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BAR CPA Exam > SFCPA Notes Area I & II > Flashcards

SFCPA Notes Area I & II Flashcards

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1
Q

Each item on a particular statement
(like the income statement) is represented as a
percentage of a base figure.

A

vertical analysis

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2
Q

Compares financial data over time,
showcasing changes in numbers and percentages

A

Horizontal analysis

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3
Q

Horizontal Analysis Formulas

A

πΆβ„Žπ‘Žπ‘›π‘”π‘’ π΄π‘šπ‘œπ‘’π‘›π‘‘ = πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘ƒπ‘’π‘Ÿπ‘–π‘œπ‘‘ π΄π‘šπ‘œπ‘’π‘›π‘‘ βˆ’ π‘ƒπ‘Ÿπ‘–π‘œπ‘Ÿ π‘ƒπ‘’π‘Ÿπ‘–π‘œπ‘‘ π΄π‘šπ‘œπ‘’π‘›π‘‘

π‘ƒπ‘’π‘Ÿπ‘π‘’π‘›π‘‘π‘Žπ‘”π‘’ πΆβ„Žπ‘Žπ‘›π‘”π‘’ = (πΆβ„Žπ‘Žπ‘›π‘”π‘’ π΄π‘šπ‘œπ‘’π‘›π‘‘/π‘ƒπ‘Ÿπ‘–π‘œπ‘Ÿ π‘ƒπ‘’π‘Ÿπ‘–π‘œπ‘‘ π΄π‘šπ‘œπ‘’π‘›π‘‘) * 100%

(New - Old)/Old

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4
Q

What is the Gross Profit margin and what does it measure

A

Gross Profit/Sales
(Sales - CoGS)/Sales

Measures the percentage of sales that exceed the cost
of goods sold. A decrease might suggest rising costs or
declining sales prices.

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5
Q

What is the net profit margin and what does it measure?

A

Net Profit/Sales

Shows the percentage of profit for each dollar of sales.
A decrease can indicate operational inefficiencies or
other rising expenses.

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6
Q

What is the return on assets formula and what does it measure?

A

Net Income/Average Total Assets

Indicates how effectively the company’s assets
generate earnings.

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7
Q

What is the return on equity formula and what does it measure?

A

Net Income/Average SE

Measures the profitability of a company in relation to
stockholders’ equity.

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8
Q

What is the current ratio and explanation of it?

A

current assets/current liabilities

A measure of a company’s ability to cover its short-term
liabilities. A ratio under 1 may indicate liquidity
concerns.

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9
Q

What is the quick ratio(acid test ratio)?

A

(Current Assets - inventory - prepaid assets)/current liabilities

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10
Q

What is the debt to equity ratio and what does it measure?

A

Total Liabilities/Total Equity

Evaluates a company’s debt relative to its shareholder
equity. High ratios may suggest that a company is
overleveraged.

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11
Q

What is the times interest earned ratio and what does it measure?

A

(Net income + interest expense + tax expense)/interest expense

Operating income/interest expense

Measures a company’s ability to meet its interest
obligations. A lower ratio might indicate greater financial
risk.

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12
Q

What is the inventory turnover ratio?

A

CoGS/Average inventory

Indicates how many times inventory is sold and
replaced over a period. A low turnover rate may
indicate slow sales or excess inventory.

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13
Q

What is the receivable turnover ratio?

A

Net Credit Sales/Average Accounts Receivable

Measures how quickly customers are paying their bills.
A lower turnover can indicate collection problems or a
lax credit policy.

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14
Q

What is the asset turnover formula?

A

Sales/Average Total Assets

Indicates how efficiently a company’s assets are used
to generate sales.

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15
Q

Descriptive Analysis
Diagnostic Analysis
Predictive Analysis
Prescriptive Analysis

A

What happened?
Why did it happen?
What will happen in the future?
What should be do based on what we think will happen in the future?

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16
Q

Helps assess an entity’s operational
performance without the effects of financing decisions,
tax environments, or the aging of assets.

A

EBITDA

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17
Q

Earnings adjusted for specific items
like restructuring costs, impairment charges, or other
non-recurring items.

A

Adjusted Earnings

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18
Q

free cash flow

A

Operating cash flow minus capital
expenditures, providing a view on the cash generated
that’s available for debt repayment, dividends, or
reinvestment.

