Management Accounting

Objectives, Role, and Scope of Management Accounting

A. Basic Management Function
a. Planning - The detailed formulation of action to achieve a particular end
b. Controlling - Monitoring a plan’s implementation and taking corrective action as needed.
c. Decision Making - The process of choosing among competing alternatives.
B. Standard of Ethical Standards for Management Accountants
a. Competence
b. Confidentiality
c. Integrity
d. Objectivity
C. Role and activities of controller and treasurer
a. Role and Function of Controller - Mainly responsible for the accounting aspects of management planning and
control. (1) accumulation and reporting of accounting information to all levels of management and (2)
directing management’s attention to problems and assisting them in solving such problems. Some of its
functions are: Planning for control, Reporting and Interpreting, Evaluating and Consulting, Tax
administration, Government Reporting, etc.
b. Role and Function of Treasurer - oversees the finance department; main responsibility is to help their company
grow its funds and invest the money they have wisely. Some of its functions are; Provision of capital, Investor
Relations, Short-term Financing, Banking and Custody, Credit Collections, Investments, and Insurance.
D. Distinction among management accounting, cost accounting, and financial accounting
Basis Financial Accounting Cost Accounting Management Accounting
Objects Record transactions and Ascertainment, allocation, To assist the management
determine financial
accumulation, and in decision-making and
position and profit or loss.
accounting for cost. policy formulation.
Nature Concerned with historicalConcerned with both past Deals with projection of
data. and present recorded data for the future
(historical in nature) (futuristic nature).
Principle Followed Governed by GAAP. Certain principles followed No set principles are
for recording costs. followed in it.
Data Used Data Qualitative aspects Only quantitative aspect Uses both quantitative and
are not recorded. used recorded. qualitative concepts.

Cost Terms, Concepts and Behaviors

A. Nature and Classifications of costs
a. As to type
i. Product Costs
ii. Period Costs
b. As to function
i. Manufacturing Costs
1. Direct Manufacturing Costs
2. Indirect Manufacturing Costs
ii. Non-Manufacturing Costs
1. Research and Development
2. Marketing Costs
3. Distribution Costs
4. Selling Costs
5. After-Sales Costs
6. General and Administrative Costs
c. As to traceability assignment to cost object
i. Direct Costs
ii. Indirect Costs
d. For decision making
i. Relevant Costs
ii. Differential Costs
1. Incremental Costs
2. Decremental Costs
iii. Opportunity Costs
iv. Sunk/Past or Historical Costs
e. As to behavior
i. Variable Costs
ii. Fixed Costs
1. Committed Fixed Costs
2. Discretionary or Managed Fixed Costs
iii. Mixed Costs
iv. Step Costs
 B. Cost Behavior Analysis
• The way costs change with respect to a change in activity level.
a. Fixed Costs
i. Increase in Activity level = Decrease in per Unit Cost but Constant in Total Costs
ii. Decrease in Activity Level = Increase in per Unit Costs but Constant in Toal Costs
b. Variable Costs
i. Increase in Activity Level = Constant in per Unit Cost but Increase in Total Costs
ii. Decrease in Activity Level = Constant in per Unit Costs but Decrease in Total Costs
c. Mixed Costs
i. Variable Costs = Total Costs Increases as Volume Increases/Decreases as Volume Decrease = Constant
Cost per Unit
ii. Fixed Costs = Constant in Total Costs = Increase as Volume Decreases/Decrease as Volume Increases
Cost per Unit
iii. Example
i. Labor Costs = Total Costs Increases as Volume Increases/Decreases as Volume Decreases =
Increase as Volume Decreases in Cost per Unit/Decreases as Volume Increases in Cost per Unit.

C. Splitting Mixed Costs

• Simple and widely used technique of segregating mixed costs components.

CVP Analysis
A. Factors Affecting Profit
a. Selling Price per Unit
b. Variable Costs per Unit
c. Volume or Number of Units
d. Fixed Costs
e. Sales Mix
B. Break-Even Analysis
𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔
a. 𝑩𝑬𝑷 𝒊𝒏 𝑷𝒆𝒔𝒐 =
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
b. 𝑩𝒆𝒑 𝒊𝒏 𝑼𝒏𝒊𝒕𝒔 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡
C. Required selling price, unit sales, and peso sales to achieve a target profit

D. Concepts of margin of safety and operating leverage

a. Margin of Safety – The number of peso-sales or number of units by which actual or budgeted sales may be
decreased without resulting to a loss.
b. 𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 𝒊𝒏 𝑷𝒆𝒔𝒐 = 𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝑃𝑒𝑠𝑜 − 𝐵𝑟𝑒𝑎𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 𝑖𝑛 𝑃𝑒𝑠𝑜
c. 𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 𝒊𝒏 𝑼𝒏𝒊𝒕𝒔 = 𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 − 𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑃𝑜𝑖𝑛𝑡 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 𝑖𝑛 𝑃𝑒𝑠𝑜 𝑜𝑟 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠
d. 𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝑃𝑒𝑠𝑜 𝑜𝑟 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠

