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)
Spending variance or labor rate variance
actual hours x (actual rate - standard rate); may need to calculate OH rate = variable actual OH / actual hrs
Day sales outstanding
receivables / sales per day
Cost of not taking discount
discount percent / (100% - discount %) x 365 days / (total pay period - discount period)
Dividend yield plus growth rate
Ks = (D1/P0) + expected growth rate
Cost of new common stock
Kx = [D1 / (P0 - F)] + expected growth; F= floating cost per share
Economic value added
Step 1: calculate required rate of return; Step 2: anything above rate of return is economic value added
Average collection period
- calc receivables turnover = sales / average receivables; 365 days / receivables turnover
Gross domestic product (expenditures approach)
government purchases + gross domestic investments + personal consumption +/- net exports (exports - imports)
Gross domestic product (income approach)
Income of proprietors + corporate profits + net interest + rental income + adj for net foreign inc + indirect business taxes + employee wages + depr.
Capital budgeting
cash inflos b/4 tax - depr on investment = increase in taxable income - tax = increase in acctg net income cash inflows b/4 tax - tax = after tax net cash inflow; or increase in acctg net income + depr on investment = after-tax net cash inflows
Cost of bond issue
interest rate x (1-effective rate)
Traditional costing (application of overhead)
Step 1: calculate overhead rate = budgeted overhead cost / estimated cost driver (DL $, DLH, MH); step 2: applied overhead = actual cost driver x overhead rate (from step 1)
Prime cost
direct labor + direct marketing
Conversion cost
direct labor + manufacturing overhead
Cost accounting systems are designed to meet the goal of measuring cost objectives or objectives. The most frequent objectives include
Product costing (inventory and cost of goods manufactured and sold); Income determination (profitability); Efficiency measurements (comparisons to standards)
Absorption approach - Product
COGS = DM + DL + O/H (fixed & variable)
Contribution approach
all fixed factory overhead is treated as a period cost and is expensed in the period incurred. Inventory values include only the variable manufacturing costs, so cost of goods sold includes only variable manufacturing costs.
Variable (Direct) Costing
Direct material + director labor + variable manufacturing overhead; fixed manufacturing overhead is a period costs
Cost accumulation systems
are used to assign costs to products. If the cost object is a custom order, job costing is used. IF the cost oject is a mass-produced homogeneous product (e.g. steel), process costing is used.
Job-order costing
Is the method of product costing that identifies the job (or individual units or batches) as the cost objective and is used when there are relatively few units produced and when each unit is unique or easily identifiable. Cost is allocated to a specific job as it moves through the manufacturing process.
Process costing
Process costing is a method of product costing that averages costs and applies the to a large number of homogeneous items.
Inventory: raw materials
Beginning inventory of raw materials + purchases of raw materials - raw materials used * = ending inventory of raw materials
Inventory: work in process
Beginning inventory of work in process + raw materials used plus direct labor and overhead used - inventory transferred to finished goods = ending inventory of work in process
Inventory: finished goods
Beginning inventory of finished goods + *inventory transferred from work in process - cost of goods sold = ending inventory of finished goods
DM price variance
Actual quantity pruchased x (actual price - standard price)
DM quantity usage variance
Standard price x (actual quantity used - standard quantity allowed)
DL rate variance
Actual hours worked x (actual rate - standard rate)
DL efficiency variance
Standard rate x (actual hours worked - standard hours allowed)
Four types of variances for raw materials and direct labor
Price variance (for DM; Usage (quantity) variance (for DM); Rate variance (for DL); Efficiency variance (for DL) memorize DADS with PURE DA Difference x Actual; DS Difference x Standard; DA Difference x Actual; DS Difference x Standard
VOH rate (spending) variance
Actual hours x (Actual rate - Standard rate)
VOH efficiency variance
Standard rate x (actual hours - standard hours allowed for actual production volume)
FOH budget (spending) variance
Actual fixed overhead - budgeted fixed overhead
FOH volume variance
Budgeted fixed overhead - Standard fixed overhead cost allocated to production* ; (*based on actual production x standard rate)
Sales price variance
[(actual sp/unit) - budgeted sp/unit)] x actual sold units
Sales volume variance
[(actual sold units - budgeted sales unit)] x standard contribution margin per unit
Discounted cash flow is the basis for net present value methods:
Step 1: calculate after-tax cash flows = annual net cash flow x (1-tax rate); Step 2: add depreciation benefit = depreciation x tax ate; Step 3: multiply results by appropriate present value of an annuity; Step 4: subtract initial cash outflow; Result: net present value
Profitability Index
Present value of net future cash inflow / present value of net initial investment
Present Value
FV / (1+r)^n
DOL
% change in EBIT / % change in sales
% change in operating income
% change sales x DOL
DFL
Asset/Equity
DTL
DOL x DFL or % change EPS / % change in sales
Cost of debt (after tax)
Interest rate x (1-tax rate)
Debt
carries the lowest cost of capital and is tax deductible; the higher the tax rate, the more incentive exists to use debt financing.
Cost of preferred stock
Preferred stock dividends / net proceeds of preferred stock or preferred stock dividends / selling price - flotation cost
ROA
Net income / Average total assets
ROI
NI / (D+E)
ROE
Net income / total equity
DuPont ROE
Net profit margin x asset turnover x financial leverage or (net income/sales) x (sales/average total assets) x (average total assets/equity) or net income/total equity
Extended DuPont ROE
Tax burden x Interest burden x Operating income margin x asset turnover x financial leverage; (net income/pretax income) - (pretax income/EBIT) x (EBIT/sales) x (sales/average total assets) x (average total assets/equity) or NI/sales x sales/average total assets x average total assets/equity
ROE (DuPont and extended DuPont)
Produces the same result however, management can get a better understanding of what factors are driving ROE and how those factors compare relative to competing companies and to the industry overall.
Economic value added
NOPAT - WACC
Debt to total capital ratio
total debt/total capital; the lower the ratio, the greater the ability of firm to pay debt. The debt-to total capital ratio is alternatively expressed as the debt-to asset ratio.
Debt to total asset ratio
total debt/total assets; indicates long-term debt -paying ability. The lower the ratio, the better protection afforded to creditos.
Debt-to-equity ratio
total debt/total shareholders’ equity
Times interest earned
earnings before interest and taxes (EBIT)/interest expense; measures the ability of the company to pay its interest charges as they come due
Quick (Acid Test) Ratio
(cash + marketable securities + receivables)/current liabilities
Drafts
The use of drafts or checks serves to delay cash disbursements. Using drafts instead of checks increases the payable float.
Zero-balance accounts
helps to slow cash disbursements because a disbursement is made only when there is a demand for it.
Inventory turnover
cost of goods sold / average inventory
Inventory conversion period
365/inventory turnover
Accounts receivable turnover
sales / average accounts receivable
Receivables collection period
Days sales outstanding (DSO) = 365/accounts reeivable turnover
Accounts payable turnover
cost of goods sold/average accounts payable
accounts payable deferral period
365/accounts payable turnover
Reorder point
safety stock + (lead time x sales during lead time)
