CFA level 1 formula sheet 2017, Cheat Sheet of Financial Accounting

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2017 Level I Formulas

Formula of Formulas

Type 1: Formula exists, but what really matters is the intuition

Type 2: Know the formula, good to know the intuition

Type 3: Learn the formula, don’t worry about the intuition

Have to know Should know Nice to know Type 4: Difficult formula and probability of being tested is low Content in the curriculum Area under the curve represents the probability of being tested

Quant: DCF Applications

NPV = ∑ *CFt /(1+r)

t

]

IRR is the rate which makes NPV = 0

Bank Discount Yield = (D/F) x 360/t

Holding Period Yield = (P 1 - P 0 + D) / P 0

Money Market Yield = HPY x 360 / t

Effective Annual Yield = (1 + HPY)

365/t

• 1

Effective Annual Return = (1 + Periodic interest rate)

m

• 1

Quant: Statistics

Geometric Mean = [(1+R 1 )(1+R 2 )…….(1+Rn)]

⅟n

• 1 Harmonic Mean = n / ∑ (1/Xi)

Weighted Mean = ∑ wi Xi

Location of observation at yth percentile: Ly = (n + 1) (y/100)

MAD = average of the absolute values of deviations from the mean

Range = maximum value – minimum value

Chebyshev's inequality states that for any set of observations, the proportion of the

observations within k standard deviations of the mean is at least: 1 – (1/k

2

) for all k > 1

Coefficient of variation = Risk / Return Sharpe ratio = Excess return / Risk

Excess Kurtosis = Sample Kurtosis - 3

Population and sample

variance: use the calculator

Quant: Distributions, Estimation, Hypothesis Testing

Binomial random variable: p(x) = P(X = x) = nCx p

x

(1 - p)

n – x

Expected value = np and variance = n p (1 – p)

Normal distribution to standard normal: z = (X - μ) / σ

SFRatio = [E(Rp) - RL] / sp

Standard error of sample mean = sX = s / √n or sX = s / √n

Confidence Interval = X ± zα/2(σ / √n)

Test statistic when testing for population mean:

Economics

Demand function

Inverse demand function

Supply function and inverse demand function

Consumer surplus

Producer surplus

Total surplus

Elasticity = % change in quantity demanded / % change in price

Elasticity of Demand = %ΔQ / %ΔP = (ΔQ /ΔP) x P/Q

• Own price
• Substitute
• Complement
• Income

QA = 2 − 0.4 PA + 0.0005 I + 0.10 PB - 0.15 PC

Flatter curve: more elastic Top left: more elastic

Economics

Aggregate Expenditure = Aggregate Output = Aggregate Income

GDP Deflator = (Nominal GDP / Real GDP) x 100

GDP based on expenditure approach = Consumer spending on goods and services + Business gross fixed investment + Change in inventories + Government spending on goods and services + Government gross fixed investment + Exports − Imports + Statistical discrepancy GDP based on income approach = National income + Capital consumption allowance + Statistical discrepancy National income = Compensation of employees + Corporate profits before taxes + Interest income + Unincorporated business net income + Rent + Indirect business taxes less subsidies Personal income = National income − Indirect business taxes − Corporate income taxes − Undistributed corporate profits + Transfer payments Personal disposable income = personal income – personal taxes

Economics

Aggregate Income = Aggregate Expenditure

C + S + T = C + I + G + (X – M)

S = I + (G – T) + (X – M) G – T = (S – I) – (X – M) (S – I) = (G – T) + (X – M)

Production function: Y = A F (L,K)

Growth in potential GDP = Growth in technology + WL (Growth in labor) + Wc (Growth in capital)

WL and WC are the relative share of labor and capital in the national income

Growth in per capita potential GDP = Growth in technology + Wc (Growth in K/L ratio)

Labor productivity = Real GDP/Aggregate hours; Y/L = A F (1, K/L)

Potential GDP = Aggregate hours worked x Labor productivity Potential GDP growth rate = Long-term growth rate of labor force + Long-term labor productivity growth rate

