Financial Accounting and Corporate Finance
What this domain tests
Questions here test whether you can move from reported numbers to a decision: how K-IFRS recognition choices change the ratios, how to decompose return on equity, how to price capital, and how to judge an investment or a working-capital problem.
Core rules
- Revenue (K-IFRS 1115). Five steps: identify the contract, identify performance obligations, determine the transaction price, allocate it, recognise when control transfers (point in time or over time).
- Leases (K-IFRS 1116). Lessees recognise a right-of-use asset and a lease liability. Off-balance-sheet operating leases are gone, so reported debt and leverage ratios rise versus old practice.
- DuPont decomposition. ROE = net margin × asset turnover × equity multiplier. It tells you where the return comes from.
- WACC. WACC = E/V × Re + D/V × Rd × (1 − tax rate). Use market-value weights and marginal costs, not historical book figures.
- NPV versus IRR. IRR misleads with non-conventional cash flows and ignores scale; NPV is the decision rule.
- Cash conversion cycle. DIO + DSO − DPO.
Worked example
Revenue KRW 20bn, net income KRW 800m (4.0%), total assets KRW 16bn, equity KRW 6.4bn. Asset turnover = 20/16 = 1.25. Equity multiplier = 16/6.4 = 2.5. ROE = 4.0% × 1.25 × 2.5 = 12.5%. The board wants 15% while turnover and leverage stay fixed, so margin must reach 4.8% - an extra KRW 160m of net income. If instead DSO falls from 50 to 35 days, the cycle drops from 85 to 70 days and roughly 15 days of revenue (about KRW 820m) is released as cash.
Traps that cost marks
- Mixing average and closing balances in the same ratio set.
- Forgetting the interest tax shield in WACC.
- Treating accounting profit as free cash flow.
- Using IRR ranking when projects differ in scale.