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Annuity Payment

An annuity is a series of equal cash flows that occur after equal interval of time. If we know the interest rate and number of time periods, we can work out the annuity cash flow that corresponds to a specific present value and/or future value.

Time Value of Uneven Cash Flows

When a cash flow stream is uneven, the present value (PV) and/or future value (FV) of the stream are calculated by finding the PV or FV of each individual cash flow and adding them up.

Types of Interest Rates

An interest rate is a percentage which represents the cost of money as a percentage of initial principal. Interest rates differ depending on whether they are nominal or real, quoted or effective, annual or periodic and so on.

Nominal Interest Rate

Nominal interest rate is the interest rate which includes the effect of inflation. It approximately equals the sum of real interest rate and inflation rate.

Real Interest Rate

Real interest rate is the interest rate adjusted for the effect of inflation on maturity value of a loan or investment. It approximately equals nominal interest rate minus inflation rate.

Quoted vs Periodic Interest Rate

Quoted interest rate (also called nominal interest rate or annual percentage rate) is the non-compounded interest rate for a period of one year. It can be converted to periodic interest rate by dividing it with the number of compounding periods per year.

Number of Time Periods in TVM

In case of simple interest, number of time periods t equals total interest divided by product of PV and interest rate and in case of compound interest, number of periods can be calculated using NPER function or using a logarithm-based formula

Tax Shield

Depreciation tax shield represents reduction in tax outflows when tax laws allow deduction of depreciation expense from taxable income. Interest tax shield refers to the tax-saving advantage of debt form of capital.

Pro Forma Financial Statements

Proforma financial statements are financial statements which provide information about a company’s expected financial performance and financial position in future.

Primary Market & Secondary Market

A primary market is a market in which corporations sell their securities to investors for the first time. On the other hand, a secondary market is a market in which investors trade the securities already issued with each other.

Break-even Analysis

In management accounting, break-even analysis is a technique aimed at finding the level of sales (in units or dollars) at which a company is neither making a profit nor incurring a loss.

Differential Analysis

Differential analysis (also called incremental analysis) is a management accounting technique in which we examine only the changes in revenues, costs and profits that result from a business decision instead of creating complete income statements for each alternative.

Segment Margin

Segment margin is the amount contributed by a segment towards common fixed costs and profit of a business. It equals the contribution margin of a segment minus traceable fixed costs i.e. fixed costs which can be traced to it.

Contribution Margin per Unit

Contribution margin per unit is the net amount that each additional unit sold contributes towards a company’s fixed costs and profit. It equals the difference between the product’s sales price and variable cost per unit.

Derivation of DOL Formula

Degree of operating leverage (DOL) is defined as percentage change in operating income that occurs in response to a percentage change in sales. In this article we use this definition to derive different formulas for DOL.

Manufacturing Overhead Costs

Manufacturing overheads costs represent all such costs which are incurred in production of goods excluding direct materials and direct labor. Manufacturing overhead costs are further classified into fixed manufacturing overhead costs and variable manufacturing overhead costs.

Variable Costs

In management accounting, variable costs are cost items whose total cost varies proportionately with some underlying activity level such as total units, labor hours, machine hours, etc.

Mixed Costs

Mixed costs (also called semi-variable costs) are costs that have both fixed and variable components. The fixed element doesn’t change with change in activity level at all and the variable component changes proportionately with activity.

Trial Balance

Trial balance is a draft report used by accountants that simply lists all the ledger account balances extracted from the accounting system of a business at a given date.

Fixed Costs

Fixed costs are costs which do not change with change in output as long as the production is within the relevant range. It is the cost which is incurred even when output is zero.

Variable Cost Ratio

Variable cost ratio is the ratio of variable costs to sales. It equals total variable costs divided by total sales or variable cost per unit divided by price per unit or 1 minus contribution margin ratio.

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