For many students, learning formulas is one of the most intimidating aspects of their CPCU® studies. We already have another post that gives tips on how to memorize the formulas, but it is more important that you understand what a formula results tell you and how the formula results are affected by the different variables in it. In today’s post, we’ll show you ways to improve your understanding of the CPCU formulas so that you can be fully prepared for any type of formula-related question, whether it is computational or conceptual in nature.
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Tip #1: Look for other explanations of the formula
If you don’t really under The Institutes’ explanation of a formula, you can always turn elsewhere for clarification. There are literally hundreds of webpages that explain the exact same formulas you are learning, and often times you’ll find that one of those explanations is more understandable to you. One particularly useful search term to try is “what does the [name of formula] tell you.” This will usually give you results that explain whe purpose of a particular formula, and what kind of result is considered better or worse.
Tip #2: Test out comparative scenarios
One way to “think through” a formula is to make up scenarios where you change just one element, which makes the results easier to compare.
Let’s say you are looking at the asset turnover ratio from CPCU 540, which is SALES ÷ TOTAL ASSETS. We can pretend to compare two companies with identical assets but different sales amounts:
| Sales | Assets | Asset Turnover Ratio | |
| Company A | $25,000 | $100,000 | 0.25 |
| Company B | $50,000 | $100,000 | 0.50 |
Even before calculating the asset turnover ratio, we know that Company B is in a better position because both companies have the exact same assets (cash, supplies, inventory, equipment, etc.) but one makes twice the amount of sales.
It becomes easier to see the intent of the formula when you use two nearly-identical scenarios; in this case, the formula highlights how well a company uses its assets to generate sales.
Now, we already knew that Company B is performing better, and when looking at the two asset turnover ratio results, we can see that Company B’s ratio result was higher. As such, we can conclude that with the asset turnover ratio, higher is better.
You can use this same technique with many other formulas to help you understand their purpose. When analyzing formulas, it helps to remember that generally speaking, these will hold true:
- More sales/income is better
- More assets is better
- More equity/policyholders’ surplus is better
- Less expenses is better
- Less liabilities is better
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Tip #3: Try out the formulas on real financial statements
When you apply your formulas to analyze the finances of real companies, your learning can become more interesting and you’ll get to feel the experience of gaining new insights about a company using the formulas you are learning.
Here’s how to access basic financial statements for most publicly-traded companies:
- Go to https://www.nasdaq.com/quotes/
- In the area labeled STEP 1, enter the stock symbol for the company you want to check out. For example, Apple’s stock symbol is AAPL. If you don’t know the stock symbol, you can easily find it on Google by searching “stock symbol for [name of company].”
- In the area labeled STEP 2, click on FINANCIALS,which is under the FUNDAMENTALS heading.
- You will be immediately taken to the company’s income statement. Above the income statement, you also have the option to link to BALANCE SHEET, CASH FLOWS, or FINANCIAL RATIOS. The FINANCIAL RATIOS page is particularly great, because it is like having an answer key to so many of the ratios you were studying, as applied to that particular stock symbol. There are several years of data so you can get plenty of practice out of just one stock symbol.
Tip #4: Learn the accounting equation before learning the CPCU 540 formulas
When studying CPCU 540, it is very common to encounter questions that ask whether a certain type of occurrence or transaction will have a positive or negative effect on a company’s financial position. One of the best ways to know is to have a strong grasp on the accounting equation, which is one of the most basic concepts of accounting. We covered this topic in our CPCU 540 Fundamentals series, but it is worth repeating here that knowing the accounting equation will dramatically improve your understanding of the formulas’ components, because it shows you how the various financial aspects of a company are mathematically interrelated.
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