Read Daily: Concepts to Master

Section A – Financial Statement Analysis

1. Q: What are the four basic financial statements?
   A: Balance Sheet, Income Statement, Statement of Cash Flows, Statement of Changes in Equity.

2. Q: What does the current ratio measure?
   A: Liquidity—Current Assets / Current Liabilities.

3. Q: What does the quick ratio (acid-test) exclude?
   A: Inventory and prepaid expenses.

4. Q: What is the formula for working capital?
   A: Current Assets − Current Liabilities.

5. Q: What does ROA (Return on Assets) measure?
   A: Profitability relative to total assets.

6. Q: Formula for ROA?
   A: Net Income / Average Total Assets.

7. Q: What is the formula for ROE (Return on Equity)?
   A: Net Income / Average Shareholders’ Equity.

8. Q: What does gross profit margin measure?
   A: Gross Profit / Net Sales.

9. Q: What is the net profit margin formula?
   A: Net Income / Net Sales.

10. Q: What does the debt-to-equity ratio measure?
    A: Financial leverage—Total Debt / Total Equity.

11. Q: What does interest coverage ratio assess?
    A: Ability to pay interest—EBIT / Interest Expense.

12. Q: What is the formula for inventory turnover?
    A: COGS / Average Inventory.

13. Q: What is the formula for receivables turnover?
    A: Net Credit Sales / Average Accounts Receivable.

14. Q: What is a vertical analysis?
    A: Expressing financial statement items as a % of a base amount.

15. Q: What is horizontal analysis?
    A: Comparing financial data over time.

16. Q: What does a high inventory turnover indicate?
    A: Efficient inventory management.

17. Q: What does EPS stand for?
    A: Earnings Per Share.

18. Q: What is the DuPont formula for ROE?
    A: ROE = Net Profit Margin × Asset Turnover × Equity Multiplier.

19. Q: What is the cash ratio?
    A: (Cash + Cash Equivalents) / Current Liabilities.

20. Q: What does a negative working capital indicate?
    A: Potential liquidity problems.

21. Q: What is comprehensive income?
    A: Net income + Other comprehensive income (OCI).

22. Q: What is the price-to-earnings (P/E) ratio?
    A: Market Price per Share / Earnings per Share.

23. Q: What is financial flexibility?
    A: Ability to adapt to financial adversity.

24. Q: What is common-size financial statement?
    A: Standardized using percentages for comparison.

25. Q: What is the difference between GAAP and IFRS in financial analysis?
    A: Variations in presentation and measurement standards.

26. Q: What is Z-score used for?
    A: Predicting bankruptcy.

27. Q: What is the formula for asset turnover ratio?
    A: Net Sales / Average Total Assets.

28. Q: What does EBITDA stand for?
    A: Earnings Before Interest, Taxes, Depreciation, and Amortization.

29. Q: What is solvency?
    A: Long-term ability to meet obligations.

30. Q: What is liquidity?
    A: Short-term ability to pay debts.

Section B – Corporate Finance

1. Q: What is the weighted average cost of capital (WACC)?
   A: Average rate a firm pays for capital, weighted by debt/equity.

2. Q: WACC formula?
   A: (E/V × Re) + (D/V × Rd × (1 − Tc)).

3. Q: What does Re stand for?
   A: Cost of equity.

4. Q: What does Rd stand for?
   A: Cost of debt.

5. Q: What is CAPM?
   A: Capital Asset Pricing Model: Re = Rf + β(Rm − Rf).

6. Q: What is β (beta)?
   A: Measure of market risk or volatility.

7. Q: Cost of preferred stock?
   A: Dividend / Market Price.

8. Q: What is operating leverage?
   A: Fixed operating costs’ impact on earnings.

9. Q: What is financial leverage?
   A: Use of debt to enhance returns.

10. Q: What does DFL measure?
    A: Degree of Financial Leverage = EBIT / EBT or % Change in Net Income / % Change in EBIT

