CCFA cheat sheet

Accounting equation: Assets = Liabilities + Equity; every transaction preserves it, so double-entry recording always balances.

Accrual basis: revenue recognized when the performance obligation is satisfied, expenses when the economic benefit is consumed - not when cash moves.

Revenue recognition five steps: identify contract, identify performance obligations, determine transaction price, allocate price to obligations, recognize on satisfaction.

Inventory: FIFO leaves the newest costs in ending inventory; LIFO leaves the oldest, so LIFO produces higher COGS and lower profit during rising prices.

Depreciation methods: straight-line = (cost − residual)/useful life; double-declining = 2 × straight-line rate × beginning carrying amount, ignoring residual until the final year.

Impairment (US GAAP): test when events indicate; write down to fair value only if carrying amount exceeds undiscounted future cash flows.

Leases (lessee): recognize a right-of-use asset and lease liability at present value of unpaid lease payments; short-term and low-value exemptions permitted.

Deferred taxes arise from temporary differences between book and tax basis; a valuation allowance reduces the DTA when realization is more likely than not uncertain.

Cash flow statement: interest and dividends received are operating (US GAAP); dividends paid are financing; IFRS allows interest paid in operating or financing.

DuPont: ROE = net profit margin × asset turnover × equity multiplier; each factor isolates profitability, efficiency, and leverage.

Current ratio = current assets/current liabilities; quick ratio excludes inventory and prepaids to test near-term liquidity.

Cash conversion cycle = days inventory outstanding + days sales outstanding − days payables outstanding; a shorter cycle frees working capital.

Interest coverage = EBIT/interest expense; a declining trend signals rising default risk before liquidity ratios deteriorate.

Common-size statements express income items as a percent of revenue and balance sheet items as a percent of total assets, enabling cross-company comparison.

Quality of earnings: compare accruals, cash flow from operations to net income, and revenue growth against receivables growth to detect aggressive recognition.

Free cash flow = CFO − capital expenditures; FCFF adds after-tax interest back, FCFE deducts net borrowing effects.

Inventory and depreciation method differences distort comparability; restate to a common basis before ratio comparison across firms.

WACC = (E/V) × Re + (D/V) × Rd × (1 − tax rate); use market values and target weights, not book values.

CAPM: Re = risk-free rate + beta × equity risk premium; levered beta = unlevered beta × [1 + (1 − t)(D/E)].

Modigliani-Miller without taxes: firm value is independent of leverage; with taxes, value rises by tax rate × debt (perpetuity assumption).

Trade-off theory: optimal leverage balances the interest tax shield against expected financial distress and agency costs.

NPV > 0 adds value and is the primary decision rule; IRR can mislead with non-conventional cash flows or mutually exclusive projects of different scale.

Pecking order: internal funds first, then debt, then equity - reflecting asymmetric information and issuance costs.

Dividend irrelevance holds in perfect markets; in practice, buybacks offer tax efficiency and flexibility relative to dividends.

Operating leverage magnifies EBIT sensitivity to sales; financial leverage magnifies EPS sensitivity to EBIT; combined leverage is the product.

Gordon growth: P0 = D1/(r − g); valid only when g is below the discount rate and sustainable long term.

Enterprise value = market cap + debt + preferred + minority interest − cash; EV/EBITDA is capital-structure neutral.

FCFF = EBIT(1 − t) + depreciation − capex − increase in net working capital; discount at WACC for enterprise value.

Terminal value via exit multiple or perpetuity growth; perpetuity growth should not exceed long-run nominal GDP growth.

Relative valuation: P/E suits mature profitable firms; P/B suits financials; EV/Sales suits loss-making growth firms.

Bond price moves inversely to yield; duration approximates percentage price change per 1% yield change, convexity corrects for larger moves.

CAPM beta measures systematic risk only; unsystematic risk is diversifiable and earns no premium.

Margin of safety: intrinsic value minus price; a wider gap absorbs forecast error and adverse surprises.

Three-statement model: net income flows to retained earnings, cash flow statement reconciles cash, and the balance sheet must balance to zero as a check.

Circularity arises when interest depends on average debt, which depends on cash flow; use a copy-paste macro or iterative calculation switch.

Forecast drivers: revenue from volume × price or growth rates; costs as a percent of revenue; working capital as days of revenue or COGS.

Build the cash flow statement from net income, add back non-cash items, adjust working capital, then investing and financing flows.

Scenario and sensitivity analysis: flex key drivers, use data tables or tornado charts to rank variable impact on valuation.

Never hard-code values inside formulas; separate inputs, calculations, and outputs, and color-code consistently.

Sanity checks: cash never negative without a revolver, depreciation does not exceed gross PP&E, and implied margins stay within historical bounds.

Mid-year convention discounts cash flows at t − 0.5 when flows arrive evenly through the year, raising valuation versus year-end discounting.

Put-call parity: C + PV(K) = P + S; violations permit arbitrage, and it holds only for European options on non-dividend stocks.

Black-Scholes inputs: spot, strike, volatility, time, rate; delta, gamma, vega, theta, and rho measure sensitivity to each.

Futures hedge: number of contracts = (value hedged × beta or duration) / (contract price × multiplier).

Value at risk states a loss threshold over a horizon at a confidence level; it says nothing about losses beyond that threshold.

Interest rate swap: exchange fixed for floating; the swap fixed rate sets present value of both legs equal at inception.

Duration gap and DV01 quantify rate exposure; DV01 is the price change for a one-basis-point yield move.

Forward versus futures: forwards are OTC and customizable with counterparty credit risk; futures are standardized, margined, and marked to market daily.

Hedging with options caps downside while retaining upside, at the cost of a premium; collars finance the premium by selling upside.

GDP identity: Y = C + I + G + (X − M); expenditure components drive cyclical earnings forecasts.

Central bank policy rate transmission: higher rates raise discount rates, compress valuations, and strengthen the currency, all else equal.

Yield curve inversion (short rates above long) has preceded recessions but is an imperfect timing signal.

Inflation erodes real returns; nominal return ≈ real return + inflation (Fisher approximation).

Purchasing power parity anchors long-run exchange rates; interest rate parity links forward premiums to rate differentials.

Business cycle phases - expansion, peak, contraction, trough - shift sector leadership between cyclicals and defensives.

Monetary versus fiscal policy: monetary acts through rates and liquidity; fiscal acts through spending and taxation with longer lags.

Market efficiency forms: weak (prices reflect past prices), semi-strong (public information), strong (all information including private).

Fiduciary duty: place client interests above employer and personal interests; disclose conflicts promptly and clearly.

Material nonpublic information: do not trade or cause others to trade; halt work and seek compliance guidance when received.

Independence is compromised by audit fees, gifts, or relationships that a reasonable observer would view as impairing objectivity.

Fair dealing: recommendations must reach all clients before or simultaneously with those who act on them; selective disclosure is prohibited.

Performance presentation must be fair, accurate, and complete; never cherry-pick composites or omit terminated accounts.

Suitability requires knowing the client's objectives, constraints, and risk tolerance before recommending any product.

Whistleblower and escalation duty: report violations internally first; go to regulators only when internal channels fail or are compromised.

GIPS compliance is firm-wide and voluntary; it requires defined composites, disclosed fees, and at least five years of performance (or since inception).