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Formulas Flashcards

1
Q

Accrued L + A/P + Current portion of long–term note payable =

A

Current liabilities

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2
Q

Cash+ A/R + inventory =

A

“Current Assets

Prepaid assets – not CA”

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3
Q

Avg. Gross Receivable balance =

A

AVG daily sales x Avg collection period

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4
Q

Gross Margin =

A

( unit price – unit cost ) x number of units

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5
Q

The debt–to–equity ratio measures the

A

% of total financing provided by creditors (debt) compared to financing by owners.

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6
Q

The interest coverage ratio measures the

A

firms ability to make required interest payments. The higher – the greater ability to repay the debt.

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7
Q

The return on Equity reflects the

A

net income that accrued to owners

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8
Q

If there is no provision for allocating losses –>

A

the method used to allocate profits will be used

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9
Q

Inventory T/Over ratio

A

COGS/ AVG Inventory

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10
Q

List major risks associated with the A/R component of the system?

A

“Credit may be applied to improper accounts
Updates of credit ratings may be untimely
Financial or management reporting may be inaccurate”

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11
Q

EVA % =

A

“RCOE % – WACC %,
where RCOE = Oper. income / capital,
WACC = Cost of debt + cost of equity”

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12
Q

What costs are relevant in decision making?

A

only INCREMENTAL (fixed or variable)

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13
Q

Seasonality in data may be removed by calculating a

A

WEIGHTED AVERAGE of the data for the four seasonal time periods

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14
Q

Treating dividends as a residual part of a financial decision assumes that

A

earnings should be retained and reinvested as long as profitable projects are available

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15
Q

Interest on long–term debt costs ______ than interest on short–term debt because

A

“more

of risk associated with longer maturity dates”

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16
Q

The intercept value is where the line crosses the _____ axis.

A

Y axis

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17
Q

The implicit cost of debt financing is the

A

increase in the cost of debt and equity as the debt–to–equity ration increases

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18
Q

ADRs are receipts issued by a US bank which represents ownership rights in

A

a foreign corporation

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19
Q

Cost of asset + increase in WC – tax saved – cash received from sale of old asset =

A

NET OF INVESTMENT

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20
Q

EBIT=

A

Total revenue – total Var. costs– total Fixed Costs

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21
Q

At what rate company would be INDIFFERENT to the investment?

A

“at the IRR

CF * IRR ( or annuity factor)= PV of initial investment”

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22
Q

How do you solve the problem if CL is known and Current Ratio will change from 1.75 to 1.5 to 1?

A

CA + inc in Inv / CL + inc in Inv. = 1.5

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23
Q

How to calculate conversion costs transferred to second department using WA method and normal spoilage is given?

A

“1) calc. Equivalent units= completed + spoiled + % completed of end units

2) Cost per Eq. unit = Total conversion costs / Eq. units
3) Conversion costs transferred = Cost per unit x ( Good units + Normal spoilage)”

