Certified Internal Auditor (CIA) Financial Management and Economics (Part 3) Syllabus

What is a finance (capital) lease versus an operating lease for the lessee under current U.S. GAAP (ASC 842)?

Both put a right-of-use asset and lease liability on the balance sheet; a finance lease recognizes interest and amortization separately, while an operating lease recognizes a single straight-line lease expense.

What is a deferred tax liability?

A future tax obligation arising from temporary differences where taxable income will exceed book income in later periods (e.g., accelerated tax depreciation).

How do managerial accounting and financial accounting differ in primary audience?

Managerial accounting serves internal users (managers) for decision-making; financial accounting serves external users (investors, creditors, regulators).

Define a variable cost and give an example.

A cost that changes in total proportionally with activity volume but is constant per unit; example: direct materials.

Define a fixed cost and give an example.

A cost that remains constant in total within a relevant range regardless of activity level; example: factory rent.

What is the contribution margin per unit?

Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit; it is the amount each unit contributes toward fixed costs and profit.

What is the break-even point in units formula?

Break-even units = Total Fixed Costs / Contribution Margin per Unit.

How do you compute the break-even point in sales dollars?

Break-even sales dollars = Total Fixed Costs / Contribution Margin Ratio (where CM ratio = Contribution Margin / Sales).

What is the difference between absorption costing and variable costing?

Absorption costing assigns fixed manufacturing overhead to product cost (inventoriable); variable costing treats fixed manufacturing overhead as a period expense. Absorption is required for external (GAAP) reporting.

Define a relevant cost for decision-making.

A future cost that differs between alternatives; sunk costs and costs common to all alternatives are not relevant.

What is a sunk cost?

A cost already incurred that cannot be recovered and is irrelevant to future decisions.

What is opportunity cost?

The value of the next-best alternative forgone when a resource is used for a particular purpose.

What does a flexible budget do that a static budget does not?

A flexible budget adjusts budgeted revenues and costs to the actual level of activity, enabling meaningful variance analysis; a static budget remains fixed at one planned activity level.

What does a favorable cost variance indicate?

Actual cost is less than the budgeted/standard cost (whereas a favorable revenue variance means actual revenue exceeds budget).

What is activity-based costing (ABC)?

A costing method that assigns overhead to products based on the activities (cost drivers) that consume resources, improving accuracy over single-rate allocation.

What is the formula for net present value (NPV)?

NPV = sum of (Cash Flow_t / (1+r)^t) for all periods minus the initial investment; accept the project if NPV > 0.

What is the internal rate of return (IRR)?

The discount rate that makes a project's NPV equal to zero; accept the project if IRR exceeds the required rate of return (hurdle rate).

How is the payback period calculated and what is its main weakness?

Payback = time required for cumulative cash inflows to recover the initial investment; its main weakness is ignoring the time value of money and cash flows after payback.

What is the profitability index (PI) and the decision rule?

PI = Present Value of Future Cash Flows / Initial Investment; accept the project if PI > 1.0.

When NPV and IRR give conflicting rankings for mutually exclusive projects, which should be preferred and why?

NPV should be preferred because it measures the actual dollar value added and assumes reinvestment at the cost of capital, whereas IRR assumes reinvestment at the IRR.

What is the discounted payback period?

The time required to recover the initial investment using discounted (present value) cash flows rather than nominal cash flows.

What is the weighted average cost of capital (WACC)?

The blended required return on a firm's capital: WACC = (E/V)(cost of equity) + (D/V)(after-tax cost of debt), weighted by each source's proportion of total capital.

Why is the after-tax cost of debt used in WACC?

Because interest expense is tax-deductible, the effective cost of debt is reduced: after-tax cost of debt = pre-tax rate x (1 - tax rate).

According to the trade-off theory of capital structure, what limits the use of debt despite its tax shield?

The rising costs of financial distress and bankruptcy, which eventually offset the tax benefits of additional debt.

What is operating leverage?

The degree to which a firm uses fixed operating costs; higher operating leverage magnifies the effect of sales changes on operating income (EBIT).

What is the net working capital formula?

Net Working Capital = Current Assets - Current Liabilities.

What is the cash conversion cycle (CCC)?

CCC = Days Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding; it measures the time between paying for inputs and collecting cash from sales.

What does the economic order quantity (EOQ) model minimize?

The total of inventory ordering costs and carrying (holding) costs to determine the optimal order size.

Compare an aggressive versus a conservative working capital financing policy.

An aggressive policy finances more current (and even permanent) assets with short-term debt (higher return, higher risk); a conservative policy uses more long-term financing (lower risk, lower return).

What does GDP measure, and what are its four expenditure components?

Gross Domestic Product measures the total market value of final goods and services produced within a country in a period; components are Consumption + Investment + Government spending + Net Exports (C + I + G + NX).

What is the difference between fiscal policy and monetary policy?

Fiscal policy uses government spending and taxation (controlled by the government); monetary policy controls the money supply and interest rates (controlled by the central bank).

Define demand-pull inflation versus cost-push inflation.

Demand-pull inflation results from aggregate demand exceeding supply ('too much money chasing too few goods'); cost-push inflation results from rising production costs (e.g., wages, raw materials).

What are the four phases of the business cycle?

Expansion, peak, contraction (recession), and trough.

What is the law of demand?

All else equal, as the price of a good rises, the quantity demanded falls, and as price falls, quantity demanded rises (inverse relationship).

What does price elasticity of demand measure, and what makes demand elastic?

It measures the responsiveness of quantity demanded to a price change (% change in quantity / % change in price); demand is elastic when the absolute value exceeds 1 (quantity is highly responsive).

Distinguish perfect competition from a monopoly.

Perfect competition has many firms selling identical products as price takers with free entry; a monopoly is a single seller of a unique product with high barriers to entry that is a price maker.

What is the law of diminishing marginal returns?

As successive units of a variable input are added to fixed inputs, beyond some point the additional output (marginal product) from each extra unit declines.

What is comparative advantage and why does it drive trade?

A country has comparative advantage when it can produce a good at a lower opportunity cost than another; specializing accordingly and trading increases total output and benefits both parties.

What is the difference between a tariff and a quota?

A tariff is a tax on imported goods (raising their price and generating government revenue); a quota is a quantitative limit on the amount of a good that can be imported.

What does a spot exchange rate versus a forward exchange rate represent?

A spot rate is the price for immediate (current) currency exchange; a forward rate is an agreed price today for exchanging currency at a specified future date.

If a company expects to receive foreign currency in 90 days and wants to eliminate exchange-rate risk, what hedging instrument can it use?

A forward contract (or currency futures/options) to lock in the exchange rate at which the foreign currency will be converted.