SFCPA Notes Area I & II Flashcards

(192 cards)

1
Q

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

A

vertical analysis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

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

A

Horizontal analysis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the quick ratio(acid test ratio)?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

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

A

EBITDA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

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

A

Adjusted Earnings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

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

A

Core earnings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

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

A

balanced scorecard

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

four perspectives of the balanced scorecard

A

financial
customer
internal process
learning and growth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

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

A

financial perspective

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

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

A

customer perspective

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Key Metrics: Process efficiency, quality measures, cycle time, cost per unit, etc
internal process perspective
26
Analyze the organization's ability to innovate, improve, and learn – essentially how it fosters human capital, organizational capital, and information capital.
learning and growth perspective
27
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
28
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
29
It measures output per labor hour. Increasing ___________ _______ can indicate improved efficiencies, technological advancements, or effective training.
labor productivity rate
30
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
31
fixed cost formula
Total Cost βˆ’ Variable Cost Γ— Number of Units Produced
32
variable cost formula
total variable cost/number of units produced
33
high-low method formula for mixed costs
(cost at highest activity level - cost at lowest activity level)/(highest activity level - lowest activity level)
34
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)
35
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)
36
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.
activity-based costing (ABC)
37
price variance formula
(Actual Selling Price - Budgeted Selling Price) * Actual Quantity Sold
38
volume variance formula
(Actual Quantity sold - Budgeting Quantity Sold) * Budgeted Selling Price
39
Mix variance formula
(Actual Mix Percentage - Budgeted Mix Percentage) * Budgeted Selling Price * Actual Total Quantity Sold
40
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
41
takes a broader approach, accounting for expected future events or strategies, and can be both quantitative and qualitative.
projection
42
breakeven point formula
Fixed costs/(Selling price - variable cost)
43
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
44
cost of debt (Rd) formula
Interest Rate on Debt * ( 1- Tax Rate)
45
Cost of Equity (Re) formula
Re = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
46
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.
beta
47
weighted average cost of capital (WACC) formula
WACC = (Weight of Debt * Rd) + (Weight of Equity * Re)
48
_________ is more expensive than ________, but it doesn't increase the firm's risk in the same way that ______ does.
equity debt debt
49
Refers to the mix of debt and equity a company uses to finance its operations and investments.
capital structure
50
This denotes the extent to which a company is financed by debt. Higher leverage can amplify returns, but also comes with higher risk.
leverage
51
Measures the time it takes for an investment to generate an amount equal to the original investment.
payback period
52
Calculates the present value of future cash inflows from an investment, subtracted by the present value of the investment outlay.
Net present value (NPV)
53
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)
54
Assesses the cash inflows and outflows over the investment's life
Cash Flow Analysis
55
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.
Internal Rate of Return (IRR)
56
The risk of investments declining in value due to economic developments or other events that affect the entire market
Market Risk (Price Risk)
57
The risk that an investment's value will change due to a change in the absolute level of interest rates.
Interest Rate Risk
58
The risk of loss arising from changes in the price of one currency relative to another.
Currency (Foreign Exchange) Risk
59
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
60
Price Elasticity of Demand
% 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.
61
Income elasticity of demand
change in quantity demanded/% change in income
62
cross elasticity of demand formula
% change in quantity demanded of good A/% change in price of good B
63
Real price formula
nominal price/(1 + Inflation Rate)
64
real return formula
nominal return - inflation rate
65
future expense formula
Current expense * (1+ inflation rate)^number of years
66
interest coverage ratio formula
(net income + interest expense + tax expense)/interest expense
67
gross margin ratio formula
(sales - CoGS)/sales * 100
68
p/e ratio
market price per share/earnings per share
69
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
70
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
71
How to calculate Goodwill when a company acquires another company?
Goodwill = Purchase price - fair value of net identifiable assets acquired
72
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
DR: Identifiable assets 800,000 DR: Goodwill 300,000 CR: Liabilities 100,000 CR: Cash 1,000,000
73
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
74
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
75
How are research and development cost treated under GAAP?
Expenses as incurred
76
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
77
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
78
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)
79
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
80
What is the initial recognition of an operating lease for a lessor?
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
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
82
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
83
establishes the form and content of financial statements to be filed with the SEC.
Regulation S-X
84
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
85
Actual Revenue: 1,100 Budgeted Revenue: 1,050 Actual CoGS: 660 Budgeted CoGS: 630
50 favorable 30 unfavorable
86
Organized data in rows and columns, ideal for a detailed view.
tabular reports
87
Multi-dimensional analysis to identify patterns across different data categories.
cross tab reports or pivot tables
88
Useful for time series analysis to spot trends over periods.
line charts
89
Great for comparing different categories or data segments.
bar/column charts
90
Visual representation of data where individual values are represented as colors. Great for spotting areas of high or low performance quickly.
heat maps
91
Ideal for identifying correlations between two variables.
scatter plots
92
Consolidated view of multiple reports and visualizations, useful for executive summaries.
dashboards
93
Recurring events or behaviors in data. E.g., Seasonal sales spikes in December.
patterns
94
Long-term movement in data. E.g., A steady increase in operating expenses over years.
trends
95
Relationship between two or more variables. E.g., A positive correlation between marketing spend and revenue growth.
correlations
96
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.
97
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.
98
Comparing performances, processes, or practices within the same organization, such as between departments or different business units.
internal benchmarking
99
Comparing an organization's metrics to those of external entities, typically competitors or industry standards.
external benchmarking
100
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
101
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
102
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?
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
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.
104
105
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
106
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.
unstructured data
107
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
108