Standard Costing and Variance Analysis

A. Direct Material Variance
a. 𝑺𝒑𝒆𝒏𝒅𝒊𝒏𝒈 𝒐𝒓 𝑷𝒓𝒊𝒄𝒆 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 − 𝑆𝑡𝑎𝑛𝑑𝑟𝑎𝑑 𝑃𝑟𝑖𝑐𝑒) 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
b. 𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 𝒐𝒓 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 − 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦) 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑃𝑟𝑖𝑐𝑒
B. Direct Labor Variance
a. 𝑺𝒑𝒆𝒏𝒅𝒊𝒏𝒈 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑅𝑎𝑡𝑒 − 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑅𝑎𝑡𝑒 )𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠
b. 𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 𝒐𝒓 𝑻𝒊𝒎𝒆 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠 − 𝑆𝑡𝑎𝑛𝑑𝑟𝑎𝑟𝑑 𝐻𝑜𝑢𝑟𝑠)𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑅𝑎𝑡𝑒
C. Factory Overhead Variance
Variance Costing and Absorption Costing
A. Variable Costing
• Direct Costing
• Includes only variable manufacturing costs (DM, DL, and Variable OH)
• Fixed OH are treated as period costs (Expensed as they incur)
B. Absorption Costing
• Full or conventional Costing
• Includes all costs
• Fixed OH is treated as product costs
C. Distinction between product costs and period cost
Period Cost Product Cost
1. Cost that is charged against current revenue 1. Cost that is included in the computation of product cost
during a time period regardless of the difference that is apportioned between the sold and unsold units.
between production and sales volumes.
2. Does not form part of inventory. 2. An inventoriable cost. Portion of cost that is allocated
to unsold units becomes part of cost of inventory.
3. Reduces income for the current period by its full 3. Reduces current income by the portion allocated to the
amount. sold units; portion allocated to unsold units is treated as
an asset, being part of cost of inventory.
D. Inventory cost between variable and absorption
a. Variable - Cost of Inventory includes only the variable manufacturing costs
b. Absorption - Costs of inventory include all manufacturing costs
E. Reconciliation of operating income between variable and absorption

Absorption Costing Income xxx Change in Inventory (Production in Sales) xxx

Fixed OH in Beginning Inventory xxx Multiply by Fixed OH rate per unit xxx
Fixed OH in Ending Inventory (xxx) Difference in Income xxx
Variable Costing Income xxx

Financial Planning and Budgets

A. Master Budget - covers all of the company's anticipated income and costs for the fiscal period. It breaks down various operating
budgets for the departments of a company, as well as the planned financial budgets involving spending on company growth
and cash flow.
a. Operating Budget - contains the budgets for what will be coming into the company from an income perspective, and
how it will be used in order to support the business's operation; cover the general company expenses and income.
b. Financial Budget – deal with cash flows and company’s financial data.
B. Types of Budgets
a. Static – a.k.a. fixed budget. It remains unchanged regardless of the actual activity levels or changes in business
conditions.
b. Flexible – Designed to adjust and adapt to changes in activity levels.
c. Zero-Based – Requires all expenses to be justifies from scratch for each budgeting period and it does not rely from
previous budgets.
d. Continuous – a.k.a. rolling or perpetual budget. Involves regularly updating and extending the budget throughout
the budgeting period.
C. Budget Variance Analysis (Static and Flexible)

Activity Based Costing (ABC) and Activity Based Management (ABM)

A. Activity Levels (Unit level, batch level, and facility level)
B. Costs pools and Activity Drivers
a. Cost Driver – Factor that causes change in cost pool for particular activity and a basis for cost allocation.
 b. Activity – Any event, transaction, or work sequence that incurs cost when producing a product.
c. Activity Cost Pool – A bucket in which costs are accumulated that relate to single activity measure in ABC System.
C. Traditional costing vs Activity based costing

Activity Based Costing Traditional Costing

1. Assume that cost objects consume activities 1. Assume that cost objects consume resources.
2. Uses drivers at various levels. 2. Uses volume-related allocation bases.
3. Process-oriented 3. Structure-oriented.
D. Process Value Analysis
a. Value Adding – Activities that are necessary to produce products.
b. Non-Value Adding – Activities that do not make the product or service more valuable to customers.

Strategic Cost Management

A. Total quality Management (TQM)
• Approach to continuous improvement that focuses on serving customers and uses front-line workers to identify and solve
problems systematically.
B. Just-in-time Production (JIT)
• What you need becomes available just in time you will use it.
• Advantages: Inventory cost savings, release of facilities, prompt delivery of goods and services and quick response to
customers’ needs, reduction of defective output resulting into minimization of wastage and losses and greater satisfaction
of customers
C. Continuous Improvement
• Is a Lean improvement technique that helps to streamline workflows. The Lean way of working enables efficient
workflows that save time and money, allowing you to reduce wasted time and effort.
• Maintain quality standards while cutting time and cost, companies turn to Lean ways of working, including continuous
improvement.
D. Kaizen Costing
• process of continual cost reduction that occurs after a product design has been completed and is now in production; it
emphasizes employees’ involvement and continuous improvement. This practice typically involves minimizing costs and
eliminating the inefficiencies of an organization’s production process via several small, incremental alterations instead of
extensive, disruptive changes
E. Product life cycle costing
• involves the determination of a product’s estimated revenues and expenses over its expected life-cycle.
o Life Cycle:
▪ Research and Development Stage
▪ Introduction Stage
▪ Growth Stage
▪ Mature Stage
▪ Harvest or decline Stage and Final Provision of customer support
F. Target Costing
• system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve
for a new product. If it cannot manufacture a product at these planned levels, then it cancels the design project entirely.