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19
Q

Earnings derived from the company’s
primary business activities, excluding side activities or
extraordinary items.

A

Core earnings

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20
Q

the practice of comparing business processes
and performance metrics to industry bests and/or best practices
from other industries. It’s about understanding and evaluating the
current position of an entity in comparison to others.

A

benchmarking

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21
Q

a strategic performance
management tool that provides a balanced view of an
organization by looking beyond traditional financial measures

A

balanced scorecard

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22
Q

four perspectives of the balanced scorecard

A

financial
customer
internal process
learning and growth

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23
Q

Key Metrics: Revenue growth, profit margins, return on
investment, economic value added, etc.

A

financial perspective

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24
Q

Key Metrics: Customer satisfaction scores, customer
retention rates, net promoter score, market share, etc.

A

customer perspective

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25
Q

Key Metrics: Process efficiency, quality measures, cycle
time, cost per unit, etc

A

internal process perspective

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26
Q

Analyze the
organization’s ability to innovate, improve, and learn –
essentially how it fosters human capital, organizational
capital, and information capital.

A

learning and growth perspective

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27
Q

This measures the percentage
of customers a business retains over a specific period. A
high rate indicates customer satisfaction and product/service
quality.

A

customer retention rate

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28
Q

This represents the percentage of
employees that leave a company during a specified period.
High turnover can be costly for businesses due to
recruitment and training expenses and can indicate
underlying issues, such as employee dissatisfaction.

A

employee turnover

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29
Q

It measures output per labor hour.
Increasing ___________ _______ can indicate improved
efficiencies, technological advancements, or effective
training.

A

labor productivity rate

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30
Q

The average time taken by a
company to respond to customer inquiries or complaints. A
short response time generally signifies good customer
service.

A

ticket response time

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31
Q

fixed cost formula

A

Total Cost βˆ’ Variable Cost Γ— Number of
Units Produced

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32
Q

variable cost formula

A

total variable cost/number of units produced

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33
Q

high-low method formula for mixed costs

A

(cost at highest activity level - cost at lowest activity level)/(highest activity level - lowest activity level)

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34
Q

This method assigns all manufacturing costs (both fixed and
variable) to products. All overhead costs are spread out over
produced units.

A

absorption costing (full costing)

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35
Q

Only variable manufacturing costs are assigned to products.
Fixed costs are treated as period costs and are expensed in
the period they occur.

A

variable costing (direct, marginal costing)

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36
Q

Costs are assigned based on activities that drive these
costs. It’s more accurate than traditional methods, especially
for products that use overhead at different rates.

A

activity-based costing (ABC)

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37
Q

price variance formula

A

(Actual Selling Price - Budgeted Selling Price) * Actual Quantity Sold

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38
Q

volume variance formula

A

(Actual Quantity sold - Budgeting Quantity Sold) * Budgeted Selling Price

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39
Q

Mix variance formula

A

(Actual Mix Percentage - Budgeted Mix Percentage) * Budgeted Selling Price * Actual Total Quantity Sold

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40
Q

typically uses quantitative methods to predict the
short-term future based on past data. It assumes that the future
will continue in the same patterns as the past.

A

forecasting

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41
Q

takes a broader approach, accounting for expected
future events or strategies, and can be both quantitative and
qualitative.

A

projection

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42
Q

breakeven point formula

A

Fixed costs/(Selling price - variable cost)

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43
Q

represents the minimum return that a
company must earn on its investments to maintain its market
value and attract funds. It serves as a critical benchmark for
evaluating the profitability of investments.

A

cost of capital

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44
Q

cost of debt (Rd) formula

A

Interest Rate on Debt * ( 1- Tax Rate)

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45
Q

Cost of Equity (Re) formula

A

Re = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

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46
Q

a measure of a stock or investment’s
volatility in relation to the market. In other words,
it measures the sensitivity of the investment’s
returns to the returns on the market as a whole.

A

beta

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47
Q

weighted average cost of capital (WACC) formula

A

WACC = (Weight of Debt * Rd) + (Weight of Equity * Re)

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48
Q

_________ is more expensive than ________, but it doesn’t increase
the firm’s risk in the same way that ______ does.

A

equity
debt
debt

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49
Q

Refers to the mix of debt and equity a
company uses to finance its operations and investments.

