11

CTP Exam ReviewCTP Exam Review

Financial Accounting, Reporting, Financial Accounting, Reporting, Planning, and AnalysisPlanning, and Analysis

Texpo 2011 - Texpo 2011 - April 4April 4

Ft. Worth, TexasFt. Worth, Texas

Mike Sultanik, CTP, CPAMike Sultanik, CTP, CPASVP, Bank of Texas, Corporate BankingSVP, Bank of Texas, Corporate Banking

CTP Tract

Local TMA organizations – ATTA

AFP – Essentials of Treasury Management

Certified Treasury Professional (CTP)

CTP and CPE credit sheets – registration desk

READ THE BOOK!!!

33

Some CTP Test Preparation Some CTP Test Preparation ResourcesResources

Study GroupsStudy Groups

Practice CTP ExamsPractice CTP Exams

AFP CTP Exam Preparation Guide: AFP CTP Exam Preparation Guide:

http://www.afponline.org/pub/pdf/CTP-11_Exam_Prep_Guide2.pdfhttp://www.afponline.org/pub/pdf/CTP-11_Exam_Prep_Guide2.pdf

AFP’s CTP Review and Essentials of Cash Management AFP’s CTP Review and Essentials of Cash Management

CoursesCourses

Web Sites (i.e. AFPOnline.org)Web Sites (i.e. AFPOnline.org)

CTP Exam Q&A (CTP Hotline) at AFPOnlineCTP Exam Q&A (CTP Hotline) at AFPOnline

44

Chapter 4

Financial Accounting and Reporting

Chapter 4 – Financial Accounting and Reporting

Accounting Concepts and Standards Global and U.S. Accounting Standards

Financial Reporting Statements Financial Statement Reliability Types of Financial Statements

Derivatives, Hedges and FX Translation Government and Not-for-Profits Pension Plans and Deferred Compensation

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Accounting Concepts and Standards

Global Accounting StandardsGlobal Accounting Standards International Financial Reporting Standards (IFRS)International Financial Reporting Standards (IFRS)

U.S. Account StandardsU.S. Account Standards Generally Accepted Accounting Standards (GAAP)Generally Accepted Accounting Standards (GAAP)

U.S. GAAP vs IFRS U.S. GAAP vs IFRS (US 2016)(US 2016)

U.S. GAAPU.S. GAAP Revenue Recognized Revenue Recognized

when earnedwhen earned

Intangible assets can not Intangible assets can not

be written upbe written up

Allows FIFO, LIFO, Allows FIFO, LIFO, Average and CostAverage and Cost

Valued at CostValued at Cost

IFRSIFRS Assesses if economic Assesses if economic

benefits can accrue to benefits can accrue to entity and revenue can entity and revenue can be appropriately be appropriately measuredmeasured

Intangible assets can be Intangible assets can be written upwritten up

Prohibits LIFOProhibits LIFO

Can reflect FMV Can reflect FMV

77

88

U.S. Accounting Concepts & U.S. Accounting Concepts & StandardsStandards

RULES: RULES: GGenerally enerally AAccepted ccepted AAccounting ccounting PPrinciples (GAAP)rinciples (GAAP)

PUBLISHED BY: PUBLISHED BY: FFinancial inancial AAccounting ccounting SStandards tandards BBoard oard

(FASB) (FASB) and GASB and GASB The The FFinancial inancial AAccounting ccounting FFoundation oundation

oversees the FASB and GASBoversees the FASB and GASB

99

U.S. Accounting Concepts & U.S. Accounting Concepts & Standards Standards (continued)(continued)

Securities and Exchange Commission Securities and Exchange Commission (SEC) (SEC) When a company issues securities to the When a company issues securities to the

public, it must file financial statements public, it must file financial statements in accordance with GAAP with the SEC.in accordance with GAAP with the SEC.