Responsibility Accounting and Transfer Pricing

A. Types of Responsibility Center
a. Costs Center – A management center where a manager has control over the incurrence of costs but not over the revenue
or investments (Maintenance Department)
b. Revenue Center – Manager has control over revenues (Sales Department)
c. Profit Center – Manager has control over both costs and revenues (Branch)
d. Investment Center – Manager has control over both costs and revenues as well as over investments in plant and
equipment, receivable, inventory, and other assets.
e. Service Center – Usually operated as a costs center. Provide support to the other segments or subunits of the organization.
B. Concepts of decentralization and segment reporting
a. Decentralization - A situation in which decisions tend to be made at lower levels in a firm; tendency to disperse decision
making authority in an organization structure.
b. Segment Reporting - An analysis of sales, profit or assets by line of business or by geographical area.
C. Controllable, non-Controllable costs, direct, and common costs
a. Controllable – include all costs that are influenced by a manager’s decision and actions.
b. Non-Controllable – any cost that cannot be affected by the management of a responsibility center within a given time
span.
c. Direct Cost - price that can be directly tied to the production of specific goods or services. A direct cost can be traced to
the cost object, which can be a service, product, or department.
d. Common Cost - a cost that is not attributable to a specific cost object, such as a product or process. When a common cost
is associated with the manufacturing process, it is included in factory overhead and allocated to the units produced.
D. Performance Margin (manager vs segment performance)
a. Segment Margin = Revenue – Direct Costs
b. Segment Reporting
i. Sales - Variable costs = Contribution margin
 ii.
Contribution margin - Direct fixed costs controllable by managers = Contribution controllable by segment managers
(also known as short-run segment margin)
iii. Contribution controllable by segment managers - Direct fixed costs controllable by others = Segment margin
iv. For evaluation purposes in segment reporting, common costs are not allocated.
E. Preparation of segmented Income Statement
a. Contribution Format – Separates fixed from variable costs to compute contribution margin.
b. Traceable Fixed Costs – Should be separated from common fixed costs to compute segment margin.
F. Return on Investment, Residual Income, and Economic Value Added
𝐼𝑛𝑐𝑜𝑚𝑒
a. 𝑹𝑶𝑰 =
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
b. 𝑹𝒆𝒔𝒊𝒅𝒖𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆 = 𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑎𝑟𝑛𝑒𝑑 𝑏𝑦, 𝑜𝑟 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑖𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑎𝑛 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑒𝑛𝑡𝑒𝑟 −
𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝐼𝑛𝑐𝑜𝑚𝑒 (𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑥 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛)
c. 𝑬𝒄𝒐𝒏𝒐𝒎𝒊𝒄 𝑽𝒂𝒍𝒖𝒆 𝑨𝒅𝒅𝒆𝒅 = 𝐴𝑓𝑡𝑟𝑒𝑟 𝑇𝑎𝑥 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝐼𝑛𝑐𝑜𝑚𝑒
G. Rational and need for Transfer Price
a. To supply adequate information to motivate managers of the different segment of the organization to make good economic
decisions.
b. To supply transparent and useful information that may be used in evaluating the performance of business segments.
c. To properly distribute economic resources of the organization among the segments or responsibility centers.
d. To ensure that the autonomy of the various segments of the organization is protected and respected.
H. Transfer Pricing schemes
a. Transfer Price - charged by one segment of the organization for goods and services transferred and provided to another
segment of the same organization
b. Minimum transfer price - refers to the lowest price at which goods or services can be transferred between divisions or
departments within the same company. It is the internal price used to determine the cost of goods or services when one
division sells to another division within the organization.
c. Market-based transfer price - is often regarded as the best approach to the transfer pricing problem; works best when
the product or service is sold in its present form to outside customers and the selling division has no idle capacity.
d. Cost-based transfer price - Uses costs incurred by the division producing the goods as its foundation; May be based on
variable costs alone or on variable costs plus fixed costs.
e. Negotiated transfer price - results from discussions between the selling and buying divisions. Upper limit is determined
by the buying division. Lower limit is determined by the selling division.

Balance Score Card

• A goal congruence tool or a performance measurement system that strikes a balance between financial and operating
performance measures, links performance to rewards and gives explicit recognition to the diversity of interests of
stakeholders. It is a strategic management system that defines a strategic-based responsibility accounting system.

