SFCPA Notes Area I & II Flashcards
Each item on a particular statement
(like the income statement) is represented as a
percentage of a base figure.
vertical analysis
Compares financial data over time,
showcasing changes in numbers and percentages
Horizontal analysis
Horizontal Analysis Formulas
πΆβππππ π΄πππ’ππ‘ = πΆπ’πππππ‘ ππππππ π΄πππ’ππ‘ β πππππ ππππππ π΄πππ’ππ‘
πππππππ‘πππ πΆβππππ = (πΆβππππ π΄πππ’ππ‘/πππππ ππππππ π΄πππ’ππ‘) * 100%
(New - Old)/Old
What is the Gross Profit margin and what does it measure
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.
What is the net profit margin and what does it measure?
Net Profit/Sales
Shows the percentage of profit for each dollar of sales.
A decrease can indicate operational inefficiencies or
other rising expenses.
What is the return on assets formula and what does it measure?
Net Income/Average Total Assets
Indicates how effectively the companyβs assets
generate earnings.
What is the return on equity formula and what does it measure?
Net Income/Average SE
Measures the profitability of a company in relation to
stockholdersβ equity.
What is the current ratio and explanation of it?
current assets/current liabilities
A measure of a companyβs ability to cover its short-term
liabilities. A ratio under 1 may indicate liquidity
concerns.
What is the quick ratio(acid test ratio)?
(Current Assets - inventory - prepaid assets)/current liabilities
What is the debt to equity ratio and what does it measure?
Total Liabilities/Total Equity
Evaluates a companyβs debt relative to its shareholder
equity. High ratios may suggest that a company is
overleveraged.
What is the times interest earned ratio and what does it measure?
(Net income + interest expense + tax expense)/interest expense
Operating income/interest expense
Measures a companyβs ability to meet its interest
obligations. A lower ratio might indicate greater financial
risk.
What is the inventory turnover ratio?
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.
What is the receivable turnover ratio?
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.
What is the asset turnover formula?
Sales/Average Total Assets
Indicates how efficiently a companyβs assets are used
to generate sales.
Descriptive Analysis
Diagnostic Analysis
Predictive Analysis
Prescriptive Analysis
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?
Helps assess an entityβs operational
performance without the effects of financing decisions,
tax environments, or the aging of assets.
EBITDA
Earnings adjusted for specific items
like restructuring costs, impairment charges, or other
non-recurring items.
Adjusted Earnings
free cash flow
Operating cash flow minus capital
expenditures, providing a view on the cash generated
thatβs available for debt repayment, dividends, or
reinvestment.
Earnings derived from the companyβs
primary business activities, excluding side activities or
extraordinary items.
Core earnings
the practice of comparing business processes
and performance metrics to industry bests and/or best practices
from other industries. Itβs about understanding and evaluating the
current position of an entity in comparison to others.
benchmarking
a strategic performance
management tool that provides a balanced view of an
organization by looking beyond traditional financial measures
balanced scorecard
four perspectives of the balanced scorecard
financial
customer
internal process
learning and growth
Key Metrics: Revenue growth, profit margins, return on
investment, economic value added, etc.
financial perspective
Key Metrics: Customer satisfaction scores, customer
retention rates, net promoter score, market share, etc.
customer perspective
Key Metrics: Process efficiency, quality measures, cycle
time, cost per unit, etc
internal process perspective
Analyze the
organizationβs ability to innovate, improve, and learn β
essentially how it fosters human capital, organizational
capital, and information capital.
learning and growth perspective
This measures the percentage
of customers a business retains over a specific period. A
high rate indicates customer satisfaction and product/service
quality.
customer retention rate
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.
employee turnover
It measures output per labor hour.
Increasing ___________ _______ can indicate improved
efficiencies, technological advancements, or effective
training.
labor productivity rate
The average time taken by a
company to respond to customer inquiries or complaints. A
short response time generally signifies good customer
service.
ticket response time
fixed cost formula
Total Cost β Variable Cost Γ Number of
Units Produced
variable cost formula
total variable cost/number of units produced
high-low method formula for mixed costs
(cost at highest activity level - cost at lowest activity level)/(highest activity level - lowest activity level)
This method assigns all manufacturing costs (both fixed and
variable) to products. All overhead costs are spread out over
produced units.
absorption costing (full costing)
Only variable manufacturing costs are assigned to products.
