⭐️ RECITATION 4 / MOCKUP-EXAM (L14) Flashcards
Contribution Margin,
general explaination (2)
- seperates ..
- usefull for ..
separates, a company’s costs into
variable & fixed categories
useful for, analyzing the profitability of
- individual products
- services
Contribution Margin Income Statement format
Sales Revenue
− Variable Costs
= Contribution Margin
− Fixed Costs
———— EBIT / Net Profit ———–
= EBIT (Operating Income)
before Tax and Interest Expense
− Income Tax
= Net Income (Net Profit)
after Tax and Interest Expense
Contribution Margin
Contribution Margin = Sales Revenue − Variable Costs
Break-Even point
(units)
Break-Even point (units)
=
Fixed Costs
/
Contribution Margin per Unit
Margin of Safety
(units)
Margin of Safety (units)
=
Actual Sales
-
Break-Even Point (units)
Required Sales in Units,
to Achieve a Target Net Income
(Unit sales required for a monthly after-tax profit of $X)
Unit Sales, Required
=
(Target Profit + Fixed Costs + Taxes)
/
(Contribution Margin, per Unit)
Current Monthly Profits Formular
R = QP - (QV - F)
-
Total Revenue (QP) =
Current Sales Volume ×
Unit Selling Price -
Total Variable Costs (QV) =
Current Sales Volume ×
Variable Costs per Unit - Fixed Costs (F)
What is the content of the
Contribution Income Statement?
- behavior (2)
- contribution margin (2)
What is the content of the
Functional Income Statement? (2)
The natural classification of expenses involves categories such as salaries, rent, supplies, and travel.
Break-Even Analysis:
Break-Even Unit Sales Volume (2)
FIXED COSTS /
- (Selling price per unit -
Variable costs per unit) - Contribution Margin
Target Unit Sales Volume
Before-tax profit
Break-Even Point
Target Sales Volume
- Fixed Costs + Profit
-
Contribution Margin
= (Selling Price per Unit - Variable Cost per Unit)
Total Liabilities
- Assets
- Liabilities
- Stockholders’ Equity
- Assets =
Liabilities
+ Stockholders’ Equity -
Liabilities =
Assets
− Stockholders’ Equity
How to calculate
Cash from Financing Activities (FA)?
Cash from FA =
Change in Cash - Cash from OA - Cash from IA
__
The formula for the change in cash is: Change in Cash = Cash from OA + Cash from IA + Cash from FA
The statement of cash flows is divided into three sections:
- operating activities,
- investing activities,
- financing activities.
Degree of Operating Leverage (DOL)
- DOL (% Changed)
- Function
DOL = (% Change in Operating Income) / (% Change in Sales)
The degree of operating leverage (DOL) measures the sensitivity of a company’s ..
- operating income to
- changes in sales.
To determine the impact of a special order on profits, follow these 3 steps:
-
Contribution Margin (CM) per Unit
= Selling Price per Unit - Variable Cost per Unit -
Change in Profits per Unit
= CM (Special Order) − CM (Regular) -
Change in Profits Total
= Change in Profits per Unit x Number of Units in Special Order
Income Statement formats?
What is the typical format?
Revenue
- Cost of Goods Sold
(if applicable,
COGS Expense Account)
= Gross Profit
- Operating Expenses (SG&A)
= Operating Income (EBIT)
- Interest Expense and Taxes
(if applicable)
= Net Income
How to determine the weekly production schedule for products under a short-run profit-maximizing strategy?
📲🥇📈
-
Calculate
Contribution Margin per Labor-Hour:
CM per Labor-Hour = Unit CM / Labor-Hours per Unit -
Rank
the Products Based on Contribution Margin per Labor-Hour: Rank the products in descending order of their contribution margin per labor-hour. -
Allocate
Labor-Hours Based on Ranking and Demand: Allocate the limited labor-hours to the products starting from the one with the highest contribution margin per labor-hour, until the labor-hour limit is reached or the demand for a product is fulfilled.
The formula for net cash flow from operating activities using the indirect method is: (4)
- NET INCOME
- (+) Non-cash expenses Depreciation & Amortization
- [ (-) Non operating Gains ]
(Investing / Financing Act.:
Stock, Securities or loans) - (+/-) Changes in Working Capital current assets & liabilities
-
= NET CASH FLOW
from operating activities (indirect method)
___
Non operating Gains = sale of property or investments, interest income, and gains from foreign currency exchange.
Break-Even Point (2)
Break-Even Point = Total Fixed Costs / Contribution Margin Ratio
Contribution Margin Ratio = (Selling Price - Variable Costs) / Selling Price
How to get the total liabilities from financial statements?
- Assets = Liabilities + Stockholders’ Equity
- Liabilities = Assets − Stockholders’ Equity
⭐️ Gross Profit Margin
- use cases (3)
- formula
Assessing Production Efficiency:
Evaluate how efficiently a company is managing its production or service delivery costs.
Pricing and Cost Management:
Determine whether a company’s pricing strategy is effective in covering direct costs and leaving enough for operating expenses and profits.
Analyzing Product or Service Lines:
(Benchmark or change over time)
Identify which products or services are most profitable.
Contribution Margin vs
Gross Profit Margin
- Calculation
- Purpose
Calculation:
-
Contribution Margin:
(Total Revenue - Variable Costs) / Total Revenue. -
Gross Profit Margin:
(Total Revenue - COGS) / Total Revenue.
Purpose:
- Contribution Margin:
Managerial Accounting
Assess individual product profitability. - Gross Profit Margin:
Financial Accounting
Evaluate production efficiency.