A

capital structure

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50
Q

This denotes the extent to which a company is
financed by debt. Higher leverage can amplify returns, but also
comes with higher risk.

A

leverage

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51
Q

Measures the time it takes for an
investment to generate an amount equal to the original
investment.

A

payback period

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52
Q

Calculates the present value
of future cash inflows from an investment, subtracted by
the present value of the investment outlay.

A

Net present value (NPV)

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53
Q

Measures the true
economic profit of a company, calculated as net
operating profit after taxes minus the capital charge
(i.e., the return on capital)

A

Economic Value Added (EVA)

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54
Q

Assesses the cash inflows and
outflows over the investment’s life

A

Cash Flow Analysis

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55
Q

Represents the discount
rate that makes the NPV of an investment zero. It’s the
rate at which the present value of future cash inflows
equals the initial investment.

A

Internal Rate of Return (IRR)

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56
Q

The risk of investments declining in value due to economic
developments or other events that affect the entire market

A

Market Risk (Price Risk)

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57
Q

The risk that an investment’s value will change due to a
change in the absolute level of interest rates.

A

Interest Rate Risk

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58
Q

The risk of loss arising from changes in the price of one
currency relative to another.

A

Currency (Foreign Exchange) Risk

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59
Q

The risk that a firm may not be able to meet its short-term
financial needs because it cannot convert assets into cash
without incurring a loss.

A

Liquidity Risk

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60
Q

Price Elasticity of Demand

A

% change in quantity demanded/% change in price

● Elastic (>1): Demand is responsive to price changes.
● Inelastic (<1): Demand is not very responsive to price
changes.
● Unitary (=1): Total revenue remains unchanged when
the price changes.

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61
Q

Income elasticity of demand

A

change in quantity demanded/% change in income

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62
Q

cross elasticity of demand formula

A

% change in quantity demanded of good A/% change in price of good B

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63
Q

Real price formula

A

nominal price/(1 + Inflation Rate)

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64
Q

real return formula

A

nominal return - inflation rate

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65
Q

future expense formula

A

Current expense * (1+ inflation rate)^number of years

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66
Q

interest coverage ratio formula

A

(net income + interest expense + tax expense)/interest expense

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67
Q

gross margin ratio formula

A

(sales - CoGS)/sales * 100

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68
Q

p/e ratio

A

market price per share/earnings per share

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69
Q

Arises when one company acquires another
company for a purchase price higher than the fair value of
the net identifiable assets of the acquired company. It
essentially represents the value of synergies, reputation,
customer loyalty, and other non-quantifiable assets that the
acquired company brings

A

Goodwill

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70
Q

These are intangible
assets that are not subject to amortization because they
have an indefinite useful life. Examples include trademarks
or trade names that can be renewed indefinitely.

A

indefinite-lived intangible assets

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71
Q

How to calculate Goodwill when a company acquires another company?

A

Goodwill = Purchase price - fair value of net identifiable assets acquired

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72
Q

Company A acquires Company B for $1,000,000. The fair
value of Company B’s identifiable assets is $800,000, and
the fair value of its liabilities is $100,000.
What is the journal entry

A

DR: Identifiable assets 800,000
DR: Goodwill 300,000
CR: Liabilities 100,000
CR: Cash 1,000,000

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73
Q

Company A acquired a business for 1,000,000 but now thinks the fair value is 900,000. Amount of Goodwill was 300,000
What is the journal entry?

A

DR: Impairment loss 100,000
CR: Goodwill 100,000

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74
Q

Revenue recognition process

A

Identify the contract with the customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations
Recognize revenue when or as the Entity Satisfies a performance obligation

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75
Q

How are research and development cost treated under GAAP?

A

Expenses as incurred

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76
Q

How are each things remeasured for a foreign currency Translation
Assets/Liabilities
Equity
Income Statements Item

A

Current Exchange rate (spot rate)
Historical Rate
Average exchange rate

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77
Q

Lease Classification test

A

If any are yes than this would classified as a sales-type lease
If all are no then it would classified as an operating lease

Bargain (written) purchase options that lessee is likely to exercise
Ownership transfers at the end of the lease terms
Net present value is 90% of fair value of leased asset
Lease term is 75% of the economic life of the asset
Specialized in nature which means lessor does not have use for it at the end of the lease

78
Q

What is the initial recognition of a sale-type lease for a lessor?

