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SME Consultant · LESSON 2

Finance and accountingEqual subject marks; equal sampling here · 12 topics

Profit measures performance over a period, the balance sheet describes financial position at a date, and cash flow tracks cash movements. Profit is not the same as cash. In CVP, unit contribution is price less unit variable cost; contribution covers fixed costs. Investment appraisal requires cash flows on a consistent time basis and explicit discount-rate assumptions.

2.1Finance and accounting

Concept

Profit measures performance over a period, the balance sheet describes financial position at a date, and cash flow tracks cash movements. Profit is not the same as cash. In CVP, unit contribution is price less unit variable cost; contribution covers fixed costs. Investment appraisal requires cash flows on a consistent time basis and explicit discount-rate assumptions.

How it works / steps

  1. Unit contribution is 800 yen; 120,000/800 = 150 units.
  2. Current ratio = current assets/current liabilities × 100 = 150%.
  3. Operating profit is sales minus variable and fixed costs: 100 − 60 − 20 = 20.

Workplace example

For an investment of 100 and net cash inflow of 110 after a year at 10%, NPV is zero. Do not assume that every hour saved becomes a cash saving.

Common confusions and exam tips

Reference links

2.2Bookkeeping and financial statements

Concept

Transactions preserve assets=liabilities+equity through debit and credit entries. Under accrual accounting, revenue and expense recognition can differ from cash settlement. Collecting a receivable is not new revenue, and current depreciation is not a current cash payment.

How it works / steps

  1. Collection exchanges one asset for another; revenue was recognized at sale.
  2. Equity equals assets minus liabilities: 800−500=300.
  3. 200+50−20=230. Dividends reduce retained earnings without being an expense.

Workplace example

A credit sale of 100 increases receivables and revenue. Later collection increases cash and reduces receivables without recording revenue again.

Common confusions and exam tips

Mini quiz

Q1. A receivable of 100 is collected in cash. Which entry is correct?

  1. Debit cash, credit receivables
  2. Debit receivables, credit revenue
  3. Debit cash, credit revenue
  4. Debit revenue, credit cash
Show answer and explanation

Answer: A Debit cash, credit receivables

Collection exchanges one asset for another; revenue was recognized at sale.

Q2. Assets are 800 and liabilities 500. What is equity?

  1. 500
  2. 800
  3. 1,300
  4. 300
Show answer and explanation

Answer: D 300

Equity equals assets minus liabilities: 800−500=300.

Reference links

2.3Profitability, liquidity and efficiency

Concept

ROE divides net income by equity; ROA requires an explicit earnings definition. DuPont decomposes ROE into net margin, asset turnover and financial leverage. The current ratio indicates short-term coverage, but receivable collectibility and inventory quality also matter.

How it works / steps

  1. 40/200×100=20%; neither sales nor assets is the denominator.
  2. 300/150×100=200%; the ratio does not establish asset liquidity by itself.
  3. DuPont gives 4%×1.5×2=12%.

Workplace example

A 5% margin, asset turnover of two and leverage of two imply 20% ROE. Debt-driven increases in ROE can add financial risk.

Common confusions and exam tips

Mini quiz

Q1. Net income is 40 and average equity 200. What is ROE?

  1. 20%
  2. 5%
  3. 40%
  4. 80%
Show answer and explanation

Answer: A 20%

40/200×100=20%; neither sales nor assets is the denominator.

Q2. Current assets are 300 and current liabilities 150. What is the current ratio?

  1. 50%
  2. 150%
  3. 300%
  4. 200%
Show answer and explanation

Answer: D 200%

300/150×100=200%; the ratio does not establish asset liquidity by itself.

Reference links

2.4CVP, break-even and margin of safety

Concept

Contribution is revenue less variable cost. Break-even sales equal fixed costs divided by the contribution margin ratio; add target profit to fixed costs for target sales. CVP assumes stable prices, unit variable costs and fixed costs within a relevant range, including a stable product mix.

