CIMA BA1 cheat sheet

Price elasticity of demand = % change in quantity demanded ÷ % change in price; |E| > 1 elastic, |E| < 1 inelastic, |E| = 1 unit elastic.

Income elasticity of demand: positive for normal goods, negative for inferior goods, greater than 1 for luxury goods.

Cross elasticity of demand: positive for substitutes, negative for complements, near zero for unrelated goods.

Demand curve shifts are caused by non-price factors (income, tastes, substitute prices); price changes cause movements along the curve.

Law of diminishing returns: in the short run, adding variable factors to a fixed factor eventually reduces marginal product.

Short-run average cost is U-shaped because of diminishing returns; long-run average cost is U-shaped because of economies and diseconomies of scale.

Perfect competition: many buyers and sellers, homogeneous product, free entry, price taker, normal profit in long-run equilibrium.

Monopoly: single seller, high barriers to entry, downward-sloping demand, marginal revenue below price, profit maximising where MR = MC.

GDP = C + I + G + (X − M); real GDP adjusts nominal GDP for inflation using a price index.

Prime cost = direct materials + direct labour + direct expenses; production cost = prime cost + production overheads.

High-low method: variable cost per unit = (cost at high activity − cost at low activity) ÷ (high activity − low activity).

Contribution per unit = selling price − variable cost per unit; total contribution = contribution per unit × units sold.

Break-even units = fixed costs ÷ contribution per unit; break-even revenue = break-even units × selling price.

Margin of safety = (budgeted sales − break-even sales) ÷ budgeted sales × 100%.

Target profit volume = (fixed costs + target profit) ÷ contribution per unit.

Absorption costing values inventory at full production cost; marginal costing values it at variable production cost only, so profit differs by the change in inventory × fixed overhead per unit.

Overhead absorption rate = budgeted overheads ÷ budgeted activity level; over-absorption arises when actual activity exceeds budget.

Relevant cost for a decision is a future, incremental cash flow; sunk costs and committed costs are irrelevant.

Accounting equation: Assets = Capital + Liabilities; every transaction preserves this equality.

Double entry: each transaction is recorded with equal debits and credits; debits increase assets and expenses, credits increase liabilities, capital and income.

Trial balance extracts debit and credit balances; it detects arithmetic errors but not errors of principle, omission, commission or compensating errors.

Accruals (matching) concept: income and expenses are recognised in the period they are earned or incurred, not when cash moves.

Going concern assumes the entity will continue in operation for the foreseeable future, so assets are not valued at break-up value.

Straight-line depreciation = (cost − residual value) ÷ useful life; reducing balance = a fixed percentage of the carrying amount each year.

Gross profit = revenue − cost of sales; net profit = gross profit − expenses.

Inventory is measured at the lower of cost and net realisable value, where NRV = expected selling price − costs to complete and sell.

Current ratio = current assets ÷ current liabilities; quick ratio = (current assets − inventory) ÷ current liabilities.

Agency relationship: directors act as agents of the shareholders (principals), which creates a risk of divergent interests.

Separation of the roles of chairman and chief executive reduces the concentration of power and is a key governance safeguard.

Audit committee of independent non-executive directors oversees external audit, internal controls and financial reporting.

Independence threats to auditors include self-interest, self-review, advocacy, familiarity and intimidation.

A contract requires offer, acceptance, consideration and intention to create legal relations.

An offer may be terminated by revocation, rejection, lapse of time, death or failure of a condition precedent.

A company is a separate legal person from its members, so shareholders have limited liability and the company contracts in its own name.

Directors' duties typically include acting within powers, promoting the success of the company, exercising independent judgement and avoiding conflicts of interest.

Bribery and corruption controls rely on a risk assessment, top-level commitment, due diligence and monitoring.