CMA Final Paper 20A cheat sheet

Relevant cost test: a cost is relevant only if it is a future cash flow that differs between alternatives; sunk costs and allocated fixed costs are excluded even when they appear in the accounting records.

Contribution margin per unit = selling price − variable cost per unit; contribution margin ratio = contribution ÷ sales. Use CM ratio for break-even in revenue: fixed costs ÷ CM ratio.

Break-even units = fixed costs ÷ contribution per unit. Target profit units = (fixed costs + target profit) ÷ contribution per unit; target profit is stated pre-tax unless the question specifies after-tax.

Special-order rule: accept if incremental revenue exceeds incremental costs and no better use exists for the released capacity; opportunity cost of constrained capacity must be added to the incremental cost.

When a resource is scarce, rank products by contribution per unit of the scarce resource, not by contribution per unit or gross margin per unit.

Make-or-buy: compare avoidable fixed costs plus variable costs of making against the purchase price plus any opportunity cost of freed facilities; unavoidable allocated fixed costs are irrelevant.

Relevant cost of materials already in stock = current replacement cost if usable, or net realisable value if not usable; original historical cost is sunk.

ABC assigns overhead by activity drivers (set-ups, machine hours, orders); it changes product costs but not total overhead, so it improves cross-subsidy visibility, not total profit.

Throughput contribution = sales revenue − direct material cost; theory of constraints focuses improvement on the bottleneck resource identified by the constraint.

COSO internal control framework has five components: control environment, risk assessment, control activities, information and communication, and monitoring activities.

COSO ERM (2017) has five components and twenty principles: governance and culture, strategy and objective-setting, performance, review and revision, and information, communication and reporting.

Segregation of duties separates custody of assets, authorisation, and record-keeping; combining any two of these three in one person creates a control weakness.

Preventive controls stop errors before they occur (authorisation, access restriction); detective controls find them afterwards (reconciliations, exception reports); corrective controls fix the effect.

Inherent risk is risk before controls; residual risk is risk remaining after controls. Control risk is the risk that controls fail to prevent or detect a material misstatement.

Risk responses under COSO ERM: accept, avoid, pursue, reduce, and share. Risk appetite is the amount of risk an entity is willing to accept in pursuit of value.

Three lines model: management owns and manages risk (first line), risk and compliance functions monitor (second line), internal audit provides independent assurance (third line).

Limitations of internal control: collusion, management override, human error, cost-benefit constraints, and controls designed for routine rather than non-routine transactions.

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

Current ratio = current assets ÷ current liabilities; quick ratio excludes inventory and prepayments from current assets.

DuPont: ROE = net profit margin × asset turnover × equity multiplier, where equity multiplier = total assets ÷ equity.

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

Under IFRS, revenue is recognised when control of goods or services transfers to the customer, in the amount of consideration expected to be entitled (IFRS 15 five-step model).

A lease is recognised as a right-of-use asset and a lease liability at the present value of lease payments under IFRS 16, removing the operating/finance lease distinction for lessees.

Impairment under IAS 36: carrying amount is compared with the higher of fair value less costs of disposal and value in use; the excess is the impairment loss.

Goodwill is not amortised under IFRS; it is tested for impairment at least annually and allocated to cash-generating units.

Earnings quality: operating cash flow persistently below net profit suggests aggressive revenue recognition or weak working capital management; compare accruals to cash.

Horizontal analysis compares a line item across periods; vertical (common-size) analysis expresses each item as a percentage of a base such as revenue or total assets.

NPV = present value of cash inflows − initial investment; discount at the project's cost of capital. Accept independent projects with NPV > 0; for mutually exclusive projects, choose the highest NPV.

IRR is the discount rate at which NPV = 0. IRR can mislead with non-conventional cash flows (multiple IRRs) or when project scale differs from NPV ranking.

WACC = (E ÷ V) × Ke + (D ÷ V) × Kd × (1 − tax rate), using market values of equity and debt where available.

Cost of equity by CAPM: Ke = risk-free rate + beta × market risk premium. Beta measures systematic risk only; unsystematic risk is diversifiable.

