating efficiencies
- Which allows them to grow and increas shareholder value
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Term
Balanced Scorecard
Financial Perpective
*descriptions
*what do financial goal typically have to do with? |
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Definition
- Financial performance measures indicate whether the company's strategy, implementation, and execution are contributing to bottom line growth
- Typical Financial goals have to do with:
- Profitability
- Growth
- Shareholder Value
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Term
Balanced Scorecard
Financial Perpective
Why critichs are wrong when asserting financial measures are unnecessary |
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Definition
- Well designed financial control can improve quality
- The linkage between improved operational performance and improved financial performance is not always clear cut
- A failure to convert improved operational performance into improved financial performance should cause a rethinking of the company's strategy or implementation plan
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Term
Balanced Scorecard
Leading Measures of Financial Perspective |
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Definition
- Percent of sales from new products
- percent of sales paid in 30 days
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Term
Balanced Scorecard
Lagging Measures of Financial Perspective |
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Definition
- Market Share
- Return on Equity
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Term
Balanced Scorecard
Leading Measures of Customer Perspective |
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Definition
- Customer Satisfaction Surveys
- Product Performance
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Term
Balanced Scorecard
Lagging Measures of Customer Perspective |
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Definition
- Percent of sales from new products
- percent of sales paid in 30 days
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Term
Balanced Scorecard
Leading Measures of
Learning & Growth Perspective |
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Definition
- Training costs per employee
- average weekly team meetings
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Term
Balanced Scorecard
Lagging Measures of Learning and Growth Perspective |
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Definition
- Average employee turnover
- Employee satisfaction surveys
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Term
Balanced Scorecard
Measures of Internal Processes Perspective
A)Service after Sale
B)Operations
C)Innovation |
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Definition
A) -Service turnaround time
-Percent of error free invoices
B) -Unit cost vs competitors
-Inventory as a percent of sales
C) -# of new products
-# of patents taken
*In the balanced scorecard, they dont use lagging or leading measures for internal processes. They use Service after sale, Operations, and innovation |
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Term
Four steps to creating a Balanced Scorecard |
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Definition
- Define measurement architecture around organizations distinct strategy
- Brainstorm, define strategic objectives and priorities
- Work in groups to determine measures
- Implement Balanced Scorecard
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Term
Internal Control Process Role |
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Definition
- To provide senior management reasonable assurance that:
- The company is on track to achieve its mission successfully
- To minimize the profitability of unexpected surprises
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Term
Internal Control
2 views of internal control |
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Definition
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Term
Broad view of internal control |
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Definition
Internal controll process encompasses all controls put into place by management to ensure the organization is achieving its strategic goals in an effective (Doing the right thing) and efficient (economical manner) way. |
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Term
Narrow view of internal control |
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Definition
Includes only those controls designed to prevent fraud and to ensure accuracy and completeness of accounting records |
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Term
Internal Control
5 components which together must be an integrated Internal Control Process
(IM RIM) |
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Definition
- Internal control environment
- Risk Assessment
- Internal Control Activities
- Info and communication
- Monitoring
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Term
Internal Control Environment |
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Definition
- Tone that supports and enhances internal control process must be set at the top
- It is the collective result of organizational initiatives, procedures, and policies including:
- Ethical/Operating Policies;
- Board of Directors ethical style;
- Company's personnel hiring training etc,
- Mgmt support of regs and statute requirements;
- mgmt monitoring of employee and dept performance;
- mgmt response to internal control failurs
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Term
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Definition
- Senior mgmt must ID & assess the principal risks the entity has to manage in pursuit of its objectives
- this drives resource allocation to the design, maintenance, & implementation of internal control process
- High risk areas take priority
- Since risk faced by companies is always changing, the risk assessment component must be a continuous activity
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Term
2 Categories of Internal control activities |
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Definition
- Admin Controls
- Accounting controls
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Term
Internal Controls
Administrative Controls |
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Definition
- Designed to sassure mgmt that operations are being conducted efficiently and company policies are being followed
- Organizational structure with assigned responsibilities
- performance reviews
- Written policies for dealing with vendors, customers, and regulatory entities
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Term
Internal Controls
Accounting Control |
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Definition
- concerned mainly w/the protection of assets and that financial records are reliable and complete
- procedures to safeguard assets
- procedures to ensure completeness and accuracy of acct records
- procedures to ensures timely release of financial statements
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Term
Internal Controls
Info and Communication |
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Definition
- all employees should recieve a clear message that their control responsibilities should be taken seriously
- that their role in Internal control should be well defined
- that serious breaches in the internal control system can and must be reported to senior mgmt and possibly the board of directors
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Term
Internal Controls
Monitoring |
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Definition
- Internal controls process must be monitored so that those that rely on it can be assured it is fulfilling its role
- Must be an ongoing process of assessing quality of internal controls
- If risks change, or serious breaches of the system occur, monitoring should increase and evals should be made
- Senior mgmt has responsibility to assess internal control structure, considering the company's size, business, complexity, and regulatory reqs
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Term
Internal Controls
Three Parities that play an important monitoring role |
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Definition
- Audit Committee Board
- Internal Auditors
- Independent Auditors
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Term
SARBANES-OXLEY (SOX) ACT OF 2002
Public Company Requirements
(Annual Reports) |
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Definition
Requires companies in each annual report to:
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Affirm that the mgmt is assuming responsibility for establishing and maintaining an adequate financial reporting internal control process
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Provide a mgmt assessment of the effectiveness of the firms internal control process
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Term
SARBANES-OXLEY (SOX) ACT OF 2002
Public Company Requirements |
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Definition
- Disclose on a timely basis material changes in their financial condition or operations
- CEO & CFO must certify that the info contained in the companies financial statements is a fair representation of the results
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