Fixed costs are treated as period costs and are expensed in
the period they occur.
variable costing (direct, marginal costing)
Costs are assigned based on activities that drive these
costs. Itβs more accurate than traditional methods, especially
for products that use overhead at different rates.
activity-based costing (ABC)
price variance formula
(Actual Selling Price - Budgeted Selling Price) * Actual Quantity Sold
volume variance formula
(Actual Quantity sold - Budgeting Quantity Sold) * Budgeted Selling Price
Mix variance formula
(Actual Mix Percentage - Budgeted Mix Percentage) * Budgeted Selling Price * Actual Total Quantity Sold
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.
forecasting
takes a broader approach, accounting for expected
future events or strategies, and can be both quantitative and
qualitative.
projection
breakeven point formula
Fixed costs/(Selling price - variable cost)
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.
cost of capital
cost of debt (Rd) formula
Interest Rate on Debt * ( 1- Tax Rate)
Cost of Equity (Re) formula
Re = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
a measure of a stock or investmentβs
volatility in relation to the market. In other words,
it measures the sensitivity of the investmentβs
returns to the returns on the market as a whole.
beta
weighted average cost of capital (WACC) formula
WACC = (Weight of Debt * Rd) + (Weight of Equity * Re)
_________ is more expensive than ________, but it doesnβt increase
the firmβs risk in the same way that ______ does.
equity
debt
debt
Refers to the mix of debt and equity a
company uses to finance its operations and investments.
capital structure
This denotes the extent to which a company is
financed by debt. Higher leverage can amplify returns, but also
comes with higher risk.
leverage
Measures the time it takes for an
investment to generate an amount equal to the original
investment.
payback period
Calculates the present value
of future cash inflows from an investment, subtracted by
the present value of the investment outlay.
Net present value (NPV)
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)
Economic Value Added (EVA)
Assesses the cash inflows and
outflows over the investmentβs life
Cash Flow Analysis
Represents the discount
rate that makes the NPV of an investment zero. Itβs the
rate at which the present value of future cash inflows
equals the initial investment.
Internal Rate of Return (IRR)
The risk of investments declining in value due to economic
developments or other events that affect the entire market
Market Risk (Price Risk)
The risk that an investmentβs value will change due to a
change in the absolute level of interest rates.
Interest Rate Risk
The risk of loss arising from changes in the price of one
currency relative to another.
Currency (Foreign Exchange) Risk
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.
Liquidity Risk
Price Elasticity of Demand
% change in quantity demanded/% change in price
β Elastic (>1): Demand is responsive to price changes.
β Inelastic (<1): Demand is not very responsive to price
changes.
β Unitary (=1): Total revenue remains unchanged when
the price changes.
Income elasticity of demand
change in quantity demanded/% change in income
cross elasticity of demand formula
% change in quantity demanded of good A/% change in price of good B
Real price formula
nominal price/(1 + Inflation Rate)
real return formula
nominal return - inflation rate
future expense formula
Current expense * (1+ inflation rate)^number of years
interest coverage ratio formula
(net income + interest expense + tax expense)/interest expense
gross margin ratio formula
(sales - CoGS)/sales * 100
p/e ratio
market price per share/earnings per share
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
Goodwill
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.
indefinite-lived intangible assets
How to calculate Goodwill when a company acquires another company?
Goodwill = Purchase price - fair value of net identifiable assets acquired
Company A acquires Company B for $1,000,000. The fair
value of Company Bβs identifiable assets is $800,000, and
the fair value of its liabilities is $100,000.
What is the journal entry
DR: Identifiable assets 800,000
DR: Goodwill 300,000
CR: Liabilities 100,000
CR: Cash 1,000,000
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?
DR: Impairment loss 100,000
CR: Goodwill 100,000
Revenue recognition process
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
How are research and development cost treated under GAAP?
Expenses as incurred
How are each things remeasured for a foreign currency Translation
Assets/Liabilities
Equity
Income Statements Item
Current Exchange rate (spot rate)
Historical Rate
Average exchange rate
Lease Classification test
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
What is the initial recognition of a sale-type lease for a lessor?