A

DR: Lease Receivable at the present value of the lease payments
CR: The equipment that is being leased at the book value
DR/CR: Loss/Gain on the leasing of equipment (PV of Lease payments - Book Value)

79
Q

What are the journal entries for a sales-type lease for a lessor during the lease?

A

DR: Cash payment
CR: Lease Receivable
CR: Interest Income

80
Q

What is the initial recognition of an operating lease for a lessor?

A

The leased asset remains on the lessor’s books and
continues to be depreciated. Lease income is recognized on
a straight-line basis over the lease term unless another
systematic basis is more representative.

81
Q

What are the journal entries during a lease for an operating lease for the lessor?

A

DR: Cash payments received
CR: Lease Income

Also recognize any depreciation because the leased equipment stays on the books of the lessor

82
Q

If the sale qualifies and the
leaseback is an _______ _____, any gain or loss is
recognized immediately. However, if the leaseback is a
________ _______, any gain or loss is deferred and amortized
over the lease term.

A

operating lease
finance lease

83
Q

establishes the form and content of financial
statements to be filed with the SEC.

A

Regulation S-X

84
Q

contains the non-financial statement disclosure
requirements. It essentially provides guidance on the
non-financial data companies should provide in their filings with
the SEC

A

Regulation S-K

85
Q

Actual Revenue: 1,100
Budgeted Revenue: 1,050

Actual CoGS: 660
Budgeted CoGS: 630

A

50 favorable

30 unfavorable

86
Q

Organized data in rows and columns,
ideal for a detailed view.

A

tabular reports

87
Q

Multi-dimensional
analysis to identify patterns across different data
categories.

A

cross tab reports or pivot tables

88
Q

Useful for time series analysis to spot
trends over periods.

A

line charts

89
Q

Great for comparing different
categories or data segments.

A

bar/column charts

90
Q

Visual representation of data where
individual values are represented as colors. Great for
spotting areas of high or low performance quickly.

A

heat maps

91
Q

Ideal for identifying correlations between
two variables.

A

scatter plots

92
Q

Consolidated view of multiple reports and
visualizations, useful for executive summaries.

A

dashboards

93
Q

Recurring events or behaviors in data. E.g.,
Seasonal sales spikes in December.

A

patterns

94
Q

Long-term movement in data. E.g., A steady
increase in operating expenses over years.

A

trends

95
Q

Relationship between two or more variables.
E.g., A positive correlation between marketing spend and
revenue growth.

A

correlations

96
Q

What does issuing a bond at part do to
Balance sheet
Income statement
Cash flow statements
Notes to f/s

A

B/S: increase in cash and increase in long term liabilities
Income statement: No immediate impact but there will be when there is interest expense
Cash flow statement: Increase in cash from financing
Notes: Terms of the bond, interest rate, maturity, and
any covenants might be detailed in the notes.

97
Q

What does a sale on credit do to
Balance sheet
Income Statement
Cash flow Statement
Notes to f/s

A

B/S: Increase in accounts receivable and increase in equity due to the increase in retained earnings from sales
Income Statement: Increase in sales revenue
Cash flow statement: No immediate impact, but when
cash is collected, there will be an inflow in operating
activities.
Notes: Significant credit sales terms or customers might
be mentioned, as well as any related allowances for
doubtful accounts.

98
Q

Comparing performances, processes, or practices within the
same organization, such as between departments or
different business units.

A

internal benchmarking

99
Q

Comparing an organization’s metrics to those of external
entities, typically competitors or industry standards.

A

external benchmarking

100
Q

Suppose a company has a monthly rental expense of
$10,000 for its factory. This rental expense remains the
same whether the company produces 1 unit or 10,000
units.
What is the fixed cost?

A

10,000

101
Q

Suppose it costs a company $5 in raw materials to
produce one unit of a product. If the company produces
1,000 units
What is the variable cost?

