3.1 KiB
Accounting Equation
\text{Assets} = \text{Equity} + \text{Liabilities}\text{Equity} = \text{Assets} - \text{Liabilities}Gross Profit
\text{Gross Profit} = \text{Revenue} - \text{Cost of Sales}⚠️ Other Income is added AFTER gross profit — never include it here
Straight-Line Depreciation
\text{Annual Depreciation} = \frac{\text{Original Value} - \text{Residual Value}}{\text{Expected Life}}Carrying Amount (Book Value)
\text{Carrying Amount} = \text{Original Cost} - (\text{Annual Depreciation} \times \text{Years Elapsed})⚠️ Land is never depreciated
Declining Balance Depreciation
\text{Depreciation}_n = \text{Remaining Balance}_{n-1} \times \text{Fixed Rate}Fixed Rate is typically 2× the straight-line rate Depreciation is higher in early years, lower later
Share of Profit of Associates
\text{Share of Profit} = \text{Ownership \%} \times \text{Investee's Net Income}Used when ownership is 20–50% (equity method) Non-cash item — subtract when calculating cash-based ratios
Yield Relationships
| Bond Price vs Par | Relationship |
|---|---|
| Price < Par (Discount) | Coupon Rate < Current Yield < YTM |
| Price > Par (Premium) | Coupon Rate > Current Yield > YTM |
| Price = Par | Coupon Rate = Current Yield = YTM |
Volatility Rules
| Rule | Relationship |
|---|---|
| Interest rates vs price | Rates ↑ → Prices ↓ | Rates ↓ → Prices ↑ |
| Maturity & volatility | Longer maturity = more price volatility |
| Coupon & volatility | Lower coupon = more price volatility |
| Duration | Higher duration = more price sensitivity |
Ownership Thresholds
\text{Ownership} < 20\% \Rightarrow \text{Cost Method (record dividends received only)}20\% \leq \text{Ownership} \leq 50\% \Rightarrow \text{Equity Method (record \% of profit/loss)}\text{Ownership} > 50\% \Rightarrow \text{Full Consolidation}Yield Curve Theories
| Theory | Key Idea | Explains All Curves? |
|---|---|---|
| Expectations | Long rates = expected future short rates | Partially |
| Liquidity Preference | Investors prefer short-term; demand premium for long | Normal only |
| Market Segmentation | Supply & demand by maturity segment | Yes — all shapes |
Common Exam Traps
Gross Profit trap — Other Income is added after gross profit. Never include it in Revenue − Cost of Sales.
Dividends paid vs received — Dividends paid to shareholders = Financing Activities. Dividends received from associates = Investing Activities.
Depreciation is non-cash — Add back to profit in Operating Activities on the cash flow statement.
Current yield vs YTM — Current yield ignores capital gain/loss. YTM includes everything. Equal only when bond trades at par.
Semi-annual adjustments — Divide coupon by 2, multiply periods by 2, divide annual rate by 2.
Carrying amount — End of Year 2 = subtract 2 years of depreciation. End of Year
n= Cost − (Dep ×n).