Formulas Flashcards
Price Elasticity
% change in quantity demanded / % change in price; note that the absolute value of the calcuation is considered when elasticity problems are posed on the CPA exam, as it is assured that price elasticity is negative for a normal demand curve when the price elasticity of demand is less than 1.0 it is considered inelastic.
Consumer Price Index
[CPI (this period) - CPI (last period) ] / CPI last period; negative is deflation; positive is inflation
Cash Conversion Cycle
Inventory conversion period + receivable conversion period - payables deferral period; measures the time period from the time the firm pays for materials/labor to the time it collects its cash from sales of goods; the longer the cycle, the more tied to financials
Inventory conversion period
average inventory / cost of goods sold per day (or in some references sales per day); measures the average time required to convert materials into finished goods and sell those goods
Receivable collection period (day sales outstanding)
average receivables/credit sales; measures the average time required to collect accounts receivable
Payable deferral period
average payables / purchases per day or average payables / (cost of goods sold/365)
Internal rate of return (IRR)
initial payment / after tax net cas inflows = present value factor (same as payback period)
Accounting rate of return
Increase in accounting net incoe / investment; investment may be initial investment; long-term average = (initial investment + salvage value)/2; short term average = beg (carrying value + ending carrying value) / 2; accounting rate of return does not consider time value of money
Payback method
initial investment / after tax net cash inflow; traditional payback method does not take into account time value of money; PV payback method considers the time value of money ; don’t factor in salvage value
Net Present Value
After tax net cash inflow x present value factor for annuity @ target rate = present value of investment - initial investment = net present value; if salvage value calculate PV of salvage value
Effective interest rate
(1 +(r/m)^m) - 1; r = stated interest rate; m=compounding interest
Margin of safety
breakeven sales = contribution margin or fixed cost/sales; argin of safety = sales - breakeven sales
Price elasticity of demand
% change in quantity demanded / % change in price
Real GDP
(nominal GDP / GDP deflator) x 100
Cost of preferred stock
Total dividend amount / total issuance price
Weighted average unit cost inventory
Units completed + ending WIP % complete = total units; total cost = prior month + current month; total costs / total # of units
WIP Inventory FIFO
Beginning WIP (% units to complete) + units completed & transferred out - units in beginning invetory + WIP ending units (% complete)
Degree of financial leverage
% change in EPS / % change in EBIT
Degree of operating leverage
% change in operating income / % change in unit volume
Economic order quantity
squareroot (2SO/c; S=annual sales in units; O=cost per order; C = carrying cost per unit
Efficiency variance
Standard rate x (actual hrs - standard hrs) or qty
Sales volume variance
standard rate x (actual units - standard units)
Cost of preferred quity
1,000 shares @ $8/SH preferred stock issued @ $102,500; cost of preferred stock = 8,000/102,500 = 7.8%
CAPM
risk free rate + beta (market rate - risk free rate); krf + bi(km - krf)