A

5 * 1,000 = 5,000

102
Q

Let’s say a company incurs costs of $20,000 at an
activity level of 2,000 units and costs of $26,000 at
an activity level of 4,000 units.
What is the variable and fixed cost using the high-low method?

A

Variable Cost per Unit = (26,000 - 20,000) / (4,000
- 2,000) = $6,000 / 2,000 = $3/unit

Then, the Fixed Cost = $20,000 - ($3/unit Γ— 2,000
units) = $20,000 - $6,000 = $14,000

Total Cost = $14,000 + $3 Γ— (Number of Units
Produced)

103
Q

Imagine a company produces 1,000 widgets. Each
widget has direct materials of $5, direct labor of $3, and
the company has overall manufacturing overhead costs
of $10,000.

A

If all 1,000 widgets absorb this overhead,
then each widget would carry an overhead cost of $10
($10,000 Γ· 1,000). Total cost per widget: $5 + $3 + $10
= $18.

104
Q
A
105
Q

typically organized in rows and columns,
often seen in databases or spreadsheets. For budgeting and
forecasting, this data might include past sales, costs, and
other financial metrics.

A

structured data

106
Q

doesn’t have a pre-defined model or
organization. For budgeting and forecasting, this might
include notes from meetings, market analysis reports, or
emails about sales projections.

A

unstructured data

107
Q

typically uses quantitative methods to predict the
short-term future based on past data. It assumes that the future
will continue in the same patterns as the past.

A

forecasting

108
Q

takes a broader approach, accounting for expected
future events or strategies, and can be both quantitative and
qualitative.

A

projection

109
Q

evaluates how different values of an
independent variable impact a particular dependent variable
under a given set of assumptions.

A

sensitivity analysis

110
Q

Evaluates possible outcomes for different scenarios to
understand potential risks and rewards.

A

what-if scenarios

111
Q

What is the formula to calculate the breakeven point?

A

Fixed Costs/(Selling price - variable cost)

112
Q

Uses statistical algorithms and machine learning techniques
to identify the likelihood of future outcomes based on
historical data.

A

predictive analytics

113
Q

cost of debt formula

A

Interest rate of Debt * (1 - tax rate)

114
Q

cost of equity formula using capital asset pricing model (CAPM)

A

Risk free rate + beta(Market return - risk free rate)

115
Q

a measure of a stock or investment’s
volatility in relation to the market. In other words,
it measures the sensitivity of the investment’s
returns to the returns on the market as a whole

A

beta

116
Q

Let’s say ABC Corporation has the following structure:
● Market Value of Equity (E): $500,000
● Market Value of Debt (D): $500,000
● Total Value (V): $1,000,000
● Risk-Free Rate: 2%
● Market Return: 8%
● Beta: 1.2
● Interest Rate on Debt: 5%
● Corporate Tax Rate: 30%

Cost of debt?
Cost of equity using capm?
WACC?

A

Step 1: Calculate Cost of Debt (Rd):
Rd = 5% x (1 - .03) = 3.5%
Step 2: Calculate Cost of Equity (Re) using CAPM:
Re = 2% + 1.2 x (8% - 2%) = 9.2%
Step 3: Calculate WACC:
● Weight of Debt: D/V = $500,000/$1,000,000 = 0.5
● Weight of Equity: E/V = $500,000/$1,000,000 = 0.5
WACC = (0.5 Γ— 3.5%) + (0.5 Γ— 9.2%) = 6.35%
So, ABC Corporation’s cost of capital is 6.35%.

117
Q

Generally, _______ is less costly
than _______ due to tax advantages (interest on debt is
tax-deductible).

A

debt
equity

118
Q

Raising capital by issuing shares. No
obligation to pay dividends or return capital. Cost is the
required return by equity holders

A

equity financing

119
Q

Raising capital by borrowing, either through
loans or issuing bonds. Obligation to pay interest and
principal. Cost is the interest rate, but interest payments can
be tax-deductible

A

debt financing

120
Q

Instruments that combine features of both
debt and equity, e.g., convertible bonds or preferred stocks.

A

hybrid financing

121
Q

Impact on Financial Statements:
● Balance Sheet:
● Income Statement:
● Cash Flow Statement:

A

● Balance Sheet: The relative proportions of debt and equity
on the liabilities and equity side.
● Income Statement: Interest expense increases with more
debt, affecting net income.
● Cash Flow Statement: Interest payments represent outflows
in the operating section; principal repayments or issuing debt
affects the financing section.