How it works / steps

  1. Contribution per unit is 200; 60,000/200=300.
  2. (60,000+20,000)/200=400; contribution must cover profit as well as fixed cost.
  3. (Actual−break-even)/actual=(1,000,000−700,000)/1,000,000=30%.

Workplace example

At price 500, variable cost 300 and fixed cost 60,000, break-even is 300 units; a 20,000 profit requires 400 units.

Common confusions and exam tips

Mini quiz

Q1. Price is 500, unit variable cost 300 and fixed cost 60,000. What is break-even volume?

  1. 200 units
  2. 120 units
  3. 500 units
  4. 300 units
Show answer and explanation

Answer: D 300 units

Contribution per unit is 200; 60,000/200=300.

Q2. Price is 500, variable cost 300 and fixed cost 60,000. How many units yield a target profit of 20,000?

  1. 160 units
  2. 500 units
  3. 400 units
  4. 300 units
Show answer and explanation

Answer: C 400 units

(60,000+20,000)/200=400; contribution must cover profit as well as fixed cost.

Reference links

2.5Costing, allocation and standard variances

Concept

Job costing accumulates costs by order; process costing by period and process for continuous production. Overhead drivers should reflect resource consumption. Standard variances separate price from usage, but a variance alone does not establish departmental responsibility.

How it works / steps

  1. Order-specific specifications and inputs call for cost accumulation by production order.
  2. (12−10)×100=200, shown as a positive adverse amount.
  3. The rate is 600/300=2 per hour, so allocation is 200.

Workplace example

With standard price 10, actual price 12 and actual quantity 100, price variance is 200 adverse. If allowed quantity is 90, usage variance is 100 adverse.

Common confusions and exam tips

Mini quiz

Q1. Custom machines are built to separate customer orders. Which costing method fits?

  1. Group process costing
  2. Job-order costing
  3. Simple process costing
  4. Equivalent-product process costing
Show answer and explanation

Answer: B Job-order costing

Order-specific specifications and inputs call for cost accumulation by production order.

Q2. Standard material price is 10, actual price 12 and actual quantity 100. What is the adverse price variance?

  1. 200
  2. 100
  3. 20
  4. 1,200
Show answer and explanation

Answer: A 200

(12−10)×100=200, shown as a positive adverse amount.

Reference links

2.6Cash flow and working capital

Concept

Indirect operating cash flow adjusts profit for noncash items and working capital. Increasing receivables or inventory usually absorbs cash; increasing payables defers payments. The cash conversion cycle equals inventory days plus receivable days minus payable days.

How it works / steps

  1. 100+20−30−10+5=85; operating asset increases consume cash and payable increases preserve it.
  2. 40+30−25=45; payable days defer the cash outflow.
  3. Growth can tie up working capital; examine collection, inventory and payment terms together.

Workplace example

Profit 100 plus depreciation 20 minus receivable growth 30 and inventory growth 10 plus payable growth five gives operating cash flow 85, ignoring other adjustments.

Common confusions and exam tips

Mini quiz

Q1. Profit 100, depreciation 20, receivables +30, inventory +10 and payables +5. With no other adjustments, operating cash flow is?

  1. 75
  2. 85
  3. 115
  4. 145
Show answer and explanation

Answer: B 85

100+20−30−10+5=85; operating asset increases consume cash and payable increases preserve it.

Q2. Inventory days are 40, receivable days 30 and payable days 25. What is CCC?

  1. 45 days
  2. 95 days
  3. 35 days
  4. 65 days
Show answer and explanation

Answer: A 45 days

40+30−25=45; payable days defer the cash outflow.

Reference links

2.7NPV, IRR and payback

Concept

NPV discounts incremental future cash flows at the capital cost and subtracts initial investment. IRR makes NPV zero. For mutually exclusive projects with different scales or timing, prioritize value added through NPV. Simple payback omits discounting and post-payback cash flows.

