Business Analysis and Reporting (BAR): Analysis, Valuation, and Decisions
Business Analysis and Reporting (BAR) is a discipline section that tests financial statement analysis, forecasting, valuation, cost and managerial accounting, and risk analysis. Expect calculations followed by interpretation: the exam often asks which decision or adjustment follows from a number.
Analysis and forecasting
Use common-size statements and ratio decomposition. DuPont analysis expresses ROE as net profit margin × total asset turnover × equity multiplier. Sustainable growth is ROE × retention ratio, assuming constant margins and turnover. For forecasting, distinguish fixed and variable costs and test assumptions for seasonality and autocorrelation.
Capital budgeting
Use incremental after-tax cash flows. Include initial outlay, operating cash flows, working capital, and terminal salvage net of tax. Exclude sunk costs and allocated fixed overhead that does not change. NPV is the primary criterion; IRR assumes reinvestment at the IRR and can mislead when projects differ in scale or timing.
Worked example
Equipment costs $500,000, has a five-year life, and is depreciated straight-line to zero. Annual revenue is $300,000 and cash operating costs are $120,000; the tax rate is 25% and the discount rate is 10%. Depreciation is $100,000, so taxable income is $80,000, tax is $20,000, and net income is $60,000. Add back depreciation to get annual operating cash flow of $160,000. The five-year annuity factor at 10% is 3.7908, so PV is $606,528 and NPV is $106,528. Accept the project.
Traps
Do not discount accounting income instead of cash flow, forget the depreciation add-back, or ignore tax on salvage. Do not include sunk costs or allocated overhead. Do not compare IRRs across projects of very different scale without considering NPV.