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24
Q

Leverage refers to the amount of _________ in the firm’s structure

A

Debt

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25
"FIXED OVERHEAD is a Product cost for ABSORPTION COSTING at the time of _________ and a PERIOD COST under Variable costing at time of ________"
"SALE | PRODUCTION"
26
Marginal Propensity to Consume
Change in Spending / Change in Income
27
Marginal Propensity to Save
Change in Savings / Change in Income
28
Multiplier Effect
[1 / (1-MPC)] x Chg Spending
29
Gross Domestic Product (GDP)
+ annual value of all goods and services produced domestically at current prices by consumers, businesses, the government, and foreign companies with domestic interests + Foreign company has US factory - US company has foreign factory
30
Gross Domestic Product (GDP) - Income Approach
+ Sole Proprietor and Corp Income + Passive Income + Taxes + Employee Salaries + Foreign Income Adjustments + Depreciation
31
Gross Domestic Product (GDP) - Expenditure Approach
+ Individual Consumption + Private Investment + Government Purchases + Net Exports
32
Nominal GDP
Measures goods/services in current prices
33
GDP Deflator
Used to Convert GDP to Real GDP
34
Real GDP
Nominal GDP / GDP Deflator x 100
35
Gross National Product (GNP)
Like GDP; Swaps foreign production. US Firms overseas are included, Foreign firms domestically, not included
36
Consumer Price Index (CPI)
[(CPI Current - CPI Last) ÷ CPI Last] * 100
37
Disposable Income
Personal Income – Personal Taxes
38
Return to Scale
" % Increase in output / % Increase in input | > 1 Increasing returns to scale
39
Accounting Cost
Explicit (Actual) cost of operating a business o Implicit costs are opportunity costs
40
Accounting Profit
Revenue – Accounting Cost
41
Economic Cost
Explicit + Implicit Cost
42
Economic Profit
Revenue – Economic Cost
43
High-Low Method
Chg Cost (High-Low pts) / Chg Activity (High-Low pts)
44
TMV - Before Tax Payback Example
"$1,000 Investment and $250 annual cash flow | $1,000/250=4 Yrs"
45
TMV - After Tax Payback Example
"$1,000 Investment and $250 annual cash flow 5 year useful life ($200 Depreciation/yr) and 25% tax rate $250 x (1-.25) = $187.50 $200 Depreciation x 25% = $50 $1,000/(187.50+50) = 4.21 yrs"
46
Cash Conversion Cycle (RI-P)
"It is Time from Cash OutFlow (Vendors) to Cash InFlow (Customers) - Receivables CP + Inventory CP - Payables DP"
47
Inventory Conversion Period
"Time to convert materials into goods and sell | Avg Inventory / (COGS/365)"
48
Receivables Collection Period
" Time to collect AR | Avg Receivables / Credit Sales/365"
49
Payables Deferral Period
"Time from purchase to AP payment | •Avg Payables / (COGS/365)"
50
Economic Order Quantity
``` "EOQ = SQRT(2DO/C) D = Unit Demand (Annual) O = Order Cost C = Cost of Inventory" ```
51
EOQ: Inventory Re-order Point
"It is the Avg Daily Demand x Avg Lead Time Demand = Sales Lead Time = Wait for Inventory Shipment"
52
Cost of Forgoing % Trade Discount
[% Trade Discount / (1 - % Trade Discount)] / [(Due date - Early pmt date)/365]
53
Weighted-Average Cost of Capital
``` "Its Calculates the true Cost of Capital An Example Debt costs 5%; 40% of Cap. Equity costs 12%; 60% of Cap. (5% x 40%) + (12% x 60%) WACC = 9.2%" ```
54
CAPM - Capital Asset Pricing Module
" Stock’s expected performance based on its Beta (Risk) compared to that of the Stock Market. More Risk = more Expected Return."
55
Cost of Debt
(Interest Expense – Tax Benefit) / Carrying Value of Debt
56
Return on Investment (ROI)
"It is Return / Investment Example: You Invest $100 to buy a machine that generates $60 in Operating Income $60 / $100 = 60% ROI"
57
Residual Income
"Operating Income - (Required RoR x Invested Capital) Example: You Invest $100 to buy a machine that generates $60 in Operating Income and have a Required RoR of 10% $60 – (10% x $100) = $50 Residual Income"
58
Required RoR is also called ‘Cost of Capital’
"Cost of Capital is the Weighted-Average of the interest rates you pay for your Capital Includes Debt and the ROR your Equity Shareholders expect Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a RoR of 12% Cost of Capital: (.45 x .09) + (.55 x .12) = 10.65%"
59
Spread
"It is ROI – Cost of Capital 60% ROI – 10.65% Cost of Capital = 49.35% Spread"
60
Economic Value Added (EVA)
"It is Operating Income (After Tax) - (Net Assets x WACC) You Invest $100 to buy a machine that generates $60 in (after tax) Operating Income and have a WACC of 10% $60 – ($100 x 10%) = $50 EVA Investments should exceed costs Emphasis on Stockholder Value"
61
Free Cash Flow
"Operating Income (After Tax) =+ Depreciation & Amortization =- Capital Expenditures - Change in Net Working Capital"
62
Breakeven Point (per unit)
"Assumes: Total Costs & Total Revenues are Linear | Total Fixed Costs / Contribution Margin (per unit)"
63
Special Orders: Income Approach
"A t-shirt factory has some idle capacity and are made an offer to fulfill a special order Example: The order calls for: 30,000 t-shirts and $10 per shirt Variable Manufacturing Costs: $6/shirt Fixed Manufacturing Costs: $4/shirt What impact will this order have on operating income? For special orders using the Incremental Approach, Fixed Costs are ignored 30,000x$10 = $300k Incremental Revenue 30,000x$6 = $180k Incremental Costs $300k-$180k = $120k impact on Operating Income"
64
SHORT-TERM COST ANALYSIS
* Use relevant costs only * Ignore sunk costs * Opportunity costs a must
65
Dividend Payout Ratio
= cash dividend per share / Earnings per share
66
Effective Interest Rate
Int Exp (Int to be paid**) / Usable funds (net proceeds*) * Loan amount - origination fees * *to be paid at end of loan term
67
Discounted Loans
Loan in which interest and finance charges are paid at the beginning of the loan term.
68
Discounted loans - total borrowings
Amount needed / 1.0 - stated rate
69
Discounted loans - total borrowings w/compensating balance
Amount needed / 1.0 - compensating balance %
70
Discounted loans - total borrowings eff int rate
A) (Total borrowing x stated rate)** / usable funds B) state rate / 1.0 - stated rate **Amount needed
71
Discounted loans - total borrowings eff int rate w/compensating balance
A) (Total borrowing x stated rate)** / usable funds B) state rate / 1.0 - compensating balance %) **Amount needed

CPA Business (10 decks)

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