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)
What are the journal entries for a sales-type lease for a lessor during the lease?
DR: Cash payment
CR: Lease Receivable
CR: Interest Income
What is the initial recognition of an operating lease for a lessor?
The leased asset remains on the lessorβs 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.
What are the journal entries during a lease for an operating lease for the lessor?
DR: Cash payments received
CR: Lease Income
Also recognize any depreciation because the leased equipment stays on the books of the lessor
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.
operating lease
finance lease
establishes the form and content of financial
statements to be filed with the SEC.
Regulation S-X
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
Regulation S-K
Actual Revenue: 1,100
Budgeted Revenue: 1,050
Actual CoGS: 660
Budgeted CoGS: 630
50 favorable
30 unfavorable
Organized data in rows and columns,
ideal for a detailed view.
tabular reports
Multi-dimensional
analysis to identify patterns across different data
categories.
cross tab reports or pivot tables
Useful for time series analysis to spot
trends over periods.
line charts
Great for comparing different
categories or data segments.
bar/column charts
Visual representation of data where
individual values are represented as colors. Great for
spotting areas of high or low performance quickly.
heat maps
Ideal for identifying correlations between
two variables.
scatter plots
Consolidated view of multiple reports and
visualizations, useful for executive summaries.
dashboards
Recurring events or behaviors in data. E.g.,
Seasonal sales spikes in December.
patterns
Long-term movement in data. E.g., A steady
increase in operating expenses over years.
trends
Relationship between two or more variables.
E.g., A positive correlation between marketing spend and
revenue growth.
correlations
What does issuing a bond at part do to
Balance sheet
Income statement
Cash flow statements
Notes to f/s
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.
What does a sale on credit do to
Balance sheet
Income Statement
Cash flow Statement
Notes to f/s
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.
Comparing performances, processes, or practices within the
same organization, such as between departments or
different business units.
internal benchmarking
Comparing an organizationβs metrics to those of external
entities, typically competitors or industry standards.
external benchmarking
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?
10,000
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?
5 * 1,000 = 5,000
Letβs 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?
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)
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.
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.
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.
structured data
doesnβt 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.
unstructured data
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.
forecasting
takes a broader approach, accounting for expected
future events or strategies, and can be both quantitative and
qualitative.
projection
evaluates how different values of an
independent variable impact a particular dependent variable
under a given set of assumptions.
sensitivity analysis
Evaluates possible outcomes for different scenarios to
understand potential risks and rewards.
what-if scenarios
What is the formula to calculate the breakeven point?
Fixed Costs/(Selling price - variable cost)
Uses statistical algorithms and machine learning techniques
to identify the likelihood of future outcomes based on
historical data.
predictive analytics
cost of debt formula
Interest rate of Debt * (1 - tax rate)
cost of equity formula using capital asset pricing model (CAPM)
Risk free rate + beta(Market return - risk free rate)
a measure of a stock or investmentβs
volatility in relation to the market. In other words,
it measures the sensitivity of the investmentβs
returns to the returns on the market as a whole
beta
Letβs say ABC Corporation has the following structure:
β Market Value of Equity (E): $500,000
β Market Value of Debt (D): $500,000
β Total Value (V): $1,000,000
β Risk-Free Rate: 2%
β Market Return: 8%
β Beta: 1.2
β Interest Rate on Debt: 5%
β Corporate Tax Rate: 30%
Cost of debt?
Cost of equity using capm?
WACC?
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:
β Weight of Debt: D/V = $500,000/$1,000,000 = 0.5
β 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 Corporationβs cost of capital is 6.35%.
Generally, _______ is less costly
than _______ due to tax advantages (interest on debt is
tax-deductible).
debt
equity
Raising capital by issuing shares. No
obligation to pay dividends or return capital. Cost is the
required return by equity holders
equity financing
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
debt financing
Instruments that combine features of both
debt and equity, e.g., convertible bonds or preferred stocks.
hybrid financing
Impact on Financial Statements:
β Balance Sheet:
β Income Statement:
β Cash Flow Statement:
β Balance Sheet: The relative proportions of debt and equity
on the liabilities and equity side.
