CMA Final Paper 16 cheat sheet

Revenue recognition (ASC 606 / IFRS 15) five steps: identify the contract, identify distinct performance obligations, determine transaction price, allocate price to obligations by standalone selling price, recognize revenue when each obligation is satisfied.

Variable consideration is included in the transaction price using either the expected-value method (many similar contracts) or the most-likely-amount method (binary outcomes), constrained so that a significant revenue reversal is not probable.

Over-time revenue recognition applies when the customer receives and consumes benefits simultaneously, the asset creates or enhances a customer-controlled asset, or the asset has no alternative use and the entity has an enforceable right to payment for progress to date.

Lease classification (lessee, ASC 842 / IFRS 16): a finance lease exists if ownership transfers, a bargain purchase option exists, the term is a major part of economic life, the present value of payments is substantially all of fair value, or the asset is specialized. IFRS 16 recognizes all leases on-balance-sheet for lessees except short-term and low-value elections.

Goodwill is not amortized under US GAAP or IFRS; it is tested for impairment at least annually. Under IFRS an impairment loss on goodwill cannot be reversed; under US GAAP reversal of any goodwill impairment is prohibited.

Foreign currency translation: assets and liabilities at the closing rate, income statement items at the average rate, and the translation adjustment to other comprehensive income when the functional currency is the foreign currency. Remeasurement gains and losses (functional currency is the reporting currency) go to income.

Fair value hierarchy: Level 1 quoted prices in active markets for identical assets; Level 2 observable inputs other than Level 1; Level 3 unobservable inputs supported by best available information.

Deferred taxes arise from temporary differences between book and tax bases. A valuation allowance is recorded when it is more likely than not (greater than 50%) that some or all of a deferred tax asset will not be realized.

Statement of cash flows: interest paid and interest received are operating under US GAAP; IFRS permits interest paid in operating or financing and interest/dividends received in operating or investing. Dividends paid are financing under US GAAP, operating or financing under IFRS.

Static budget variance = actual results minus static (master) budget. Flexible budget variance = actual results minus flexible budget. Sales volume variance = flexible budget minus static budget. Static variance = flexible variance plus sales volume variance.

A flexible budget is prepared for the actual level of activity; it removes volume effects so that the flexible budget variance reflects price and efficiency performance only.

Management by exception compares actual to budget and investigates variances that exceed a defined threshold (absolute or percentage), focusing scarce managerial attention on significant deviations.

Contribution margin per unit = price minus variable cost per unit. Breakeven units = fixed costs / contribution margin per unit. Target profit units = (fixed costs + target profit) / contribution margin per unit.

Operating leverage = contribution margin / operating income. Higher operating leverage means profit is more sensitive to sales changes; a 1% sales change produces a percentage change in operating income equal to the degree of operating leverage.

Responsibility accounting: a cost center is evaluated on controllable costs, a revenue center on revenues, a profit center on profit, and an investment center on return on investment or residual income.

Return on investment = operating income / invested capital = margin x turnover. Residual income = operating income minus (required rate x invested capital). Residual income avoids the ROI underinvestment incentive.

The balanced scorecard uses four perspectives: financial, customer, internal business process, and learning and growth. Strategy maps link objectives by cause-and-effect across the four perspectives.

Zero-based budgeting builds each budget from zero rather than adjusting prior-year amounts; it consumes more resources but challenges embedded spending. Rolling forecasts are continuously updated for a fixed future horizon.

Net present value = present value of cash inflows minus present value of cash outflows, discounted at the cost of capital. Accept a project when NPV is greater than zero; among mutually exclusive projects choose the highest positive NPV.

Internal rate of return is the discount rate that sets NPV to zero. Accept when IRR exceeds the hurdle rate. IRR can produce multiple solutions with nonconventional cash flows and assumes reinvestment at the IRR.

The profitability index = present value of cash inflows / initial investment. It ranks projects under capital rationing when funds are limited and projects are divisible.

Payback period ignores the time value of money and cash flows after payback; the discounted payback period corrects for the time value of money but still ignores later cash flows.

Relevant cash flows are incremental, after-tax, and future. Sunk costs, allocated fixed costs, and financing costs (already captured in the discount rate) are excluded. Opportunity costs are included.

MACRS depreciation provides tax shields: depreciation tax shield = depreciation expense x tax rate. A gain on sale of an asset is taxed at the ordinary rate; a loss reduces taxes.

Weighted average cost of capital = (weight of debt x after-tax cost of debt) + (weight of preferred x cost of preferred) + (weight of equity x cost of equity). After-tax cost of debt = pre-tax rate x (1 - tax rate).

Cost of equity via CAPM = risk-free rate + beta x market risk premium. The dividend growth model gives cost of equity = expected dividend / price + growth rate.