11. Q: Optimal capital structure?
    A: Mix of debt/equity that minimizes WACC.

12. Q: Business risk?
    A: Risk from operations and industry factors.

13. Q: Financial risk?
    A: Risk from financing with debt.

14. Q: What is working capital?
    A: Current Assets − Current Liabilities.

15. Q: Cash conversion cycle?
    A: CCC = DSO + DIO − DPO.

16. Q: What is DSO?
    A: Days Sales Outstanding.

17. Q: What is DIO?
    A: Days Inventory Outstanding.

18. Q: What is DPO?
    A: Days Payables Outstanding.

19. Q: Goal of cash management?
    A: Minimize idle cash, maximize liquidity.

20. Q: What is factoring?
    A: Selling receivables for cash.

21. Q: Line of credit?
    A: Flexible borrowing arrangement.

22. Q: Commercial paper vs. T-bills?
    A: Corporate vs. government short-term debt.

23. Q: What is float?
    A: Time delay in fund transfer.

24. Q: Spontaneous financing?
    A: Trade credit, accrued expenses.

25. Q: Matching principle in finance?
    A: Match asset life with financing source.

26. Q: Dividend payout ratio?
    A: Dividends / Net Income.

27. Q: What is treasury stock?
    A: Repurchased shares not retired.

28. Q: Market capitalization?
    A: Stock Price × Shares Outstanding.

29. Q: What is dilution?
    A: Reduction in EPS due to new shares.

30. Q: Dividend yield formula?
    A: Annual Dividend / Market Price per Share.

Section C – Business Decision Analysis

1. Q: What is CVP analysis?
   A: Cost-Volume-Profit analysis for decision-making.

2. Q: What is the breakeven point?
   A: Sales level where profit is zero.

3. Q: Formula for breakeven in units?
   A: Fixed Costs / Contribution Margin per unit.

4. Q: Contribution margin per unit?
   A: Selling Price − Variable Cost.

5. Q: What is operating leverage?
   A: Sensitivity of EBIT to sales.

6. Q: Relevant cost?
   A: A cost that changes based on the decision.

7. Q: Sunk cost?
   A: Already incurred and irrelevant for decisions.

8. Q: Opportunity cost?
   A: Benefit lost when choosing an alternative.

9. Q: What is marginal analysis?
   A: Comparing marginal cost and marginal benefit.

10. Q: What is sensitivity analysis?
    A: Changing assumptions to see the impact on results.

11. Q: What is a decision tree?
    A: A diagram to evaluate decisions under uncertainty.

12. Q: Incremental cost?
    A: Additional cost from a decision.

13. Q: Make or buy decision?
    A: Choose between internal production vs. outsourcing.

14. Q: Special order decision?
    A: Accepting orders below normal price if profitable.

15. Q: Joint product decision?
    A: Split-off point considerations.

16. Q: Contribution margin ratio?
    A: CM / Sales.

17. Q: Absorption vs. variable costing?
    A: Absorption includes fixed overhead in inventory.

18. Q: What is the margin of safety?
    A: Budgeted Sales − Breakeven Sales.

19. Q: What is linear programming?
    A: Optimization technique for resource allocation.

20. Q: What is regression analysis?
    A: Statistical method to predict variable relationships.

21. Q: What is elasticity of demand?
    A: Sensitivity of quantity to price.

22. Q: Profit maximization rule?
    A: MR = MC (Marginal Revenue = Marginal Cost).

23. Q: What is price skimming?
    A: High initial price, then lowered.

24. Q: Penetration pricing?
    A: Low price to gain market share quickly.

25. Q: Target costing?
    A: Price-driven cost planning.

26. Q: What is a relevant range?
    A: Normal activity limits where assumptions hold.

27. Q: What is the high-low method?
    A: Estimating variable/fixed costs from high/low data.

28. Q: What is product mix decision?
    A: Selecting products that maximize CM with constraints.

29. Q: Break-even revenue?
    A: Fixed Costs / CM Ratio.

30. Q: What is sunk fallacy?
    A: Continuing an investment due to prior costs.

Section E – Capital Investment Decisions

1. Q: What is capital budgeting?
   A: Process of planning long-term investments.

2. Q: What is NPV?
   A: Net Present Value – present value of cash flows minus investment.

3. Q: What is IRR?
   A: Internal Rate of Return – rate where NPV = 0.

4. Q: What is payback period?
   A: Time to recover investment cost.

5. Q: What is discounted payback period?
   A: Payback using discounted cash flows.

6. Q: What is profitability index?
   A: PV of inflows / PV of outflows.

7. Q: What is a mutually exclusive project?
