BCS Written Finance cheat sheet

Weighted average cost of capital: WACC = (E/V)·Ke + (D/V)·Kd·(1 − t), where V = E + D and Kd is the pre-tax cost of debt.

Capital asset pricing model: Ke = Rf + β·(Rm − Rf); β measures a stock's sensitivity to market returns, so only systematic risk is priced.

Net present value decision rule: accept a project when NPV > 0 at the WACC; IRR rule accepts when IRR > WACC, but IRR can mislead for non-conventional or mutually exclusive cash flows.

Dividend valuation (Gordon growth): P0 = D1 / (Ke − g), valid only when g < Ke; g = retention ratio × return on equity.

Operating leverage rises with fixed costs: degree of operating leverage = contribution margin / EBIT. Financial leverage rises with interest: DFL = EBIT / (EBIT − interest).

Trade-off theory of capital structure: firms balance the tax shield of debt (interest deductibility) against expected financial distress and agency costs.

Working capital: cash conversion cycle = days inventory outstanding + days sales outstanding − days payables outstanding; a shorter cycle frees cash.

Modigliani–Miller without taxes: firm value is independent of leverage; with corporate taxes, value rises by t × D up to the point distress costs offset the shield.

Budget cycle stages: formulation, legislative approval, execution, and audit/oversight; each stage has distinct accountability requirements.

Annual budget must satisfy the fiscal identity: total revenue + grants + net borrowing = total expenditure, with borrowing covering the residual deficit.

Medium-term expenditure framework links annual budgets to a 3–5 year sectoral ceiling, giving agencies forward estimates for planning.

Line-item budgeting controls inputs; programme and performance budgeting link appropriations to outputs and outcomes, enabling value-for-money assessment.

Fund accounting separates resources by legal restriction: consolidated fund, contingency fund, and special funds each carry separate authority.

Commitment (encumbrance) control prevents overspending: an appropriation is reserved when a contract is signed, before cash is disbursed.

Fiscal rules such as a deficit-to-GDP or debt-to-GDP ceiling constrain discretionary budgeting and anchor credibility of the fiscal plan.

Cash vs accrual budgeting: cash basis records when money moves; accrual basis records when obligations arise, capturing liabilities like pensions and arrears.

Accounting equation: Assets = Liabilities + Equity; every transaction preserves this balance through double entry.

Accrual concept: revenue is recognised when earned and expenses when incurred, regardless of cash timing; matching pairs expenses with related revenue.

Depreciation methods: straight line = (cost − residual)/useful life; reducing balance applies a constant rate to carrying amount, giving higher early charges.

IFRS conceptual framework qualitative characteristics: relevance and faithful representation are fundamental; comparability, verifiability, timeliness and understandability are enhancing.

Revenue recognition (IFRS 15) five steps: identify contract, identify performance obligations, determine transaction price, allocate price, recognise on satisfaction.

Consolidation requires control (power over relevant activities, exposure to variable returns, ability to use power); intra-group balances and unrealised profits are eliminated.

Impairment test: carrying amount compared with recoverable amount (higher of fair value less costs to sell and value in use); write down if carrying amount exceeds it.

Statement of cash flows classifies flows as operating, investing and financing; interest and dividends classification is a disclosed accounting policy choice.

Money market instruments mature within one year (treasury bills, commercial paper, certificates of deposit); capital market instruments are longer term (bonds, equities).

Bond price and yield move inversely; for a given maturity, lower coupon means higher duration and greater price sensitivity to yield changes.

Basel III capital: common equity tier 1 minimum 4.5% of risk-weighted assets, tier 1 minimum 6%, total capital 8%, plus a 2.5% capital conservation buffer.

Liquidity coverage ratio requires high-quality liquid assets to cover 30 days of net stressed cash outflows; net stable funding ratio covers a one-year horizon.

Central bank policy tools: open market operations, reserve requirements, standing facilities and policy interest rate; raising the rate tightens credit conditions.

Moral hazard in deposit insurance arises when insured depositors stop monitoring banks; minimum capital and supervision offset this.