How it works / steps

  1. 121/1.1−100=10; the undiscounted difference of 21 is not NPV.
  2. Solve 100=110/(1+r), giving r=10%.
  3. Payback focuses on recovery time, neglecting subsequent value and discounting.

Workplace example

An initial 100 followed by 121 in one year at 10% gives NPV 10. Use cash flows including relevant tax effects, rather than depreciation expense alone.

Common confusions and exam tips

Mini quiz

Q1. Initial investment is 100, one-year cash inflow 121 and discount rate 10%. What is NPV?

  1. 21
  2. 11
  3. −10
  4. 10
Show answer and explanation

Answer: D 10

121/1.1−100=10; the undiscounted difference of 21 is not NPV.

Q2. An investment costs 100 and pays only 110 after one year. What is IRR?

  1. 9.1%
  2. 20%
  3. 10%
  4. 11%
Show answer and explanation

Answer: C 10%

Solve 100=110/(1+r), giving r=10%.

Reference links

2.8Cost of capital, WACC and CAPM

Concept

WACC weights equity cost and after-tax debt cost using market-value capital weights. CAPM is the risk-free rate plus beta times the market risk premium. Beta captures exposure to market movements, not every firm-specific risk.

How it works / steps

  1. 2%+1.2×5%=8%; do not add the risk-free rate into the premium again.
  2. 0.6×10%+0.4×5%×(1−0.3)=7.4%.
  3. Diversification reduces idiosyncratic risks, while common market exposure remains.

Workplace example

With 60% equity at 10%, 40% debt at 5% and tax rate 30%, WACC is 7.4%.

Common confusions and exam tips

Mini quiz

Q1. Risk-free rate is 2%, beta 1.2 and market risk premium 5%. What is CAPM equity cost?

  1. 7%
  2. 10.4%
  3. 8%
  4. 6%
Show answer and explanation

Answer: C 8%

2%+1.2×5%=8%; do not add the risk-free rate into the premium again.

Q2. Equity weight is 60% at 10%; debt weight 40% at 5%; tax rate 30%. What is WACC?

  1. 9.5%
  2. 7.4%
  3. 8.0%
  4. 6.0%
Show answer and explanation

Answer: B 7.4%

0.6×10%+0.4×5%×(1−0.3)=7.4%.

Reference links

2.9Bond and equity valuation

Concept

A bond is valued by discounting coupons and redemption value. Rising market yields usually lower fixed-rate bond prices. The constant-growth dividend model is P=D1/(r−g), requiring r>g. Distinguish next-period from current dividends and market yield from coupon rate.

How it works / steps

  1. 5/(0.08−0.03)=100; use next-period dividend.
  2. Discount redemption: 110/1.1=100.
  3. Fixed future payments have a lower present value when discounted at a higher yield.

Workplace example

Next dividend five, required return 8% and growth 3% imply value 100. A zero-coupon bond paying 110 in one year at 10% is also worth 100.

Common confusions and exam tips

Mini quiz

Q1. Next dividend is five, required return 8% and perpetual growth 3%. What is theoretical share value?

  1. 100
  2. 62.5
  3. 166.7
  4. 45.5
Show answer and explanation

Answer: A 100

5/(0.08−0.03)=100; use next-period dividend.

Q2. A zero-coupon bond redeems at 110 in one year. At a market yield of 10%, what is its price?

  1. 110
  2. 99
  3. 121
  4. 100
Show answer and explanation

Answer: D 100

Discount redemption: 110/1.1=100.

Reference links

2.10Relevant costs and constrained decisions

Concept

Compare future revenues and costs that differ between alternatives. Exclude sunk costs; include avoidable and opportunity costs. When a resource is constrained, rank products by contribution per unit of that resource rather than contribution per finished unit.

How it works / steps

  1. It is sunk and unchanged by the decision; compare future differential flows.
  2. Per constrained hour, A yields 20 and B 25, so B ranks first absent other constraints.
  3. Relevant internal cost is 70+10=80, ten below outsourcing; exclude unavoidable allocated overhead.

