Candidates often select the Finance module due to their financial professional background. However, Finance has many similarities to Core 2 and prepares well for Day 1 of the CFE. Below are some helpful tips for successfully completing the Finance module.
#1: Expect F/S Analysis
Providing explanation on a company’s financial position is common AO in the Finance exam. These AOs ask you to determine the expansion possibilities, financing options, and comparing financial structures to competitors or industry trends. Your recommendations should focus on improving the company’s financial health.
Similar to Core 2, some examples on key areas to focus on include:
- Vertical Analysis: Analyze company’s F/S by different accounts (eg. gross margin ratio involves revenues and COGS)
- Financial Ratios: Measuring liquidity (eg. Current Ratio), Profitability (eg. Profit Margin Ratio, Return on Equity, etc.) and Leverage (eg. Debt Ratio, AP Turnover, etc.)
- Horizontal Analysis: Analyze company’s F/S over multiple periods to spot trends and patterns.
It’s not as simple as stating that a company is in good or bad health. You should discuss company’s strengths and/or weaknesses using numeric and qualitative support, with the integration of case facts. This will ensure you get C grading.
#2: Practice Quants
Because there is a large portion of quant analysis required in Finance elective, it’s important to practice quants calculations and use your time effectively. Being able to identify the most appropriate analysis (“quants tool“) will help you save time when writing cases. Identifying the user’s ask (i.e. the ultimate goal of the calculation), the financials available, and the time frame will help you isolate what quants tool you need.
Some examples include:
- WACC – know how to calculate and when to use it
- Working Capital (Current Assets – Current Liabilities) – know how to calculate
- Capital Investments – Net Present Value (NPV), Internal Rate of Return (IRR), Payback (PB)
- Cash Flow Statements and Capital Budgeting
- Financial analysis/ratios
- Valuations
These will come with practice, so actively track your time as your practice cases. Spend the necessary time debriefing your calculations to determine where best to begin, what approaches enable you to solve for missing components, and how to lay out your exhibits in excel in an organized manner. Sticking with the time and learning when to walk away from an AO will set you up for success.
#3: Practice Valuations
Knowing how to value a business is important for acquisition AOs. You’ll be asked to determine if an offer price for the business is appropriate, or how much to offer on the potential acquisition. This is a common testable AO as there are several methods to valuing a business.
Some examples of valuations include:
- EBITDA multiple
- Replacement cost method
- Relief-from-royalty method
- Capitalized cash flows
- Discounted cash flow
- Asset based
Understanding the core differences between each of the valuation methods and understanding when best to use each method by looking at the inputs and case facts will be critical. Additionally, keep in mind that these AOs will often require an interpretation / discussion on the result, core assumptions / considerations used in the calculation, and a recommendation on if the proposal should be pursued.
#4: Add Qualitative
Qualitative discussions in Finance elective are based on interpreting results, discussing causes, and providing recommendations. The case will require concise and specific explanations, while integrating case facts.
Some examples of qual. include:
- For ratio analysis, you’ll be required to discuss the results of efficiency, liquidity, and solvency ratios. You’ll also be asked to identify causes and compare to industry benchmarks or prior years.
- For leasing, you’ll be required to discuss the pros and cons of leasing an asset vs. buying.
- For expansion or sale of a business, you’ll be required to discuss the different ways to sell or acquire a business including the purchase of shares vs assets.
- For sources of financing, you’ll be required to discuss the pros and cons of each option to help the company come to a decision.
See my PM tips article on how to write good quals with a handy formula.
#5: Understand Financing Sources
Like Core 2, you’ll likely be asked to provide an analysis on the various financing options available (“sources of financing”). Ideal approach is to use a pros and cons format to discuss the options: loan amount, interest expense, any constraints/risk, flexibility, etc. Then perform quants calculations, if enough information is provided. Offer any mitigations or suggestions for the options available and finally make a clear recommendation on which option to pursue.
Extra Resources
To be successful in the CPA Canada Finance module, you must understand the core quantitative topics and how best to manage time for calculations. Extra study resources are available in the Finance Review course.
