Cheat Sheet
Chapter 1:
ASSETS=OWNERS EQUITY + LIABILITIES
ASSETS
EQUITY
Owners Equity
Cash
Plant & Equipment
Raw Material
Processed Inventory
Labor for creation of product
Finished Goods inventory
- Depreciation to Plant & Equip
Prepayments
Debtors
- Bad Debts
- Administrative Wages
+Profit
-Depreciation
-Cost of doing business
- Expenses like maintenance
LIABILITIES
Creditors
+ Accruals
Loans
Deferred Revenue
In P&L: Inventory & Labor that include in Cost of Sales is only that which applies to goods actually sold
Balance Sheet: Inventory means the value of all inventory (raw & finished)
Cash: Increase in inventory is total inventory
Provision for bad debt:
Year One Debtors
Policy: bad debts
provision set at 5%
Entry in P&L
Charge for bad debts
provision
Entry in balance sheet
Debtors less provision
100,000
5000
95,000
Year Two Debtors
Same policy
122,000
Specific bad debt
arising in Year 2 to be
written off
Entry in P&L
Bad debt written off
2,000
Top Up provision to 5%
(5% of 120K – 5000, its
120K because 122k
minus 2k bad debts)
1000
Entry in Balance Sheet
Debtors
Less Provision ($6000)
2,000
$120,000
$114,000
Chapter 2:
Cost of goods sold = cost of opening stock + cost of purchases – cost of closing stock
If using average cost method to calculate cost of closing stock, don’t forget to include the opening
balance value in your calculations
Reducing Balance Depreciation = 1 – nth Sq Root (Scrap cost/Cost), n = life of asset – but most of the
time you are given a precentage which you apply to an ever diminishing book value.
Bad debts are taken off debtors in the Balance Sheet
Rent is a general expense in the P&L.
The P&L only contains expenses that are for the time period in questions, prepayments are instead
included in the Current Assets section of the Balance Sheet
Accruals appear in the Current Liabilities section of the balance sheet, they are taken added to the
Creditors figure.
Cash Statement : ortcaelf
O= Cash Flow from Operations (Profits after tax & interest (+depreciation + increase in bad debts
provision), increase in inventory/creditors (+),decrease in creditors )
R = Returns on Investments & servicing finance (e.g. interest paid)
T = Taxation (Taken from last year’s balance sheet)
C = Capital Expenditure (cash from selling assets
A = Acquisitions
E= Equity Dividend (including increase in shares & Drawings on Cash)
L = Management of liquid resources (govt securities etc.)
F = Financing (increase or decrease in loans)
Gearing = (Long term Debts/Owners Equity)
Return on Owners Equity = (Profit after interest on loan/Equity) x 1000
Note: Equity includes any long term debts
Chapter 3:
Deferred Income:
Example: One year subscription = $75, Three year = $ 210. In 1996 there were 3000 one year and 2000
three year subscriptions:
Balance Sheets
1996
1997
1998
Cash
645000
Owners Equity
$X
$X
$X
Deferred Revenue
280,000
140,000
Profit and Loss
Account
Subscription Revenue:
One Year
Three Years
Total
225,000
140,000
365,000
140,000
140,000
140,000
140,000
Only this years rightful income appears in the P&L, Deferred Revenue is used to offset the artificially high
Cash figure
The result of the cash flow statement should equal the increase (or decrease) of ‘Cash’ in the Current
Assets part of the balance sheet from one year to the next.
Note: When calculating cash flow its important to include any fixed assets disposed of. Look at the book
value in the previous years balance sheet and the value at the end of this year’s. If they differ then there
was a fixed asset disposal, you must calculate the actual value of the disposal (rather than the profit) and
include that in the cash flow statement.
Note: Do not include bank overdrafts in the cash flow statement – instead add their delta to the cash delta
and compare to the cash flow statement result
Chapter 6:
Ratios are only good when comparing companies of a similar size and in the same type of business.