β Income Statement: Interest expense increases with more
debt, affecting net income.
β Cash Flow Statement: Interest payments represent outflows
in the operating section; principal repayments or issuing debt
affects the financing section.
The use of an asset that maximizes
its value, considering both its current use and potential
alternate uses.
highest and best use
Assumes the transaction
takes place between hypothetical market participants who
are knowledgeable, willing, and unforced.
market participant assumptions
Refers to how an asset or liability is
described for recognition purposes (e.g., individual asset,
group of assets).
unit of account
Based on the amount required to replace
the service capacity of an asset (often replacement cost).
cost approach
Converts future cash flows or income
and expenses into a single present value. Discounted Cash
Flow (DCF) is a commonly used method.
income approach
Uses prices and relevant information
from market transactions involving identical or comparable
assets or liabilities.
market approach
: Calculates the present value
of future cash inflows from an investment, subtracted by
the present value of the investment outlay.
net present value
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).
economic value added
Assesses the cash inflows and
outflows over the investmentβs life.
cash flow analysis
Represents the discount
rate that makes the NPV of an investment zero. Itβs the
rate at which the present value of future cash inflows
equals the initial investment.
internal rate of return (IRR)
What are the four purposes of the COSO ERM system?
integrated approach
Enhanced decision-making
Strategic alignment
risk appetite
What are the four objectives of the COSO ERM system?
Strategic objectives
Operations Objectives
Reporting Objectives
Compliance Objectives
The organizational culture, risk
appetite, and internal factors that determine how risk is
viewed and addressed.
internal environment
The process of ensuring that
management has a clear process in place for setting
objectives aligned with the organizationβs risk appetite.
objective setting
Recognizing potential events that
might affect the organization.
event identification
Evaluating risks based on their
likelihood and impact.
risk assessment
Deciding how to address each risk
(avoid, reduce, share, or accept).
risk reponse
Establishing policies and procedures
to ensure risk responses are effectively carried out.
control activities
: Ensuring that relevant
information is captured and communicated effectively
throughout the organization.
information and communication
Continual oversight and review of the ERM
to ensure its effectiveness.
monitoring
Align risk tolerance with strategy.
ERM helps in identifying and managing risks that might
hinder the achievement of strategic objectives.
strategic objectives
Ensure effective and efficient
use of resources. This means managing operational
risks that can impact the achievement of operational
goals.
operations objectives
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.
reporting objectives
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.
compliance objectives
The risk of investments declining in value due to economic
developments or other events that affect the entire market.
market risk (price risk)
The risk that an investmentβs value will change due to a
change in the absolute level of interest rates.
interest rate risk
The risk of loss arising from changes in the price of one
currency relative to another.
currency (foreign exchange) risk
Ways to mitigate market risk?
β Diversification: Spreading investments across various
assets or asset classes can reduce the impact of a
poor-performing investment on the portfolio.
β Asset Allocation: Investing in a mix of asset categories
(stocks, bonds, commodities) to reflect oneβs risk
tolerance, goals, and investment time frame.
β Hedging: Using financial instruments like futures and
options to counteract potential price movements.
Ways to mitigate interest rate risk?
Fixed to Floating Rate Swaps: Swap fixed interest rate
obligations for floating rates if expecting interest rates to
fall.
β Duration Matching: Matching the duration of assets and
liabilities can ensure changes in interest rates affect
both in a similar way.
β Refinancing: Refinance high-interest debts in a lower
interest rate environment
Ways to mitigate currency risk?
Forward Contracts: Lock in an exchange rate for future
transactions.
β Currency Matching: Match the currency of your
liabilities with your assets.
β Options: Purchase options to buy/sell foreign currency
in the future at a set rate
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.
liquidity risk
Ways to mitigate liquidity risk?
β Maintaining a Cash Reserve: Keep a buffer of readily
available funds.
β Diversifying Funding Sources: Avoid over-reliance on a
single source of financing.
β Ensuring Asset Liquidity: Invest in assets that can be
quickly and easily sold.
the difference between a companyβs 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.
working capital
t involves managing a companyβs
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.
working capital management
Ensure sufficient cash to meet day-to-day
operational expenses while minimizing idle cash.
cash management
Minimize the time between making a sale
and collecting cash.