FRA: Accounting

Assets = Liability + Equity Equity = Contributed Capital + Retained Earnings Assets = Liability + CC + BRE + Rev – Exp – Div Revenue recognition, Percentage of completion method Installment method: Profit = Cash * Expected Profit as % of Sales Profit = Revenue - Expenses Comprehensive Income = Net Income + OCI

FRA: Cash Flow

Calculating CFO items: use the +/- technique

Ending Gross Equipment Balance Gross Cost of Equipment Sold: BB Equipment +Equip. Purchased

• EB Equipment Beginning Gross Equipment Balance

Cash Paid for New + -

Equipment

Historical Cost of Equipment Sold: BB Equipment + Equip. Purchased - EB Equipment Depreciation on Equipment Sold: BB Acc. Depreciation + Dep. Expense - EB Acc. Depreciation Gain on Sale of Equipment

Cash from - +

Sale

FCFF = NI + NCC + Int(1-Tax rate) – FCInv – WCInv

FCFF = CFO + Int(1-Tax rate) – FCInv

FCFE = CFO – FCInv + Net borrowing

FCFE = CFO – FCInv – Net debt repayment

FRA: Inventory, LLA, DTL, Bonds

FIFO and LIFO: use the 1 1 2 2 technique WAC = Total cost of units available for sale / Total units available for sale

FIFO Inventory = LIFO Inventory + LIFO Reserve

FIFO COGS = LIFO COGS – (ending LIFO reserve – beginning LIFO reserve) Carrying amount = historical cost – accumulated depreciation Under IFRS: Impairment loss = Carrying Value – Recoverable amount DTL = (Carrying Amount - Tax Base) x Tax Rate ITE = ITP + Change in DTL – Change in DTA Carrying amount of bond

CF

Capital Budgeting NPV and IRR formulas Profitability index = PV for future cash flows / investment AAR = Average net income/ average book value Cost of Capital WACC = wd rd (1-t) + wp rp + were YTM for cost of debt (IRR) Cost of preferred stock = preferred dividend / share price re = Rf + β [E(Rmkt ) – Rf] re = Rf + β[E(rmkt) – Rf + CRP] P 0 = D 1 / (re- g) and re = D 1 / P 0 + g Breakpoint = amount of capital at which the component cost of capital changes / weight of the component in the capital structure βasset = βequity {1/1+[(1-t) D/E]} and βequity = βasset {1+[(1-t) D/E]}

CF

Ratio Numerator Denominator

Current ratio Current assets Current liabilities Quick ratio Cash + M/S + A/R Current liabilities Receivable turnover Credit sales Average receivables Days of receivables 365 Receivable turnover Inventory turnover Cost of goods sold Average inventory Number of days of inventory 365 Inventory turnover Payables turnover Purchases Average payables Days of payables 365 Payables turnover Operating cycle = days of inventory + days of receivables Cash conversion cycle = Net operating cycle = average days of receivables + average days of inventory - average days of payables Yield Formula Discount basis yield (F – P) / F x (360/T) Money market yield (F – P) / P x (360/T) BEY (F – P) / P x (365/T) Line of credit: Banker’s Acceptance: Commercial Paper:

PM

Diversification ratio = Risk of equally weighted portfolio of n securities / Risk of single security selected at random ρ (Ri, Rj) = Cov(Ri, Rj) / σ (Ri) σ (Rj) E(RP) = w 1 R 1 + w 2 R 2 σ^2 (R P) = w 1 (^2) σ 1 (^2) + w 2 (^2) σ 2 (^2) + 2w 1 w 2 ρ^ σ 1 σ 2 Utility of an investment = E(r) – ½ A * σ^2 Market Model: Ri = αi + βRm + ei Beta = Covariance of return on i and the market / Variance of the market return CAPM: re = Rf + β [E(Rmkt) – Rf] Sharpe Ratio = (RP – Rf) / σP Treynor Ratio = (RP – Rf) / βP M^2 = (RP – Rf) σm / σP – (Rm – Rf) Jensen’s Alpha αP = RP – [Rf + β(Rm – Rf)] CML Formula:

Standard deviation: use the calculator