FEBNM cheat sheet

Accounting equation: Assets = Liabilities + Equity; every transaction preserves this equality, so debits always equal credits.

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

Revenue recognition (five-step model): identify contract, identify performance obligations, determine transaction price, allocate price to obligations, recognize revenue on satisfaction.

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

Inventory: FIFO leaves the newest costs in ending inventory; LIFO leaves the oldest. Weighted average = cost of goods available / units available.

Lower of cost or net realizable value applies to inventory under IFRS; US GAAP uses lower of cost or market for LIFO and retail-method inventories.

Impairment (IFRS): compare carrying amount with recoverable amount, the higher of fair value less costs of disposal and value in use.

Statement of cash flows: operating (indirect method starts from net income and removes non-cash items and working-capital changes), investing, and financing.

Consolidation: a parent controls an investee with power over relevant activities, exposure to variable returns, and ability to use power to affect returns.

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

Break-even units = fixed costs / contribution margin per unit; break-even revenue = fixed costs / contribution margin ratio.

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

Margin of safety = (actual or budgeted sales − break-even sales) / actual sales, expressed as a percentage.

High-low method: variable cost per unit = change in total cost / change in activity; fixed cost = total cost at high point − variable rate × high activity.

Overhead: predetermined rate = estimated overhead / estimated allocation base; applied overhead = rate × actual base. Underapplied when actual overhead exceeds applied.

Standard costing variances: material price = (standard price − actual price) × actual quantity; material usage = (standard quantity − actual quantity) × standard price.

Absorption costing defers fixed production overhead in inventory, so profit exceeds variable costing profit when inventory rises and falls short when inventory falls.

Relevant costs are future and differ between alternatives; sunk costs and allocated common fixed costs are irrelevant to a decision.

Time value: future value = present value × (1 + r)^n; present value = future value / (1 + r)^n.

Net present value discounts incremental after-tax cash flows at the cost of capital; accept projects with NPV greater than zero.

Internal rate of return is the discount rate making NPV zero; accept when IRR exceeds the hurdle rate, but IRR can mislead with non-conventional or mutually exclusive cash flows.

Weighted average cost of capital = (E/V) × cost of equity + (D/V) × cost of debt × (1 − tax rate).

Cost of equity by CAPM = risk-free rate + beta × market risk premium.

Cost of equity by dividend growth model = next dividend / current price + growth rate.

Working capital: current ratio = current assets / current liabilities; quick ratio excludes inventory. Cash conversion cycle = days inventory + days receivable − days payable.

Operating leverage = contribution margin / operating income; financial leverage = operating income / pre-tax income.

Dividend policy: a stock split or stock dividend changes share count but not total equity; a cash dividend reduces both cash and retained earnings.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price; demand is elastic when the absolute value exceeds 1.

A price ceiling set below equilibrium creates shortage; a price floor set above equilibrium creates surplus.

GDP (expenditure approach) = consumption + investment + government spending + net exports.

Real GDP is nominal GDP deflated by the price index, removing the effect of inflation.

Demand-pull inflation arises from excess aggregate demand; cost-push inflation arises from rising input costs, such as wages or energy.

Central bank expansionary policy: lower policy rate, buy securities, or lower reserve requirements, raising money supply and lowering market rates.

Comparative advantage: a country gains from trade by specializing where its opportunity cost of production is lower.

A tariff raises domestic price, increases domestic producer surplus, reduces consumer surplus, and creates deadweight loss.

Fiscal multiplier = 1 / (1 − marginal propensity to consume) in the simple closed-economy model.

A contract requires offer, acceptance, consideration, capacity, and legality; a counteroffer terminates the original offer.

An agent binds a principal when acting with actual authority (express or implied) or apparent authority created by the principal's manifestations.

Agency terminates by revocation, renunciation, death or incapacity, or completion of the purpose.

Corporation limited liability protects shareholders from corporate debts; the corporate veil can be pierced for fraud or commingling.

A negotiable instrument requires an unconditional promise or order to pay a fixed sum, payable on demand or at a definite time, to order or bearer.

The Uniform Commercial Code governs sale of goods; common law governs service and real estate contracts.

Statute of frauds generally requires a writing for contracts for land, guarantees of debt, and goods priced at $500 or more.

Breach remedies: expectation damages place the injured party in the position performance would have produced; consequential damages require foreseeability.

Bankruptcy liquidation (Chapter 7) follows priority: secured creditors, then administration costs, wages, taxes, and unsecured creditors.

Taxable income = gross income − allowable deductions; tax liability = tax on taxable income − credits − prepayments.

