Financial Reporting and Analysis Quiz

Certified Financial Management Specialist (CFMS) Review Material

• This material is a review for the CFMS certification.
• The information provided is from 2024 curriculum materials.
• Content is not for sale.

Capital Markets

• Stock Markets: Establish prices of firm's stocks, essential for financial managers to maximize firm value.
• Physical Location Stock Exchanges: Formal organizations with physical locations for trading listed securities.
• Over-The-Counter (OTC): A network of brokers and dealers connected electronically; trades in unlisted securities.
• Dealer Market: Consists of dealers holding inventories of securities, brokers acting as agents, and electronic networks for communication.

Equity Valuation

• Equity Valuation: Estimating the value of a firm or its security based on underlying business fundamentals.
• Comparable Approach: Comparing a company's equity to competitors or similar firms in the same sector.

Capital Structure

• Capital: Investor-supplied funds (debt, preferred/common stock, retained earnings). Accounts payable and accruals are not considered capital.
• Capital Structure: The mix of investor-supplied capital (as a percentage), aiming for optimal structure to maximize stock's intrinsic value and minimise WACC (Weighted Average Cost of Capital).

Behavioral Finance

• Behavioral Finance: Study of psychological factors impacting financial markets.
• Mental Accounting: Allocating money for specific purposes.
• Herd Behavior: Mimicking the financial behaviors of others (common in stock markets).
• Emotional Gaps: Decision-making based on extreme emotions (fear, excitement, etc.).
• Confimation Bias: Favoring information confirming pre-existing beliefs.
• Experiential Bias: Biasing decisions based on recent memories.
• Loss Aversion: More concern for losses than gains, leading to risk aversion.
• Familiarity Bias: Favoring familiar investments.

Interest Rates

• Interest Rates: Price that lenders receive from borrowers for debt capital.
• Real Risk-Free Rate (R):* Interest rate on default-free U.S. Treasury if inflation is not expected.
• Nominal Risk-Free Rate: Rate of interest free of all risk, including an inflation premium.
• Inflation Premium (IP): Premium added to real risk-free rate to account for expected inflation.
• Default Risk Premium (DRP): Difference between corporate and Treasury bond rates, reflecting default risk.
• Liquidity Premium (LP): Addition to the yield to reflect a security’s lack of immediate marketability.
• Interest Rate Risk, Maturity Risk Premium & Reinvestment Rate Risk: Risks related to changes in interest rates impacting bond values and income.

Income and Business Taxation

• Corporate Tax: Taxes collected by the government on taxable income, after deductions.
• Corporate Tax Deductions: Allowable deductions for necessary business expenses (salaries, benefits, insurance, travel, etc) and investments for the business.
• Double Taxation: Taxation both at the corporate and individual (dividend) levels when a company's income is distributed.

Individual Taxation

• Individual Income Tax: Tax levied on individual's wages, salaries, income, that may not be taxed on the entire amount due to exemptions/deductions/credits.

Financial Analysis and Reporting

• Financial Statement Analysis: Process for analyzing company financials for decision-making (internal/external).
• Financial Statements: Balance sheet, income statement, and cash flow statement.

Financial Modeling

• Financial Modeling: Process of creating summary of a company's expenses and earnings.
• Goal: Determine impact of future events/decisions.

Banking and Financial Institutions

• Banking Regulation: Rules and regulations that govern banks.
• Bank Regulation Purposes: Protection of consumers, financial system stability, prevention of financial crime.

Risk Management in Banks

• Risk Management Types: Credit, Market, Operational, Reputational, Liquidity.

Corporate Governance

• Corporate Governance: System of rules, practices, and processes that direct and control company operations. Balancing varied stakeholders interests.
• Benefits: Transparency, leadership, trust, financial viability etc.

Bonds and their Valuation

• Bonds: Long-term contracts for borrowing funds involving regular interest payments and principal repayment.
• Types of Bonds: Treasury, Corporate, Municipal, Foreign

Portfolio Theory and Management

• Portfolio Theory: Maximizing expected return for a certain level of risk.
• Diversification: Minimizing risk by holding uncorrelated assets.
• Portfolio Frontier: Set of portfolios that maximize expected return for a given risk level.
• Capital Allocation Line (CAL): Shows tradeoff between risk and reward for different portfolios.

Cash and Working Capital Management

• Cash Flow Management: Tracking and managing inflows and outflows of cash, vital for business health.
• Cash Flow Categories: Operating activities, Investing activities, Financing activities (primary components).
• Accounts Payable (AP) and Receivable (AR): Monitoring and managing the timing of payments to/from vendors and customers.

Inventory Management

• Inventory Management: Sourcing, storing, and selling inventory efficiently, crucial for businesses focused on products.
• Benefits: Cost savings, greater control, reduced risk of overselling.

Short-Term Financing

• Short-Term Financing: Funds for less than a year (covering operating expenses, inventory, receivables).
• Forms of short-term financing: Trade credit, working capital loans, factoring or invoice discounting, business lines of credit.

Test your knowledge on the essential aspects of financial reporting and analysis in a business context. This quiz covers key concepts such as financial statements, performance metrics, and capital budgeting. Assess your understanding of the objectives and limitations of financial reporting.