CFO Fundamentals

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.

• What This Book Will Do for You xvPART ONE: REPORTS AND FILINGS1: Chief Financial Offi cer’s Role and Reports 3Role of the Chief Financial Offi cer 3Governmental Reporting 12Reporting under the Sarbanes-Oxley Act 12XBRL Reporting 13Other Reporting 142: Securities and Exchange Commission Filings 15SEC Rules 15S Forms 16SEC Regulations 17SOX Reporting Requirements 19PART TWO: FINANCIAL REPORTING3: Financial Statement Reporting: The Income Statement 27How Is the Income Statement Presented? 27Revenue Recognition 30Construction Contracts 31Expense Recognition 374: Financial Statement Reporting: The Balance Sheet 45Assets 45Accounts Receivable 46Inventory 49Fixed Assets 54Disclosure 62Liabilities 65Accounting for Compensated Absences 72Environmental Obligations 74Exit or Disposal Activities 75Fair Value Measurements 76Fair Value Option for Financial Assets and Financial Liabilities 78Statement of Cash Flows 80Available-for-Sale and Held-to-Maturity Securities 825: Statement of Cash Flows 95Classifi cations of Cash Flow 95Analysis of the Statement of Cash Flows 1006: Accounting and Disclosures 107Accounting Changes 107Futures Contracts 119Various Disclosures 1227: Key Financial Accounting Areas 125Consolidation 125Investments in Stocks and Bonds 127Leases 138Pension Plans 147Postretirement Benefi ts Excluding Pensions 158Income Tax Allocation 161Deferred Tax Liability versus Deferred Tax Asset 164Tax Rates 167Foreign Currency Accounting 169Translation of Foreign Currency Statements When the Foreign Currency Is the Functional Currency 172International Financial Reporting Standards 1778: Interim and Segmental Reporting 185Interim Reporting 185Segmental Reporting 188PART THREE: COST MANAGEMENT AND IT SYSTEMS9: Cost Management and Analysis 197What Is Cost Management and Analysis? 197Strategic Cost Management 198Overhead Costing 199Activity-Based Costing 205Activity-Based Management 210Target Costing and Pricing 21410: Cost-Volume-Profi t Analysis and Leverage 219Cost-Volume-Profi t Analysis 219What-If Analysis 223Sales-Mix Analysis 225CVP Analysis for Nonprofit Organizations 227Leverage 22811: Short-Term Decisions 233Relevant Costs 233Best Use of Scarce Resources 241Theory of Constraints 24212: Financial Forecasting, Planning, and Budgeting 245Financial Forecasting: The Percent-of-Sales Method 245Budgeting 247Some Financial Calculations 257Budgeting Software 257Using an Electronic Spreadsheet to Develop a Budget Plan 257Latest Generation of Budgeting and Planning Software and E-Budgeting 25913: Risk Management 261Enterprise Risk Management 261An Approach to Risk Management 263A Close Look at Risk Management 264How to Reduce Investment Risk: Diversify 267Beta—The Capital Asset Pricing Model 271Arbitrage Pricing Model 27214: Capital Budgeting and Real Options 275Time Value Fundamentals 276Popular Evaluation Techniques 280Limited Funds for Capital Spending 286Real Options 289Discovery-Driven Planning 290Effect of Income Taxes on Capital Budgeting Decisions 29015: The What and Why of Responsibility Accounting 297Responsibility Accounting Basics 297Cost Center Performance and Standard Costs 298Flexible Budgets and Performance Reports 304Production Mix and Yield Variances 30816: Control of Profit Centers 313How Do You Evaluate Profit Centers? 313Profit Variance Analysis 31517: Performance of Investment Centers and Transfer Pricing 323Rate of Return on Investment 323Residual Income 324Investment Decisions under ROI and RI 324Transfer Pricing 32518: How to Analyze and Improve CorporateProfi tability and Shareholder Value 331Measures of Managerial Performance and Shareholder Return 331Sustainable Rate of Growth 339Economic Value Added 340Balanced Scorecard 34519: Information Technology and IT Systems 349Computer Technologies Available for Business 349Role of Information Systems in the Strategic Plan 350Management Information Systems 351Who Uses Executive Information Systems? 