Progressive rates apply higher marginal rates to higher brackets; the marginal rate applies to the next unit of income, the average rate equals total tax / total income.

Taxable income versus accounting income: permanent differences (e.g., non-deductible fines) never reverse; temporary differences reverse and create deferred tax.

Deferred tax liability arises when book income exceeds taxable income on a temporary difference; deferred tax asset when taxable income exceeds book income.

Depreciation for tax often uses accelerated or statutory pool methods, creating timing differences from straight-line book depreciation.

Capital gains generally receive different treatment from ordinary income; holding period often determines short-term versus long-term rates.

Value added tax is levied on each stage of production, with input credits offsetting tax on purchases; the final burden falls on the consumer.

Transfer pricing rules require related-party transactions to be priced on an arm's-length basis.

Tax avoidance uses legal arrangements to reduce tax; tax evasion is illegal concealment or misreporting and carries penalties.

Audit risk model: audit risk = inherent risk × control risk × detection risk; the auditor controls detection risk through the nature, timing, and extent of procedures.

Materiality is the amount of misstatement that could influence a user's economic decisions; performance materiality is set lower for individual balances.

Assertions tested include existence, completeness, rights and obligations, valuation, and presentation and disclosure.

Internal control components (COSO): control environment, risk assessment, control activities, information and communication, and monitoring.

Segregation of duties separates authorization, custody of assets, and record keeping to reduce fraud risk.

A control deficiency exists when a control is missing or fails to prevent or detect misstatements; a material weakness is a reasonable possibility of material misstatement.

Positive confirmation requests ask the recipient to respond whether or not they agree; negative confirmations are used only when risk is low and other conditions hold.

The auditor's opinion is unmodified when statements are fairly presented; qualified, adverse, or disclaimer opinions depend on materiality and pervasiveness.

Subsequent events: adjusting events provide evidence of conditions existing at the reporting date; non-adjusting events arise after that date.

Porter's five forces: rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers.

SWOT analysis maps internal strengths and weaknesses against external opportunities and threats; it is descriptive, not a prioritization tool.

Porter's generic strategies: cost leadership, differentiation, and focus; being stuck in the middle erodes competitive advantage.

The BCG matrix classifies business units by market growth and relative market share into stars, cash cows, question marks, and dogs.

Agency theory: managers may pursue self-interest; governance mechanisms include independent boards, incentive alignment, and transparent disclosure.

Board committees: audit, remuneration, and nomination; the audit committee should comprise independent directors and oversee external audit and internal control.

Stakeholder theory considers employees, customers, suppliers, and communities in addition to shareholders.

Value chain analysis separates primary activities (inbound logistics, operations, outbound logistics, marketing, service) from support activities.

Corporate social responsibility and sustainability reporting disclose environmental, social, and governance performance alongside financial results.

Accounting equation: Assets = Liabilities + Equity; every transaction preserves this equality, so debits always equal credits.

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

Revenue recognition (five-step model): identify contract, identify performance obligations, determine transaction price, allocate price to obligations, recognize revenue on satisfaction.

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

Inventory: FIFO leaves the newest costs in ending inventory; LIFO leaves the oldest. Weighted average = cost of goods available / units available.

Lower of cost or net realizable value applies to inventory under IFRS; US GAAP uses lower of cost or market for LIFO and retail-method inventories.

Impairment (IFRS): compare carrying amount with recoverable amount, the higher of fair value less costs of disposal and value in use.

Statement of cash flows: operating (indirect method starts from net income and removes non-cash items and working-capital changes), investing, and financing.

Consolidation: a parent controls an investee with power over relevant activities, exposure to variable returns, and ability to use power to affect returns.

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

Break-even units = fixed costs / contribution margin per unit; break-even revenue = fixed costs / contribution margin ratio.

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

Margin of safety = (actual or budgeted sales − break-even sales) / actual sales, expressed as a percentage.

High-low method: variable cost per unit = change in total cost / change in activity; fixed cost = total cost at high point − variable rate × high activity.

Overhead: predetermined rate = estimated overhead / estimated allocation base; applied overhead = rate × actual base. Underapplied when actual overhead exceeds applied.

Standard costing variances: material price = (standard price − actual price) × actual quantity; material usage = (standard quantity − actual quantity) × standard price.

Absorption costing defers fixed production overhead in inventory, so profit exceeds variable costing profit when inventory rises and falls short when inventory falls.

Relevant costs are future and differ between alternatives; sunk costs and allocated common fixed costs are irrelevant to a decision.

Time value: future value = present value × (1 + r)^n; present value = future value / (1 + r)^n.

