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CPA Intermediate LevelFinancial Management
Chapters

CPA Intermediate Level

Financial Management cheat sheet

Every chapter's key points, formulas and definitions on one page, for the last week before the exam. Each heading links to the chapter that explains it.

Overview of financial management

  • Financial management makes three decisions: the investment decision (which assets and projects to fund), the financing decision (where the funds come from) and the dividend decision (how much profit to pay out and how much to retain).
  • The primary financial objective is shareholder wealth maximisation, preferred to profit maximisation because profit can be manipulated by policy choices, ignores timing and ignores risk.
  • Agency theory treats managers as the shareholders' agents; the costs of controlling them are monitoring costs, bonding costs and the residual loss.
  • Section 143 of the Companies Act, 2015 takes the enlightened shareholder value position: directors promote the success of the company for its members while having regard to employees, suppliers, customers, the community and the environment.
  • Economic value added (NOPAT less WACC times capital employed) shows whether managers earned more than the cost of the capital they used; a firm can report a profit and still destroy value.

Formulas

Economic value added
EVA = NOPAT - (WACC x Capital employed)

Key terms

To shareholders
To maximise the value of their investment, the return earned on the capital they supplied relative to the risk they bear, and to account to them honestly for how it has been used; the finance manager is their agent (see Agency, stakeholders and governance, below).
To employees
To keep the firm solvent so that it can pay wages and provide secure employment, to fund fair remuneration, and to invest in the training and equipment that make their work productive.
To society and the community
To conduct the firm's affairs responsibly: paying suppliers on time, not externalising costs onto the environment, and having regard to the community the firm operates in, which section 143 of the Companies Act, 2015 requires directors to consider.
To government
To comply with company, tax, competition and sector law, to pay taxes when due and account for the taxes the firm collects as agent (PAYE, VAT), and to provide the returns and disclosures the regulators require.
To lenders, suppliers and customers
To honour the firm's contracts, service its debt, and give the counterparties who extend it credit or rely on its products the information they need; a firm that cannot pay its creditors cannot serve its shareholders either.
Accounting measures
Profit and earnings per share (EPS), return on capital employed (ROCE) and return on investment (ROI) for a division; simple and familiar, but based on accounting profit, which managers can influence by policy choices, and which ignores risk and the cost of the capital tied up.
Residual income and economic value added
Residual income charges the division or firm for the capital it uses: profit less a capital charge at the required rate. Economic value added (EVA) is the same idea applied to the whole firm: net operating profit after tax less the weighted average cost of capital times the capital employed, adjusted to remove accounting distortions; a positive EVA means the managers created value above the cost of the funds they used.
Market measures
Share price and total shareholder return (dividend plus capital gain over the period), and market value added (MVA), the excess of the firm's market value over the capital invested in it (see Valuing ordinary shares, in the chapter on valuation); the most direct measures of the shareholder objective, but affected by market movements the managers do not control.
Non-financial and balanced measures
Customer satisfaction, quality, innovation, employee development and market share, combined with the financial measures in a balanced scorecard, so that managers are not rewarded for a short-term financial result bought at the expense of the drivers of future value.
Compensation and incentives
Pay:

The rest of the sheet covers

  • The financing decision
  • Financial institutions and markets
  • The time value of money
  • Business and financial asset valuation models
  • Capital structure
  • Capital budgeting
  • Financial statement analysis and forecasting
  • Working capital management
  • The dividend decision
  • Portfolio analysis
  • Islamic finance
  • Personal financial management
  • Worked examples
  • Exam technique and revision
  • Glossary