Workplace example

A contributes 60 in three machine-hours and B 50 in two: contribution per hour is 20 versus 25. Prioritize B subject to demand and other constraints.

Common confusions and exam tips

Mini quiz

Q1. How should a nonrefundable research fee already paid be treated in a new investment decision?

  1. Add it as a new cash payment
  2. Deduct it directly from capital cost
  3. Deduct it uniformly from sales
  4. Exclude it from incremental cash flows
Show answer and explanation

Answer: D Exclude it from incremental cash flows

It is sunk and unchanged by the decision; compare future differential flows.

Q2. A contributes 60 using three machine-hours; B contributes 50 using two. With machine time constrained, which gets priority?

  1. Equal priority
  2. Whichever has higher selling price
  3. B
  4. A
Show answer and explanation

Answer: C B

Per constrained hour, A yields 20 and B 25, so B ranks first absent other constraints.

Reference links

2.11Portfolios and financial risk management

Concept

Expected portfolio return is a weighted average; portfolio risk also depends on correlation. Hedging offsets an existing exposure. A forward exchange contract can stabilize the home-currency value of a transaction but can also surrender gains from favorable exchange-rate movements.

How it works / steps

  1. 0.4×5%+0.6×10%=8%; risk needs variances and correlation too.
  2. Perfect negative correlation gives the strongest offset; suitable weights can eliminate variance in this simple model.
  3. Selling the future dollar receipt forward fixes the yen proceeds.

Workplace example

Equal investments with expected returns of 4% and 10% yield 7%. Correlation below one can create diversification benefits.

Common confusions and exam tips

Mini quiz

Q1. A portfolio invests 40% at expected return 5% and 60% at 10%. What is expected return?

  1. 7.5%
  2. 6%
  3. 15%
  4. 8%
Show answer and explanation

Answer: D 8%

0.4×5%+0.6×10%=8%; risk needs variances and correlation too.

Q2. Two assets have the same standard deviation. Which correlation offers the greatest diversification?

  1. 0.5
  2. 1
  3. −1
  4. 0
Show answer and explanation

Answer: C −1

Perfect negative correlation gives the strongest offset; suitable weights can eliminate variance in this simple model.

Reference links

2.12Case IV workshop: CVP, investment and cash

Concept

D sells 8,000 units at 1,000 yen, variable cost 600 and annual fixed cost JPY2.4m. A project costs JPY1m and ends after net cash inflow JPY1.21m in one year; discount rate is 10%. Receivables grow with sales, but the owner equates profit and cash. Tax effects are already included in cash flow.

Writing workshop (self-assessed)

Calculate break-even units, operating profit and NPV, then state one cash-planning concern.

Show model answer and self-check criteria

Contribution is 400 yen. Break-even is 6,000 units, operating profit JPY800,000, and NPV JPY100,000. Budget receivable growth and the timing of equipment payments separately from accounting profit.

Self-check: consistent currency units; contribution covers fixed costs; discount cash flows; distinguish receivables from cash. Do not simply add NPV to annual operating profit.

How it works / steps

  1. Contribution is 400 yen; 2,400,000/400=6,000.
  2. Total contribution is 3.2m; subtract 2.4m fixed cost.
  3. 1.21m/1.1−1m=0.1m; positive NPV does not remove the need to fund the initial payment.

Mini quiz

Q1. What is D’s break-even volume?

  1. 2,400 units
  2. 4,000 units
  3. 8,000 units
  4. 6,000 units
Show answer and explanation

Answer: D 6,000 units

Contribution is 400 yen; 2,400,000/400=6,000.

Q2. What is D’s operating profit at 8,000 units?

  1. JPY2,400,000
  2. JPY8,000,000
  3. JPY800,000
  4. JPY3,200,000
Show answer and explanation

Answer: C JPY800,000

Total contribution is 3.2m; subtract 2.4m fixed cost.

Reference links

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