Net present value discounts incremental after-tax cash flows at the cost of capital; accept projects with NPV greater than zero.

Internal rate of return is the discount rate making NPV zero; accept when IRR exceeds the hurdle rate, but IRR can mislead with non-conventional or mutually exclusive cash flows.

Weighted average cost of capital = (E/V) × cost of equity + (D/V) × cost of debt × (1 − tax rate).

Cost of equity by CAPM = risk-free rate + beta × market risk premium.

Cost of equity by dividend growth model = next dividend / current price + growth rate.

Working capital: current ratio = current assets / current liabilities; quick ratio excludes inventory. Cash conversion cycle = days inventory + days receivable − days payable.

Operating leverage = contribution margin / operating income; financial leverage = operating income / pre-tax income.

Dividend policy: a stock split or stock dividend changes share count but not total equity; a cash dividend reduces both cash and retained earnings.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price; demand is elastic when the absolute value exceeds 1.

A price ceiling set below equilibrium creates shortage; a price floor set above equilibrium creates surplus.

GDP (expenditure approach) = consumption + investment + government spending + net exports.

Real GDP is nominal GDP deflated by the price index, removing the effect of inflation.

Demand-pull inflation arises from excess aggregate demand; cost-push inflation arises from rising input costs, such as wages or energy.

Central bank expansionary policy: lower policy rate, buy securities, or lower reserve requirements, raising money supply and lowering market rates.

Comparative advantage: a country gains from trade by specializing where its opportunity cost of production is lower.

A tariff raises domestic price, increases domestic producer surplus, reduces consumer surplus, and creates deadweight loss.

Fiscal multiplier = 1 / (1 − marginal propensity to consume) in the simple closed-economy model.

A contract requires offer, acceptance, consideration, capacity, and legality; a counteroffer terminates the original offer.

An agent binds a principal when acting with actual authority (express or implied) or apparent authority created by the principal's manifestations.

Agency terminates by revocation, renunciation, death or incapacity, or completion of the purpose.

Corporation limited liability protects shareholders from corporate debts; the corporate veil can be pierced for fraud or commingling.

A negotiable instrument requires an unconditional promise or order to pay a fixed sum, payable on demand or at a definite time, to order or bearer.

The Uniform Commercial Code governs sale of goods; common law governs service and real estate contracts.

Statute of frauds generally requires a writing for contracts for land, guarantees of debt, and goods priced at $500 or more.

Breach remedies: expectation damages place the injured party in the position performance would have produced; consequential damages require foreseeability.

Bankruptcy liquidation (Chapter 7) follows priority: secured creditors, then administration costs, wages, taxes, and unsecured creditors.

Taxable income = gross income − allowable deductions; tax liability = tax on taxable income − credits − prepayments.

Progressive rates apply higher marginal rates to higher brackets; the marginal rate applies to the next unit of income, the average rate equals total tax / total income.

Taxable income versus accounting income: permanent differences (e.g., non-deductible fines) never reverse; temporary differences reverse and create deferred tax.

Deferred tax liability arises when book income exceeds taxable income on a temporary difference; deferred tax asset when taxable income exceeds book income.

Depreciation for tax often uses accelerated or statutory pool methods, creating timing differences from straight-line book depreciation.

Capital gains generally receive different treatment from ordinary income; holding period often determines short-term versus long-term rates.

Value added tax is levied on each stage of production, with input credits offsetting tax on purchases; the final burden falls on the consumer.

Transfer pricing rules require related-party transactions to be priced on an arm's-length basis.

Tax avoidance uses legal arrangements to reduce tax; tax evasion is illegal concealment or misreporting and carries penalties.

Audit risk model: audit risk = inherent risk × control risk × detection risk; the auditor controls detection risk through the nature, timing, and extent of procedures.

Materiality is the amount of misstatement that could influence a user's economic decisions; performance materiality is set lower for individual balances.

Assertions tested include existence, completeness, rights and obligations, valuation, and presentation and disclosure.

Internal control components (COSO): control environment, risk assessment, control activities, information and communication, and monitoring.

Segregation of duties separates authorization, custody of assets, and record keeping to reduce fraud risk.

A control deficiency exists when a control is missing or fails to prevent or detect misstatements; a material weakness is a reasonable possibility of material misstatement.

Positive confirmation requests ask the recipient to respond whether or not they agree; negative confirmations are used only when risk is low and other conditions hold.

The auditor's opinion is unmodified when statements are fairly presented; qualified, adverse, or disclaimer opinions depend on materiality and pervasiveness.

Subsequent events: adjusting events provide evidence of conditions existing at the reporting date; non-adjusting events arise after that date.