Working capital management: the cash conversion cycle = days inventory outstanding + days sales outstanding minus days payable outstanding. A shorter cycle frees cash.

Capital rationing occurs when a firm has more acceptable projects than funds; rank by profitability index if projects are divisible, or use NPV of feasible combinations if indivisible.

Porter's five forces: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, and rivalry among existing competitors. High combined force pressure lowers industry profitability.

Porter's generic strategies: cost leadership, differentiation, and focus (cost focus or differentiation focus). Being stuck in the middle without a clear strategy erodes returns.

The SWOT analysis maps internal strengths and weaknesses against external opportunities and threats; it informs strategy but does not by itself set priorities.

The BCG matrix classifies business units as stars (high growth, high share), cash cows (low growth, high share), question marks (high growth, low share), and dogs (low growth, low share).

The product life cycle stages are introduction, growth, maturity, and decline. Pricing and investment choices shift by stage; maturity typically emphasizes cost control and differentiation.

The IMA Statement of Ethical Professional Practice has four principles: honesty, fairness, objectivity, and responsibility. Its standards are competence, confidentiality, integrity, and credibility.

An ethical conflict resolution path: follow the organization's policies, escalate to the immediate supervisor (unless involved), then to higher levels, and consider confidential discussion with an ethics hotline or legal counsel. Do not disclose confidential information externally without legal obligation.

Corporate social responsibility and the triple bottom line address profit, people, and planet. Stakeholder theory weighs affected parties beyond shareholders; shareholder primacy targets long-term shareholder value.

Internal control environment tone at the top is the foundation of ethical culture; a code of conduct, whistleblower protection, and consistent enforcement reduce fraud risk.

Job order costing accumulates costs by job; process costing averages costs over units in a continuous process. Equivalent units = units completed + (ending work-in-process units x percentage complete).

Under process costing, cost per equivalent unit = costs added during the period / equivalent units. Transferred-in costs are treated as a separate cost category added at the start of the process.

Activity-based costing assigns overhead to products using activity cost pools and cost drivers (for example, number of setups, machine hours, number of orders). It improves accuracy when products consume overhead differently.

Overhead allocation: predetermined overhead rate = estimated total overhead / estimated activity base. Applied overhead = rate x actual activity. Underapplied overhead is closed to cost of goods sold (or prorated).

Standard costing variances: material price variance = (actual price - standard price) x actual quantity purchased; material quantity variance = (actual quantity used - standard quantity allowed) x standard price.

Labor rate variance = (actual rate - standard rate) x actual hours; labor efficiency variance = (actual hours - standard hours allowed) x standard rate.

Variable overhead spending variance = actual variable overhead - (actual hours x standard variable overhead rate). Variable overhead efficiency variance = (actual hours - standard hours allowed) x standard rate.

Fixed overhead budget variance = actual fixed overhead - budgeted fixed overhead. Fixed overhead volume variance = (denominator hours - standard hours allowed) x standard fixed overhead rate.

The learning curve: as cumulative output doubles, cumulative average time per unit falls by a fixed percentage. A 90% learning curve means the second unit takes 90% of the first unit's time.

The theory of constraints identifies the bottleneck, exploits it, subordinates other operations to it, elevates it, and repeats. Throughput contribution = sales minus direct material costs.

COSO Internal Control - Integrated Framework has five components: control environment, risk assessment, control activities, information and communication, and monitoring activities. Its 17 principles map to these components.

Preventive controls stop errors before they occur (segregation of duties, authorization, physical safeguards); detective controls find errors after the fact (reconciliations, audits, exception reports); corrective controls restore correct processing.

Segregation of duties separates custody of assets, authorization, and record keeping so no single person controls a transaction end to end. Compensating controls (for example, independent review) mitigate small-staff limitations.

COSO ERM framework components: governance and culture, strategy and objective-setting, performance, review and revision, and information, communication, and reporting.

Risk responses: avoid, reduce (mitigate), share (transfer, such as insurance), and accept. Residual risk is risk remaining after the response; inherent risk is risk before controls.

The fraud triangle: pressure (incentive), opportunity, and rationalization. Opportunity is reduced by internal controls; pressure and rationalization are addressed through culture and monitoring.

IT general controls cover access security, change management, backup and recovery, and program development. Application controls cover input, processing, and output completeness and accuracy.

Business continuity includes a business impact analysis, recovery time objective (maximum tolerable downtime), and recovery point objective (maximum tolerable data loss). Disaster recovery focuses on restoring IT infrastructure.

Audit risk model: audit risk = inherent risk x control risk x detection risk. Detection risk is managed by the auditor through the nature, timing, and extent of substantive testing.