As you’re studying for the CPA Canada Common Final Exam (CFE), you’ll notice that Day 1 of the exam is structured differently from that of Day 2 and Day 3.
The Day 1 exam is considered indirect, which means the assessment opportunities (AOs) aren’t as clearly laid out for you. For example, instead of being told directly to do a NPV calculation for your quantitative analysis, you may need to figure out which financial tool to use based on the information you’re provided.
Likewise, identifying the big picture issues, such as the cash constraint, is also a key challenge on Day 1, because this may require you to read between the lines to uncover it.
What is cash constraint?
A few years ago, passing Day 1 was simple. You had to prepare a Situational Analysis Framework (such as KSF, SWOT, etc.), analyze 3-4 strategic issues, analyze 1-2 operational issues, and prepare an overall recommendation.
Day 1 exams are now more complicated. CPA Canada Board of Examiners has introduced several layers of big picture issues. These are overarching, pervasive issues that affect all other issues. They relate to strategic direction of the company (referred to as “SD”), interrelation of issues (which we call “IRI”), non-monetary constraints and cash constraints. This cash constraint big picture issue means that the company has limited financial resources for investments. For example, they may have $2M available, while strategic issues may require $4M or $5M or higher. It’s a constraint you have to be careful to not recommend over the limit. You can think of this like a credit card limit that should not be exceeded.
Why is finding cash constraint important?
Simply put, you need it to pass Day 1. Cash constraint is a big picture issue that you need to tackle in order to score a “Yes” on the “Conclude and advise” AO.
Below is the feedback guide for the Conclude and advise AO from a Day 1 case, which shows how you’ll be marked.
When your overall assessment is determined, you must score a Yes on Conclude and advise to score a Clear Pass.
Below is what will see in your Automatic Feedback Report, if you don’t address the big picture issue and you’re unsuccessful at passing the Day 1 exam:
How to spot the cash constraint?
You might find that the cash constraint is mentioned directly in the case or you might have to dig a little deeper. Here are some places in the case where you can look for information about a cash constraint:
- 1) The narrative (introduction)
- 2) Transcript of the board meeting
- 3) The company’s financial statements, if provided
- 4) Appendix with financing information, if provided
Below are examples to help you understand better.
1) The narrative
Often, you’ll find the cash constraint mentioned in the first few pages of the case.
Below is an excerpt from the first page of the CPA Canada JRP Version 2 Day 1 case. The highlighted section below tells you that JRP only has $5M available for investments – that’s your cash constraint!
Here’s another example from NPF v1 case:
2) Transcript of the Board Meeting
Sometimes discussions among BOD members reveal cash constraints. In the below excerpt from the CPA Canada API Day 1 case, Jacob, one of the founding shareholders of API, points out the company’s cash constraint. He mentions that although there is $20M available for financing, any new investments must generate enough cash flow to cover the debt. That’s a clear sign of a cash constraint.
3) Financial Statements (if provided)
If the case doesn’t directly mention a cash constraint, that doesn’t mean there isn’t one! If you’re provided with financial statements, specifically a balance sheet or cash flow statement, be sure to review them. If the case doesn’t mention cash constraint anywhere, you should treat the cash balance on the F/S as the constraint. For example, in DHC v2 exam case below, the cash balance was given in the financial statements and not mentioned anywhere else:
4) Appendix with financing information (if provided)
This is not the same as “financial statements”, this is financing options. You may be provided with an appendix that details the financing available to the company to fund new investments. Below is an example from the CPA Canada CTI v1 Day 1 case:
Conclusion
Day 1 of CFE is more complicated now. Always remember to take a step back and consider if you need to address any big picture issues, such as a cash constraint. Regardless of whether the cash constraint is made obvious or not, it’s important for you to comment on how each proposal could impact the constraint. The cash constraint should be incorporated into your situational analysis, conclusion for each strategic option and overall recommendation. Not addressing it may hold you from passing Day 1!
Extra Resources
CFE pass rates are now at the lowest level on record at just 67.3%. Capstone 2 provides three mock exam cases, only 2 of which are marked. This provides you with limited practice opportunities for Day 1, with cases that are not accurate representations of the actual exam.
Check out Gevorg’s CFE Review – Day 1 with Marking. This highly-rated exam tutoring program provides supplemental mock CFE Day 1 case authored by Gevorg, CPA to simulate the actual exam so that you can practice the types of questions that may be asked. In addition, you’ll get access to live classes, on-demand video lessons, templates, handouts, technical study notes, and much more.