Porter's five forces: rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers.

SWOT analysis maps internal strengths and weaknesses against external opportunities and threats; it is descriptive, not a prioritization tool.

Porter's generic strategies: cost leadership, differentiation, and focus; being stuck in the middle erodes competitive advantage.

The BCG matrix classifies business units by market growth and relative market share into stars, cash cows, question marks, and dogs.

Agency theory: managers may pursue self-interest; governance mechanisms include independent boards, incentive alignment, and transparent disclosure.

Board committees: audit, remuneration, and nomination; the audit committee should comprise independent directors and oversee external audit and internal control.

Stakeholder theory considers employees, customers, suppliers, and communities in addition to shareholders.

Value chain analysis separates primary activities (inbound logistics, operations, outbound logistics, marketing, service) from support activities.

Corporate social responsibility and sustainability reporting disclose environmental, social, and governance performance alongside financial results.

Accounting equation: Assets = Liabilities + Equity; every transaction preserves this equality, so debits always equal credits.

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

Revenue recognition (five-step model): identify contract, identify performance obligations, determine transaction price, allocate price to obligations, recognize revenue on satisfaction.

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

Inventory: FIFO leaves the newest costs in ending inventory; LIFO leaves the oldest. Weighted average = cost of goods available / units available.

Lower of cost or net realizable value applies to inventory under IFRS; US GAAP uses lower of cost or market for LIFO and retail-method inventories.

Impairment (IFRS): compare carrying amount with recoverable amount, the higher of fair value less costs of disposal and value in use.

Statement of cash flows: operating (indirect method starts from net income and removes non-cash items and working-capital changes), investing, and financing.

Consolidation: a parent controls an investee with power over relevant activities, exposure to variable returns, and ability to use power to affect returns.

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

Break-even units = fixed costs / contribution margin per unit; break-even revenue = fixed costs / contribution margin ratio.

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

Margin of safety = (actual or budgeted sales − break-even sales) / actual sales, expressed as a percentage.

High-low method: variable cost per unit = change in total cost / change in activity; fixed cost = total cost at high point − variable rate × high activity.

Overhead: predetermined rate = estimated overhead / estimated allocation base; applied overhead = rate × actual base. Underapplied when actual overhead exceeds applied.

Standard costing variances: material price = (standard price − actual price) × actual quantity; material usage = (standard quantity − actual quantity) × standard price.

Absorption costing defers fixed production overhead in inventory, so profit exceeds variable costing profit when inventory rises and falls short when inventory falls.

Relevant costs are future and differ between alternatives; sunk costs and allocated common fixed costs are irrelevant to a decision.

Time value: future value = present value × (1 + r)^n; present value = future value / (1 + r)^n.

Net present value discounts incremental after-tax cash flows at the cost of capital; accept projects with NPV greater than zero.

Internal rate of return is the discount rate making NPV zero; accept when IRR exceeds the hurdle rate, but IRR can mislead with non-conventional or mutually exclusive cash flows.

Weighted average cost of capital = (E/V) × cost of equity + (D/V) × cost of debt × (1 − tax rate).

Cost of equity by CAPM = risk-free rate + beta × market risk premium.

Cost of equity by dividend growth model = next dividend / current price + growth rate.

Working capital: current ratio = current assets / current liabilities; quick ratio excludes inventory. Cash conversion cycle = days inventory + days receivable − days payable.

Operating leverage = contribution margin / operating income; financial leverage = operating income / pre-tax income.

Dividend policy: a stock split or stock dividend changes share count but not total equity; a cash dividend reduces both cash and retained earnings.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price; demand is elastic when the absolute value exceeds 1.

A price ceiling set below equilibrium creates shortage; a price floor set above equilibrium creates surplus.

GDP (expenditure approach) = consumption + investment + government spending + net exports.

Real GDP is nominal GDP deflated by the price index, removing the effect of inflation.

Demand-pull inflation arises from excess aggregate demand; cost-push inflation arises from rising input costs, such as wages or energy.

Central bank expansionary policy: lower policy rate, buy securities, or lower reserve requirements, raising money supply and lowering market rates.

Comparative advantage: a country gains from trade by specializing where its opportunity cost of production is lower.

A tariff raises domestic price, increases domestic producer surplus, reduces consumer surplus, and creates deadweight loss.

Fiscal multiplier = 1 / (1 − marginal propensity to consume) in the simple closed-economy model.

A contract requires offer, acceptance, consideration, capacity, and legality; a counteroffer terminates the original offer.

