When you write the CPA Canada Day 1 Common Final Exam (CFE), you’re expected to find – and recognize in your Situational Analysis Framework (SAF) – two types of quantitative items: 1) financial analysis and 2) quantitative big picture (quant BP) issues. Students often ask me what’s the difference between the two. Let’s review in this post.
What’s Financial Analysis?
Financial analysis is about getting a picture of a company’s financial health. It involves financial ratio and trend analysis where you compare different F/S elements, like revenues, profits, and various ratios. Financial analysis in Day 1 doesn’t need to be in-depth, you can keep it brief.
To know what financial analysis to perform in the Day 1 exam, you need to pay close attention to the details provided in the case.
For example, in the CPA Canada CFE Day DHC v1 case below, Appendix III provides various benchmarks, comparing company to the industry for the years 2022 and 2019 as follows:
When you see these ratios, it’s a signal to discuss some of these ratios.
You don’t have to discuss all of them nor answer the “so what“, but you gotta compare the key ratios of company vs industry, and state whether it decreased or increased. To know which ratios are important enough to discuss, look for BOD objectives in your case. For example, if the BOD wants to achieve a better current ratio in the next three year, this is a key ratio. If the BOD wants to achieve a better occupancy rate, this is a key ratio.
Here’s an example response:
About 3-4 bullet points like above are enough. You don’t need to do anything further except to integrate it to your analysis (discussed below).
What are Quantitative Big Picture issues?
Big picture issues in general are overarching, pervasive issues that impact all the other issues in the case and relate to the company’s overall strategic direction.
Big picture issues can be quantitative and qualitative. As quantitative, they can be financial or non–financial.
Quant BP issues involve constraints, basically limitations on resources that the company needs. Financially these are cash constraints, like company has $10M spending available. Non-financially these are resource constraints, like company has raw materials of only 10M kg.
As I teach in my popular CFE tutoring classes, these are crucial to include in your strategic analysis, recommendations, and overall recommendation. You cannot proceed with that strategic option if it exceeds the constrained resource. For example, if the investment requires more cash than the company has, even if all factors suggest the option is profitable and the pros outweigh the cons, you can’t suggest to proceed with it, unless the company can come up with a way to mitigate it. For example, they can accept a strategic issue to sell part of the company to raise cash and use that cash for other investments.
Here are some examples of quant BP constraints:
- Cash flow constraints
- Lending constraints
- Covenants
- Management time constraint
- Materials constraint
- Space constraint
These can be tricky to spot because they require reading between the lines. For example, Day 1 might hint at a covenant tied to the company’s bank loan without explicitly saying it’s a constraint.
How to Integrate Financial Analysis and Quant BP Issues
Now you learned what are Quant BP issues and Financial Analysis. How do you add those into your response? First, you have to put them in your SAF. Second, you need to integrate factors from the SAF into your analysis of the strategic and other issues in order to pass Day 1.
You can add your financial analysis in either or both quantitative and qualitative of strategic options.
Here’s an example of a student integrating their financial analysis into their quantitative analysis in DHC Version 1 case:
Above student tied strategic issue analysis back to their financial analysis by explaining how it will impact DHC’s ratios overall.
Quant BP issues can also be integrated within either or both quantitative or qualitative. Here’s an example of a student response from CPA Canada Day 1 KTI, Version 1 exam:
In this example, the student integrated the supply constraint of having limited tea leaves available due to KTI’s two contracts expiring from their SAF into their quantitative analysis. The impact on the tea supply is calculated under the scenario that KTI doesn’t renew the May 2025 contract. There would be 1.6M kg in additional tea available to KTI, which is favorable given their limitation on tea supply.
The student also integrated the supply constraint within their qualitative analysis in the scenario the contract is renewed as follows:
Conclusion
Remember the key differences between financial analysis and quantitative BP constraints: financial analysis assesses how the company is doing financially, using ratios and trends, while quant BP issues are constraints that must be considered in your analysis of all strategic options and all recommendations. Both financial analysis and quantitative constraints should be mentioned in your SAF and then integrated, either or both within your quantitative and qualitative analysis of each strategic option.
Extra Resources
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