Formulae

Question 1

CVP

Answer 1

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

Question 2

Total Contribution

Answer 2

Revenue - Variable Costs

Question 3

Break Even Point

Answer 3

Fixed Costs / Contribution per Unit

This gives BEP in Units Sold

Question 4

Break Even Point using Contribution/Sales Ration (C/S Ratio)

Answer 4

C/S Ratio: Total Contribution/Total Revenue

Break Even Revenue: Fixed Cost/ (C/S Ratio)

Question 5

Present Value

Answer 5

Cash Flow x[1/(1+r)^n]

e.g. £100 x 1/1.1^2

Question 6

Perpetuity Formula

Answer 6

Value x 1/r

£1000 in 5.5% discount rate perpetuity’s current value is: 1000 x (1/0.055) = £18.82

Question 7

Monthly to Annual conversion rate

Answer 7

1+annual rate = (1+monthly rate)^12

Question 8

Sensitivity

Answer 8

(NPV/PV of a Cash Flow) x 100%

Question 9

IRR

Answer 9

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

Question 10

Assets formula

Answer 10

Assets = Equity + Liabilities

Question 11

Statement of Financial Position / Balance Sheet

Answer 11

Assets
Non Current Assets

Current Assets

Equity and Liabilities
Equity

Non current Liabilities

Current Liabilities

Total Assets and Total Equity & Liabilities should match

Question 12

Current & Non Current

Answer 12

Current is short term e.g. current assets are cash, inventory etc.

Non current assets are long term e.g. property, equipment etc.

Question 13

Balance Sheet Double entries

Answer 13

If an owner invests £1000, put £1000 into current assets - cash
and also £1000 into equity - capital

Question 14

Income Statement

Answer 14

Revenue
Less: Cost of Sales

Gross Profit
Less Expenses

Profit for the Period

Question 15

Trade Receivables

Answer 15

Opening TR + Credit Sales - Cash received - Bad debts written off = Closing TR

Question 16

Liquidity Ratio

Answer 16

Current Assets/Current Liabilities

We want this to be at least 2:1 for a healthy business

Question 17

Gross Profit Margin

Answer 17

Gross Profit/Revenue x 100%

Question 18

Net Profit Margin

Answer 18

Profit before Interest and Tax/Revenue x 100%

Question 19

Cost of sales

Answer 19

Opening inventory + Purchases - Closing Inventory

Question 20

Prudence

Answer 20

Exercise of caution when making judgements under conditions of uncertainty

Question 21

Set up costs in NPV

Answer 21

Ignore set up costs in NPV

Question 22

Consistency accounting term

Answer 22

Once you adopt a principle, continue to follow it in future accounting periods

Question 23

Going concern accounting term

Answer 23

A company that has the resources to continue operating in Definetely I.e. stay afloat

Question 24

Historic Cost accounting term

Answer 24

Where an asset on a balance sheet is recited at the price at which it was acquired

Question 25

Money measurement accounting term

Answer 25

A business should only record a transaction if it can be expressed it terms of money

Question 26

Materiality accounting term

Answer 26

All items that are likely to influence an investors decision making should be recorded in a firms financial statements

Question 27

Separate Entity accounting term

Answer 27

We should always separately record the transactions of a business and its owners

Question 28

Dual Aspect accounting term

Answer 28

Every business transaction should be recorded in two different accounts - double entry

Question 29

Why are profit and cash different

Answer 29

Due to timing differences. Profit may be there but the cash not there in reality due to selling on credit

Question 30

Cash Flow Statement

Answer 30

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