Financial and Managerial Accounting Basics
What the exam tests
Financial and Managerial Accounting Basics tests how transactions flow into statements and how managers use cost information. Expect the accounting equation, accrual accounting, revenue recognition, depreciation, inventory, contribution margin, and simple variances.
Core rules
- Assets = liabilities + equity. Every transaction preserves the balance.
- Accrual accounting records revenue when earned and expenses when incurred, not when cash moves.
- Matching pairs expenses with the revenue they help generate. Capital expenditures become assets and are depreciated over time.
- Contribution margin = sales - variable costs. It funds fixed costs and then profit.
- Gross profit = revenue - cost of goods sold; operating income subtracts operating expenses; net income subtracts interest and taxes.
Worked example
Revenue is 100,000; COGS is 55,000; operating expenses are 20,000, including 5,000 of depreciation; interest is 2,000; the tax rate is 25%. Gross profit = 45,000. EBIT = 45,000 - 20,000 = 25,000. EBT = 25,000 - 2,000 = 23,000. Tax = 5,750. Net income = 17,250. Depreciation reduced profit but did not use cash in the period.
Traps
Do not expense equipment immediately when it is capitalized. Do not confuse gross margin with net margin. Do not treat depreciation as a cash outflow. Do not ignore the difference between product costs and period costs.