Financial management, management accounting and internal control
What this domain tests
Investment appraisal, cost of capital, cost-volume-profit analysis and the design of internal control - the toolkit you use to challenge management's budgets, impairment models and going-concern assumptions.
Core rules
- NPV discounts incremental after-tax cash flows at the WACC; accept positive NPV. IRR can mislead for mutually exclusive projects and non-conventional cash flows - prefer NPV.
- WACC = E/V × ke + D/V × kd × (1 − t). Use market values where available and the after-tax cost of debt, because interest is tax-deductible.
- CVP: contribution margin per unit = price − variable cost; break-even units = fixed costs / contribution margin. Operating leverage rises with the fixed-cost share.
- Payback and discounted payback are liquidity screens only; they ignore cash flows beyond the cut-off.
- Working capital: cash conversion cycle = inventory days + receivable days − payable days.
- Internal control follows COSO (control environment, risk assessment, control activities, information and communication, monitoring) and the IIA Three Lines Model; segregation of duties and authorisation are the auditor's main expectations.
Worked example
A company is 60% equity-financed at 12% and 40% debt-financed at 6%; tax is 21%. After-tax cost of debt = 6% × 0.79 = 4.74%. WACC = 0.6 × 12% + 0.4 × 4.74% = 7.20% + 1.90% = 9.1%. A project costs CZK 350m and generates CZK 100m a year for five years. The five-year annuity factor at 9.1% is 3.88, so PV = CZK 388m and NPV = CZK +38m - accept. Using the 6% pre-tax debt cost would overstate NPV; the tax shield belongs in the discount rate.
Traps
Discounting accounting profit instead of cash flow; mixing nominal cash flows with a real discount rate; using book rather than market weights; ignoring that a positive NPV can still sit on an unacceptable control environment, which the audit examiner wants you to say out loud.