Liquidity:
Current Ratio
Quick Ratio
(Acid Test)
Current Assets
Current Liabilities
Current Assets – Inventory
Current Liabilities
Profit:
Gross Profit
Margin
Profit Margin
Return on
Total Assets
Return on
Specific
Assets
Return on
Capital
Employed
Return on
Owners Equity
Gross Profit x 100%
Sales
Profit before Interest and Taxes x 100%
Sales
(Profit includes that from associated
companies)
Profit before Interest and Taxes x 100%
Total Assets
Profit before Interest and Taxes x 100%
Inventory
Profit before Interest and Taxes x 100%
Capital Employed
Profit Attributable to Shareholders x 100%
Owners Equity
(remove profit attributable to minority
interests and dividends but after tax and
interest)
(Owners Equity = share capital + retained
earnings + share premium)
Capital
Fixed to
Current Asset
Debt Ratio
(Gearing %)
Fixed Assets
Current Assets
Total debt
Total Assets
(debt includes creditors +loans – debt
attributable to minority interests)
Time Interest
Earned
Profit before Tax +Interest Charges
Interest Charges
Efficiency:
Inventory
Turnover
Sales
Inventory
Closing Inventory
Average
Collection
Period
Debtors
Sales per day
Fixed Asset
Turnover
Sales
Fixed Assets
Dupont Chart:
Return on
Total Assets
Profit x Sales
Sales Total Assets
Stock Market
Earnings Per
Share
Net Profit for the financial year
Number of Ordinary Share in issue
Price/Earnings
Ratio
(after tax + Interest but before
dividends)
Market Price
Earning Per Share
Dividend Yield
Dividend per Share
x 100
Market Value per Share
Dividend
Cover
Net Profit of the year
Dividend Payout
Chapter 7
In an acquisition, if the holding does not own all the subsidiary, there will be a minority interest figure in
the holding companies balance sheet under the Owners Equity. It will be equal the % of the subsidiary’s
net worth that the subsidiary still owns
Chapter 9 –
Variable Costs are those that vary with the volume produced
Fixed Costs do not vary with production output
Direct Costs are those that are incurred simply because the item is manufactured (= Traceable costs)
Indirect Costs are those that are incurred in the support of the fundamental activities of manufacturing
and selling (= Common costs)
Direct Cost usually = Variable costs (except for examples like buying a piece of machinery for a particular
product)
Product costs are costs which can be attached to the cost items without too much difficulty
Period costs are costs which, although incurred ultimately in support of the product, are best controlled in
time periods
Neither are used in management accounting
P/V ratio = Contribution Margin Ratio = Contribution Margin per unit
Sales Price per unit
BEP (units) =
Fixed Cost
Contribution Margin per unit
BEP ($) = Fixed Costs
Contribution Margin Ratio
Profits = Sales Revenue - Fixed Costs - Variable Costs
When calculating the BEP for multiple product companies, use the weighted average of their contribution
margins – weighted by their sales revenue figures.
When calculating the BEP for multiple product companies when there is a limiting production factor, use
the weighted average of their contribution margins and then get the weighted contribution margin per
limiting factor.
Remember – an fixed overhead which is allocated on a per unit basis must first be de-unitized – ie. You
should never have an equation like S x fixed overhead!!!
Chapter 10
Plantwide rate means using one cost driver for whole plant rather than the more realistic of using a
different driver for each department
Direct Method of overhead allocation – use cost driver for each dept
Step method
– allocate one depts overheads to all others, including production and non production depts.
– always ignore a depts. consumption of its own resources (don’t include it in the allocation
denominator)
– close down dept once allocated
– when finished, use predetermined allocation for the production depts.
Joint products should be products that management cannot prevent from resulting from the production
process
- Equal shares of cost
- Cost sharing according to their physical characterisitics
- Sales value at split off
-
Ultimate net sales : allocate on basis of sales value after all costs are deducted from
joint products
Process costing - Equivalent units
Assuming FIFO is used, calculate equivalent units based on the % work that is required to complete them
this period, starting with opening balance
EX: if there is 2000 units of opening stock, 75% finished in terms of material then its 25% of 2000 or 500
equivalent units of material that are counted towards equivalent units of production
To get closing stock value
1. Get equivalent units for opening + units completed + closing stock = equivalent units of
production
2. Divide this by the cost incurred in this period for Materials and Labor – this gives you the two
costs for equivalent units of production
3. Multiple the equiv units for closing inv x these two costs and sum them to get cost of closing inv.
In the Weighted average, it’s the same, just include the work done on opening inv in the above three
steps
Chapter 11:
 Denominator Volume Variance is caused when actual production is not equal to planned production
 Bottom line profit difference arises when actual sales is not equal to actual production
With a variable costing computation of inventory costs, only the variable costs of manufacturing are used
to calculate the per unit cost of inventory
Contribution Margin is defined as the selling price minus the total variable cost (including both
manufacturing and non manufacturing variable costs).
When looking at costing figures, remember they are based on the planned production. The variable costs
must be adjusted for the actual production.
