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CPA Business > Formulas > Flashcards

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
Q

“FIXED OVERHEAD is a Product cost for ABSORPTION COSTING at the time of _________ and
a PERIOD COST under Variable costing at time of ________”

A

“SALE

PRODUCTION”

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26
Q

Marginal Propensity to Consume

A

Change in Spending / Change in Income

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27
Q

Marginal Propensity to Save

A

Change in Savings / Change in Income

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28
Q

Multiplier Effect

A

[1 / (1-MPC)] x Chg Spending

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29
Q

Gross Domestic Product (GDP)

A

+ 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
Q

Gross Domestic Product (GDP) - Income Approach

A

+ Sole Proprietor and Corp Income + Passive Income + Taxes + Employee Salaries + Foreign Income Adjustments + Depreciation

31
Q

Gross Domestic Product (GDP) - Expenditure Approach

A

+ Individual Consumption + Private Investment + Government Purchases + Net Exports

32
Q

Nominal GDP

A

Measures goods/services in current prices

33
Q

GDP Deflator

A

Used to Convert GDP to Real GDP

34
Q

Real GDP

A

Nominal GDP / GDP Deflator x 100

35
Q

Gross National Product (GNP)

A

Like GDP; Swaps foreign production. US Firms overseas are included, Foreign firms domestically, not included

36
Q

Consumer Price Index (CPI)

A

[(CPI Current - CPI Last) ÷ CPI Last] * 100

37
Q

Disposable Income

A

Personal Income – Personal Taxes

38
Q

Return to Scale

A

” % Increase in output / % Increase in input

> 1 Increasing returns to scale

39
Q

Accounting Cost

A

Explicit (Actual) cost of operating a business o Implicit costs are opportunity costs

40
Q

Accounting Profit

A

Revenue – Accounting Cost

41
Q

Economic Cost

A

Explicit + Implicit Cost

42
Q

Economic Profit

A

Revenue – Economic Cost

43
Q

High-Low Method

A

Chg Cost (High-Low pts) / Chg Activity (High-Low pts)

44
Q

TMV - Before Tax Payback Example

A

“$1,000 Investment and $250 annual cash flow

$1,000/250=4 Yrs”

45
Q

TMV - After Tax Payback Example

A

“$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
Q

Cash Conversion Cycle (RI-P)

A

“It is Time from Cash OutFlow (Vendors) to Cash InFlow (Customers)
- Receivables CP + Inventory CP - Payables DP”

47
Q

Inventory Conversion Period

A

“Time to convert materials into goods and sell

Avg Inventory / (COGS/365)”

48
Q

Receivables Collection Period

A

” Time to collect AR

Avg Receivables / Credit Sales/365”

49
Q

Payables Deferral Period

A

“Time from purchase to AP payment

•Avg Payables / (COGS/365)”

50
Q

Economic Order Quantity

A 
"EOQ = SQRT(2DO/C)
D = Unit Demand (Annual)
O = Order Cost
C = Cost of Inventory"
51
Q

EOQ: Inventory Re-order Point

A

“It is the Avg Daily Demand x Avg Lead Time
Demand = Sales
Lead Time = Wait for Inventory Shipment”

52
Q

Cost of Forgoing % Trade Discount

A

[% Trade Discount / (1 - % Trade Discount)] / [(Due date - Early pmt date)/365]

53
Q

Weighted-Average Cost of Capital

A 
"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
Q

CAPM - Capital Asset Pricing Module

A

” Stock’s expected performance based on its Beta
(Risk) compared to that of the Stock Market.
More Risk = more Expected Return.”

55
Q

Cost of Debt

A

(Interest Expense – Tax Benefit) / Carrying Value of Debt

56
Q

Return on Investment (ROI)

A

“It is Return / Investment
Example: You Invest $100 to buy a machine that
generates $60 in Operating Income
$60 / $100 = 60% ROI”

57
Q

Residual Income

A

“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
Q

Required RoR is also called ‘Cost of Capital’

A

“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
Q

Spread

A

“It is ROI – Cost of Capital
60% ROI – 10.65% Cost of Capital
= 49.35% Spread”

60
Q

Economic Value Added (EVA)

A

“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
Q

Free Cash Flow

A

“Operating Income (After Tax)
=+ Depreciation & Amortization
=- Capital Expenditures
- Change in Net Working Capital”

62
Q

Breakeven Point (per unit)

A

“Assumes: Total Costs & Total Revenues are Linear

Total Fixed Costs / Contribution Margin (per unit)”

63
Q

Special Orders: Income Approach

A

“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
Q

SHORT-TERM COST ANALYSIS

A
  • Use relevant costs only * Ignore sunk costs * Opportunity costs a must
65
Q

Dividend Payout Ratio

A

= cash dividend per share / Earnings per share

66
Q

Effective Interest Rate

A

Int Exp (Int to be paid**) / Usable funds (net proceeds*)

  • Loan amount - origination fees
  • *to be paid at end of loan term
67
Q

Discounted Loans

A

Loan in which interest and finance charges are paid at the beginning of the loan term.

68
Q

Discounted loans - total borrowings

A

Amount needed / 1.0 - stated rate

69
Q

Discounted loans - total borrowings w/compensating balance

A

Amount needed / 1.0 - compensating balance %

70
Q

Discounted loans - total borrowings eff int rate

A

A) (Total borrowing x stated rate)** / usable funds
B) state rate / 1.0 - stated rate

**Amount needed

71
Q

Discounted loans - total borrowings eff int rate w/compensating balance

A

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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