CPA PEP Finance Elective cheat sheet

Revenue recognition (IFRS 15 / ASC 606) five-step model: identify the contract, identify performance obligations, determine transaction price, allocate price to obligations, recognize revenue when each obligation is satisfied (point in time or over time).

Over-time recognition requires one of: customer simultaneously receives and consumes benefits, the entity's performance creates or enhances a customer-controlled asset, or performance creates an asset with no alternative use plus an enforceable right to payment.

Lease accounting (IFRS 16): lessee recognizes a right-of-use asset and lease liability at present value of unavoidable lease payments; exclude variable payments not tied to an index or rate. Short-term and low-value exemptions permitted.

Under ASPE, leases are classified as operating or finance; capitalized finance lease transfers substantially all risks and rewards (e.g., bargain purchase option, lease term ≥ 75% of useful life, PV of payments ≥ 90% of fair value).

Impairment: IAS 36 uses recoverable amount = higher of fair value less costs of disposal and value in use; US GAAP uses undiscounted cash flow recoverability test first, then fair value.

Deferred taxes arise from temporary differences between accounting carrying amount and tax base; measure at enacted/substantively enacted rates expected when the difference reverses.

Consolidation: control under IFRS 10 requires power over relevant activities, exposure to variable returns, and ability to use power to affect returns; significant influence (typically 20%-50%) uses equity method.

Fair value hierarchy (IFRS 13): Level 1 quoted prices in active markets, Level 2 observable inputs, Level 3 unobservable inputs; disclosure increases with lower-level inputs.

Provisions recognized when a present obligation exists from a past event, outflow is probable, and amount can be reliably estimated; contingent assets are not recognized until virtually certain.

DuPont decomposition: ROE = net profit margin × asset turnover × equity multiplier; isolate operating performance (margin, turnover) from financing leverage (multiplier).

Quality-of-earnings check: compare net income to operating cash flow; persistent gaps suggest aggressive accruals, capitalization choices, or working-capital manipulation.

Free cash flow to firm = EBIT × (1 − tax rate) + depreciation − capex − increase in net working capital; FCFF discounts at WACC, FCFE at cost of equity.

Sustainable growth rate = ROE × (1 − dividend payout ratio); growth above this requires new external equity or higher leverage.

Common-size analysis converts income statement lines to % of revenue and balance sheet lines to % of total assets, enabling cross-company and time-series comparison of structure.

Forecasting: build revenue drivers bottom-up (volume × price, segment growth), tie working capital to revenue days, and reconcile retained earnings to close the balance sheet each period.

Variance analysis: decompose profit shortfall into price, volume, mix, and cost components; mix effects often dominate in multi-product businesses.

Ratio benchmarks: current ratio, quick ratio, interest coverage (EBIT/interest), and debt/EBITDA are covenant metrics; compare to peer medians and the company's own trend, not absolute thresholds.

NPV = Σ CFt/(1+r)^t − initial outlay; accept projects with NPV > 0; NPV is the primary criterion because it measures value added in absolute dollars.

IRR is the discount rate where NPV = 0; unreliable for non-conventional cash flows (multiple IRRs) and misleading when comparing projects of different scale or duration-use incremental IRR or NPV.

Incremental cash flow rules: include opportunity costs and cannibalization, exclude sunk costs and allocated fixed overhead, and treat working capital as recovered at project end.

Real options (expand, abandon, defer) add value beyond static DCF; option value rises with volatility and time to decide.

Capital rationing: when capital is limited, rank by profitability index (PV of inflows / initial investment) rather than raw NPV, subject to project indivisibility.

Payback and discounted payback measure liquidity and risk exposure, not value creation; use as secondary screens alongside NPV.

Replacement decisions compare equivalent annual cost = NPV of costs / annuity factor over the asset's life, not raw cost totals.

Tax shield on CCA (Canada): PV of tax shield = (C × d × T)/(d + r) × (1 + r/2) for a half-year convention, where d is the CCA rate and T the tax rate.

WACC = (E/V) × Re + (D/V) × Rd × (1 − T); use market values for weights and target capital structure for forward-looking decisions.

CAPM: Re = Rf + β × (Rm − Rf); levered beta = unlevered beta × [1 + (1 − T) × D/E] (Hamada); relever peer betas to the target structure.

