How to interpret the breakeven point in units?
The formula for calculating breakeven point in units is to take total fixed costs and divide by contribution margin per unit. Contribution margin per unit is calculated as revenue per unit minus variable costs per unit. The output of this formula will tell the company exactly how many units they need to sell to cover…
What is target costing?
Target costing is a system in which a company plans in advance the price points, product costs, and margins that it would like to use to achieve a new product. This concept will use the selling price of the product in order to determine the production of the cost that is required to enter the…
What is capital rationing?
Capital rationing is meant to illustrate that a company does not have unlimited capital, so they would perform analysis to determine what types of capital projects would provide the greatest benefit to the company. Every company will use different metrics to determine which projects to accept or reject based on their goals. As it relates…
Gross Profit Method – Impact of overstating the gross profit %
A company will often use the gross profit method to estimate cost of goods sold and ending inventory during an interim period. A company would use this method if they do not have a perpetual inventory system and they only perform a physical inventory count at the end of a period. The formula for calculating…
How to calculate working capital turnover ratio?
The working capital turnover ratio is used by a company’s management team, investors, and/or creditors to determine how efficiently and effectively the company uses its assets. This is a topic that is often tested on the BEC section of the CPA exam. Candidates should understand how to calculate and interpret the working capital turnover ratio….
How to calculate the cash conversion cycle?
The cash conversion cycle is considered a metric that expresses the length of time, in days, that is takes for a company to convert inputs into cash flows. The cash conversion cycle is computed as follow: To calculate the cash conversion cycle, you will need to calculate days in inventory (DIO), days sales in accounts…
Valuation Models Tested on the CPA Exam
The BEC section of the CPA Exam will test a candidates knowledge on a variety of valuation models. There are two types of valuation types that you need to be familiar with for the CPA exam. Underneath each type of valuation model, there are different methods or ratios that we need to understand for the…
How to calculate present value factors?
The present value factor formula is below, and while it may look daunting at first glance, it is easy to remember after you work through it a few times! In the formula, rate represents the cost of capital or the discount rate, while periods equals the number of years. Present Value Factor Formula Example: Let’s…
