CFO Fundamentals
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What This Book Will Do for You xv
PART ONE: REPORTS AND FILINGS
1: Chief Financial Offi cer's Role and Reports 3
Role of the Chief Financial Offi cer 3
Governmental Reporting 12
Reporting under the Sarbanes-Oxley Act 12
XBRL Reporting 13
Other Reporting 14
2: Securities and Exchange Commission Filings 15
SEC Rules 15
S Forms 16
SEC Regulations 17
SOX Reporting Requirements 19
PART TWO: FINANCIAL REPORTING
3: Financial Statement Reporting: The Income Statement 27
How Is the Income Statement Presented? 27
Revenue Recognition 30
Construction Contracts 31
Expense Recognition 37
4: Financial Statement Reporting: The Balance Sheet 45
Assets 45
Accounts Receivable 46
Inventory 49
Fixed Assets 54
Disclosure 62
Liabilities 65
Accounting for Compensated Absences 72
Environmental Obligations 74
Exit or Disposal Activities 75Fair Value Measurements 76
Fair Value Option for Financial Assets and Financial Liabilities 78
Statement of Cash Flows 80
Available-for-Sale and Held-to-Maturity Securities 82
5: Statement of Cash Flows 95
Classifi cations of Cash Flow 95
Analysis of the Statement of Cash Flows 100
6: Accounting and Disclosures 107
Accounting Changes 107
Futures Contracts 119
Various Disclosures 122
7: Key Financial Accounting Areas 125
Consolidation 125
Investments in Stocks and Bonds 127
Leases 138
Pension Plans 147
Postretirement Benefi ts Excluding Pensions 158
Income Tax Allocation 161
Deferred Tax Liability versus Deferred Tax Asset 164
Tax Rates 167
Foreign Currency Accounting 169
Translation of Foreign Currency Statements When the Foreign Currency Is the Functional Currency 172
International Financial Reporting Standards 177
8: Interim and Segmental Reporting 185
Interim Reporting 185
Segmental Reporting 188
PART THREE: COST MANAGEMENT AND IT SYSTEMS
9: Cost Management and Analysis 197
What Is Cost Management and Analysis? 197
Strategic Cost Management 198
Overhead Costing 199
Activity-Based Costing 205
Activity-Based Management 210
Target Costing and Pricing 214
10: Cost-Volume-Profi t Analysis and Leverage 219
Cost-Volume-Profi t Analysis 219
What-If Analysis 223Sales-Mix Analysis 225
CVP Analysis for Nonprofit Organizations 227
Leverage 228
11: Short-Term Decisions 233
Relevant Costs 233
Best Use of Scarce Resources 241
Theory of Constraints 242
12: Financial Forecasting, Planning, and Budgeting 245
Financial Forecasting: The Percent-of-Sales Method 245
Budgeting 247
Some Financial Calculations 257
Budgeting Software 257
Using an Electronic Spreadsheet to Develop a Budget Plan 257
Latest Generation of Budgeting and Planning Software and E-Budgeting 259
13: Risk Management 261
Enterprise Risk Management 261
An Approach to Risk Management 263
A Close Look at Risk Management 264
How to Reduce Investment Risk: Diversify 267
Beta-The Capital Asset Pricing Model 271
Arbitrage Pricing Model 272
14: Capital Budgeting and Real Options 275
Time Value Fundamentals 276
Popular Evaluation Techniques 280
Limited Funds for Capital Spending 286
Real Options 289
Discovery-Driven Planning 290
Effect of Income Taxes on Capital Budgeting Decisions 290
15: The What and Why of Responsibility Accounting 297
Responsibility Accounting Basics 297
Cost Center Performance and Standard Costs 298
Flexible Budgets and Performance Reports 304
Production Mix and Yield Variances 308
16: Control of Profit Centers 313
How Do You Evaluate Profit Centers? 313
Profit Variance Analysis 315
17: Performance of Investment Centers and Transfer Pricing 323
Rate of Return on Investment 323
Residual Income 324
Investment Decisions under ROI and RI 324
Transfer Pricing 325
18: How to Analyze and Improve Corporate
Profi tability and Shareholder Value 331
Measures of Managerial Performance and Shareholder Return 331
Sustainable Rate of Growth 339
Economic Value Added 340
Balanced Scorecard 345
19: Information Technology and IT Systems 349
Computer Technologies Available for Business 349
Role of Information Systems in the Strategic Plan 350
Management Information Systems 351
Who Uses Executive Information Systems? 351
Value Chain Management Software 353
Extensible Business Reporting Language 356
Web 2.0 357
Cloud Computing and Competitive Advantage 358
Mobile Computing (Wireless Technology) 360
Handheld Device Security and Contingency Planning 362
Disaster Recovery and Business Continuity Planning 363
CFO's View of Information Technology: A Current Survey 364
PART FOUR: MANAGEMENT OF ASSETS AND LIABILITIES
20: Working Capital and Cash Management 369
Evaluating Working Capital 369
Cash Management 370
