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CTP Tract

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

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CTP Tract

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  1. CTP Exam ReviewFinancial Accounting, Reporting, Planning, and AnalysisTexpo 2011 - April 4Ft. Worth, TexasMike Sultanik, CTP, CPASVP, Bank of Texas, Corporate Banking 1

  2. 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!!!

  3. 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

  4. Chapter 4 Financial Accounting and Reporting

  5. 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

  6. Accounting Concepts and Standards • Global Accounting Standards • International Financial Reporting Standards (IFRS) • U.S. Account Standards • Generally Accepted Accounting Standards (GAAP)

  7. U.S. GAAP vs IFRS (US 2016) U.S. GAAP IFRS Assesses if economic benefits can accrue to entity and revenue can be appropriately measured Intangible assets can be written up Prohibits LIFO Can reflect FMV • Revenue Recognized when earned • Intangible assets can not be written up • Allows FIFO, LIFO, Average and Cost • Valued at Cost

  8. 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

  9. 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

  10. Four Basic Principles of GAAP • Historical cost • Full disclosure • Revenue recognition • Matching

  11. 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)

  12. ASC Codification Topics • Guidelines provided by FASB • Topic 320 (FAS 115) – Accounting for short-term investments: • Trading Securities (carried at FMV and marked to market) • Held-to-Maturity Securities (Cost) • Available for Sale Securities (marked to market)

  13. 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 other-than-temporary. • The impairment must be booked against earnings in the period in which the impairment occurs.

  14. 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-Balance-Sheet Arrangements (OBSA) • Guarantees • Contingent interests in assets • Operating leases • Special purpose entities

  15. 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)

  16. 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

  17. Financial Statements

  18. Financial Statements

  19. Financial Statements

  20. Financial Statements

  21. 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.

  22. 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

  23. 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

  24. 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

  25. Chapter 4 Financial Accounting and Reporting

  26. Chapter 5 Financial Planning and Analysis

  27. Chapter 5Financial Planning and Analysis • Financial Concepts • Cost of Capital • Breakeven Analysis • Budgeting and Planning • Economic Value Added

  28. 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)

  29. 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

  30. 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

  31. 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%.

  32. 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

  33. Cost Behavior Fixed Costs – Rental Payments Variable Costs – COGS Semi-variable Costs – Costs that are stair stepped.

  34. 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

  35. Operating Leverage (cont.) Lower Higher

  36. 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.

  37. 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

  38. 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

  39. 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

  40. Developing a Financial Plan Long-term strategic plans help companies establish and reach their overall goals and objectives.

  41. Developing a Financial Plan (continued) Budgeting Process Develop Proforma Financials – Income Statement Balance Sheet Operating Budget Financial Budget

  42. Financial Statement Analysis • Lenders, Investors, Suppliers • Ratio Analysis • Liquidity • Leverage • Performance • Efficiency • Cash Flow Analysis • Pro-forma and Forecasting

  43. Liquidity and Working Capital Measures & Ratios the Higher the better • Current Ratio = current assets / current liabilities Measures a company’s short term liquidity

  44. Liquidity and Working Capital Measures & Ratios (cont.) • Quick Ratio = Acid Test = (Cash + Short Term Investments + AR)/Current Liabilities The most liquid assets covering current liabilities the Higher the better

  45. Cash Flow to Total Debt Ratio 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 the Higher the better

  46. 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

  47. Cash Turnover • Number of cash conversion cycles in a year • 365/cash conversion cycle the More the better

  48. Efficiency Ratios • Cash Conversion Efficiency = Cash Flow / Sales the Higher the better

  49. 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)

  50. 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

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