A/R management
Strategies for A/R management
β Credit Policies: Establish clear credit policies and
stick to them.
β Discounts: Offer early payment discounts to
incentivize quicker payments.
β Aging Analysis: Regularly review aging
receivables and follow up on overdue accounts.
Ensure that inventory levels are optimized -
neither too high (to avoid obsolescence and carrying
costs) nor too low (to prevent stockouts).
Inventory Management
Strategies for inventory management
Just-In-Time Inventory (JIT): Reduce inventory
levels by ordering only what is needed, when itβs
needed.
β Economic Order Quantity (EOQ): Determine the
optimal order quantity that minimizes total
inventory costs.
β Regular Stock Review: Implement regular stock
reviews and adjust order quantities as required.
Maximize the benefits of credit terms given
by suppliers.
A/P management
Strategies for A/P management
β Negotiate Terms: Extend payable periods without
incurring penalties.
β Take Advantage of Discounts: If suppliers offer
discounts for early payment, consider them if cash
flow allows.
β Stagger Payments: Spread out payments to
manage cash outflows better.
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.
supply
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.
demand
reached when the quantity supplied
equals the quantity demanded at a certain price level.
equilibrium
measures the responsiveness of demand or
supply to changes in price or income.
elasticity
Price Elasticity of demand formula
When is it elastic?
Inelastic?
Unit Elastic?
PED =% πβππππ ππ ππ’πππ‘ππ‘π¦ ππππππππ/% πβππππ ππ πππππ
β Elastic (>1): Demand is responsive to price changes.
β Inelastic (<1): Demand is not very responsive to price
changes.
β Unitary (=1): Total revenue remains unchanged when
the price changes.
Measures how much
the quantity demanded of a good responds to a change in
consumersβ income.
Income Elasticity of Demand
Income Elasticity of demand formula
YED =% πβππππ ππ ππ’πππ‘ππ‘π¦ ππππππππ/% πβππππ ππ πππππe
Measures how the
quantity demanded of one good responds to a change in the
price of another good
cross elasticity of demand
Cross elasticity of demand formula
XED =% πβππππ ππ ππ’πππ‘ππ‘π¦ ππππππππ ππ ππππ π΄/% πβππππ ππ πππππ ππ ππππ B
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.
inflation
This is the current price or sticker price of a
product.
normal price
Adjusts the nominal price for inflation and
represents the purchasing power.
real price
t represents the potential benefits an individual,
investor, or business misses out on when choosing one
alternative over another. Itβs the value of the next best option
foregone.
opportunity cost
Buying another business can provide access to
new markets, technologies, or resources, or can be a
strategic move to eliminate competition.
acquisition
Selling a part of a business can be done to
focus on core operations, raise capital, or offload
unprofitable/non-core segments.
divestiture
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.
preliminary stage
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.
application development stage
Costs during
this phase are generally expensed as incurred. This
includes training and software maintenance.
post-implementation/operational stage
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.
technological feasibility
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 companyβs stock. Letβs
delve into the core concepts:
stock compensation or share-based payments
the date at which an employer and
employee reach a mutual understanding of the terms and
conditions of a share-based payment award. Itβs 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.
grant date
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.
Black-Scholes-Merton (BSM) Model
This model offers more
flexibility than the BSM model. It considers different
scenarios for stock price changes over the optionβs life,
making it better suited for awards that have complicated
features.
Binomial (lattice) model
What are key costs included in research and development
β Salaries, wages, and other related costs of personnel
engaged in R&D.
β Cost of materials and services consumed in R&D.
β Fees paid to entities that perform R&D on behalf of the
company.
β Depreciation or lease costs of assets used in R&D
activities.
β Overhead costs directly attributable to R&D.
β 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
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.
measurement period
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.
noncontrolling interest
is the currency of the primary economic environment in which it
operates. Itβs the currency that primarily influences sales prices
for goods or services, or the currency in which an entity primarily
generates and expends cash.
functional currency
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.
derivative
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.
freestanding derivative
a component of a hybrid
instrument that includes both a host contract and a derivative
feature
embedded derivative
