Wiley CPAexcel Exam Review 2014 Focus Notes: Business Environment and Concepts

Focus on: Financial Management—Module 44

FINANCIAL MANAGEMENT

Five functions:

1. Financing—Raising capital to fund the business

2. Capital budgeting—Selecting the best long-term projects based on risk and return

3. Financial management—Managing cash flow so that funds are available when needed at the lowest cost

4. Corporate governance—Ensuring behavior by managers that is ethical and in the best interests of shareholders

5. Risk management—Identifying and managing the firm’s exposure to all types of risk

Working Capital Management

Inventory conversion period (ICP)—The average number of days required to convert inventory to sales

• ICP = Average inventory / Cost of sales per day
• Average inventory = (Beginning inventory + Ending inventory) / 2
• Assume 365 days in a year unless told otherwise

Receivables collection period (RCP)—The average number of days required to collect accounts receivable

• RCP = Average receivables / Credit sales per day

Payables deferral period (PDP)—The average number of days between the purchase of inventory (including materials and labor for a manufacturing entity) and payment for them

• PDP = Average payables / Purchases per day

Cash conversion cycle (CCC)—The average number of days between the payment of cash to suppliers of material and labor and cash inflows from customers

• CCC = ICP + RCP – PDP

Cash Management

Cash balances are maintained by a firm for:

• Operations—To pay ordinary expenses
• Compensating balances—To receive various bank services, ...