ACCT FINAL STUDY 15, 16, 24, FRUAD

Profit formula
Profit = total revenues total costs
=RY
R = pX
Y = a + bX
p = Unit selling price
a = fixed costs
b = unit variable costs
X = unit sales
= pX (a+bX)

used to predict profit at any specific activity level

contribution margin difference between total revenues and total variable costs
unit contribution margin ratio = unit contribution margin / selling price
break even point unit or dollar sales valume equals total cost
marign of safety amount by which actual or planned sales exceed the
break- even
(Total revenues) pX = a + bX (total costs)
a fixed costs
p selling price per unit
b variable cost per unit
break even sales volume
X = a/(p-b) = fixed costs/ (selling price variable costs)

Unit contribution margin = selling price variable costs

Margin of safety = expected units sales break even sales
Expected profit = margin of safety X contribution margin

Sales dollar analysis

Contribution margin ratio = contribution margin/sales

Sales mix = product sales / total sales

Differential cost analysis

Cost-volume-profit graph - Illustrates relationships among

activity volume
total revenues
total cost
profits

profit volume graph shows relationship between profit and volumes does
not show costs
after tax profit = before-tax profit x (1 tax rate)
target dollar sales volume = fixed costs + desired profit
contribution margin ratio
operating leverage ratio = contribution margin
before-tax profits

how much a company will rely on its fixed costs

higher more reliant on fixed costs more opportunity company has for
profit
use operating leverage to show how a change in sales will affect our net
income

Capital expenditures investments of financial resources w the expectation

that the investment will generate financial inflows that exceed the initial cost
Cost of equity capital =
Current annual dividend per common share + expected dividend
Current market price per common share
growth rate
Depreciation tax shield = depreciation x tax rate
Payback period = Initial investment
Annual operating cash inflows
Accounting rate of return on average(or initial) investment =
Average annual increase in net income
Average(or initial) investment
Average annual increase in net income =
cash flows from operations average annual depreciation
straight line depreciaition = average annual depreciation =
(value of depreciable asset- salvage value)/ useful life
average investment = (initial investment + disinvestment recovery)/
2
NPV with calculator
cf cash flows

o Cfo initial investment make sure to make negative!

o CO1 cash flows 1
FO1 frequency
o Once it is all entered, hit NPV
o Add discount rate
o Hit CPT
IRR with calculator
Once cash flows are entered, just hit IRR and compute
PROFITABILITY ANALYSIS involves examining the relationship between revenues, costs,
and profits.
CVP (cost-volume-profit) analysis
technique used to examine the relationship between the total volume of an
independent variable, total costs, total revenues, and profits for a time period.
Provides easily understood framework for discussing planning issues and
organizing relevant data
Assumptons
Costs are classified as fixed or variable
The total cost function is linear within the relevant range
The total revenue function is linear within the relevant range
The analysis is for a single product, or the sales mix of multiple products is
constant
There is only one cost driver: unit or sales dollar volume
contribution income statement costs are classified according to behavior as variable or
fixed recorded in order as
Sales
Less variable costs
Contribution margin
Less fixed costs
Profit (before tax then after tax profit)
Functional income statement costs are classified according to function
Sensitivity analysis study of the responsiveness of a model to changes in independent
variables
Relevant costs costs that differ between alternative actions
Future revenues
o Inflows from sale of goods and service
o Cost reduction proposal a decision that will reduce costs
Outlay costs
o Costs that require future expenditures of cash or other resources
Sunk costs irrelevant
o Past decisions that cannot be changed
o Can cause ethical dilemmas

Disposal and salvage

Opportunity costs
o Any benefit of an alternative decision is an opportunity cost

Differential cost analysis an approach to the analysis of relevant costs that focuses on
the costs that differ under alternative actions
Preferable because
o Focuses on only items that differ
o Contains fewer items
o Simplifies complex situations
Used to decide
o Changes in profit plans
o Special orders
o Time span and opportunity costs
o Outsourcing decisions
o Sell or process further
Single product decsisions
Joint product decisions
Joint products
Split-off point
Joint costs costs prior to split-off point
Use of limited resources
Single constraint
o Achieve short run profit maximization by allocating resources in a manner
that maximizes the contribution per unit
Multiple constraints
Theory of constraints
o Every process has a bottleneck
o Goal is to maximize throughput (sales revenue direct material costs)
Management should identify bottleneck
Management should schedule production to maximize use of
bottleneck
Schedule production to avoid build up of inventory
Work to eliminate bottleneck
o Performance reports should
Measure utilization of bottleneck resources
Measure factory throughput
Not encourage the full utilization of bottleneck resources
Discourage the buildup of excess inventory
Limitations of decision analysis models
Human resource
Marketing
Cultural
Logistical
Technological
others

FRAUD any crime that uses deceit as its principal method is considered fraud.
Auditing tells us how fraud is committed
Criminology tells us why
Both help to deter
Sutherland gave us the term white collar crime
Main point tendency to commit a crime is learned not inherited
o Criminals learn more techniques in jail
o Occupational fraudsters learn by working with numbers, and from employees
who have failed in fraud
Fraud triangle - Cressy
Perceived opportunity
Non- shareable financial pressure
o Violation of ascribed obligations
o Problems from personal failure
o Business reversals
Loss of a major client, contract
Realization
All equally important
Albrecht also made a triangle
financial pressure
perceived opportunity
personal integrity
occupational fraud committed against organizations by individuals who work for the
organization
other types of fraud
insurance fraud
o committed by policy holders
internet fraud
o by individuals
against government organization
o by companies and individuals
against banks
o by outsiders
credit card fraud
o against businessese
skimming defalcation taking cash off the top of the daily receipts of a business and
officially reporting a lower total
sales skimming employee makes sale and does not record transaction
o cash register manipulation
o after hours sales
o skimming by off-site employees

o preventing
oversight at all points
perception of detection
video cameras
utilize customers
log in and log out time
receivables skimming more difficult
o poor collection procedures
o understated sales
o theft in mail room
checks are normally stolen when single employee is responsible for the
mail and preparing the deposit
o examples
lapping
crediting one customers account with payment received from
another
force balancing
posting to a customers account without depositing the check
cash account is overstated so the amount skimming must be
forced in order to balance the account
stolen statements
employee steals or alters account statement or produces
counterfeit statements
can change address to intercept statements
fraudulent write offs or discounts
debiting the wrong account
destroying or altering records of the transaction
o preventing
search for accounting clues
trend analysis on aging of customer accounts
conduct audit tests