An agent binds a principal when acting with actual authority (express or implied) or apparent authority created by the principal's manifestations.

Agency terminates by revocation, renunciation, death or incapacity, or completion of the purpose.

Corporation limited liability protects shareholders from corporate debts; the corporate veil can be pierced for fraud or commingling.

A negotiable instrument requires an unconditional promise or order to pay a fixed sum, payable on demand or at a definite time, to order or bearer.

The Uniform Commercial Code governs sale of goods; common law governs service and real estate contracts.

Statute of frauds generally requires a writing for contracts for land, guarantees of debt, and goods priced at $500 or more.

Breach remedies: expectation damages place the injured party in the position performance would have produced; consequential damages require foreseeability.

Bankruptcy liquidation (Chapter 7) follows priority: secured creditors, then administration costs, wages, taxes, and unsecured creditors.

Taxable income = gross income − allowable deductions; tax liability = tax on taxable income − credits − prepayments.

Progressive rates apply higher marginal rates to higher brackets; the marginal rate applies to the next unit of income, the average rate equals total tax / total income.

Taxable income versus accounting income: permanent differences (e.g., non-deductible fines) never reverse; temporary differences reverse and create deferred tax.

Deferred tax liability arises when book income exceeds taxable income on a temporary difference; deferred tax asset when taxable income exceeds book income.

Depreciation for tax often uses accelerated or statutory pool methods, creating timing differences from straight-line book depreciation.

Capital gains generally receive different treatment from ordinary income; holding period often determines short-term versus long-term rates.

Value added tax is levied on each stage of production, with input credits offsetting tax on purchases; the final burden falls on the consumer.

Transfer pricing rules require related-party transactions to be priced on an arm's-length basis.

Tax avoidance uses legal arrangements to reduce tax; tax evasion is illegal concealment or misreporting and carries penalties.

Audit risk model: audit risk = inherent risk × control risk × detection risk; the auditor controls detection risk through the nature, timing, and extent of procedures.

Materiality is the amount of misstatement that could influence a user's economic decisions; performance materiality is set lower for individual balances.

Assertions tested include existence, completeness, rights and obligations, valuation, and presentation and disclosure.

Internal control components (COSO): control environment, risk assessment, control activities, information and communication, and monitoring.

Segregation of duties separates authorization, custody of assets, and record keeping to reduce fraud risk.

A control deficiency exists when a control is missing or fails to prevent or detect misstatements; a material weakness is a reasonable possibility of material misstatement.

Positive confirmation requests ask the recipient to respond whether or not they agree; negative confirmations are used only when risk is low and other conditions hold.

The auditor's opinion is unmodified when statements are fairly presented; qualified, adverse, or disclaimer opinions depend on materiality and pervasiveness.

Subsequent events: adjusting events provide evidence of conditions existing at the reporting date; non-adjusting events arise after that date.

Porter's five forces: rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers.

SWOT analysis maps internal strengths and weaknesses against external opportunities and threats; it is descriptive, not a prioritization tool.

Porter's generic strategies: cost leadership, differentiation, and focus; being stuck in the middle erodes competitive advantage.

The BCG matrix classifies business units by market growth and relative market share into stars, cash cows, question marks, and dogs.

Agency theory: managers may pursue self-interest; governance mechanisms include independent boards, incentive alignment, and transparent disclosure.

Board committees: audit, remuneration, and nomination; the audit committee should comprise independent directors and oversee external audit and internal control.

Stakeholder theory considers employees, customers, suppliers, and communities in addition to shareholders.

Value chain analysis separates primary activities (inbound logistics, operations, outbound logistics, marketing, service) from support activities.

Corporate social responsibility and sustainability reporting disclose environmental, social, and governance performance alongside financial results.

Accounting equation: Assets = Liabilities + Equity; every transaction preserves this equality, so debits always equal credits.

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

Revenue recognition (five-step model): identify contract, identify performance obligations, determine transaction price, allocate price to obligations, recognize revenue on satisfaction.

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

Inventory: FIFO leaves the newest costs in ending inventory; LIFO leaves the oldest. Weighted average = cost of goods available / units available.

Lower of cost or net realizable value applies to inventory under IFRS; US GAAP uses lower of cost or market for LIFO and retail-method inventories.

Impairment (IFRS): compare carrying amount with recoverable amount, the higher of fair value less costs of disposal and value in use.

Statement of cash flows: operating (indirect method starts from net income and removes non-cash items and working-capital changes), investing, and financing.

Consolidation: a parent controls an investee with power over relevant activities, exposure to variable returns, and ability to use power to affect returns.

