CTP Exam Review
Financial Accounting, Reporting, Planning,
and Analysis
Texpo 2011 -
April 4
Ft. Worth, Texas
Mike Sultanik, CTP, CPA
SVP, Bank of Texas, Corporate Banking
1
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!!!
Some CTP Test Preparation
Resources

Study Groups

Practice CTP Exams

AFP CTP Exam Preparation Guide:
http://www.afponline.org/pub/pdf/CTP-11_Exam_Prep_Guide2.pdf

AFP’s CTP Review and Essentials of Cash Management
Courses

Web Sites (i.e. AFPOnline.org)

CTP Exam Q&A (CTP Hotline) at AFPOnline
3
Chapter 4
Financial Accounting and Reporting
4
Chapter 4 – Financial Accounting
and Reporting

Accounting Concepts and Standards


Financial Reporting Statements





Global and U.S. Accounting Standards
Financial Statement Reliability
Types of Financial Statements
Derivatives, Hedges and FX Translation
Government and Not-for-Profits
Pension Plans and Deferred Compensation
Accounting Concepts and
Standards

Global Accounting Standards


International Financial Reporting Standards
(IFRS)
U.S. Account Standards

Generally Accepted Accounting Standards
(GAAP)
6
U.S. GAAP vs IFRS
U.S. GAAP




Revenue Recognized
when earned
(US 2016)
IFRS

Assesses if economic
benefits can accrue to
entity and revenue can
be appropriately
measured
Intangible assets can be
written up
Intangible assets can not
be written up

Allows FIFO, LIFO,
Average and Cost
Valued at Cost

Prohibits LIFO

Can reflect FMV
7
U.S. Accounting Concepts &
Standards



RULES: Generally Accepted Accounting
Principles (GAAP)
PUBLISHED BY: Financial Accounting
Standards Board (FASB)
and GASB
The Financial Accounting Foundation oversees
the FASB and GASB
8
U.S. Accounting Concepts &
Standards (continued)

Securities and Exchange Commission
(SEC)


When a company issues securities to the
public, it must file financial statements in
accordance with GAAP with the SEC.
Electronic Data Gathering Analysis and
Retrieval database (EDGAR) –
http://www.sec.gov/edgar.shtml
9
Four Basic Principles of GAAP

Historical cost

Full disclosure

Revenue recognition

Matching
10
Cash Versus Accrual Accounting

Cash Method



Revenues = Cash Received
Costs and expenses = Cash Paid
Accrual Method (GAAP)


Revenues = When earned (receivables)
Costs and Expenses = When incurred
(payables)
11
ASC Codification Topics


Guidelines provided by FASB
Topic 320 (FAS 115) – Accounting for shortterm investments:



Trading Securities (carried at FMV and marked to
market)
Held-to-Maturity Securities (Cost)
Available for Sale Securities (marked to market)
12
Other Than Temporary
Impairment (OTTI)




Topic 325 provided by FASB
An investment is impaired if its FMV is
less than its cost.
The investment must be impaired if it is
determined that the impairment is otherthan-temporary.
The impairment must be booked against
earnings in the period in which the
impairment occurs.
13
Financial Accounting Topics



Accounting for debt – short-term vs long-term
Capitalizing acquired intangibles – FAS 142
Sarbanes-Oxley Act (SOX) of 2002 mandated the
SEC improve rules of reporting Off-BalanceSheet Arrangements (OBSA)




Guarantees
Contingent interests in assets
Operating leases
Special purpose entities
14
Auditing and Financial Statement
Reliability



Integrity of financial reports is critical to
investors, lenders and regulators
To restore and promote confidence, Congress
passed the Public Company Accounting Reform
and Investor Protection Act of 2002
SOX created Public Company Accounting
Oversight Board (members appointed by SEC)
15
Auditing Financial Statement
Reliability (continued)

Audit Report (CPA) –
5 types of Opinions
Unqualified – Conform to GAAP
 Modified Unqualified – Unqualified with

explanatory paragraph
Qualified - Except for
 Adverse – Do not conform to GAAP
 Disclaimed – Insufficient Data