122
Q

The use of an asset that maximizes
its value, considering both its current use and potential
alternate uses.

A

highest and best use

123
Q

Assumes the transaction
takes place between hypothetical market participants who
are knowledgeable, willing, and unforced.

A

market participant assumptions

124
Q

Refers to how an asset or liability is
described for recognition purposes (e.g., individual asset,
group of assets).

A

unit of account

125
Q

Based on the amount required to replace
the service capacity of an asset (often replacement cost).

A

cost approach

126
Q

Converts future cash flows or income
and expenses into a single present value. Discounted Cash
Flow (DCF) is a commonly used method.

A

income approach

127
Q

Uses prices and relevant information
from market transactions involving identical or comparable
assets or liabilities.

A

market approach

128
Q

: Calculates the present value
of future cash inflows from an investment, subtracted by
the present value of the investment outlay.

A

net present value

129
Q

Measures the true
economic profit of a company, calculated as net
operating profit after taxes minus the capital charge
(i.e., the return on capital).

A

economic value added

130
Q

Assesses the cash inflows and
outflows over the investment’s life.

A

cash flow analysis

131
Q

Represents the discount
rate that makes the NPV of an investment zero. It’s the
rate at which the present value of future cash inflows
equals the initial investment.

A

internal rate of return (IRR)

132
Q

What are the four purposes of the COSO ERM system?

A

integrated approach
Enhanced decision-making
Strategic alignment
risk appetite

133
Q

What are the four objectives of the COSO ERM system?

A

Strategic objectives
Operations Objectives
Reporting Objectives
Compliance Objectives

134
Q

The organizational culture, risk
appetite, and internal factors that determine how risk is
viewed and addressed.

A

internal environment

135
Q

The process of ensuring that
management has a clear process in place for setting
objectives aligned with the organization’s risk appetite.

A

objective setting

136
Q

Recognizing potential events that
might affect the organization.

A

event identification

137
Q

Evaluating risks based on their
likelihood and impact.

A

risk assessment

138
Q

Deciding how to address each risk
(avoid, reduce, share, or accept).

A

risk reponse

139
Q

Establishing policies and procedures
to ensure risk responses are effectively carried out.

A

control activities

140
Q

: Ensuring that relevant
information is captured and communicated effectively
throughout the organization.

A

information and communication

141
Q

Continual oversight and review of the ERM
to ensure its effectiveness.

A

monitoring

142
Q

Align risk tolerance with strategy.
ERM helps in identifying and managing risks that might
hinder the achievement of strategic objectives.

A

strategic objectives

143
Q

Ensure effective and efficient
use of resources. This means managing operational
risks that can impact the achievement of operational
goals.

A

operations objectives

144
Q

Ensure that reporting (both
external and internal) is accurate, timely, and provides
all relevant information. This encompasses risks related
to reporting obligations and information dissemination.

A

reporting objectives

145
Q

Ensure that the organization
adheres to all relevant laws, regulations, and standards.
This includes managing risks that can result in
violations or non-compliance penalties.

A

compliance objectives

146
Q

The risk of investments declining in value due to economic
developments or other events that affect the entire market.

A

market risk (price risk)

147
Q

The risk that an investment’s value will change due to a
change in the absolute level of interest rates.

A

interest rate risk

148
Q

The risk of loss arising from changes in the price of one
currency relative to another.

A

currency (foreign exchange) risk

149
Q

Ways to mitigate market risk?

A

● Diversification: Spreading investments across various
assets or asset classes can reduce the impact of a
poor-performing investment on the portfolio.
● Asset Allocation: Investing in a mix of asset categories
(stocks, bonds, commodities) to reflect one’s risk
tolerance, goals, and investment time frame.
● Hedging: Using financial instruments like futures and
options to counteract potential price movements.

150
Q

Ways to mitigate interest rate risk?

A

Fixed to Floating Rate Swaps: Swap fixed interest rate
obligations for floating rates if expecting interest rates to
fall.
● Duration Matching: Matching the duration of assets and
liabilities can ensure changes in interest rates affect
both in a similar way.
● Refinancing: Refinance high-interest debts in a lower
interest rate environment

151
Q

Ways to mitigate currency risk?