Variable Costing:
Sales
Variable costs (Manufacturing+Sales)
Contribution Margin
Fixed Costs (Manu+Sales)
Net Profit
Here the variable costs/unit are adjusted for the actual number of units sold
Full (Absorption) Costing:
Sales
Full cost of sales (Fixed +Var manufacturing costs)
Gross Profit
Expenses (Fixed + Var + Denominator Variance)
Net Profit
Here the full cost of sales per unit is not altered.
To calculate the denominator variance, use the Fixed manufacturing overhead/units produced (planned
and actual)
Variable Cost of sales = 500/10000 + 125/10000 =
Var Costing:
Sales
Variable cost of sales @$62.5
Contribution Margin
Fixed Costs Manu
600
Fixed costs Sell
350
1875000
468750
1406250
950
456250 = d
Absorption costing:
Full Manufacturing Cost per unit = 1,100,000/10000 = $110/unit
Fixed Overheads Allocation rate = 600,
Should have been 1100000/9000 = $122.22
Underabsorbed by $12.22/ unit, total = $
Total Cost of sale = $110/unit
Sales
Total Cost of sales (7500 x$110)
1875
825,00
Chapter 12
Reasons to budget:
 Planning
 Control
 Motivation
 Co-ordination
 Benchmarking
Chapter 13 – Standard Costing
Flexed budget is one which the budgeted costs are adjusted to match the actual output
Material Efficiency variance = [SQ-AQ]SP
Note: SQ = actual number of units x material per unit
Material Price Variance = [SP-AP]AQ
AQ = number of actual units produced x actual material per unit
Labor Efficiency variance = [ST-AT]SR
ST= AQ x time per unit
Labor rate variance = [SR-AR]AT
Variable Overhead Efficiency variance = Standard cost of flexible budgeted time –
standard costs of actual time taken for units produced
= (standard o/h rate x standard time/unit x actual units produced)
x (actual time x standard rate of time/unit)
Compares the difference in the cost of the units produced to what that cost should have
been given the time spent on them
Variable O/H Spending Variance = Standard cost of actual time taken – actual costs
incurred
=
(actual time spent x standard time/unit) – Actual cost of time
Fixed Overhead Spending Variance = Budgeted - Actual
Fixed Overhead denominator Variance = Budgeted Amount less Amount applied to
units produced
since it’s the denominator variance it deals in ’units’ produced – also a negative
denominator variance is favorable, since it shows that more overhead has been
allocated to production than budgeted for
Sales Contribution Variance =
[Difference between actual and budgeted contribution margin per unit] –
[Actual sales in units]
Sales Volume Variance = [Actual Sales less Budgeted sales] x
[Budgeted Contribution Margin per unit]
Sales Quantity = [Actual Sales less budgeted sales] x
[Budgeted weighted average contribution margin per unit]
weighted based on the relative volumes sold of all products
Sales Mix Variance = [Actual sales less budgeted sales] x
[Budgeted contribution margin per unit less budgeted
weighted contribution margin per unit]
Its Actual –Budgeted not the opposite way around
Each one of there should be applied to all products and then results summed
Chapter 14:
ROI = Controllable Profit / Investment (%)
RI = Controllable Profit – Imputed Interest on Assets ($)
When assessing the effect on the companies overall financial performance, compare the ROI of the
investment to the company’s cost of capital. If the ROI > imputed interest it’s a go!
With Transfer pricing, the selling depts price becomes part of the buying depts variable cost. So the
maximum a buying dept will pay is when its contribution margin = 0.
In considering an investment’s ROI, its profit not contribution that is used. Profit is contribution –fixed
costs.
In considering an investments RI, calculate the RI before and then after the investment. The division
which would gain the most is the division that should receive the investment.
Chapter 15 – Investment Decisions
PV = equivalent cost of future money now
NPV = finding the current values of all cash flows & summing them to find if its >0
Discounted Cash Flow = finding the % cost of capital at which NPV = 0
Use interpolation to find this – try one low % (X) and then one high % (Y), giving you a below zero NPV
(L) and one above zero NPV (H)
DCF = Y + [
L
L-H
* (X - Y) ]
When evaluating investments, check to see if their NPV > 0 when using the company’s cost of capital
Payoff is usually done on cash flows rather than NPV’s unless opportunity costs should be taken into
account
Chapter 16
Return per factory hour = Sales price – Material Cost
Time spent at the factory bottleneck per product
Cost per factory hour = Total Factory Cost
Total time available at factory bottleneck
Throughput accounting ratio = Return per factory hour
Cost per factory hour