After-tax cost of debt = pre-tax yield × (1 − T); flotation costs raise the effective cost and can be incorporated as a reduction in project proceeds.

Modigliani-Miller: in perfect markets with taxes, firm value increases with debt by T × D; trade-off theory balances tax shields against financial distress and agency costs.

Pecking order: firms prefer internal funds, then debt, then equity, reflecting asymmetric information and issuance costs.

Dividend policy is largely irrelevant in perfect markets (MM 1961); in practice, signaling, clientele effects, and taxes drive observed payout choices.

Debt covenants (maintenance vs. incurrence) restrict leverage, distributions, and asset sales; covenant headroom affects the cost and availability of financing.

Credit ratings drive cost of debt; rating agencies weight leverage, interest coverage, business risk, and financial policy (e.g., stated leverage targets).

Interest rate parity links spot and forward FX rates: F/S = (1 + r_foreign)/(1 + r_domestic); deviations create covered arbitrage opportunities.

Purchasing power parity: expected spot change ≈ inflation differential; used for long-run FX forecasting, not short-term.

Forward contracts lock a price with counterparty credit risk; futures are standardized, exchange-traded, and marked to market daily with margin.

Options: call payoff at expiry = max(S − K, 0); put payoff = max(K − S, 0); premiums reflect intrinsic value plus time value; delta measures hedge ratio.

Interest rate swaps exchange fixed for floating payments; a fixed-rate payer gains when rates rise; value = PV of net fixed-vs-floating differential.

Hedge accounting (IFRS 9 / ASC 815) requires formal designation, documentation, and effectiveness assessment; fair value, cash flow, and net investment hedges are the three types.

Cash management: target operating cash balance, invest surplus in laddered instruments matched to liquidity needs, and monitor counterparty exposure limits.

Transaction exposure affects near-term cash flows from known foreign-currency contracts; translation exposure affects reported equity from consolidating foreign subsidiaries.

Enterprise value = equity value + net debt + preferred + minority interest − associates/investments; EV/EBITDA is capital-structure-neutral and useful for cross-border comparisons.

DCF: EV = Σ FCFF/(1+WACC)^t + terminal value/(1+WACC)^n; terminal value = FCFF_(n+1)/(WACC − g) under the Gordon growth model, with g < WACC and g ≤ long-run nominal GDP growth.

Comparable company analysis uses trading multiples (EV/EBITDA, P/E, EV/Sales); precedent transactions use control premiums and are typically higher than trading comps.

M&A synergy value = combined PV of incremental cash flows − premium paid; acquirer shareholders benefit only if synergies exceed premium and integration costs.

Accretion/dilution: a deal is accretive to EPS if the target's earnings yield (E/P) exceeds the after-tax cost of acquisition financing; stock deals depend on the acquirer's P/E relative to the target's.

Purchase price allocation under IFRS 3 / ASC 805 recognizes identifiable intangibles at fair value; goodwill = consideration − fair value of net identifiable assets; goodwill is not amortized but tested annually for impairment.

Control premium, minority discount, and marketability discount adjust valuation for ownership characteristics; disclose basis and magnitude.

LBO returns: target IRR driven by entry multiple, leverage, EBITDA growth, and exit multiple; value creation decomposes into EBITDA growth, multiple expansion, and debt paydown.

CPA Code of Professional Conduct (Canada): principles include professional behaviour, integrity and due care, objectivity, confidentiality, and competence; independence rules apply to assurance and certain finance roles.

Conflict of interest: disclose and manage, or withdraw; a finance professional cannot serve two parties with adverse interests without informed consent.

COSO internal control framework: five components (control environment, risk assessment, control activities, information and communication, monitoring) and 17 principles.

Board committees: audit committee (financial reporting oversight, external auditor independence), compensation committee (executive pay alignment), and risk committee (enterprise risk oversight).

Agency problems: separation of ownership and control creates monitoring costs; align incentives through equity-based pay, clawbacks, and independent directors.

Strategy frameworks: Porter's five forces (supplier/buyer power, rivalry, substitutes, new entrants) and SWOT; link financial forecasts to explicit strategic assumptions.

Professional skepticism: corroborate management representations with independent evidence; document judgments and the alternatives considered.

Whistleblowing and escalation: report suspected fraud or illegal acts to appropriate authority (audit committee, regulator); confidentiality does not override legal or ethical reporting duties.