Chapter 12 Notes

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University of Toronto Scarborough
Financial Accounting
Prof.Jan Klakurka

Chapter 12 Identifying Strategic Risk - In the business setting, managers must be sensitive to conditions that can cause specific categories of risk to become dangerous. - To effectively manage their business, all managers must assess strategic risk, which is an unexpected event or set of conditions that significantly reduces the ability of managers to implement their intended business strategy. Operations Risk - Results from the consequences of a breakdown in a core operating, manufacturing, or processing capability. Any operational error that impedes the flow of high quality products and services has the potential to expose the firm to loss and liability - Operations risk becomes a strategic risk in the event of critical product or process failures. - Applying the inputs process outputs model is critical for identifying and controlling operations risk, especially when technology failure can lead to inefficiencies and breakdowns. Analyzing operations according to this model provides guidance about what key processes should be standardized and controlled tightly to assure safety and quality. Asset Impairment Risk - An asset becomes impaired when it loses a significant portion of its current value because of a reduction in the likelihood of receiving those future cash flows. - Asset impairment can become a strategic risk if there is deterioration in the financial value, intellectual property rights, or the physical condition of assets that are important for the implementation of strategy. - Financial impairment results from a decline in the market value of a significant balance sheet asset held for resale or as collateral. - Credit risk occurs when a creditor becomes bankrupt or insolvent and is unable to pay contractual obligations as they become due. - Sovereign risk is a business exposed to risk at a national level when a foreign government becomes unable or unwilling to repay its debts. - Counterparty risk is the risk that the other party to the agreement may be unable to honour its contractual obligations due to solvency or inability to deliver what was promised. Competitive Risk - Results from changes in the competitive environment that could impair the businesss ability to successfully create value and differenti
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