EElectronic lectronic DData ata GGathering athering AAnalysis and nalysis and RRetrieval database (EDGAR) – etrieval database (EDGAR) – http://www.sec.gov/edgar.shtmlhttp://www.sec.gov/edgar.shtml

1010

Four Basic Principles of GAAPFour Basic Principles of GAAP

Historical costHistorical cost

Full disclosureFull disclosure

Revenue recognitionRevenue recognition

MatchingMatching

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Cash Versus Accrual Cash Versus Accrual AccountingAccounting

Cash MethodCash Method Revenues = Cash ReceivedRevenues = Cash Received Costs and expenses = Cash PaidCosts and expenses = Cash Paid

Accrual Method (GAAP)Accrual Method (GAAP) Revenues = When earned (receivables)Revenues = When earned (receivables) Costs and Expenses = When incurred Costs and Expenses = When incurred

(payables)(payables)

1212

ASC Codification TopicsASC Codification Topics Guidelines provided by FASBGuidelines provided by FASB Topic 320 (FAS 115) – Accounting for Topic 320 (FAS 115) – Accounting for

short-term investments:short-term investments: Trading Securities (carried at FMV and Trading Securities (carried at FMV and

marked to market)marked to market) Held-to-Maturity Securities (Cost)Held-to-Maturity Securities (Cost) Available for Sale Securities (marked to Available for Sale Securities (marked to

market)market)

Other Than Temporary Other Than Temporary Impairment (OTTI)Impairment (OTTI)

1313

Topic 325 provided by FASBTopic 325 provided by FASB An investment is impaired if its FMV An investment is impaired if its FMV

is less than its cost.is less than its cost. The investment must be impaired if The investment must be impaired if

it is determined that the it is determined that the impairment is other-than-impairment is other-than-temporary.temporary.

The impairment must be booked The impairment must be booked against earnings in the period in against earnings in the period in which the impairment occurs.which the impairment occurs.

1414

Financial Accounting TopicsFinancial Accounting Topics

Accounting for debt – short-term vs long-Accounting for debt – short-term vs long-termterm

Capitalizing acquired intangibles – FAS 142Capitalizing acquired intangibles – FAS 142 Sarbanes-Oxley Act (SOX) of 2002 mandated Sarbanes-Oxley Act (SOX) of 2002 mandated

the SEC improve rules of reporting Off-the SEC improve rules of reporting Off-Balance-Sheet Arrangements (OBSA)Balance-Sheet Arrangements (OBSA) GuaranteesGuarantees Contingent interests in assetsContingent interests in assets Operating leasesOperating leases Special purpose entitiesSpecial purpose entities

1515

Auditing and Financial Auditing and Financial Statement ReliabilityStatement Reliability

Integrity of financial reports is critical to Integrity of financial reports is critical to investors, lenders and regulatorsinvestors, lenders and regulators

To restore and promote confidence, To restore and promote confidence, Congress passed the Public Company Congress passed the Public Company Accounting Reform and Investor Protection Accounting Reform and Investor Protection Act of 2002Act of 2002

SOX created Public Company Accounting SOX created Public Company Accounting Oversight Board (members appointed by Oversight Board (members appointed by SEC) SEC)

1616

Auditing Financial Statement Auditing Financial Statement Reliability (continued)Reliability (continued)

Audit Report (CPA) – Audit Report (CPA) – 5 types of Opinions5 types of Opinions Unqualified – Conform to GAAPUnqualified – Conform to GAAP Modified Unqualified – Modified Unqualified – Unqualified with Unqualified with

explanatory paragraphexplanatory paragraph

Qualified -Qualified - Except forExcept for Adverse – Do not conform to GAAPAdverse – Do not conform to GAAP Disclaimed – Insufficient DataDisclaimed – Insufficient Data

1717

Financial StatementsFinancial Statements

ASSETS

Current Year Prior Year ChangeCash 1,500,000$ 1,000,000$ 500,000$ Short-Term Investments 1,300,000$ 1,500,000$ (200,000)$ Accounts Receivable 1,700,000$ 1,300,000$ 400,000$ Inventory 2,600,000$ 2,100,000$ 500,000$ Pre-Paid Expenses 900,000$ 900,000$ -$

Total Current Assets 8,000,000$ 6,800,000$ 1,200,000$ Property, Plant & Equipment 7,500,000$ 6,800,000$ 700,000$