351Value Chain Management Software 353Extensible Business Reporting Language 356Web 2.0 357Cloud Computing and Competitive Advantage 358Mobile Computing (Wireless Technology) 360Handheld Device Security and Contingency Planning 362Disaster Recovery and Business Continuity Planning 363CFO’s View of Information Technology: A Current Survey 364PART FOUR: MANAGEMENT OF ASSETS AND LIABILITIES20: Working Capital and Cash Management 369Evaluating Working Capital 369Cash Management 370Cash Management Models 378Banking Relationships 381International Cash Management 38221: Management of Accounts Receivable 385Managing Receivables 385Investment in Accounts Receivable 38822: Inventory Management 395Inventory Recording and Control 395Inventory Costs 401Economic Order Quantity 402Reorder Point 403How to Find the Optimal Safety Stock Size 406ABC Inventory Control 409Service Business 40923: Management of Payables 411Accounts Payable System 411Managing Payables 413PART FIVE: FINANCING THE BUSINESS24: Short-Term and Intermediate-Term Financing 417Short-Term Financing 417Intermediate-Term Financing 43325: Long-Term Financing 439Types of Long-Term Debt and When Each Should Be Used 440Issuance of Equity Securities 448Financing Strategy 45626: Warrants and Convertibles 465Warrants 465Convertible Securities 46727: Cost of Capital and Capital Structure Decisions 475Individual Costs of Capital 475Weights 479EBIT–EPS Approach to Capital Structure Decisions 482Analysis of Corporate Cash Flows 485Coverage Ratios 485Capital Structure Decisions 48728: Dividend Policy 489Types of Dividend Policies 489Variables to Be Considered 49129: Financial Management of Multinational Corporations 495Financial Management Essentials for MNCs 495Foreign Exchange Market 496Financial Strategies 499Types of Foreign Exchange Exposure 499Interest Rate Parity 505Purchasing Power Parity 506Appraising Foreign Investments 507Financing 509Analysis of Foreign Investments 512PART SIX: FINANCIAL ANALYSIS, INSURANCE AND LEGAL CONSIDERATIONS, AND ECONOMICS30: Financial Statement Analysis 521Financial Analysis Essentials 521Balance Sheet Analysis 523Potential for Business Failure 540Income Statement Analysis 543Market Value Ratios 549Analyzing the Financial Structure of the Firm 550Product Line Measures 553Industry Characteristics Indicative of Greater Risk 555Considerations in Foreign Operations 55631: Analysis, Evaluation, and Control of Revenue and Costs 557Control Reports 557Control of Costs 560Performance Measures 562Business Processes 56432: Insurance and Legal Considerations 567Insurance Protection 567Types of Insurance 569Medical and Catastrophe Coverage 573Liability Insurance Coverage for CFOs 575Business Law 57533: Reading Economic Indicators 577How Can You Keep Track of the Economy with Economic and Monetary Indicators? 577Housing-Related Measures 582Indices of Leading, Coincident, and Lagging Economic Indicators 583Other Important Economic Indices 585Monetary Indicators and How They Impact the Economy 586Understanding Economic Data and Indicators 592Economic Indicators and Stocks and Businesses 593Economic Indicators and Bond Yields 593PART SEVEN: LIQUIDITY AND TREASURY34: Corporate Investments in Securities 597Cash and Liquidity Management 597Terms and Features of Bonds 600Other Fixed Income Investments 609Money Market Preferred Stock 614Private Equity 615Current Trends in Liquidity Management Strategy 616PART EIGHT: TAXATION35: Tax Factors in Financial Decision Making 621What Should You Know about Taxes? 621Gross Income 622Depreciation 624Amortization 624Tax Planning 626PART NINE: MERGERS AND ACQUISITIONS, DIVESTITURES, FAILURE, AND REORGANIZATION36: Mergers and Acquisitions 631Valuation 631Fair Market Value of Net Assets 639Capitalization of Revenue 640Price/Earnings Ratio 641Similar Businesses 642Sales of Stock 643Combination of Methods 643Successful Strategy for Mergers and Acquisitions 64437: Divestiture 645Why Divest? 645Asset Valuation Methods 647Profi tability Methods 648Market-Based Comparisons 648Discounted Cash Flow Analysis 649Divestiture with Uncertainty 65138: Forecasting Corporate Financial Distress 655Prediction Models 656Z-Score Model 656Applications 65739: Failure and Reorganization 667Business Failure 667Reorganization 66940: Valuation of Bonds and Stocks 679How to Value a Security 679How to Value Bonds 680How to Value Preferred Stock 683How to Value Common Stock 684Price/Earnings Ratio Approaches 688Other Pragmatic Approaches 693The Bottom Line 69441: Financial Statement Analysis: Key Financial Ratios and Metrics for Nonprofits 697Trend Analysis 698Analysis of the Balance Sheet 699Liquidity Analysis 699Appraisal of Solvency, Capital Structure, and Net Assets (Fund Balance) 704Evaluation of the Statement of Activities 704Performance Metrics 707Spotting Potential Bankruptcy and Avoiding Financial Problems 711Case Study in Financial Statement Analysis 714Appendix 725About the Authors 729Index 731