CMA Part 2 cheat sheet

Current ratio = current assets ÷ current liabilities; the quick ratio removes inventory and prepaids from the numerator.

Inventory turnover = cost of goods sold ÷ average inventory; days in inventory = 365 ÷ inventory turnover.

Receivables turnover = net credit sales ÷ average accounts receivable; days sales outstanding = 365 ÷ turnover.

DuPont decomposition: ROE = net profit margin × total asset turnover × equity multiplier (total assets ÷ total equity).

Times interest earned = EBIT ÷ interest expense; a rising ratio indicates greater capacity to service debt.

Debt-to-equity = total debt ÷ total equity; a higher ratio raises financial risk and the cost of equity.

Free cash flow = cash flow from operations − capital expenditures required to maintain capacity.

Revenue is recognized when the performance obligation is satisfied; expenses are matched to the revenue they helped generate.

LIFO is prohibited under IFRS; when prices fall, LIFO inventory liquidation can inflate reported gross margin.

WACC = (E ÷ V) × Ke + (D ÷ V) × Kd × (1 − t), where weights use market values and Kd is after-tax.

CAPM: cost of equity = risk-free rate + beta × (expected market return − risk-free rate).

Dividend growth model: Ke = D1 ÷ P0 + g; valid only for firms with stable, perpetual dividend growth.

Cost of preferred equity = preferred dividend ÷ net proceeds per share after flotation costs.

Cash conversion cycle = days inventory outstanding + days sales outstanding − days payables outstanding.

Operating leverage = contribution margin ÷ EBIT; financial leverage = EBIT ÷ earnings before tax.

Accept independent projects when NPV > 0 or IRR > required return; for mutually exclusive projects choose the highest NPV.

Modigliani-Miller with corporate taxes: firm value increases by tax rate × debt because interest is tax deductible.

A stock split or stock dividend changes the number of shares but not total shareholders' equity or firm value.

Breakeven units = fixed costs ÷ unit contribution margin; breakeven sales dollars = fixed costs ÷ contribution margin ratio.

Target profit units = (fixed costs + target operating income) ÷ unit contribution margin.

Contribution margin = sales − variable costs; contribution margin ratio = contribution margin ÷ sales.

Relevant costs are future, differential, and avoidable; sunk costs and allocated common fixed costs are irrelevant.

Make-or-buy: compare the outside purchase price to the avoidable fixed costs plus variable costs of internal production.

Special-order rule: accept when incremental revenue exceeds incremental cost and no profitable regular sales are displaced.

Margin of safety % = (actual or budgeted sales − breakeven sales) ÷ actual sales.

With a scarce resource, rank products by contribution margin per unit of the constrained resource, not per unit sold.

Degree of operating leverage = contribution margin ÷ operating income; it magnifies the profit effect of a sales change.

Risk responses are avoid, reduce (mitigate), transfer (insurance, hedging, outsourcing), and accept.

Coefficient of variation = standard deviation ÷ expected return; a lower value means less risk per unit of expected return.

Diversification eliminates unsystematic risk; systematic risk measured by beta remains and is priced in expected returns.

Bond prices move inversely to interest rates; longer duration and lower coupon imply greater price sensitivity.

Hedging tools: forwards and futures lock in a price, options set a floor or cap for a premium, swaps exchange cash flow streams.

Expected credit loss = probability of default × loss given default × exposure at default.

Liquidity risk is the chance an asset cannot be sold quickly at fair value; investors demand a liquidity premium in yield.

Purchasing power risk is the erosion of real returns by inflation; it hits long-term fixed-income securities hardest.

Value at Risk estimates the maximum expected loss over a stated horizon at a given confidence level.

NPV = present value of expected cash inflows − initial investment, discounted at the risk-adjusted cost of capital.

IRR is the discount rate that forces NPV to zero; accept a project when IRR exceeds the hurdle rate.

Profitability index = present value of inflows ÷ initial investment; under capital rationing, rank projects by PI.

Payback ignores the time value of money and all cash flows after the payback date; discounted payback fixes only the first flaw.

Project cash flow = after-tax incremental operating cash flow + depreciation tax shield − capital expenditures − working capital increases.

Sunk costs are excluded from project analysis; opportunity costs and end-of-project working capital recovery are included.

Depreciation itself is not a cash flow, but the tax saving (depreciation × tax rate) is a cash inflow.

NPV and IRR can conflict for mutually exclusive projects due to scale or timing; NPV is the preferred criterion.

Multiple IRRs occur when cash flow signs change more than once; rely on NPV in that situation.

The IMA Statement of Ethical Professional Practice has four standards: competence, confidentiality, integrity, and credibility.

Competence: maintain professional skills, follow technical standards, and provide accurate, timely, well-supported analysis.

Confidentiality: do not disclose employer information or use it for personal gain; exceptions include legal compulsion or authorization.

Integrity: avoid conflicts of interest, refuse gifts that could influence decisions, and abstain from discreditable conduct.

Credibility: communicate information fairly and objectively and disclose all relevant information, including delays or deficiencies.

Resolution sequence: follow the organization's policy, then escalate to the immediate supervisor and on to higher levels, including the audit committee or board.

If internal channels are exhausted, consult an attorney about legal obligations; do not disclose to outsiders unless legally required.

A member who observes unethical conduct should first discuss it with the individual involved, then follow the escalation steps.

Noncompliance can result in disciplinary action by the employer, and the IMA may censure, suspend, or expel a member.