takes a broader approach, accounting for expected future events or strategies, and can be both quantitative and qualitative.
projection
109
evaluates how different values of an independent variable impact a particular dependent variable under a given set of assumptions.
sensitivity analysis
110
Evaluates possible outcomes for different scenarios to understand potential risks and rewards.
what-if scenarios
111
What is the formula to calculate the breakeven point?
Fixed Costs/(Selling price - variable cost)
112
Uses statistical algorithms and machine learning techniques to identify the likelihood of future outcomes based on historical data.
predictive analytics
113
cost of debt formula
Interest rate of Debt * (1 - tax rate)
114
cost of equity formula using capital asset pricing model (CAPM)
Risk free rate + beta(Market return - risk free rate)
115
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
beta
116
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?
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
Generally, _______ is less costly than _______ due to tax advantages (interest on debt is tax-deductible).
debt equity
118
Raising capital by issuing shares. No obligation to pay dividends or return capital. Cost is the required return by equity holders
equity financing
119
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
120
Instruments that combine features of both debt and equity, e.g., convertible bonds or preferred stocks.
hybrid financing
121
Impact on Financial Statements: ● Balance Sheet: ● Income Statement: ● Cash Flow Statement:
● 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
The use of an asset that maximizes its value, considering both its current use and potential alternate uses.
highest and best use
123
Assumes the transaction takes place between hypothetical market participants who are knowledgeable, willing, and unforced.
market participant assumptions
124
Refers to how an asset or liability is described for recognition purposes (e.g., individual asset, group of assets).
unit of account
125
Based on the amount required to replace the service capacity of an asset (often replacement cost).
cost approach
126
Converts future cash flows or income and expenses into a single present value. Discounted Cash Flow (DCF) is a commonly used method.
income approach
127
Uses prices and relevant information from market transactions involving identical or comparable assets or liabilities.
market approach
128
: Calculates the present value of future cash inflows from an investment, subtracted by the present value of the investment outlay.
net present value
129
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
130
Assesses the cash inflows and outflows over the investment's life.
cash flow analysis
131
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.
internal rate of return (IRR)
132
What are the four purposes of the COSO ERM system?
integrated approach Enhanced decision-making Strategic alignment risk appetite
133
What are the four objectives of the COSO ERM system?
Strategic objectives Operations Objectives Reporting Objectives Compliance Objectives
134
The organizational culture, risk appetite, and internal factors that determine how risk is viewed and addressed.
internal environment
135
The process of ensuring that management has a clear process in place for setting objectives aligned with the organization's risk appetite.
objective setting
136
Recognizing potential events that might affect the organization.
event identification
137
Evaluating risks based on their likelihood and impact.
risk assessment
138
Deciding how to address each risk (avoid, reduce, share, or accept).
risk reponse
139
Establishing policies and procedures to ensure risk responses are effectively carried out.
control activities
140
: Ensuring that relevant information is captured and communicated effectively throughout the organization.
information and communication
141
Continual oversight and review of the ERM to ensure its effectiveness.
monitoring
142
Align risk tolerance with strategy. ERM helps in identifying and managing risks that might hinder the achievement of strategic objectives.
strategic objectives
143
Ensure effective and efficient use of resources. This means managing operational risks that can impact the achievement of operational goals.
operations objectives
144
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
145
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
146
The risk of investments declining in value due to economic developments or other events that affect the entire market.
market risk (price risk)
147
The risk that an investment's value will change due to a change in the absolute level of interest rates.
interest rate risk
148
The risk of loss arising from changes in the price of one currency relative to another.
currency (foreign exchange) risk
149
Ways to mitigate market risk?
● 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
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. ● 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
Ways to mitigate currency risk?
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
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
153
Ways to mitigate liquidity risk?
● 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
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.
working capital
155
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.
working capital management
156
Ensure sufficient cash to meet day-to-day operational expenses while minimizing idle cash.
cash management
157
Minimize the time between making a sale and collecting cash.
A/R management
158
Strategies for A/R management
● 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
Ensure that inventory levels are optimized - neither too high (to avoid obsolescence and carrying costs) nor too low (to prevent stockouts).
Inventory Management
160
Strategies for inventory management
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
Maximize the benefits of credit terms given by suppliers.
A/P management
162
Strategies for A/P management
● 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
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
164
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
165
reached when the quantity supplied equals the quantity demanded at a certain price level.
equilibrium
166
measures the responsiveness of demand or supply to changes in price or income.
elasticity
167
Price Elasticity of demand formula When is it elastic? Inelastic? Unit Elastic?
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
Measures how much the quantity demanded of a good responds to a change in consumers' income.
Income Elasticity of Demand
169
Income Elasticity of demand formula
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
Measures how the quantity demanded of one good responds to a change in the price of another good
cross elasticity of demand
171
Cross elasticity of demand formula
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
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
173
This is the current price or sticker price of a product.
normal price
174
Adjusts the nominal price for inflation and represents the purchasing power.
real price
175
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.
opportunity cost
176
Buying another business can provide access to new markets, technologies, or resources, or can be a strategic move to eliminate competition.
acquisition
177
Selling a part of a business can be done to focus on core operations, raise capital, or offload unprofitable/non-core segments.
divestiture
178
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
179
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
180
Costs during this phase are generally expensed as incurred. This includes training and software maintenance.
post-implementation/operational stage
181
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
182
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:
stock compensation or share-based payments
183
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.
grant date
184
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
185
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.
Binomial (lattice) model
186
What are key costs included in research and development
● 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
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
188
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
189
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.
functional currency
190
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
191
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
192
a component of a hybrid instrument that includes both a host contract and a derivative feature
embedded derivative