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

Break-even units = fixed costs / contribution margin per unit; break-even revenue = fixed costs / contribution margin ratio.

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

Margin of safety = (actual or budgeted sales − break-even sales) / actual sales, expressed as a percentage.

High-low method: variable cost per unit = change in total cost / change in activity; fixed cost = total cost at high point − variable rate × high activity.

Overhead: predetermined rate = estimated overhead / estimated allocation base; applied overhead = rate × actual base. Underapplied when actual overhead exceeds applied.

Standard costing variances: material price = (standard price − actual price) × actual quantity; material usage = (standard quantity − actual quantity) × standard price.

Absorption costing defers fixed production overhead in inventory, so profit exceeds variable costing profit when inventory rises and falls short when inventory falls.

Relevant costs are future and differ between alternatives; sunk costs and allocated common fixed costs are irrelevant to a decision.

Time value: future value = present value × (1 + r)^n; present value = future value / (1 + r)^n.

Net present value discounts incremental after-tax cash flows at the cost of capital; accept projects with NPV greater than zero.

Internal rate of return is the discount rate making NPV zero; accept when IRR exceeds the hurdle rate, but IRR can mislead with non-conventional or mutually exclusive cash flows.

Weighted average cost of capital = (E/V) × cost of equity + (D/V) × cost of debt × (1 − tax rate).

Cost of equity by CAPM = risk-free rate + beta × market risk premium.

Cost of equity by dividend growth model = next dividend / current price + growth rate.

Working capital: current ratio = current assets / current liabilities; quick ratio excludes inventory. Cash conversion cycle = days inventory + days receivable − days payable.

Operating leverage = contribution margin / operating income; financial leverage = operating income / pre-tax income.

Dividend policy: a stock split or stock dividend changes share count but not total equity; a cash dividend reduces both cash and retained earnings.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price; demand is elastic when the absolute value exceeds 1.

A price ceiling set below equilibrium creates shortage; a price floor set above equilibrium creates surplus.

GDP (expenditure approach) = consumption + investment + government spending + net exports.

Real GDP is nominal GDP deflated by the price index, removing the effect of inflation.

Demand-pull inflation arises from excess aggregate demand; cost-push inflation arises from rising input costs, such as wages or energy.

Central bank expansionary policy: lower policy rate, buy securities, or lower reserve requirements, raising money supply and lowering market rates.

Comparative advantage: a country gains from trade by specializing where its opportunity cost of production is lower.

A tariff raises domestic price, increases domestic producer surplus, reduces consumer surplus, and creates deadweight loss.

Fiscal multiplier = 1 / (1 − marginal propensity to consume) in the simple closed-economy model.

A contract requires offer, acceptance, consideration, capacity, and legality; a counteroffer terminates the original offer.

An agent binds a principal when acting with actual authority (express or implied) or apparent authority created by the principal's manifestations.

Agency terminates by revocation, renunciation, death or incapacity, or completion of the purpose.

Corporation limited liability protects shareholders from corporate debts; the corporate veil can be pierced for fraud or commingling.

A negotiable instrument requires an unconditional promise or order to pay a fixed sum, payable on demand or at a definite time, to order or bearer.

The Uniform Commercial Code governs sale of goods; common law governs service and real estate contracts.

Statute of frauds generally requires a writing for contracts for land, guarantees of debt, and goods priced at $500 or more.

Breach remedies: expectation damages place the injured party in the position performance would have produced; consequential damages require foreseeability.

Bankruptcy liquidation (Chapter 7) follows priority: secured creditors, then administration costs, wages, taxes, and unsecured creditors.

Taxable income = gross income − allowable deductions; tax liability = tax on taxable income − credits − prepayments.

Progressive rates apply higher marginal rates to higher brackets; the marginal rate applies to the next unit of income, the average rate equals total tax / total income.

Taxable income versus accounting income: permanent differences (e.g., non-deductible fines) never reverse; temporary differences reverse and create deferred tax.

Deferred tax liability arises when book income exceeds taxable income on a temporary difference; deferred tax asset when taxable income exceeds book income.

Depreciation for tax often uses accelerated or statutory pool methods, creating timing differences from straight-line book depreciation.

Capital gains generally receive different treatment from ordinary income; holding period often determines short-term versus long-term rates.

Value added tax is levied on each stage of production, with input credits offsetting tax on purchases; the final burden falls on the consumer.

Transfer pricing rules require related-party transactions to be priced on an arm's-length basis.

Tax avoidance uses legal arrangements to reduce tax; tax evasion is illegal concealment or misreporting and carries penalties.