Quantitative Techniques
A. Regression and correlation analysis
a. Regression – Expresses the relationship in the form of an equation.
b. Correlation – Quantifies the strength of the linear relationship between a pair of variables.
B. Gantt Chart
a. Shows different activities or tasks in a project as well as their estimated start and completion times
C. Program Evaluation Review Technique (PERT) / Critical Path Method (CPM)
a. PERT – Networking technique used for planning and controlling the activities in a project.
D. Probability Analysis
a. Commonly used in planning as well as in decision making under uncertainty.
b. Decision making under conditions of Uncertainty – Probability distribution of the possible future states of
nature(events) is not known and must be determined subjectively.
E. Learning Curve
a. Mathematical expression of the phenomenon that incremental unit costs to produce decrease as managers and labor
hain experience from practice.
F. Inventory Models
a. Help to find out the order quantity which minimizes the total costs.
b. Carrying Costs – a.k.a holding costs, refers to the total cost of holding inventory.
i. (Average order Quantity x Carrying Cost per Unit)
c. Order Costs – Cost of ordering inventory
i. (No. of orders in a period x Ordering cost)
d. Economic Order Quantity – Ideal order quantity which minimizes the total cost

e. Reorder Point – Point at which theorder must be made.

i. (Lead time x Average Daily Usage) or (Max consumption x Max Reorder Point)
f. Safety Stock – Additional quantity in inventory to reduce the risk of stockout.
i. (Lead Time x Average Daily Usage) + Safety Stock
 G. Linear Programming – Used to find optimal solution to short-term resource allocation problems
a. Steps in Formulating Linear Program
i. Identify the decision variables
ii. Express the objective and constraints functions in terms of the decision variables identified in step 1.

Relevant Costing and Differential Analysis

A. Definition and identification of relevant costs
a. Relevant Costs – Are expected future costs which differ between the decision alternatives. These are costs that will
be increased or decreased as a result of a decision.
B. Concept of opportunity costs
a. Opportunity Costs – The value lost by choosing a specific option; potential benefits that an individual, investor, or
business misses out on when choosing one alternative over another.
C. Approaches in analyzing alternatives in non-routine decisions
a. The Scientific Process
i. Identify the Problem
ii. Specify the Criteria
iii. Identify Different Alternatives
iv. Develop Decision Model
v. Gather Data
vi. Evaluate the Different Alternatives
vii. Decide
D. Types of Decisions
a. Make or Buy- Whether an item should be made or brought from an outside supplier.
b. Continue or Shutdown - whether to close a business unit or continue to operate it, and relevant costs are
the basis for the decision.
c. Sell or Process - deciding how the joint product cost of that input is going to be divided among the joint
products.

Financial Management

Objectives and Scope of Financial Management

A. Financial Management
• Specialized function in organizations that focuses on planning, organizing, controlling, and monitoring financial
resources.
B. Objective
• Maximize the organization’s value through efficient financial management.
• Maximizing profits, increasing wealth, allocating resources, managing risks, and maintaining an efficient capital
structure.
C. Scope
• Financing Planning
• Capital Budgeting
• Financing Decisions
• Working Capital Management
• Financial Analysis, Reporting, and Risks Management
D. Role of financial managers in investment, operating, and financing decisions
• Evaluate investment opportunities, assess risks and returns, and allocate financial resources to projects.
• Manage working capital, cash flow, and credit policies.
• Determine the optimal capital structure and make financing decisions by considering costs, risks, and the organization’s
financial stability.

Financial Statement Analysis

• An evaluation of the past and current performance of the firm and its forecast for the future
A. Vertical Analysis – Comparing figures in FS in a single period. In Balance Sheet, the Total Assets, and Total Liabilities &
Capital is the 100%, while in the Income Statement, the Sales are the 100%
B. Horizontal Analysis – Comparison of FS of two or more consecutive periods.
𝑀𝑂𝑠𝑡 𝑅𝑒𝑐𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒−𝐵𝑎𝑠𝑒 𝑃𝑒𝑟𝑖𝑜𝑑 𝑉𝑎𝑙𝑢𝑒
a. 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝑪𝒉𝒂𝒏𝒈𝒆 𝑭𝒐𝒓𝒎𝒖𝒍𝒂 =
𝐵𝑎𝑠𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝑉𝑎𝑙𝑢𝑒
C. Cash Flow Analysis
• Analysis of the inflow and outflow of cash from the company's operating, investing, and financing activities.
• Cashflow problems identification and corrective actions are used to improve cash position
• It assesses a firm’s ability to generate cash to meet its financial obligations and invest in new opportunities.
a. Classification of Cash Flows
i. Operating Activities
ii. Financing Activities
 iii. Investing Activities
b. Free Cash Flow Concept
• Represents cash generated by a business after accounting for all necessary expenditures to maintain and expand
its operations. Measures surplus cash available to be used for other purposes.
D. Gross Profit Variance Analysis
• Used to evaluate differences between the actual gross profit and the expected or budgeted gross profit.
a. Price Variance
i. 𝑷𝑽 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡𝑠 − 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑈𝑛𝑖𝑡 𝐶𝑂𝑠𝑡𝑠) 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝑄𝑢𝑎𝑛𝑡𝑖𝑟𝑦 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑
b. Costs Variance
i. 𝑪𝑽 = 𝑃𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑 𝐶𝑜𝑠𝑡 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑠𝑡𝑠)
c. Volume Variance
i. 𝑽𝑽 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑 − 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑈𝑛𝑖𝑡𝑠)𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝐻 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
E. Financial Ratios
a. Liquidity Ratios – Ability to meet short-term obligations
b. Leverage Ratios – Measure the company’s use of debt to finance assets and operations
c. Asset Management Ratios – Measures how the firm uses its assets to generate revenue and income.
d. Cost Management Ratios - Measures how well a firm controls its costs.
e. Profitability Ratios – Measures earnings in relation to some base, such as assets, sales, or capital.
f. Growth Ratios – The changes in the economic status over a period of time.
g. Valuation Ratios – Shareholder value as reflected in the price of the firm’s stock.
F. Financial Forecasting using additional funds needed
• Estimation of future outcomes based on historical data, industry trends, and other relevant factors.
a. Additional Funds Needed (AFN)
• Additional financing required to support the forecasted increase in assets that results from anticipated growth.
• It determines the amount of additional funds it needs to obtain externally to support forecasted growth.

