CMA Part 2 flashcards
CMA Part 2 · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Current Ratio
- Current assets divided by current liabilities. It measures short-term liquidity; a value below 1.0 indicates that current obligations exceed the resources available to pay them.
- Quick (Acid-Test) Ratio
- Cash, marketable securities, and receivables divided by current liabilities. It excludes inventory and prepaid items to test the ability to meet immediate obligations.
- Inventory Turnover
- Cost of goods sold divided by average inventory. It shows how many times inventory is sold and replaced in a period; 365 divided by it gives days in inventory.
- DuPont ROE Model
- Return on equity equals net profit margin times total asset turnover times the equity multiplier, decomposing performance into profitability, efficiency, and leverage drivers.
- Times Interest Earned
- Earnings before interest and taxes divided by interest expense. It shows how many times operating earnings cover interest charges; higher values mean greater safety for lenders.
- Free Cash Flow
- Cash flow from operations minus the capital expenditures needed to maintain capacity. It is the cash available for debt repayment, dividends, and new investment.
- Weighted Average Cost of Capital
- The weighted average of after-tax debt cost and equity cost using market value proportions. It is the minimum return a firm must earn on average-risk investments.
- CAPM Cost of Equity
- Cost of equity equals the risk-free rate plus beta times the market risk premium. Beta scales the premium to reflect the firm's systematic risk.
- Dividend Growth Model
- Cost of equity equals next year's dividend divided by the current share price plus the expected dividend growth rate, assuming constant perpetual growth.
- Cash Conversion Cycle
- Days inventory outstanding plus days sales outstanding minus days payables outstanding. It measures how long cash is tied up in operating assets before collection.
- Degree of Operating Leverage
- Contribution margin divided by operating income. It estimates the percentage change in operating income produced by a one percent change in sales volume.
- Relevant Cost
- A future, differential, avoidable cost that differs between alternatives. Only relevant costs and revenues belong in the analysis of a business decision.
- Sunk Cost
- A cost already incurred that cannot be changed by any current or future decision. It is irrelevant to decision making and must be excluded from incremental analysis.
- Breakeven Point in Units
- Fixed costs divided by contribution margin per unit. It is the sales volume at which total revenue equals total cost and operating income is exactly zero.
- Margin of Safety
- Actual or budgeted sales minus breakeven sales, divided by actual sales. It shows the percentage by which sales can fall before a loss is incurred.
- Contribution Margin Ratio
- Contribution margin divided by sales revenue. It is the fraction of each sales dollar available to cover fixed costs and then generate operating income.
- Special Order Decision
- A one-time order priced below the normal level. Accept it when incremental revenue exceeds incremental cost and no profitable regular sales are displaced.
- Coefficient of Variation
- Standard deviation divided by expected value. It measures risk per unit of return, allowing comparison of alternatives that have different expected returns.
- Systematic Risk
- Risk from economy-wide factors such as interest rates and recessions that diversification cannot eliminate. It is measured by beta and is the only risk priced.
- Interest Rate Risk
- The risk that bond prices fall when market interest rates rise. Longer maturity and higher duration increase a bond's sensitivity to rate changes.
- Risk Transfer
- Shifting risk to a third party, typically through insurance, derivative hedging, or contractual indemnification, in exchange for a premium or fee.
- Bond Duration
- A weighted average time to a bond's cash flows, measured in years, used to estimate the percentage price change for a given change in interest rates.
- Net Present Value
- Present value of expected cash inflows minus the initial investment, discounted at the cost of capital. Positive NPV means the project adds shareholder value.
- Internal Rate of Return
- The discount rate that makes a project's net present value equal to zero. A project is accepted when IRR exceeds the required rate of return.
- Profitability Index
- Present value of future cash inflows divided by the initial investment. A ratio above 1.0 signals positive NPV, and it is used to rank projects under capital rationing.
- Payback Period
- The time required for cumulative cash inflows to recover the initial investment. It ignores the time value of money and all cash flows after payback.
- Depreciation Tax Shield
- The tax savings created by depreciation expense, equal to depreciation times the tax rate. It is treated as a cash inflow in project operating cash flows.
- Confidentiality Standard
- An IMA ethical standard requiring members to keep employer information confidential and never use it for personal advantage unless disclosure is legally required.
- Integrity Standard
- An IMA ethical standard requiring honesty, avoidance of conflicts of interest, refusal of gifts that influence decisions, and abstention from discreditable activities.
- Credibility Standard
- An IMA ethical standard requiring fair and objective communication, full disclosure of relevant information, and acknowledgement of delays or deficiencies in recommendations.
- Competence Standard
- An IMA ethical standard requiring members to maintain professional expertise, follow technical standards, and deliver accurate, timely, and well-supported analyses and recommendations.
- Ethical Conflict Resolution
- When an ethics issue arises, follow the employer's policy; if unresolved, escalate to higher levels up to the board or audit committee, consulting legal counsel before any outside disclosure.