Audit risk model: audit risk = inherent risk × control risk × detection risk; the auditor controls detection risk through the nature, timing, and extent of procedures.

Materiality is the amount of misstatement that could influence a user's economic decisions; performance materiality is set lower for individual balances.

Assertions tested include existence, completeness, rights and obligations, valuation, and presentation and disclosure.

Internal control components (COSO): control environment, risk assessment, control activities, information and communication, and monitoring.

Segregation of duties separates authorization, custody of assets, and record keeping to reduce fraud risk.

A control deficiency exists when a control is missing or fails to prevent or detect misstatements; a material weakness is a reasonable possibility of material misstatement.

Positive confirmation requests ask the recipient to respond whether or not they agree; negative confirmations are used only when risk is low and other conditions hold.

The auditor's opinion is unmodified when statements are fairly presented; qualified, adverse, or disclaimer opinions depend on materiality and pervasiveness.

Subsequent events: adjusting events provide evidence of conditions existing at the reporting date; non-adjusting events arise after that date.

Porter's five forces: rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers.

SWOT analysis maps internal strengths and weaknesses against external opportunities and threats; it is descriptive, not a prioritization tool.

Porter's generic strategies: cost leadership, differentiation, and focus; being stuck in the middle erodes competitive advantage.

The BCG matrix classifies business units by market growth and relative market share into stars, cash cows, question marks, and dogs.

Agency theory: managers may pursue self-interest; governance mechanisms include independent boards, incentive alignment, and transparent disclosure.

Board committees: audit, remuneration, and nomination; the audit committee should comprise independent directors and oversee external audit and internal control.

Stakeholder theory considers employees, customers, suppliers, and communities in addition to shareholders.

Value chain analysis separates primary activities (inbound logistics, operations, outbound logistics, marketing, service) from support activities.

Corporate social responsibility and sustainability reporting disclose environmental, social, and governance performance alongside financial results.

Accounting equation: Assets = Liabilities + Equity; every transaction preserves this equality, so debits always equal credits.

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

Revenue recognition (five-step model): identify contract, identify performance obligations, determine transaction price, allocate price to obligations, recognize revenue on satisfaction.

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

Inventory: FIFO leaves the newest costs in ending inventory; LIFO leaves the oldest. Weighted average = cost of goods available / units available.

Lower of cost or net realizable value applies to inventory under IFRS; US GAAP uses lower of cost or market for LIFO and retail-method inventories.

Impairment (IFRS): compare carrying amount with recoverable amount, the higher of fair value less costs of disposal and value in use.

Statement of cash flows: operating (indirect method starts from net income and removes non-cash items and working-capital changes), investing, and financing.

Consolidation: a parent controls an investee with power over relevant activities, exposure to variable returns, and ability to use power to affect returns.

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

Break-even units = fixed costs / contribution margin per unit; break-even revenue = fixed costs / contribution margin ratio.

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

Margin of safety = (actual or budgeted sales − break-even sales) / actual sales, expressed as a percentage.

High-low method: variable cost per unit = change in total cost / change in activity; fixed cost = total cost at high point − variable rate × high activity.

Overhead: predetermined rate = estimated overhead / estimated allocation base; applied overhead = rate × actual base. Underapplied when actual overhead exceeds applied.

Standard costing variances: material price = (standard price − actual price) × actual quantity; material usage = (standard quantity − actual quantity) × standard price.

Absorption costing defers fixed production overhead in inventory, so profit exceeds variable costing profit when inventory rises and falls short when inventory falls.

Relevant costs are future and differ between alternatives; sunk costs and allocated common fixed costs are irrelevant to a decision.

Time value: future value = present value × (1 + r)^n; present value = future value / (1 + r)^n.

Net present value discounts incremental after-tax cash flows at the cost of capital; accept projects with NPV greater than zero.

Internal rate of return is the discount rate making NPV zero; accept when IRR exceeds the hurdle rate, but IRR can mislead with non-conventional or mutually exclusive cash flows.

Weighted average cost of capital = (E/V) × cost of equity + (D/V) × cost of debt × (1 − tax rate).

Cost of equity by CAPM = risk-free rate + beta × market risk premium.

Cost of equity by dividend growth model = next dividend / current price + growth rate.

Working capital: current ratio = current assets / current liabilities; quick ratio excludes inventory. Cash conversion cycle = days inventory + days receivable − days payable.

Operating leverage = contribution margin / operating income; financial leverage = operating income / pre-tax income.

Dividend policy: a stock split or stock dividend changes share count but not total equity; a cash dividend reduces both cash and retained earnings.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price; demand is elastic when the absolute value exceeds 1.