   A: Only one investment can be selected.

8. Q: What is capital rationing?
   A: Limited capital requiring project prioritization.

9. Q: What are sunk costs in capital budgeting?
   A: Irrelevant past costs.

10. Q: What is working capital investment?
    A: Cash tied up in operations.

11. Q: What is post-audit in capital budgeting?
    A: Review of project performance after implementation.

12. Q: What is a hurdle rate?
    A: Minimum acceptable return.

13. Q: What is depreciation’s role in capital budgeting?
    A: Non-cash expense that affects tax cash flows.

14. Q: MACRS?
    A: Modified Accelerated Cost Recovery System.

15. Q: What is a terminal cash flow?
    A: Final inflows from asset disposal or recovery.

16. Q: What is risk-adjusted discount rate?
    A: Adjusted for project risk level.

17. Q: Real vs. nominal cash flows?
    A: Real excludes inflation.

18. Q: Tax shield on depreciation?
    A: Depreciation × Tax rate.

19. Q: What is incremental cash flow?
    A: Cash flow difference from a decision.

20. Q: What is cannibalization?
    A: New product reduces existing product sales.

21. Q: What is salvage value?
    A: Estimated resale value at project end.

22. Q: IRR > hurdle rate means?
    A: Accept the project.

23. Q: When is NPV preferable to IRR?
    A: When comparing mutually exclusive projects.

24. Q: What is real option analysis?
    A: Flexibility in investment decisions.

25. Q: What is EVA (Economic Value Added)?
    A: NOPAT − (Capital × WACC).

26. Q: What is sensitivity analysis in investment?
    A: Testing variable impacts on outcomes.

27. Q: What is capital recovery?
    A: Reclaiming original investment over time.

28. Q: Cost of capital = discount rate?
    A: Yes, typically.

29. Q: What is scenario analysis?
    A: Testing different combinations of variables.

30. Q: What’s the difference between NPV and IRR decision rules?
    A: NPV focuses on value added; IRR on % return.

Section D: Risk Management

1. Q: What is the definition of business risk?
   A: The possibility that a company will have lower than anticipated profits or experience a loss due to uncertainties.

2. Q: What is financial risk?
   A: The risk of a company not being able to meet its financial obligations.

3. Q: What are the main types of risks organizations face?
   A: Strategic, operational, financial, and compliance risks.

4. Q: What is risk appetite?
   A: The amount and type of risk a company is willing to accept to achieve its objectives.

5. Q: What is risk tolerance?
   A: The acceptable level of variation in performance relative to achieving objectives.

6. Q: What is inherent risk?
   A: The level of risk in the absence of any actions to alter the risk's impact or likelihood.

7. Q: What is residual risk?
   A: The risk remaining after risk mitigation efforts.

8. Q: What is risk mitigation?
   A: The process of reducing the likelihood or impact of a risk.

9. Q: What are the four risk response strategies?
   A: Avoid, reduce, transfer, accept.

10. Q: What does "risk transfer" mean?
    A: Shifting risk to another party, such as through insurance.

11. Q: What is enterprise risk management (ERM)?
    A: A structured, organization-wide approach to identifying and managing risks.

12. Q: Who is responsible for establishing risk management policies?
    A: Senior management and the board of directors.

13. Q: What is a risk register?
    A: A document listing identified risks, their severity, and action plans.

14. Q: How is risk impact usually measured?
    A: In terms of financial loss, operational disruption, or reputational damage.

15. Q: What is a key risk indicator (KRI)?
    A: A metric used to signal potential risk exposure.

16. Q: What does COSO ERM framework stand for?
    A: Committee of Sponsoring Organizations of the Treadway Commission’s Enterprise Risk Management.

17. Q: What are the components of COSO ERM?
    A: Governance & Culture, Strategy & Objective-Setting, Performance, Review & Revision, Information/Communication/Reporting.

18. Q: What is credit risk?
    A: The risk that a borrower will default on a loan obligation.

19. Q: What is operational risk?
    A: The risk of loss from inadequate or failed internal processes, people, or systems.

20. Q: What is market risk?
    A: Risk arising from fluctuations in market variables like interest rates, currency, and stock prices.