A

Forward Contracts: Lock in an exchange rate for future
transactions.
● Currency Matching: Match the currency of your
liabilities with your assets.
● Options: Purchase options to buy/sell foreign currency
in the future at a set rate

152
Q

The risk that a firm may not be able to meet its short-term
financial needs because it cannot convert assets into cash
without incurring a loss.

A

liquidity risk

153
Q

Ways to mitigate liquidity risk?

A

● Maintaining a Cash Reserve: Keep a buffer of readily
available funds.
● Diversifying Funding Sources: Avoid over-reliance on a
single source of financing.
● Ensuring Asset Liquidity: Invest in assets that can be
quickly and easily sold.

154
Q

the difference between a company’s current
assets and its current liabilities. It represents the short-term
liquidity position of a company and indicates its ability to cover its
short-term liabilities with its short-term assets.

A

working capital

155
Q

t involves managing a company’s
cash, accounts receivable, inventory, and accounts payable in
such a way that a firm maximizes its returns on current asset
investments while meeting its operational expenses and
short-term debt obligations.

A

working capital management

156
Q

Ensure sufficient cash to meet day-to-day
operational expenses while minimizing idle cash.

A

cash management

157
Q

Minimize the time between making a sale
and collecting cash.

A

A/R management

158
Q

Strategies for A/R management

A

● Credit Policies: Establish clear credit policies and
stick to them.
● Discounts: Offer early payment discounts to
incentivize quicker payments.
● Aging Analysis: Regularly review aging
receivables and follow up on overdue accounts.

159
Q

Ensure that inventory levels are optimized -
neither too high (to avoid obsolescence and carrying
costs) nor too low (to prevent stockouts).

A

Inventory Management

160
Q

Strategies for inventory management

A

Just-In-Time Inventory (JIT): Reduce inventory
levels by ordering only what is needed, when it’s
needed.
● Economic Order Quantity (EOQ): Determine the
optimal order quantity that minimizes total
inventory costs.
● Regular Stock Review: Implement regular stock
reviews and adjust order quantities as required.

161
Q

Maximize the benefits of credit terms given
by suppliers.

A

A/P management

162
Q

Strategies for A/P management

A

● Negotiate Terms: Extend payable periods without
incurring penalties.
● Take Advantage of Discounts: If suppliers offer
discounts for early payment, consider them if cash
flow allows.
● Stagger Payments: Spread out payments to
manage cash outflows better.

163
Q

the quantity of a product that producers are
willing and able to provide to the market at a given
price. Factors affecting supply include production costs,
technological advances, and the prices of related
goods.

A

supply

164
Q

the quantity of a product that
consumers are willing and able to purchase at a certain
price. Factors affecting demand include income levels,
tastes and preferences, and the prices of
complementary or substitute goods.

A

demand

165
Q

reached when the quantity supplied
equals the quantity demanded at a certain price level.

A

equilibrium

166
Q

measures the responsiveness of demand or
supply to changes in price or income.

A

elasticity

167
Q

Price Elasticity of demand formula
When is it elastic?
Inelastic?
Unit Elastic?

A

PED =% π‘β„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘žπ‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ π‘‘π‘’π‘šπ‘Žπ‘›π‘‘π‘’π‘‘/% π‘β„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘π‘Ÿπ‘–π‘π‘’
● Elastic (>1): Demand is responsive to price changes.
● Inelastic (<1): Demand is not very responsive to price
changes.
● Unitary (=1): Total revenue remains unchanged when
the price changes.

168
Q

Measures how much
the quantity demanded of a good responds to a change in
consumers’ income.

A

Income Elasticity of Demand

169
Q

Income Elasticity of demand formula

A

YED =% π‘β„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘žπ‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ π‘‘π‘’π‘šπ‘Žπ‘›π‘‘π‘’π‘‘/% π‘β„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘–π‘›π‘π‘œπ‘še

170
Q

Measures how the
quantity demanded of one good responds to a change in the
price of another good

A

cross elasticity of demand

171
Q

Cross elasticity of demand formula

A

XED =% π‘β„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘žπ‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ π‘‘π‘’π‘šπ‘Žπ‘›π‘‘π‘’π‘‘ π‘œπ‘“ π‘”π‘œπ‘œπ‘‘ 𝐴/% π‘β„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘π‘Ÿπ‘–π‘π‘’ π‘œπ‘“ π‘”π‘œπ‘œπ‘‘ B

172
Q

a rise in the general level of prices of goods
and services in an economy over a period of time. When the price
level rises, each unit of currency buys fewer goods and services.
This diminishes the purchasing power of money, which can have
wide-ranging impacts on products, investments, debts, and future
expenses.