A price ceiling set below equilibrium creates shortage; a price floor set above equilibrium creates surplus.

GDP (expenditure approach) = consumption + investment + government spending + net exports.

Real GDP is nominal GDP deflated by the price index, removing the effect of inflation.

Demand-pull inflation arises from excess aggregate demand; cost-push inflation arises from rising input costs, such as wages or energy.

Central bank expansionary policy: lower policy rate, buy securities, or lower reserve requirements, raising money supply and lowering market rates.

Comparative advantage: a country gains from trade by specializing where its opportunity cost of production is lower.

A tariff raises domestic price, increases domestic producer surplus, reduces consumer surplus, and creates deadweight loss.

Fiscal multiplier = 1 / (1 − marginal propensity to consume) in the simple closed-economy model.

A contract requires offer, acceptance, consideration, capacity, and legality; a counteroffer terminates the original offer.

An agent binds a principal when acting with actual authority (express or implied) or apparent authority created by the principal's manifestations.

Agency terminates by revocation, renunciation, death or incapacity, or completion of the purpose.

Corporation limited liability protects shareholders from corporate debts; the corporate veil can be pierced for fraud or commingling.

A negotiable instrument requires an unconditional promise or order to pay a fixed sum, payable on demand or at a definite time, to order or bearer.

The Uniform Commercial Code governs sale of goods; common law governs service and real estate contracts.

Statute of frauds generally requires a writing for contracts for land, guarantees of debt, and goods priced at $500 or more.

Breach remedies: expectation damages place the injured party in the position performance would have produced; consequential damages require foreseeability.

Bankruptcy liquidation (Chapter 7) follows priority: secured creditors, then administration costs, wages, taxes, and unsecured creditors.

Taxable income = gross income − allowable deductions; tax liability = tax on taxable income − credits − prepayments.

Progressive rates apply higher marginal rates to higher brackets; the marginal rate applies to the next unit of income, the average rate equals total tax / total income.

Taxable income versus accounting income: permanent differences (e.g., non-deductible fines) never reverse; temporary differences reverse and create deferred tax.

Deferred tax liability arises when book income exceeds taxable income on a temporary difference; deferred tax asset when taxable income exceeds book income.

Depreciation for tax often uses accelerated or statutory pool methods, creating timing differences from straight-line book depreciation.

Capital gains generally receive different treatment from ordinary income; holding period often determines short-term versus long-term rates.

Value added tax is levied on each stage of production, with input credits offsetting tax on purchases; the final burden falls on the consumer.

Transfer pricing rules require related-party transactions to be priced on an arm's-length basis.

Tax avoidance uses legal arrangements to reduce tax; tax evasion is illegal concealment or misreporting and carries penalties.

Audit risk model: audit risk = inherent risk × control risk × detection risk; the auditor controls detection risk through the nature, timing, and extent of procedures.

Materiality is the amount of misstatement that could influence a user's economic decisions; performance materiality is set lower for individual balances.

Assertions tested include existence, completeness, rights and obligations, valuation, and presentation and disclosure.

Internal control components (COSO): control environment, risk assessment, control activities, information and communication, and monitoring.

Segregation of duties separates authorization, custody of assets, and record keeping to reduce fraud risk.

A control deficiency exists when a control is missing or fails to prevent or detect misstatements; a material weakness is a reasonable possibility of material misstatement.

Positive confirmation requests ask the recipient to respond whether or not they agree; negative confirmations are used only when risk is low and other conditions hold.

The auditor's opinion is unmodified when statements are fairly presented; qualified, adverse, or disclaimer opinions depend on materiality and pervasiveness.

Subsequent events: adjusting events provide evidence of conditions existing at the reporting date; non-adjusting events arise after that date.

Porter's five forces: rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers.

SWOT analysis maps internal strengths and weaknesses against external opportunities and threats; it is descriptive, not a prioritization tool.

Porter's generic strategies: cost leadership, differentiation, and focus; being stuck in the middle erodes competitive advantage.

The BCG matrix classifies business units by market growth and relative market share into stars, cash cows, question marks, and dogs.

Agency theory: managers may pursue self-interest; governance mechanisms include independent boards, incentive alignment, and transparent disclosure.

Board committees: audit, remuneration, and nomination; the audit committee should comprise independent directors and oversee external audit and internal control.

Stakeholder theory considers employees, customers, suppliers, and communities in addition to shareholders.

Value chain analysis separates primary activities (inbound logistics, operations, outbound logistics, marketing, service) from support activities.

Corporate social responsibility and sustainability reporting disclose environmental, social, and governance performance alongside financial results.