Total Assets 15,500,000$ 13,600,000$ 1,900,000$

LIABILITIES AND OWNER'S EQUITY

Current Year Prior Year ChangeAccounts Payable 1,600,000$ 1,200,000$ 400,000$ Short-Term Notes Payable 1,800,000$ 1,300,000$ 500,000$

Total Current Liabilities 3,400,000$ 2,500,000$ 900,000$ Long-Term Debt 3,900,000$ 3,500,000$ 400,000$ Total Liabilities 7,300,000$ 6,000,000$ 1,300,000$

Common Stock at Par Value 200,000$ 200,000$ -$ Paid-In Capital 3,600,000$ 3,600,000$ -$ Retained Earnings 4,400,000$ 3,800,000$ 600,000$ Total Equity 8,200,000$ 7,600,000$ 600,000$ Total Liabilities & Equity 15,500,000$ 13,600,000$ 1,900,000$

Balance Sheet

1818

Financial StatementsFinancial Statements

Current Year Prior Year ChangeRevenue 15,000,000$ 12,500,000$ 2,500,000$ Less: Cost of Goods Sold 9,200,000$ 7,400,000$ 1,800,000$ Gross Profit 5,800,000$ 5,100,000$ 700,000$ Less: Operating Expenses 4,000,000$ 3,500,000$ 500,000$ Less: Depreciation 200,000$ 150,000$ 50,000$ Operating Profit/EBIT 1,600,000$ 1,450,000$ 150,000$ Less: Interest Expense 300,000$ 245,000$ 55,000$ Net Profit Before Taxes 1,300,000$ 1,205,000$ 95,000$ Less Provision for Income Taxes 450,000$ 370,000$ 80,000$ Net Income 850,000$ 835,000$ 15,000$

Income Statement

1919

Financial StatementsFinancial Statements

Current Year Prior Year ChangeBeginning Retained Earnings 3,800,000$ 3,215,000$ 585,000$ Earnings Available for Common Shareholders 850,000$ 835,000$ 15,000$ Less: Common Stock Dividends Paid 250,000$ 250,000$ -$

Addition to Retained Earnings 600,000$ 585,000$ 15,000$ Ending Retained Earnings 4,400,000$ 3,800,000$ 600,000$ Earnings per Share (100,000 shares outstanding) 8.50$ 8.35$ 0.15$

Statement of Retained Earnings

2020

Financial StatementsFinancial Statements

Cash Flows from Operating Activities

Net Income 850,000 Adjustments to Reconcile Net Income to Net CashDepreciation 200,000 Increase in Accounts Receivable (400,000) Increase in Inventories (500,000) Increase in Accounts Payable 400,000 Net Cash Provided (Used) in Operating Activities 550,000

Cash Flows from Investing Activities

Capital Expenditures (900,000) Decrease in Short-Term Investments 200,000 Net Cash Provided (Used) in Investing Activities (700,000)

Cash Flows from Financing Activities

Net Borrowing--Bank Line of Credit Agreement 500,000 Proceeds from Issuance of Long-Term Debt 400,000 Dividends Paid (250,000) Net Cash Provided (Used) by Financing Activities 650,000

Net Increase (Decrease) in Cash

Cash--Beginning of Year 1,000,000 Cash--End of Year 1,500,000 Net Cash Increase (Decrease) 500,000

Statement of Cash Flows

2121

Derivatives and Hedge Derivatives and Hedge AccountingAccounting

Topic 815 and amendments – Accounting Topic 815 and amendments – Accounting for derivatives and hedges (carried at for derivatives and hedges (carried at FMV)FMV)

A derivative is a financial instrument A derivative is a financial instrument whose value is derived from some other whose value is derived from some other instrumentinstrument

Derivatives can be forwards, futures, Derivatives can be forwards, futures, options and swapsoptions and swaps

Gains and Loss treatment depends on type Gains and Loss treatment depends on type of transaction or activity and the purpose of transaction or activity and the purpose of the hedge. Income or Comprehensive of the hedge. Income or Comprehensive Income.Income.

