CMA Final Paper 15 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Sustainable growth rate

Maximum sales growth achievable without issuing new equity, given constant profit margin, asset turnover, and leverage. Formula: (ROE × retention ratio) / (1 − ROE × retention ratio).

Economic Value Added

NOPAT minus a charge for capital employed (WACC × invested capital). Positive EVA means the firm earned more than its cost of capital and created shareholder value.

Market Value Added

Difference between the market value of a firm's debt and equity and the book value of capital invested. It measures cumulative value created or destroyed for capital providers.

Cash conversion cycle

Days inventory outstanding plus days sales outstanding minus days payable outstanding. A shorter cycle frees cash; each day reduced equals one day of sales held as cash.

Target costing

Allowable cost equals target selling price minus target profit. The design team uses value engineering to close any gap between current and allowable cost.

Residual income

Divisional operating profit minus a charge for invested capital at the required rate. Unlike ROI, it encourages managers to accept projects earning above the required return.

General transfer pricing rule

Minimum transfer price equals variable cost of the transferring unit plus its opportunity cost. Opportunity cost is zero when spare capacity exists and no external sales are lost.

Balanced Scorecard perspectives

Four linked perspectives: financial, customer, internal business process, and learning and growth. Each requires objectives, measures, targets, and initiatives to translate strategy into action.

Throughput accounting

Throughput equals sales revenue minus direct material cost. The bottleneck resource sets output pace; management protects and exploits the constraint before improving elsewhere.

COSO internal control components

Five components: control environment, risk assessment, control activities, information and communication, and monitoring activities. They apply across the entity and support reliable reporting and compliance.

Three lines model

First line: management owns and manages risk. Second line: risk and compliance functions monitor. Third line: internal audit gives independent assurance to the board.

Residual risk

Risk remaining after management applies controls, calculated as inherent risk adjusted for control effectiveness. It is the exposure the organization actually accepts.

Fraud triangle

Three conditions enabling fraud: incentive or pressure, opportunity, and rationalization or attitude. Controls mainly reduce opportunity, for example through segregation of duties.

Value at Risk

Maximum expected loss over a stated horizon at a given confidence level. It does not describe the size of losses beyond that threshold, so tail risk remains hidden.

Agency problem

Conflict arising when managers (agents) pursue their own interests rather than owners' (principals'). Governance tools include independent boards, audits, disclosure, and equity-based incentives.

Audit committee role

Board committee of independent directors overseeing external audit, internal audit, financial reporting integrity, and internal control. It does not manage the business or approve strategy.

Shareholder primacy model

Governance view that directors should maximize long-term shareholder value within legal and ethical limits. Contrasts with stakeholder models balancing employees, creditors, community, and environment.

Whistleblowing protection

Confidential channels allowing employees to report misconduct without retaliation. Effective programmes offer anonymity, independent investigation, and legal protection for good-faith reporters.

IMA ethical principles

Competence, confidentiality, integrity, and credibility. Unresolved ethical issues escalate to the next management level, then to the audit committee if still unresolved.

Contract essentials

Offer, acceptance, consideration, capacity, intention to create legal relations, and legality of object. Missing any element can make an agreement unenforceable.

Apparent authority

A principal may be bound by an agent's acts when the principal's conduct led a third party to reasonably believe authority existed, even without actual authority.

Negligence elements

Claimant must prove duty of care, breach of that duty, causation, and resulting damage. Contributory negligence by the claimant reduces recoverable damages.

Revenue recognition five steps

Identify the contract, identify performance obligations, determine transaction price, allocate price to obligations, and recognize revenue when each obligation is satisfied.

DuPont decomposition

ROE equals net profit margin times asset turnover times financial leverage. Decomposition reveals whether returns come from profitability, efficiency, or borrowing.

IFRS 16 lessee treatment

Lessee recognizes a right-of-use asset and lease liability at present value of lease payments. Expense becomes depreciation plus interest, raising reported debt and EBITDA.

Fair value hierarchy

Level 1 uses quoted prices in active markets; Level 2 uses observable inputs; Level 3 uses unobservable inputs. Level 3 valuations carry the greatest estimation uncertainty.

Net present value rule

Accept projects with positive NPV, computed by discounting incremental cash flows at the cost of capital. NPV measures absolute value added and is preferred for mutually exclusive projects.

IRR limitations

IRR is the rate where NPV equals zero. It can mislead with non-conventional cash flows (multiple IRRs) and ignores project scale when comparing mutually exclusive investments.

Depreciation tax shield

Tax saving equal to depreciation multiplied by the tax rate. It is a relevant incremental cash flow because it reduces tax payable even though depreciation is non-cash.

Profitability index

Present value of future cash inflows divided by initial investment. Under single-period capital rationing, rank independent projects by PI to maximize total NPV.

WACC formula

Weighted average cost of capital equals (E/V) × cost of equity plus (D/V) × after-tax cost of debt. Use market values and the marginal cost of new capital.

CAPM cost of equity

Cost of equity equals risk-free rate plus beta times the market risk premium. Beta captures systematic risk; diversifiable risk is not compensated.