Systemic risk and contagion: interbank exposures and common asset holdings transmit shocks; macroprudential tools include countercyclical buffers and loan-to-value caps.

Efficient market hypothesis forms: weak (past prices), semi-strong (public information) and strong (all information including private).

Fiscal multiplier = ΔY / ΔG; it is larger when the marginal propensity to consume is high and smaller in open economies with high import leakage.

Automatic stabilisers (progressive taxes, unemployment benefits) dampen the cycle without discretionary legislation; discretionary policy requires new measures.

Crowding out: deficit-financed public spending raises interest rates and can displace private investment when the economy is near full capacity.

Tax incidence depends on relative elasticities: the burden falls more on the side of the market that is less elastic.

Laffer curve: revenue rises with the tax rate up to a peak, then falls as avoidance and disincentives grow; the peak rate is empirical, not fixed.

Public debt dynamics: debt/GDP rises when the interest rate exceeds nominal growth and the primary balance is not in sufficient surplus.

Monetary transmission channels: interest rate, credit, asset price, exchange rate and expectations; each affects aggregate demand with a lag.

Phillips curve trade-off between inflation and unemployment is weak in the long run; expectations-augmented versions predict no permanent trade-off.

Audit risk model: audit risk = inherent risk × control risk × detection risk; the auditor reduces detection risk through substantive testing.

COSO internal control components: control environment, risk assessment, control activities, information and communication, and monitoring activities.

Segregation of duties separates authorisation, custody of assets, recording and reconciliation so no single person controls a transaction end to end.

Three lines model: management owns risk, a risk/compliance function monitors, and internal audit provides independent assurance to the board.

Risk treatment options: avoid, reduce (mitigate), transfer (insurance, hedging) and accept; residual risk is what remains after controls.

ISA 700 audit opinion types: unmodified, qualified (material but not pervasive), adverse (material and pervasive misstatement), and disclaimer (inability to obtain evidence).

Materiality is set by professional judgement, often as a percentage of revenue, total assets or profit; performance materiality is lower to cover undetected misstatements.

Fraud triangle: pressure/incentive, opportunity and rationalisation; weak controls create opportunity, the element most responsive to audit design.

Incremental cash flow principle: include only cash flows that change because of the project; exclude sunk costs and allocate only incremental overhead.

Free cash flow = operating profit after tax + depreciation − capital expenditure − increase in working capital.

Discount only nominal cash flows at a nominal rate and real cash flows at a real rate; mismatching inflates or deflates NPV.

Payback period ignores cash flows after the cut-off and the time value of money; discounted payback corrects the latter but still ignores later flows.

Profitability index = present value of inflows / initial outlay; used to rank projects under capital rationing when funds are limited.

Sensitivity analysis varies one variable at a time; scenario analysis varies several together; both are simpler than Monte Carlo simulation.

Real options add value beyond static NPV: the option to defer, expand, contract or abandon is valued like a financial option.

For mutually exclusive projects of different scale or life, use equivalent annual annuity or NPV rather than IRR to rank.

ERP integration links budgeting, procurement, payment and accounting modules so a single transaction posts once and is visible across functions.

Integrated Financial Management Information System (IFMIS) enforces commitment control and produces real-time fiscal reports for treasury oversight.

Digital payments (mobile money, cards, real-time gross settlement) reduce leakage and speed settlement; controls shift to authentication and reconciliation.

Data integrity controls: input validation, maker-checker approval, audit trails, access rights by role, and periodic reconciliation of system to bank records.

Cybersecurity CIA triad: confidentiality, integrity and availability; controls include encryption, multi-factor authentication and backup with tested recovery.

E-government interoperability standards (open APIs, unique identifiers) let agencies exchange data while preserving privacy and auditability.

Business continuity: recovery point objective defines tolerable data loss; recovery time objective defines tolerable downtime; both drive backup and redundancy design.

Data analytics in audit: full-population testing, anomaly detection and Benford's law checks on payment data identify outliers traditional sampling misses.