Foreign Exchange Foreign Exchange Translation AccountingTranslation Accounting

2222

Topic 830 – Accounting for Foreign Topic 830 – Accounting for Foreign Currency MattersCurrency Matters

Determine the functional currency – Determine the functional currency – primary currency in the environment the primary currency in the environment the entity operatesentity operates

Determine if the functional currency is also Determine if the functional currency is also the home currencythe home currency If so, translate assets and liabilities at If so, translate assets and liabilities at

the current spot ratethe current spot rate If not, translation is at historical If not, translation is at historical

exchange ratesexchange rates

Accounting for Accounting for Governmental and Not-For-Governmental and Not-For-

Profit OrganizationsProfit Organizations

2323

Governmental Accounting Standards Governmental Accounting Standards Board (GASB) – authoritative bodyBoard (GASB) – authoritative body

Reporting focuses on compliance and Reporting focuses on compliance and accountabilityaccountability

Must file IRS Form 990 annually providing Must file IRS Form 990 annually providing information about programs and financesinformation about programs and finances

Typically these organizations use fund Typically these organizations use fund accounting with fund balances rather than accounting with fund balances rather than equity in the statementsequity in the statements

Impact of Pension Plans and Impact of Pension Plans and Deferred CompensationDeferred Compensation

2424

Pension plans are governed by the Pension plans are governed by the Employee Retirement Income Security Act Employee Retirement Income Security Act of 1974 (ERISA)of 1974 (ERISA)

Topic 715R requires the under or over Topic 715R requires the under or over funded portion of a pension obligation funded portion of a pension obligation must be reported on the balance sheet as must be reported on the balance sheet as an asset or liabilityan asset or liability

Form 5500 often must be filed with the Form 5500 often must be filed with the Department of LaborDepartment of Labor

Audited financial statements must also be Audited financial statements must also be filed by many plansfiled by many plans

Chapter 4 Chapter 4 Financial Accounting and Financial Accounting and

ReportingReporting

2525

2626

Chapter 5Financial Planning and Analysis

Chapter 5Financial Planning and

Analysis Financial Concepts Cost of Capital Breakeven Analysis Budgeting and Planning Economic Value Added

2828

Financial ConceptsFinancial Concepts

Time Value of MoneyTime Value of Money Future Value (FV)Future Value (FV) Present Value (PV)Present Value (PV) Net Present Value (NPV)Net Present Value (NPV)

Discount Rate for DCFDiscount Rate for DCF Often use the Often use the wweighted eighted aaverage verage ccost of ost of

ccapital (WACC)apital (WACC)

2929

Financial Concepts Financial Concepts (continued)(continued)

FV = PV (1 + i)FV = PV (1 + i)nn

$2,000 (1 + .06)$2,000 (1 + .06)33 = $2,000 (1.191)= $2,382 = $2,000 (1.191)= $2,382

PV = FV / (1 + i)PV = FV / (1 + i)nn

$2,382 / (1 + .06)$2,382 / (1 + .06)33 = $2,382 / (1.191) = $2,000 = $2,382 / (1.191) = $2,000

NPV = PV of Cash Inflows – PV of Cash OutflowsNPV = PV of Cash Inflows – PV of Cash Outflows

3030

Cost of CapitalCost of Capital

WACC = After tax Cost of Debt x % of WACC = After tax Cost of Debt x % of

Debt to total CapitalDebt to total Capital

plus Cost of Equity x % of plus Cost of Equity x % of Equity to total CapitalEquity to total Capital

Cost of Capital Cost of Capital (continued)(continued)

Example:Example: Debt = 40% of CapitalDebt = 40% of Capital Debt has a cost of 6%Debt has a cost of 6% Equity = 60% of CapitalEquity = 60% of Capital Equity has a cost of 10%Equity has a cost of 10% The firm’s marginal tax The firm’s marginal tax raterate is 30%.is 30%.

