Accounting and Financial Management
This domain tests double-entry accounting, preparation and interpretation of financial statements, ratio analysis and investment appraisal.
Core rules
- Accounting equation: Assets = Liabilities + Equity. Every transaction preserves it.
- Accrual basis records revenue when earned and expenses when incurred; cash basis records when cash moves.
- Matching principle aligns expenses with the revenue they help generate. Depreciation allocates cost over useful life: straight-line = (cost − residual)/life; WDV applies a fixed rate to carrying amount.
- Financial statements: statement of profit and loss, balance sheet, cash flow statement (operating, investing, financing).
- Ratios: current = current assets/current liabilities; quick excludes inventory; debt–equity = debt/equity; interest cover = EBIT/interest; inventory turnover = COGS/average inventory; receivables days = 365/receivables turnover.
- DuPont: ROE = net profit margin × asset turnover × equity multiplier.
- Capital budgeting: NPV discounts cash flows at WACC; accept if NPV > 0. IRR makes NPV zero. Payback ignores time value.
Worked example. Revenue 1,000; COGS 600; operating expenses 200; interest 50; tax 30%. PBT = 150; tax = 45; PAT = 105; net margin = 10.5%. Total assets 700, equity 350: asset turnover = 1.43; equity multiplier = 2.0. ROE = 10.5% × 1.43 × 2.0 ≈ 30%. This shows how leverage and asset efficiency amplify margin.
Traps. Profit is not cash. Depreciation is non-cash. The current ratio can look healthy while inventory is unsaleable. IRR can mislead with non-conventional cash flows or mutually exclusive projects; use NPV. WACC uses market values and after-tax cost of debt.