Working Capital Management

A. Concept and significance of working capital management
• Management of Current Assets and Liabilities to achieve a balance of profitability and risk.
• To achieve a balance between profitability and risk that contributes positively to the firm value.
• Risk and Return Trade-Off
• Profitability is inversely related to liquidity
• Operating Cycle (Starts from buying inventory to selling and collecting cash) & Cash Conversion Cycle (Start cash
transaction – Payment of Inv. to Cash Collection – AR Collection)
B. Working Capital Policy
a. Investment Policy – Where to Invest
Type of Policy Conservative Aggressive
Description Relaxed Restricted
Profitability Low High
Default Risk Low High
Liquidity High Low
Investments Current Assets Non-Current Assets
b. Financing Policy – Where the finances came from.
i. Permanent Assets – Current and Fixed assets that remain unchanged over the year (Lowest balance in the
Current Assets all throughout the year)
ii. Temporary Assets – Current assets that vary over the year. (Difference between the highest and lowest
balance throughout the year)

Classification of Assets Maturity Matching Aggressive Conservative

Short-term Debt
Temporary Assets Short-term Debt
Short-term Debt
Current Assets
Permanent Assets Long-term Debt
Long-term Debt
Long-term Debt
Fixed Assets Permanent Assets
c. External Financing Needed (EFN)
i. Increase in Sales = Increase in Spontaneous Net Assets (SNA) These are the assets and liabilities that vary
directly with sales. Hence if the company wants to increase sales it will also need to increase capital.
ii. Sources of Capital
1. Long-term Debt = External Increase in SNA (Increase in Sales * SNA%) xxx
2. Preferred Stocks = External Less Increase in Retained Earnings (Sales NY * PM * RR) (xxx)
3. Common Stocks = External External Financing Needed (EFN) xxx
PM – Profit Margin
4. Retained Earnings = Internal
RR – Retention Ratio (Opposite of Dividends Payout Ratio)
iii. Formula:
C. Cash and Marketable securities management
a. Objective
• To invest cash for a return while returning some for liquidity and to satisfy future needs.
b. Motives of Holding Cash
i. Transaction Motive
ii. Precautionary Motive
 iii. Contractual Motive
iv. Speculative Motive
c. Concept of Float
• Difference between the bank’s balance and the book balance of the firm.
• No book reconciling items only bank reconciling and no errors.
• Two types of Floats
o Negative Float (Collection Float)
▪ Book Balance > Bank Balance = Negative Float
▪ Deposit in Transit
▪ Mail, Processing, and Clearing Float
o Positive Float (Disbursement Float)
▪ Book Balance < Bank Balance = Positive Float
▪ Outstanding Checks
• Positive Float should be maximized while Negative Float should be minimized.
d. Cash Management Strategies
i. Accelerate Collections
• Prompt Billing
• Offering Discounts
• Online Banking
• Lockbox System
ii. Control or Slow Down Disbursements
• Stretching Payables
• Less Frequent Payroll
• Pay Through Checks or Draft
• Zero-Balance Accounts (ZBA)
e. Cash Flow Management
i. Prepare Cash budgets
ii. Prepare the Cash Break-Even Chart
iii. Determining the optimal cash balance using the Baumol Cash Management Model (Same as EOQ but in
Cash management)
• Cash Needs
• Converting securities or investments
o Transaction costs = (No. of transactions * Cost per transaction)
o No. of Transactions = (Annual Cash Requirement / Transaction Size)
o Opportunity Costs = (Average Cash Balance * Opportunity Cost Rate)
o Average Cash Balance = (Transaction Size / 2)
• Transaction Costs and Opportunity Costs are inversely related to each other
• Optimal Transaction Size or Optimal Cash Balance – A point where total costs is the minimum.
𝟐(𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉 𝑹𝒆𝒒𝒖𝒊𝒓𝒆𝒎𝒆𝒏𝒕)(𝑪𝒐𝒔𝒕 𝒑𝒆𝒓 𝑻𝒓𝒂𝒏𝒔𝒂𝒄𝒕𝒊𝒐𝒏)
• 𝑶𝒑𝒕𝒊𝒎𝒂𝒍 𝑪𝒂𝒔𝒉 𝑩𝒂𝒍𝒂𝒏𝒄𝒆 = √
𝑶𝒑𝒑𝒐𝒓𝒕𝒖𝒏𝒊𝒕𝒚 𝑪𝒐𝒔𝒕𝒔 𝑹𝒂𝒕𝒆
f.Types of Marketable Securities
• Short-term money market instruments that can easily be converted to cash.
• Examples:
o Government Securities (Treasury Bills or CBCI)
o Commercial Paper
o Certificate of Deposits
o Money Market Funds
g. Factors in Choosing Marketable Securities
• Risks
• Marketability
• Term to Maturity
D. Receivables management
a. Objective
• To have both optimal amount of AR outstanding and the optimal amount of bad debts
b. Factors Determining AR Policy
• Credit Standards
o Character
o Capacity
o Capital
o Conditions
• Credit Terms
o Cash Discounts
o Credit and Collection Costs
o Bad Debt Losses
o Financing Costs
c. How to Accelerate AR Collection
i. Shorten Credit Terms
ii. Offer Discounts within specified periods
 iii. Speed up mailing time of payments from customers
iv. Minimize Negative Float
d. Determinants of the Size of AR
i. Terms of Sale
ii. Paying Practices of Customers
iii. Volume of Credit Sales
iv. Credit Extension Policies and Practices
v. Cost of Capital
e. Aids in Analyzing Receivables
i. Ratio of Receivables to net credit sales
ii. Receivable Turnover
iii. Average Collection Period
iv. Aging of Accounts
E. Sources of short-term funds and estimating costs of short-term funds
a. Factors considered in selecting the source of short-term financing
i. Costs
ii. Availability
iii. Risk
iv. Flexibility
v. Restrictions
vi. Effect on Credit Rating
vii. Expected Money-Market Conditions
viii. Inflation
ix. Profitability and Liquidity Positions, and Stability of operations
b. Sources of Short-term Credit
i. Spontaneous Sources
1. Trade Credit (Accounts Payable)
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 % 360
a. 𝑨𝒏𝒏𝒖𝒂𝒍 𝑹𝒂𝒕𝒆 = 𝑥
100%−𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 % 𝑁𝑒𝑡 𝑃𝑒𝑟𝑖𝑜𝑑−𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
2. Accruals
3. Deferred Income
ii. Negotiated Sources
1. Unsecured Short-term Credit
a. Commercial Bank Loans
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
i. 𝑹𝒆𝒈𝒖𝒍𝒂𝒓 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑹𝒂𝒕𝒆 =
𝐵𝑜𝑟𝑟𝑜𝑤𝑒𝑑 𝐴𝑚𝑜𝑢𝑛𝑡
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
ii. 𝑫𝒊𝒔𝒄𝒐𝒖𝒏𝒕𝒆𝒅 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑹𝒂𝒕𝒆 =
𝐵𝑜𝑟𝑟𝑜𝑤𝑒𝑑 𝐴𝑚𝑜𝑢𝑛𝑡−𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
iii. 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 =
𝐿𝑜𝑎𝑛 𝐴𝑚𝑜𝑢𝑛𝑡−𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡−𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒
b. Commercial Paper
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 360
i. 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 = 𝑈𝑠𝑎𝑏𝑙𝑒 𝐿𝑜𝑎𝑛 𝐴𝑚𝑜𝑢𝑛𝑡
𝑥
𝐷𝑎𝑦𝑠 𝐹𝑢𝑛𝑑𝑠 𝑎𝑟𝑒 𝑢𝑠𝑒𝑑
2. Secured Short-term Credit
a. Pledging Receivables
b. Pledging Inventories
c. Other Sources of Short-term Credits