3131

Cost of Capital Cost of Capital (continued)(continued)

3232

WACC = ((40% x 6% x (1- 30%)) WACC = ((40% x 6% x (1- 30%)) + (60% x 10%)+ (60% x 10%)

WACC = (2.4% x 70%) + 6%WACC = (2.4% x 70%) + 6% WACC = 1.68% + 6%WACC = 1.68% + 6% WACC = 7.68%WACC = 7.68% Use the WACC as a discount Use the WACC as a discount

rate for NPV calculationsrate for NPV calculations Return of Total Assets must > Return of Total Assets must >

WACCWACC

Cost BehaviorCost Behavior

Fixed Costs – Rental PaymentsFixed Costs – Rental Payments

Variable Costs – COGSVariable Costs – COGS

Semi-variable Costs – Costs that are Semi-variable Costs – Costs that are stair stepped.stair stepped.

3333

Operating LeverageOperating Leverage

• Firm’s Cost Structure = fixed costs and Firm’s Cost Structure = fixed costs and variable costsvariable costs

• The higher the proportion of fixed costs = The higher the proportion of fixed costs = the higher the operating leveragethe higher the operating leverage

• When fixed costs are high, % of profits will When fixed costs are high, % of profits will increase faster as revenues increase and increase faster as revenues increase and visa versavisa versa

• Companies that are machinery intensive like Companies that are machinery intensive like manufacturers usually are higher operating manufacturers usually are higher operating leverage companiesleverage companies

• Companies that are heavy labor intensive Companies that are heavy labor intensive are typically lower operating leverage are typically lower operating leverage companiescompanies

3434

Operating Leverage (cont.)

0

10

20

30

40

50

60

70

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

FixedVariableTotalRevenue

0

10

20

30

40

50

60

70

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

FixedVariableTotalRevenue

Lower Higher

Economies of Scale

Economies of Scale occur when an increase in sales lowers the average cost per unit sold.

Companies with high operating leverage (high fixed costs) experience declining average costs per unit as revenues increase.

Cost/Benefit and Cost/Benefit and Breakeven AnalysisBreakeven Analysis

• Benefits are typically greater Benefits are typically greater than the costs by a desired than the costs by a desired amountamount

• Unit Breakeven = FC / (Price – Unit Breakeven = FC / (Price – VC)VC)

• UB = $10,000 / ($10 - $6) = UB = $10,000 / ($10 - $6) = 2,500 units2,500 units 3737

Breakeven Analysis Breakeven Analysis (continued)(continued)

AssumptionsAssumptions::

Wires cost $25 each, ACHs cost $.75 each, Wires cost $25 each, ACHs cost $.75 each, overnight investments earn 2.65%, and funds overnight investments earn 2.65%, and funds are available 2 days earlier using wire transfers are available 2 days earlier using wire transfers than ACHsthan ACHs

AnalysisAnalysis::

BE Wire Transfer Amount = (Wire Cost – ACH BE Wire Transfer Amount = (Wire Cost – ACH cost) /cost) /

(Daily Earnings Rate) x (Days Funds (Daily Earnings Rate) x (Days Funds Accelerated)Accelerated)

$167,011 = ($25.00 - $.75) / ((.0265/365) x 2 $167,011 = ($25.00 - $.75) / ((.0265/365) x 2 days)days)

This tells the treasurer that transfers over This tells the treasurer that transfers over $167,011 should be by wire, else ACH should be $167,011 should be by wire, else ACH should be usedused

3838

3939

Capital BudgetingCapital Budgeting

Process used by companies to evaluate Process used by companies to evaluate long-term projectslong-term projects

IRR = discount rate at which NPV = 0IRR = discount rate at which NPV = 0 Companies Compare IRRs of projects to Companies Compare IRRs of projects to

WACC for budgetingWACC for budgeting Payback periodPayback period Profitability index = PV of Cash Inflows Profitability index = PV of Cash Inflows

to to PV of Cash Outflows PV of Cash Outflows

Developing a Financial Developing a Financial PlanPlan

Long-term strategic plans Long-term strategic plans help companies establish and help companies establish and reach their overall goals and reach their overall goals and

objectives.objectives.