Dividend growth model: Ke = (D1 ÷ P0) + g, where D1 = D0 × (1 + g).

Capital rationing: when funds are limited, rank divisible projects by profitability index (PV of inflows ÷ initial investment); for indivisible projects use trial combinations of feasible sets.

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

Sensitivity of a project = (NPV ÷ PV of the variable's cash flows) expressed as the percentage change that makes NPV zero; higher sensitivity means greater risk exposure.

Real options (expand, defer, abandon) add value that static NPV ignores; the option value equals the value with flexibility minus the value without it.

Taxable income for a company = accounting profit adjusted for disallowable expenses, non-taxable income, and capital allowances; tax payable = taxable income × tax rate less credits.

Capital allowances replace accounting depreciation for tax; the tax benefit of an asset = capital allowance × tax rate, and timing differences create deferred tax under IAS 12.

Deferred tax arises on temporary differences between carrying amount and tax base; recognise deferred tax liabilities in full and deferred tax assets only where recovery is probable.

Indirect tax such as VAT/GST is charged on the value added at each stage; input tax is recoverable against output tax, and the net amount is remitted to the tax authority.

VAT is excluded from revenue and from the measurement of receivables in the financial statements; it is a liability collected on behalf of the authority.

Withholding tax on cross-border payments (dividends, interest, royalties) may be reduced by a double tax treaty; the effective rate is the treaty rate, not the domestic rate.

Transfer pricing rules require related-party transactions to be at arm's length; the OECD methods include comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split.

Taxable temporary differences create deferred tax liabilities; deductible temporary differences and tax losses create deferred tax assets subject to recoverability assessment.

Tax planning differs from tax evasion: planning uses the law to reduce tax legally, evasion involves concealment or misrepresentation and is an offence.

Ethical decision tests: consequences (utilitarian), duties and rights (deontological), fairness and justice, and virtue (character). Apply more than one test before concluding.

Conflict of interest exists when a personal interest could improperly influence professional judgement; the standard response is disclosure and, where required, withdrawal from the decision.

Agency theory: managers as agents may pursue self-interest over principals' interests; governance mechanisms (incentives, monitoring, disclosure) align interests.

The fraud triangle explains fraud by pressure or incentive, opportunity, and rationalisation; controls target opportunity, while culture and tone at the top address rationalisation.

Whistleblowing is justified when the wrongdoing is serious, internal channels have failed or are unsafe, and the disclosure is proportionate and evidence-based.

Professional competence and due care require maintaining knowledge and acting diligently; confidentiality continues after the professional relationship ends.

Insider trading misuses material non-public information; it breaches both fiduciary duty and market integrity, regardless of whether a profit is realised.

Stakeholder versus shareholder orientation: stakeholder theory weighs impacts on employees, customers, suppliers, and communities, not only shareholder return.

Board independence: independent non-executive directors should be free of material business or personal relationships with the company; separation of chair and CEO supports independent oversight.

Audit committee responsibilities include appointing or recommending the external auditor, overseeing internal audit, and monitoring the integrity of financial reporting and internal controls.

King IV applies an apply-and-explain approach and sets out 17 principles covering ethical leadership, performance, effective control, and trust in reporting.

Integrated reporting (IIRC) uses six capitals: financial, manufactured, intellectual, human, social and relationship, and natural; it connects strategy, governance, performance, and prospects.

IFRS S1 covers general sustainability-related financial disclosures and IFRS S2 covers climate-related disclosures, both built on TCFD structure: governance, strategy, risk management, and metrics and targets.

Double materiality: financial materiality considers sustainability matters affecting enterprise value; impact materiality considers the entity's effects on economy, environment, and people.

Scope 1 emissions are direct from owned sources; Scope 2 are indirect from purchased energy; Scope 3 are all other value-chain emissions and are usually the largest share.

Sustainability assurance is performed against standards such as ISAE 3000 or ISSA 5000; limited assurance provides less comfort than reasonable assurance.

Principle of 'comply or explain' allows departure from a governance code provided the reason for departure is disclosed to shareholders.