Finance Competency

Finance Competency
For CFM Exam
Operating & Capital Budgeting
General Financial Concepts
Management Accounting Principles
Life Cycle Costing
• A comprehensive, formal plan, expressed in
quantitative terms, describing the expected
operations of an organization over some future
time period.
• Capital Budget – Systematic process of identifying
and evaluating capital investment projects to
arrive at a capital expenditure budget.
• Operating Budget – Set of budgets for the normal
operations of a business, including all activities
involved in generating operating income.
Financial Concepts
• Balance Sheet – Snapshot of a company’s
position at a point in time
– Asset = Liabilities + Owner’s equity
– Liabilities and owner’s equity are 2 ways to finance
– Assets are shown at original cost – not current value
– Current assets will be used or turned into cash within
one year
– Current liabilities will be paid within one year
– Retained earnings is not a pool of cash, but
accumulated income amounts that have been
reinvested in assets
• Income Statement – (Profit & Loss) Measure
of a company’s financial performance over a
specific accounting period
– Income = Revenue-Expenses
– Efforts are matched to accomplishments
– Cash sales and credit sales are considered
– Expenses occur when cash is paid, when major
assets are used (depreciation) , or when material
is used that was bought on credit
– You can have income and be short of cash
– Income should be a major source of owner’s
• Net Present Value - NPV is an indicator of how
much value an investment or project adds to the
• In financial theory, if there is a choice between
two mutually exclusive alternatives, the one
yielding the higher NPV should be selected.
• Future value is the value of an asset at a specific
date. It measures the nominal future sum of
money that a given sum of money is "worth" at a
specified time in the future assuming a certain
interest rate, or more generally, rate of return; it
is the present value multiplied by the
accumulation function
• Internal Rate of Return – IRR - is a rate of
return used in capital budgeting to measure
and compare the profitability of investments.
It is also called the discounted cash flow rate
of return.
• the IRR of an investment is the discount rate
at which the net present value of costs
(negative cash flows) of the investment equals
the net present value of the benefits (positive
cash flows) of the investment.
• Depreciation – decrease in the value of assets
– Allocation of the cost of assets to periods in
which the assets are used
• Amortization – depreciation of intangible
– Intangible assets – cannot be seen, touched, or
physically measured – trade secrets, copyrights,
patents, trademarks, goodwill,
• Book Value = Cost – Accumulated depreciation
– No relation to market value
• Break-even analysis – 2 ways
– Profit = Revenues – variable costs – fixed costs
– Profit = Contribution – Fixed costs
– Set profit to zero for break even point