Cost of Goods Sold (COGS)
general explaination were to find it and example
On the income statement,
the cost of goods sold (COGS) line item is the first expense following revenue (i.e. the “top line”).
Expense Account in the general ledger Examples (COGS):
- Purchase of Inventory/Merchandise
- Cost of Raw Materials
- Cost of Direct Labor
⭐️ Period Cost vs Product Cost (5)
Both terms are important in the development of an income statement.(COGS, SG&A)
How to calculate the net cash flow from operating activities? (4)
Cash Flow Statement
Net Cash Flow from Operating Activities =
-
Net Income
From Income Statement -
(+) Depriciation Expense
(Non-cash Expenses) -
(–) Non operating Gains
(Gain on Sale of Investments) -
(+/-) Changes in Working Capital
(Asset Accounts, Liability Accounts)
⭐️ EBITDA vs.
Operating Profit (3)
- In the income statement, depreciation is typically subtracted as an operating expense.
- EBIT (Earnings Before Interest and Taxes) is the same as operational income or operating profit.
- EBITDA and operating profit are similar, EBITDA further eliminates depreciation and amortization, offering a more focused perspective on a company’s operational efficiency.
What is the format of
Income Statement (Basic)?
- What is variable there?
- COGS = Opening Inventory + Purchases − Closing Inventory
- Remember: Dividend is a Expense
⭐️ Working Capital vs. Shareholders Equity
- Current Assets
- Current Liabilities
Working capital is a measure of a company’s short-term financial health and operational liquidity.
WORKING CAPITAL
= Current Assets − Current Liabilities
Current Assets
- cash,
- accounts receivable,
- inventory,
- short-term investments,
- prepaid expenses.
Current Liabilities
- accounts payable,
- short-term debt,
- accrued expenses,
- current portion of long-term debt.
SIGNIFICANCE
- Positive working capital indicates liquidity and the ability to meet short-term obligations.
- Negative working capital may suggest potential liquidity issues.
What are adjusting entries, and how do they affect the financial statements?
- Impact on cash
- Effect on financial statements
Adjusting entries are made at the end of an accounting period to update account balances before preparing financial statements.
Impact on cash:
They almost never affect cash.
Effect on financial statements:
They usually affect at least
- one balance sheet account
(e.g., accounts receivable, accounts payable) - one income statement account
(e.g., revenues or expenses).
Allocating Unearned Revenue to Revenue
In May, customers prepaid $300 for a three-month membership (June, July and Aug) to an online health program. One month of this prepaid membership was earned in June
Allocating Assets to Expenses—
Prepaid Insurance
One month of Jana Juice’s insurance expired during June. The original payment was $800 covering June through September.
($800 / 4 months = $200)
Allocating Assets to Expenses—
Depreciation
Jana Juice’s equipment originally cost $10,200 and was expected to benefit the company for 5 years.
Depreciation expense = $10,200 / 5 years × 1/12 = $170
Accruing Revenues
At the end of June, Jana Juice learned that its bank has decided to provide interest on checking accounts for small businesses. The interest is paid into the checking account on the 5th day of the following month. Jana Juice earned $60 interest in June.
Accruing Expenses—Wages
Jana Juice’s employees earned $550 during the last week of June that will be paid on July 6.
Accruing Expenses—Interest
The $12,000 loan borrowed by Jana Juice on June 1 carries a 12% annual interest rate.
Interest expense = $12,000 x 12% x 1/12 = $120
Accruing Expenses—Income Taxes
Income taxes are paid during the month after accrual, and have not been paid for June.
⭐️ Financial statement analysis identifies: (2)
- Vertical Relationships
- Horizontal Trends
Vertical Relationships,
- between numbers within the financial statements (vertical)
- each account Balance is expressed as a precentage of total assets
Horizontal Trends,
- in these relationships from one period to the next (horizontal)
- eg Net Income is X% lower in the ending yr. compared to the previos
__
Meaningful interpretation of financial information requires an understanding of the broader business context.
Return on Financial Leverage (ROFL)
- what is it for / use case
Level of the company’s “indebtedness”
ROFL measures the increase in ROE
due to the use of debt
Earnings Before Interest (EBIT)
- Formula
- Reason for Use
Formula:
EBIT = Revenue - Operating Expenses - Depreciation - Amortization
Reason for Use:
EBIT isolates a company’s operating performance by focusing on core earnings before considering interest expenses or tax liabilities.
- It allows for comparisons across companies, regardless of how they are financed (debt vs. equity).
- Ideal for analyzing profitability based solely on operating efficiency.
ROE Disaggregation
(DuPont Analysis)
Breaks ROE into distinct components to identify:
- Profitability (Net Profit Margin)
- Efficiency (Asset Turnover)
- Leverage (Equity Multiplier)
Helps pinpoint which factor(s) drive changes in ROE, aiding strategic decision-making.
Contribution Margin vs
Contribution Margin Ratio
Contribution Margin (CM)
when you need unit-level analysis or are dealing with fixed costs in absolute dollar amounts.
Contribution Margin Ratio (CMR)
when you need a percentage-based analysis to compare products, evaluate changes in revenue, or calculate profitability relative to sales.
Return on Assets (ROA)
- ignoring / emphasizing effects
- EBIT & EWI (2)
ROA is calculated using EBIT in the numerator to ignore financing effects, emphasizing the efficiency of assets in generating operating profits.
Key Note:
- EBIT ≠ EWI (Earnings With Interest)
- EBIT excludes interest, while EWI includes it.