Capital Budgeting
A. Capital Investment decision factors
a. Net Investments – Costs or cash outflows less cash inflows or savings incidental to the acquisition of the
investment projects.
NET INVESTMENT

Old Asset New Asset Working Capital

• Proceeds from Sale (-) • Acquisition Costs (+) • Increase in Working Capital (+)
• Trade-in Value (-) • Directly Attributable Costs • Decrease in Working Capital (-)
• Tax on the gain on sale (+) (+)
• Tax on loss on sale (-)
• Avoidable repairs, net of tax (-)
• Removal Cost, net of tax (+)
 CASH FLOWS

Operating Cash Flows After Tax Cost Savings or Cash Operating Income After Tax

Cost savings/Cash Operating Income xxx 100 Tax Shield on Incremental xxx 70
Incremental Depreciation (Old-New) (xxx) (20) Depreciation xxx 6
Cash Inflow Before Tax xxx 80 Operating Cash Flow After Tax xxx 76
Incremental Tax (30%) (xxx) (24)
Incremental Net Income xxx 56 Cash OI/CS x (1 – Tax Rate) 100 (1 – 30%)
Add Back Incremental Depreciation xxx 20 Incremental Depreciation x Tax Rate 20 (30%)
Operating Cash Flow After Tax xxx 76

End of Life Cash Flows

Operating Cash Flow After Tax xxx

Salvage Value/Net Proceeds from sale xxx
Return on Increase in working capital xxx
Return on Decrease in working capital (xxx)
xxx

b. Costs of Capital – Cost of using funds. (Chapter 15)

c. Cash and Annual Net Returns – Accounting Net Income and Net Cash Flows.
B. Non-discounted capital budgeting techniques
𝑁𝑒𝑡 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑁𝑒𝑡 𝐼𝑛𝑣𝑠𝑡𝑚𝑒𝑛𝑡
a. Payback Period = or
𝐴𝑛𝑛𝑢𝑎𝑙 𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐼𝑛𝑐𝑟𝑒𝑚𝑒𝑛𝑡𝑎𝑙 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
b. Accounting Rate of Return (ARR) = or
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
c. Bailout Payback