16
Financial Statements
Balance Sheet
ASSETS
Cash
Short-Term Investments
Accounts Receivable
Inventory
Pre-Paid Expenses
Current Year
$
1,500,000
$
1,300,000
$
1,700,000
$
2,600,000
$
900,000
Total Current Assets
$
Property, Plant & Equipment $
Total Assets
$
8,000,000
7,500,000
15,500,000
$
$
$
$
$
Prior Year
1,000,000
1,500,000
1,300,000
2,100,000
900,000
Change
500,000
(200,000)
400,000
500,000
-
$
$
$
$
$
$
$
$
6,800,000
6,800,000
13,600,000
$
$
$
1,200,000
700,000
1,900,000
LIABILITIES AND OWNER'S EQUITY
Accounts Payable
Short-Term Notes Payable
Current Year
$
1,600,000
$
1,800,000
$
$
Prior Year
1,200,000
1,300,000
$
$
Change
400,000
500,000
Total Current Liabilities
Long-Term Debt
Total Liabilities
$
$
$
3,400,000
3,900,000
7,300,000
$
$
$
2,500,000
3,500,000
6,000,000
$
$
$
900,000
400,000
1,300,000
Common Stock at Par Value
Paid-In Capital
Retained Earnings
Total Equity
Total Liabilities & Equity
$
$
$
$
$
200,000
3,600,000
4,400,000
8,200,000
15,500,000
$
$
$
$
$
200,000
3,600,000
3,800,000
7,600,000
13,600,000
$
$
$
$
$
600,000
600,000
1,900,000
17
Financial Statements
Income Statement
Revenue
Less: Cost of Goods Sold
Gross Profit
Less: Operating Expenses
Less: Depreciation
Operating Profit/EBIT
Less: Interest Expense
Net Profit Before Taxes
Less Provision for Income Taxes
Net Income
Current Year
$ 15,000,000
$
9,200,000
$
5,800,000
$
4,000,000
$
200,000
$
1,600,000
$
300,000
$
1,300,000
$
450,000
$
850,000
$
$
$
$
$
$
$
$
$
$
Prior Year
12,500,000
7,400,000
5,100,000
3,500,000
150,000
1,450,000
245,000
1,205,000
370,000
835,000
$
$
$
$
$
$
$
$
$
$
Change
2,500,000
1,800,000
700,000
500,000
50,000
150,000
55,000
95,000
80,000
15,000
18
Financial Statements
Statement of Retained Earnings
Current Year
Beginning Retained Earnings
$
3,800,000
Earnings Available for Common Shareholders
$
850,000
Less: Common Stock Dividends Paid
$
250,000
Addition to Retained Earnings
$
600,000
Ending Retained Earnings
$
4,400,000
Earnings per Share (100,000 shares outstanding) $
8.50
$
$
$
$
$
$
Prior Year
3,215,000
835,000
250,000
585,000
3,800,000
8.35
$
$
$
$
$
$
Change
585,000
15,000
15,000
600,000
0.15
19
Financial Statements
Statement of Cash Flows
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to Net Cash
Depreciation
Increase in Accounts Receivable
Increase in Inventories
Increase in Accounts Payable
Net Cash Provided (Used) in Operating Activities
850,000
200,000
(400,000)
(500,000)
400,000
550,000
Cash Flows from Investing Activities
Capital Expenditures
Decrease in Short-Term Investments
Net Cash Provided (Used) in Investing Activities
(900,000)
200,000
(700,000)
Cash Flows from Financing Activities
Net Borrowing--Bank Line of Credit Agreement
Proceeds from Issuance of Long-Term Debt
Dividends Paid
Net Cash Provided (Used) by Financing Activities
500,000
400,000
(250,000)
650,000
Net Increase (Decrease) in Cash
Cash--Beginning of Year
Cash--End of Year
Net Cash Increase (Decrease)
1,000,000
1,500,000
500,000
20
Derivatives and Hedge Accounting




Topic 815 and amendments – Accounting for
derivatives and hedges (carried at FMV)
A derivative is a financial instrument whose
value is derived from some other instrument
Derivatives can be forwards, futures, options
and swaps
Gains and Loss treatment depends on type of
transaction or activity and the purpose of the
hedge. Income or Comprehensive Income.
21
Foreign Exchange Translation
Accounting



Topic 830 – Accounting for Foreign Currency
Matters
Determine the functional currency – primary
currency in the environment the entity operates
Determine if the functional currency is also the
home currency
 If so, translate assets and liabilities at the
current spot rate
 If not, translation is at historical exchange
rates
22
Accounting for Governmental
and Not-For-Profit Organizations




Governmental Accounting Standards Board
(GASB) – authoritative body
Reporting focuses on compliance and
accountability
Must file IRS Form 990 annually providing
information about programs and finances
Typically these organizations use fund
accounting with fund balances rather than equity
in the statements
23
Impact of Pension Plans and
Deferred Compensation




Pension plans are governed by the Employee
Retirement Income Security Act of 1974 (ERISA)
Topic 715R requires the under or over funded
portion of a pension obligation must be reported
on the balance sheet as an asset or liability
Form 5500 often must be filed with the
Department of Labor
Audited financial statements must also be filed
by many plans
24
Chapter 4
Financial Accounting and Reporting
25
Chapter 5
Financial Planning and Analysis
26
Chapter 5
Financial Planning and Analysis





Financial Concepts
Cost of Capital
Breakeven Analysis
Budgeting and Planning
Economic Value Added
Financial Concepts

Time Value of Money




Future Value (FV)
Present Value (PV)
Net Present Value (NPV)
Discount Rate for DCF

Often use the weighted average cost of
capital (WACC)
28
Financial Concepts
(continued)
FV = PV (1 + i)n
$2,000 (1 + .06)3 = $2,000 (1.191)= $2,382
PV = FV / (1 + i)n
$2,382 / (1 + .06)3 = $2,382 / (1.191) = $2,000
NPV = PV of Cash Inflows – PV of Cash Outflows
29
Cost of Capital