4040

Developing a Financial Developing a Financial Plan Plan (continued)(continued)

Budgeting ProcessBudgeting Process

Develop Proforma FinancialsDevelop Proforma Financials – – Income StatementIncome Statement Balance SheetBalance Sheet Operating BudgetOperating Budget Financial BudgetFinancial Budget

4141

4242

Financial Statement Financial Statement AnalysisAnalysis

Lenders, Investors, Lenders, Investors, SuppliersSuppliers

Ratio AnalysisRatio Analysis LiquidityLiquidity LeverageLeverage PerformancePerformance EfficiencyEfficiency

Cash Flow AnalysisCash Flow Analysis Pro-forma and Forecasting Pro-forma and Forecasting

4343

Liquidity and Working Capital Liquidity and Working Capital Measures & RatiosMeasures & Ratios

the Higher the betterthe Higher the better

Current Ratio = current assets Current Ratio = current assets / / current current liabilitiesliabilities

Measures a company’s short term liquidityMeasures a company’s short term liquidity

4444

Liquidity and Working Capital Liquidity and Working Capital Measures & Ratios (cont.)Measures & Ratios (cont.)

Quick Ratio = Acid TestQuick Ratio = Acid Test= (Cash + Short Term Investments + = (Cash + Short Term Investments +

AR)/Current LiabilitiesAR)/Current Liabilities

The most liquid assets covering current The most liquid assets covering current liabilitiesliabilities

the Higher the betterthe Higher the better

4545

Cash Flow to Total Debt RatioCash Flow to Total Debt Ratio

CF to TD = CF to TD = Net Income + DepreciationNet Income + Depreciation

Short-term Debt + Long-term DebtShort-term Debt + Long-term Debt

Accounts Payable is a current or short-term Accounts Payable is a current or short-term liability, but not considered debtliability, but not considered debt

the Higher the betterthe Higher the better

4646

Cash Conversion CycleCash Conversion Cycle

Days Inventory = (Inv/COGS) x 365Days Inventory = (Inv/COGS) x 365 Days Receivable = (AR/Sales) x 365Days Receivable = (AR/Sales) x 365 Days Payables = (AP/COGS) x 365Days Payables = (AP/COGS) x 365

Cash Conversion CycleCash Conversion Cycle Days it takes to convert a cash outflow Days it takes to convert a cash outflow

into a cash inflowinto a cash inflow Days Inv + Days AR – Days PayableDays Inv + Days AR – Days Payable Ex: Ex: Cash Cycle = 40 + 25 – 30 = 35Cash Cycle = 40 + 25 – 30 = 35

the Shorter the betterthe Shorter the better

4747

Cash TurnoverCash Turnover

Number of cash conversion cycles Number of cash conversion cycles in a yearin a year

365/cash conversion cycle 365/cash conversion cycle

the More the betterthe More the better

4848

Efficiency RatiosEfficiency Ratios

Cash Conversion EfficiencyCash Conversion Efficiency

= Cash Flow / = Cash Flow / SalesSales

the Higher the betterthe Higher the better

4949

Debt Management RatiosDebt Management Ratios

Long Term Debt to Capital =Long Term Debt to Capital =

Long Term Debt / LTD + EquityLong Term Debt / LTD + Equity

Debt to TNW =Debt to TNW =

Total Debt / (Total Equity – Total Debt / (Total Equity – Intangibles)Intangibles)

the Lower the betterthe Lower the better

5050

Performance MeasurementsPerformance Measurements

Return on Common Equity (ROE) =Return on Common Equity (ROE) =

Net Income / Common EquityNet Income / Common Equity

Return on Sales (ROS) =Return on Sales (ROS) =

Net Income / RevenuesNet Income / Revenues

Return on Total Assets (ROA) =Return on Total Assets (ROA) =

Net Income / Total AssetsNet Income / Total Assets

the Higher the betterthe Higher the better

5151

Performance MeasurementsPerformance Measurements

Economic Value Added (EVA)Economic Value Added (EVA)

After tax operating profit minus cost of After tax operating profit minus cost of all capitalall capital

EVA = (operating profit x (1 – tax EVA = (operating profit x (1 – tax rate)) -rate)) -

(WACC x Total Capital)(WACC x Total Capital)

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Chapter 5Financial Planning and Analysis

END