For 1st Year For 2nd Year

Salvage Value (@ Year-end) xxx Salvage Value (@ Year-end) xxx

Cash Flows After Tax xxx Cash Flows After Tax (Prior Year) xxx
xxx Cash Flows After Tax (Current Year) xxx
xxx
C. Discounted Capital Budgeting techniques
a. Net Present Value (NPV)
PV of Cash Inflows xxx PV of Cash Inflows xxx PV of Cash Inflows xxx
PV of Cash Outflows (xxx) PV of Cost of Investment (xxx) Cost of Investment (xxx)
Net Present Value xxx Net Present Value xxx Net Present Value xxx
𝑁𝑒𝑡 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
b. Internal Rate of Return (IRR) =
𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠
𝑇𝑜𝑡𝑎𝑙 𝑃𝑉 𝑜𝑓 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 𝑇𝑜𝑡𝑎𝑙 𝑃𝑉 𝑜𝑓 𝐶𝑎𝑐ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 𝑁𝑒𝑡 𝑃𝑉
c. Profitability Index = or or +1
𝑇𝑜𝑡𝑎𝑙 𝑃𝑉 𝑜𝑓 𝐶𝑎𝑠ℎ 𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑠 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 1
d. Payback Reciprocal = or
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑃𝑒𝑟𝑖𝑜𝑑
e. Present Value Payback (Discounted) – Same as payback period but discounted.
D. Sensitivity Analysis (effects of changes in project cash flow, tax rates, and other assumptions)

Risk and Rates of Returns

• Risk – Possibility of negative and undesirable events occurring. The chance of potential harm or adverse outcomes that may
affect the value or performance of an investment.
• Return – Income or profit generated from investment.
• Rate of Return – Measure that quantifies the return or profit on an investment relative to the amount invested.
A. Types of risks
a. Business Risks
i. Market risks
ii. Technical Risks
iii. Regulatory and Legal Risks
b. Operating Risks
i. Operational Risks
ii. Supply Chain Risks
iii. Human Resource Risks
c. Financing Risks
i. Credit Risks
ii. Interest Rate Risks
 iii. Liquidity Risks
iv. Foreign Exchange Risks
B. Measures of Risks
a. Standard Deviation
b. Beta Coefficient
c. Value at Risk
d. Conditional value at risks
e. Sharpe Ratio
f. Risk-to-reward Ratio
g. Risk Premium
C. Degree of operating, financing, and total leverage
a. Degree of Operating Leverage
i. The extent to which a company’s net income is affected by changes in its revenue.
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
ii. 𝑫𝑶𝑳 =
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
b. Degree of Financial Leverage
i. A measure that quantifies the sensitivity of a company’s Earnings per share (EPS) to changes in its
operating income or earnings before interest and taxes (EBIT).
%𝛥 𝑖𝑛 𝐸𝑃𝑆
ii. 𝑫𝑭𝑳 =
%𝛥 𝑖𝑛 𝐸𝐵𝐼𝑇
c. Degree of Total Leverage
i. A measure that combines both operating and Financial Leverage to assess the overall risk and sensitivity.
Of a company’s EPS to changes in sales or revenue.
ii. 𝑫𝑻𝑳 = 𝐷𝑂𝐿 𝑥 𝐷𝐹𝐿

Capital Structure and Long-Term Financial Decisions

A. Basic concepts and tools of capital structure management
• Mix of long-term debt, preferred stock, and common equity that the firm uses to finance its assets and resource.
• Its objective is to maximize the market value of the firm through an appropriate mix of long-term sources of funds.
• Capital Structure = Financial Structure – Current Liabilities
• Optimal Capital Structure is a mix of long-term sources of funds that will minimize the firm’s overall cost of capital.
B. Sources of intermediate and long-term financing
a. External Source
i. Debt
1. Debenture Bonds
2. Mortgage Bonds
3. Income Bonds
4. Serial Bonds
ii. Equity
1. Common Stock
2. Retained Earnings
iii. Hybrid Financing
1. Preferred Stocks
2. Lease Financing
3. Option
4. Warrant
b. Internal Source
i. Operations
C. Costs of capital

