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The CFO Fundamentals


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Table of Contents

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

About the Author

JAE K. SHIM, PHD , has authored or coauthored more than fifty professional and college accounting books. He is CEO of Delta Consulting Co., a financial consulting and training firm, and has been a consultant to commercial and nonprofit organizations for over thirty years. JOEL G. SIEGEL, PHD, CPA , is the author of over fifty books and has written hundreds of articles for accounting and financial journals. Dr. Siegel has acted as consultant in accounting issues to many organizations, including IT&T, Citicorp, and Person-Wolinsky CPA Review. ALLISON I. SHIM, MS, is CFO of Delta Consulting Co. She is a finance expert and a PhD candidate at the University of California, Irvine.

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