WACC = After tax Cost of Debt x % of
Debt to total Capital
plus
Cost of Equity x % of
Equity to total Capital
30
Cost of Capital
(continued)
Example:
 Debt = 40% of Capital
 Debt has a cost of 6%
 Equity = 60% of Capital
 Equity has a cost of 10%
 The firm’s marginal tax rate
is 30%.
31
Cost of Capital






(continued)
WACC = ((40% x 6% x (1- 30%)) +
(60% x 10%)
WACC = (2.4% x 70%) + 6%
WACC = 1.68% + 6%
WACC = 7.68%
Use the WACC as a discount rate for
NPV calculations
Return of Total Assets must > WACC
32
Cost Behavior
Fixed Costs – Rental Payments
Variable Costs – COGS
Semi-variable Costs – Costs that are stair
stepped.
33
Operating Leverage
•
•
•
•
•
Firm’s Cost Structure = fixed costs and variable
costs
The higher the proportion of fixed costs = the
higher the operating leverage
When fixed costs are high, % of profits will
increase faster as revenues increase and visa versa
Companies that are machinery intensive like
manufacturers usually are higher operating
leverage companies
Companies that are heavy labor intensive are
typically lower operating leverage companies
34
Operating Leverage (cont.)
Lower
Higher
70
70
60
60
50
Fixed
Variable
Total
Revenue
40
30
20
50
30
20
10
10
0
0
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Fixed
Variable
Total
Revenue
40
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
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 Breakeven
Analysis
•
•
•
Benefits are typically greater than the
costs by a desired amount
Unit Breakeven = FC / (Price – VC)
UB = $10,000 / ($10 - $6) = 2,500
units
37
Breakeven Analysis
(continued)
Assumptions:
Wires cost $25 each, ACHs cost $.75 each, overnight
investments earn 2.65%, and funds are available 2
days earlier using wire transfers than ACHs
Analysis:
BE Wire Transfer Amount = (Wire Cost – ACH cost) /
(Daily Earnings Rate) x (Days Funds Accelerated)
$167,011 = ($25.00 - $.75) / ((.0265/365) x 2 days)
This tells the treasurer that transfers over $167,011
should be by wire, else ACH should be used
38
Capital Budgeting





Process used by companies to evaluate
long-term projects
IRR = discount rate at which NPV = 0
Companies Compare IRRs of projects to
WACC for budgeting
Payback period
Profitability index = PV of Cash Inflows to
PV of Cash Outflows
39
Developing a Financial Plan
Long-term strategic plans help
companies establish and reach
their overall goals and objectives.
40
Developing a Financial Plan
(continued)
Budgeting Process
Develop Proforma Financials –
 Income Statement
 Balance Sheet
 Operating Budget
 Financial Budget
41
Financial Statement Analysis


Lenders, Investors,
Suppliers
Ratio Analysis





Liquidity
Leverage
Performance
Efficiency
Cash Flow Analysis

Pro-forma and Forecasting
42
Liquidity and Working Capital
Measures & Ratios
the Higher the better

Current Ratio = current assets / current
liabilities
Measures a company’s short term liquidity
43
Liquidity and Working Capital
Measures & Ratios (cont.)
the Higher the better

Quick Ratio = Acid Test
= (Cash + Short Term Investments +
AR)/Current Liabilities
The most liquid assets covering current
liabilities
44
Cash Flow to Total Debt Ratio
the Higher the better
CF to TD = Net Income + Depreciation
Short-term Debt + Long-term Debt
Accounts Payable is a current or short-term liability,
but not considered debt
45
Cash Conversion Cycle
the Shorter the better



Days Inventory = (Inv/COGS) x 365
Days Receivable = (AR/Sales) x 365
Days Payables = (AP/COGS) x 365
Cash Conversion Cycle



Days it takes to convert a cash outflow into a
cash inflow
Days Inv + Days AR – Days Payable
Ex: Cash Cycle = 40 + 25 – 30 = 35
46
Cash Turnover
the More the better


Number of cash conversion cycles in a
year
365/cash conversion cycle
47
Efficiency Ratios
the Higher the better

Cash Conversion Efficiency
= Cash Flow / Sales
48
Debt Management Ratios
the Lower the better


Long Term Debt to Capital =
Long Term Debt / LTD + Equity
Debt to TNW =
Total Debt / (Total Equity – Intangibles)
49
Performance Measurements
the Higher the better



Return on Common Equity (ROE) =
Net Income / Common Equity
Return on Sales (ROS) =
Net Income / Revenues
Return on Total Assets (ROA) =
Net Income / Total Assets
50
Performance Measurements
Economic Value Added (EVA)
After tax operating profit minus cost of all
capital
 EVA = (operating profit x (1 – tax rate)) (WACC x Total Capital)
51
Chapter 5
Financial Planning and Analysis
52
END