Source Capital Cost of Capital

Creditors Long-term Debt Before Tax Cost of Capital Interest (1-
Tax%)
Preferred Stockholders Preferred Shares Preferred Dividends per share / Net
issuance Price
Common Stockholders Common Shares CAPM or DGM
a. Cost of Long-Term Debt
• Computed by using the yield to maturity formula
𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒−𝐼𝑠𝑠𝑢𝑒 𝑃𝑟𝑖𝑐𝑒
𝐶𝑜𝑢𝑝𝑜𝑛+ 𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑑𝑎𝑡𝑒
• 𝒀𝒊𝒆𝒍𝒅 𝒕𝒐 𝑴𝒂𝒕𝒖𝒓𝒊𝒕𝒚 =
(𝐼𝑠𝑠𝑢𝑎𝑛𝑐𝑒 𝑃𝑟𝑖𝑐𝑒 𝑥 60%)+(𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒 𝑥 40%)
b. Cost of Preferred Stocks
• 𝑵𝒆𝒕 𝑰𝒔𝒔𝒖𝒂𝒏𝒄𝒆 𝑷𝒓𝒊𝒄𝒆 = 𝐼𝑠𝑠𝑢𝑎𝑛𝑐𝑒 𝑃𝑟𝑖𝑐𝑒 − 𝐹𝑙𝑜𝑎𝑡𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡
c. Common Equity
• Dividends Growth Model (DGM)
𝑁𝑒𝑥𝑡 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
o 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑹𝒆𝒕𝒂𝒊𝒏𝒆𝒅 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 = + 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑟𝑖𝑐𝑒
𝑁𝑒𝑥𝑡 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
o 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑶𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝑺𝒉𝒂𝒓𝒆𝒔 = + 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑟𝑖𝑐𝑒−𝐹𝑙𝑜𝑡𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡
• Capital Asset Pricing Model (CAPM)
o 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒐𝒓 𝑹𝒂𝒕𝒆 𝒐𝒇 𝑹𝒆𝒕𝒖𝒓𝒏 = 𝑅𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑅𝑎𝑡𝑒 + 𝐵𝑒𝑡𝑎 (𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚)
o 𝑹𝒊𝒔𝒌 𝑷𝒓𝒆𝒎𝒊𝒖𝒎 = (𝑀𝑎𝑟𝑘𝑒𝑡 𝑅𝑒𝑡𝑢𝑟𝑛 − 𝑅𝑖𝑠𝑘 𝐹𝑟𝑒𝑒 𝑅𝑎𝑡𝑒)
 d. Weighted Average Cost of Capital
• Multiply the cost of each source of capital to their respective weight and add all of them.

Management Consultancy

Management Consultancy Practice by CPAs

A. Nature of Management Consultancy (SIR HEBIE)
• S – Services are Rendered on behalf of Management
• I – Involves Problem-Solving
• R – Relates to Future
• H – Human relations play a vital role
• E – Engagement requires highly qualified staff
• B - Broad in Scope
• I – Involves varied assignments
• E – Engagements are non-recurring
B. Professional Attributes
• Technical Skills
o Competence of the consultant
o Knowledge, Training, and Experience
• Interpersonal Skills
o Ability to work in a team
• Consulting Process Skills (Project Management Skills)
o Ability to define a problem, find an alternative course of action, analyze information, give a recommendation,
etc.
C. Broad Areas of MAS
a. Related to the Accounting and Finance
1. Cost Accounting
2. Financial Management
3. Financial Accounting Systems Design and Development
4. Development and Establishment of Budgetary Controls
b. Not Normally Related to Accounting and Finance
1. General Management Consultation
2. Project Feasibility Study
3. Organization and Personnel
4. Industrial Engineering
5. Marketing
6. Operations Research
D. Stages of Management Consultancy Engagements
1. Negotiation of Engagement (Prelim)
2. Preparing for and starting the engagement (Planning)
3. Conducting the engagement
4. Preparing and presenting the reports and recommendations
5. Implementing the recommendations
6. Evaluating the engagement
7. Post-engagement follow-up

Project Feasibility Studies

A. Nature
• Gathering and analyzing pertinent data and information from various sources.
B. Purpose
• Assess the viability and potential of a proposed project.
C. Analysis of the project
• Evaluating various aspects of the project
• Market Research
• Evaluating requirements and limitations
• Assessing Financial Feasibility
• Examining Legal and Regulatory Factors.
• Considering social and Environmental impacts.
D. Preparation of projected financial statements
• Forecasting of Financial performance of a proposed project or business venture. Bases on financial assumptions and
projections, it entails estimating the:
1. Future Income
2. Expenses
3. Assets
4. Liabilities
5. Cash Flows
• Steps in preparing the projected financial statements:
 1. Sales Projections
2. Cost and Expense Projections
3. Capital Expenditures
4. Financing and Capital Structure
5. Cash Flow Projections
6. Balance Sheet Projections
7. Income Statement Projections
E. Analysis of financial projections
• Profitability Analysis
o Sustainability and Growth potential of the projected profits.
• Liquidity Analysis
o Ability of the project to meet its short-term obligation and cash flow requirements.
• Solvency Analysis
o The project’s ability to meet long-term obligations and manage its debt.
• Return on Investment (ROI) Analysis
o Expected return in relation to the initial investment and the assess the project’s attractiveness from an investment
standpoint.
• Sensitivity Analysis
o Impact of changes in key assumptions or variables on the financial projections. Know the critical factors that
could significantly affect the project’s financial performance and evaluate the project’s resilience to these changes.

Economic Concepts essential to obtaining, and understanding an entity’s business and industry
F. Macroeconomics
a. GDP
• Measure of production of goods during certain period.
b. Inflation
• A rise in rate of prices.
c. Fiscal and monetary policies
• Important tools to keep the economy healthy.
• Fiscal Policy – Produces public services from taxes.
• Monetary Policy – Keeps prices low, and predictable.
d. FX rates
• Used to determine changes to a range of market assets
G. Microeconomics
a. Supply and Demand
• Supply – Goods available in the market.
• Demand – Number of goods customers want to buy.
b. Market Equilibrium
• Supply and Demand are equal in the market.
c. Price Elasticity
• Changes in the Price affect the demand for a product.
d. Market Structure
• Understanding business by determining the degree of competition inside the industry.
e. Production and Cost functions
• Production Function – Output is determined by various inputs.
• Cost Function – Cost of producing different levels of output.