Formulae Flashcards
CVP
Cost volume profit, used to find how many units must be sold to make a certain profit
CVP formula:
No of units = (FC + Required Prof)/ Contribution per unit
Total Contribution
Revenue - Variable Costs
Break Even Point
Fixed Costs / Contribution per Unit
This gives BEP in Units Sold
Break Even Point using Contribution/Sales Ration (C/S Ratio)
C/S Ratio: Total Contribution/Total Revenue
Break Even Revenue: Fixed Cost/ (C/S Ratio)
Present Value
Cash Flow x[1/(1+r)^n]
e.g. £100 x 1/1.1^2
Perpetuity Formula
Value x 1/r
£1000 in 5.5% discount rate perpetuity’s current value is: 1000 x (1/0.055) = £18.82
Monthly to Annual conversion rate
1+annual rate = (1+monthly rate)^12
Sensitivity
(NPV/PV of a Cash Flow) x 100%
IRR
r1 + [NPV1 x (r2-r1) / NPV1- NPV2]
r1 and r2 can be two randomly selected discount factors, say 0.1 and 0.2
NPV1 is the NPV at r1, NPV2 is NPV at r2
If IRR is higher than the discount rate then accept the project, as it will give us a positive NPV
Assets formula
Assets = Equity + Liabilities
Statement of Financial Position / Balance Sheet
Assets
Non Current Assets
Current Assets
Equity and Liabilities
Equity
Non current Liabilities
Current Liabilities
Total Assets and Total Equity & Liabilities should match
Current & Non Current
Current is short term e.g. current assets are cash, inventory etc.
Non current assets are long term e.g. property, equipment etc.
Balance Sheet Double entries
If an owner invests £1000, put £1000 into current assets - cash
and also £1000 into equity - capital
Income Statement
Revenue
Less: Cost of Sales
Gross Profit
Less Expenses
Profit for the Period
Trade Receivables
Opening TR + Credit Sales - Cash received - Bad debts written off = Closing TR
Liquidity Ratio
Current Assets/Current Liabilities
We want this to be at least 2:1 for a healthy business
Gross Profit Margin
Gross Profit/Revenue x 100%
Net Profit Margin
Profit before Interest and Tax/Revenue x 100%
Cost of sales
Opening inventory + Purchases - Closing Inventory
Prudence
Exercise of caution when making judgements under conditions of uncertainty
Set up costs in NPV
Ignore set up costs in NPV
Consistency accounting term
Once you adopt a principle, continue to follow it in future accounting periods
Going concern accounting term
A company that has the resources to continue operating in Definetely I.e. stay afloat
Historic Cost accounting term
Where an asset on a balance sheet is recited at the price at which it was acquired
Money measurement accounting term
A business should only record a transaction if it can be expressed it terms of money
Materiality accounting term
All items that are likely to influence an investors decision making should be recorded in a firms financial statements
Separate Entity accounting term
We should always separately record the transactions of a business and its owners
Dual Aspect accounting term
Every business transaction should be recorded in two different accounts - double entry
Why are profit and cash different
Due to timing differences. Profit may be there but the cash not there in reality due to selling on credit
Cash Flow Statement
Cash flows generated from operating activities (trade recievables, decrease in inventory)
Operating profit:
Tax & Interest
Net
Cash flows generated from investing activities (assets bought etc.)
Net
Cash flows generated from financing activities (Loan, shares and dividends)
Net
Net cash inflow from activities
Cash at beginning of period
Cash at end of period