Cash Management Models 378
Banking Relationships 381
International Cash Management 382
21: Management of Accounts Receivable 385
Managing Receivables 385
Investment in Accounts Receivable 388
22: Inventory Management 395
Inventory Recording and Control 395
Inventory Costs 401
Economic Order Quantity 402
Reorder Point 403
How to Find the Optimal Safety Stock Size 406
ABC Inventory Control 409
Service Business 409
23: Management of Payables 411
Accounts Payable System 411
Managing Payables 413
PART FIVE: FINANCING THE BUSINESS
24: Short-Term and Intermediate-Term Financing 417
Short-Term Financing 417
Intermediate-Term Financing 433
25: Long-Term Financing 439
Types of Long-Term Debt and When Each Should Be Used 440
Issuance of Equity Securities 448
Financing Strategy 456
26: Warrants and Convertibles 465
Warrants 465
Convertible Securities 467
27: Cost of Capital and Capital Structure Decisions 475
Individual Costs of Capital 475
Weights 479
EBIT-EPS Approach to Capital Structure Decisions 482
Analysis of Corporate Cash Flows 485
Coverage Ratios 485
Capital Structure Decisions 487
28: Dividend Policy 489
Types of Dividend Policies 489
Variables to Be Considered 491
29: Financial Management of Multinational Corporations 495
Financial Management Essentials for MNCs 495
Foreign Exchange Market 496
Financial Strategies 499
Types of Foreign Exchange Exposure 499
Interest Rate Parity 505
Purchasing Power Parity 506
Appraising Foreign Investments 507
Financing 509
Analysis of Foreign Investments 512
PART SIX: FINANCIAL ANALYSIS, INSURANCE AND LEGAL CONSIDERATIONS, AND ECONOMICS
30: Financial Statement Analysis 521
Financial Analysis Essentials 521
Balance Sheet Analysis 523
Potential for Business Failure 540
Income Statement Analysis 543
Market Value Ratios 549
Analyzing the Financial Structure of the Firm 550
Product Line Measures 553
Industry Characteristics Indicative of Greater Risk 555
Considerations in Foreign Operations 556
31: Analysis, Evaluation, and Control of Revenue and Costs 557
Control Reports 557
Control of Costs 560
Performance Measures 562
Business Processes 564
32: Insurance and Legal Considerations 567
Insurance Protection 567
Types of Insurance 569
Medical and Catastrophe Coverage 573
Liability Insurance Coverage for CFOs 575
Business Law 575
33: Reading Economic Indicators 577
How Can You Keep Track of the Economy with Economic and Monetary Indicators? 577
Housing-Related Measures 582
Indices of Leading, Coincident, and Lagging Economic Indicators 583
Other Important Economic Indices 585
Monetary Indicators and How They Impact the Economy 586
Understanding Economic Data and Indicators 592
Economic Indicators and Stocks and Businesses 593
Economic Indicators and Bond Yields 593
PART SEVEN: LIQUIDITY AND TREASURY
34: Corporate Investments in Securities 597
Cash and Liquidity Management 597
Terms and Features of Bonds 600
Other Fixed Income Investments 609
Money Market Preferred Stock 614
Private Equity 615
Current Trends in Liquidity Management Strategy 616
PART EIGHT: TAXATION
35: Tax Factors in Financial Decision Making 621
What Should You Know about Taxes? 621
Gross Income 622
Depreciation 624
Amortization 624
Tax Planning 626
PART NINE: MERGERS AND ACQUISITIONS, DIVESTITURES, FAILURE, AND REORGANIZATION
36: Mergers and Acquisitions 631
Valuation 631
Fair Market Value of Net Assets 639
Capitalization of Revenue 640
Price/Earnings Ratio 641
Similar Businesses 642
Sales of Stock 643
Combination of Methods 643
Successful Strategy for Mergers and Acquisitions 644
37: Divestiture 645
Why Divest? 645
Asset Valuation Methods 647
Profi tability Methods 648
Market-Based Comparisons 648
Discounted Cash Flow Analysis 649
Divestiture with Uncertainty 651
38: Forecasting Corporate Financial Distress 655
Prediction Models 656
Z-Score Model 656
Applications 657
39: Failure and Reorganization 667
Business Failure 667
Reorganization 669
40: Valuation of Bonds and Stocks 679
How to Value a Security 679
How to Value Bonds 680
How to Value Preferred Stock 683
How to Value Common Stock 684
Price/Earnings Ratio Approaches 688
Other Pragmatic Approaches 693
The Bottom Line 694
41: Financial Statement Analysis: Key Financial Ratios and Metrics for Nonprofits 697
Trend Analysis 698
Analysis of the Balance Sheet 699
Liquidity Analysis 699
Appraisal of Solvency, Capital Structure, and Net Assets (Fund Balance) 704
Evaluation of the Statement of Activities 704
Performance Metrics 707
Spotting Potential Bankruptcy and Avoiding Financial Problems 711
Case Study in Financial Statement Analysis 714
Appendix 725
About the Authors 729
Index 731
