CFE Day 1: Quants Constraint vs. Financial Analysis

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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

CFE pass rates are lowest on record at 67.3%. 

Check out Gevorg’s CFE Review – Day 1 with Marking. This highly rated tutoring program boasts 91% pass rate and provides supplemental mock CFE Day 1 case, live classes, on-demand video lessons, templates, handouts, technical study notes, to help you become a CPA.

 

CFE Day 1: How to Find the Cash Constraint

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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.