A

inflation

173
Q

This is the current price or sticker price of a
product.

A

normal price

174
Q

Adjusts the nominal price for inflation and
represents the purchasing power.

A

real price

175
Q

t represents the potential benefits an individual,
investor, or business misses out on when choosing one
alternative over another. It’s the value of the next best option
foregone.

A

opportunity cost

176
Q

Buying another business can provide access to
new markets, technologies, or resources, or can be a
strategic move to eliminate competition.

A

acquisition

177
Q

Selling a part of a business can be done to
focus on core operations, raise capital, or offload
unprofitable/non-core segments.

A

divestiture

178
Q

Costs incurred during this phase are
expensed as incurred. This includes activities like
evaluating alternatives, determining the feasibility of the
software, and selection of vendors.

A

preliminary stage

179
Q

Once management
commits to funding the project and it is probable that
the project will be completed, the costs during this
phase are capitalized. This includes costs related to
software configuration, coding, testing, and installing
the software.

A

application development stage

180
Q

Costs during
this phase are generally expensed as incurred. This
includes training and software maintenance.

A

post-implementation/operational stage

181
Q

t is achieved when the company has
completed all planning, designing, coding, and testing activities
that are necessary to establish that the product can be produced
to meet its design specifications.

A

technological feasibility

182
Q

a complex
area in accounting that involves providing employees or other
parties with equity interests (e.g., stock options, restricted stock)
or cash payments tied to the value of the company’s stock. Let’s
delve into the core concepts:

A

stock compensation or share-based payments

183
Q

the date at which an employer and
employee reach a mutual understanding of the terms and
conditions of a share-based payment award. It’s essentially
the date when the employer agrees to issue equity to an
employee and the employee agrees to render services in
exchange for that equity or right to equity.

A

grant date

184
Q

This is the most
widely known and used model for stock option
valuation. It requires inputs like stock price, strike price,
expected term, volatility, dividend yield, and risk-free
interest rate.

A

Black-Scholes-Merton (BSM) Model

185
Q

This model offers more
flexibility than the BSM model. It considers different
scenarios for stock price changes over the option’s life,
making it better suited for awards that have complicated
features.

A

Binomial (lattice) model

186
Q

What are key costs included in research and development

A

● Salaries, wages, and other related costs of personnel
engaged in R&D.
● Cost of materials and services consumed in R&D.
● Fees paid to entities that perform R&D on behalf of the
company.
● Depreciation or lease costs of assets used in R&D
activities.
● Overhead costs directly attributable to R&D.
● Equipment and Facilities Costs related to assets
without alternative future use that are acquired or
constructed for a specific research project and therefore
are expensed

187
Q

the time after the acquisition
date during which the acquirer may adjust the provisional
amounts recognized for a business combination. This period
cannot exceed one year from the acquisition date.

A

measurement period

188
Q

This refers to the
portion of equity ownership in a subsidiary not attributable, directly
or indirectly, to the parent company. It represents the shares of a
subsidiary that the parent company does not own.

A

noncontrolling interest

189
Q

is the currency of the primary economic environment in which it
operates. It’s the currency that primarily influences sales prices
for goods or services, or the currency in which an entity primarily
generates and expends cash.

A

functional currency

190
Q

a financial instrument that derives its value from
the value of an underlying asset, rate, or index. It requires no or
little initial net investment and is settled at a future date.

A

derivative

191
Q

s a separate financial instrument
and is not combined with another financial instrument or
some other contract. Examples include options, futures, and
forwards that are entered into as standalone contracts.

A

freestanding derivative

192
Q

a component of a hybrid
instrument that includes both a host contract and a derivative
feature

A

embedded derivative

BAR CPA Exam (13 decks)

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