VEE Accounting and Finance
Financial statements and ratios
Accounting questions test the links among the balance sheet, income statement, and statement of cash flows. Know accrual accounting, revenue and expense recognition, depreciation, working capital, retained earnings, and the difference between book value and market value. Be able to compute liquidity, leverage, profitability, and turnover ratios and explain what each measures. A ratio is only meaningful relative to a benchmark, trend, or peer, so avoid overinterpreting a single number.
Finance and valuation
Finance concepts include time value of money, net present value, internal rate of return, capital budgeting, risk and return, cost of capital, and capital structure. Use incremental cash flows, exclude sunk costs, and include opportunity costs and tax effects. NPV and IRR can disagree when project scale or timing differs; NPV is generally preferred because it measures value added. For bonds, distinguish coupon rate from yield and price from par.
Worked rule
A project costs 100 now and returns 60 at the end of each of the next two years. At 10%, NPV = -100 + 60/1.10 + 60/1.10^2 = 4.13. Because NPV is positive, accept the project if it is independent and no rationing applies. The trap is discounting the first cash flow for two years or treating the initial outlay as a Year 1 cash flow. Always lay out dated cash flows before computing.