21. Q: What is insurance a form of in risk response?
    A: Risk transfer.

22. Q: What is scenario analysis?
    A: Evaluating the effects of different adverse events on outcomes.

23. Q: What is a heat map in risk management?
    A: A graphical representation of risk likelihood vs. impact.

24. Q: What is strategic risk?
    A: The risk of losses due to poor business decisions or improper implementation of decisions.

25. Q: What is compliance risk?
    A: The risk of legal or regulatory sanctions due to failure to comply with laws.

26. Q: What is a risk map?
    A: A visual tool for ranking and prioritizing risks.

27. Q: What is liquidity risk?
    A: The risk a company will not be able to meet its short-term financial obligations.

28. Q: What is the purpose of risk assessments?
    A: To identify and prioritize potential risks to the organization.

29. Q: What is sensitivity analysis in risk management?
    A: Testing how changes in one variable affect an outcome.

30. Q: What role does internal audit play in risk management?
    A: Evaluates risk controls and ensures they are working effectively.

Section F: Professional Ethics

1. Q: What are the four principles of the IMA Statement of Ethical Professional Practice?
   A: Honesty, Fairness, Objectivity, and Responsibility.

2. Q: What are the four standards of the IMA’s ethical code?
   A: Competence, Confidentiality, Integrity, and Credibility.

3. Q: What does competence mean in professional ethics?
   A: Maintaining appropriate knowledge and skills to perform duties professionally.

4. Q: What does confidentiality require?
   A: Refraining from disclosing information unless legally obligated.

5. Q: What is integrity in an ethical context?
   A: Avoiding conflicts of interest and acting honestly.

6. Q: What is credibility?
   A: Communicating information fairly and objectively.

7. Q: What should you do when you face an ethical dilemma?
   A: Follow the IMA’s resolution framework: discuss with supervisor, escalate, or consult the IMA helpline.

8. Q: Can an IMA member report unethical behavior externally?
   A: Only after internal options are exhausted and if permitted by law.

9. Q: What is the consequence of violating IMA’s ethics standards?
   A: Possible expulsion from the IMA and damage to professional reputation.

10. Q: How should conflicts of interest be handled?
    A: Disclosed to all relevant parties and avoided when possible.

11. Q: What does objectivity mean in ethics?
    A: Not letting bias, conflict of interest, or undue influence override professional judgment.

12. Q: What ethical standard covers continuing professional education (CPE)?
    A: Competence.

13. Q: What should a professional do if asked to act unethically?
    A: Refuse and report the request according to the IMA framework.

14. Q: What is whistleblowing?
    A: Reporting unethical or illegal acts to those in authority.

15. Q: Is disclosing confidential client information for personal gain ethical?
    A: No, it violates the Confidentiality standard.

16. Q: How often should a CMA complete ethics-related CPE?
    A: Every year, with 2 of the 30 CPE hours in ethics.

17. Q: Is ignoring financial errors found in reports ethical?
    A: No, it breaches the Integrity and Credibility standards.

18. Q: Who sets the professional conduct for CMAs?
    A: The Institute of Management Accountants (IMA).

19. Q: What is professional skepticism?
    A: Maintaining a questioning mind when evaluating information.

20. Q: What standard addresses disclosing all relevant information in reports?
    A: Credibility.

21. Q: What is the first step when facing an ethical issue?
    A: Discuss the issue with your immediate supervisor unless they are involved.

22. Q: Should ethical behavior be maintained even under pressure?
    A: Yes, ethics must always be upheld.

23. Q: Why is ethics important in management accounting?
    A: It ensures trust, transparency, and integrity in financial reporting.

24. Q: What should a CMA do if pressured to manipulate earnings?
    A: Refuse and report through appropriate channels.

25. Q: What is the difference between ethics and law?
    A: Ethics is about doing what is right, while law is about what is legal.

26. Q: Can you share internal company data with friends?
    A: No, that violates confidentiality.

27. Q: Should a CMA report a mistake in a report that no one else noticed?
    A: Yes, to maintain credibility and integrity.

28. Q: What ethical standard requires professionals to perform duties according to applicable standards?
    A: Competence.

29. Q: Can ethics be compromised to meet business targets?
    A: No, ethical standards must never be compromised.

30. Q: What is a core objective of ethical behavior?
    A: To build trust and uphold the profession’s reputation.