The Complete CFO Handbook
The CompleteCFO HandbookFrom Accounting to AccountabilityFrank J. FabozziPamela Peterson DrakeralPh s. PolimeniJohn Wiley & Sons, Inc.
Copyright 2008 by John Wiley & sons, inc. all rights reserved.Published by John Wiley & sons, inc., hoboken, new Jersey.Published simultaneously in Canada.Wiley bicentennial logo: richard J. Paciicono part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under section 107 or 108 of the 1976 United statesCopyright act, without either the prior written permission of the Publisher, or authorizationthrough payment of the appropriate per-copy fee to the Copyright Clearance Center, inc., 222rosewood Drive, Danvers, ma 01923, (978) 750-8400, fax (978) 646-8600, or on the webat www.copyright.com. requests to the Publisher for permission should be addressed to thePermissions Department, John Wiley & sons, inc., 111 river street, hoboken, nJ 07030,(201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.limit of liability/Disclaimer of Warranty: While the publisher and author have used theirbest efforts in preparing this book, they make no representations or warranties with respectto the accuracy or completeness of the contents of this book and speciically disclaim anyimplied warranties of merchantability or itness for a particular purpose. no warranty maybe created or extended by sales representatives or written sales materials. the advice andstrategies contained herein may not be suitable for your situation. You should consult with aprofessional where appropriate. neither the publisher nor author shall be liable for any lossof proit or any other commercial damages, including but not limited to special, incidental,consequential, or other damages.For general information on our other products and services or for technical support, pleasecontact our Customer Care Department within the United states at (800) 762-2974, outsidethe United states at (317) 572-3993, or fax (317) 572-4002.Wiley also publishes its books in a variety of electronic formats. some content that appears inprint may not be available in electronic books. For more information about Wiley products,visit our web site at www.wiley.com.note: the previous edition of this work is titled Cost Accounting: Concepts and Applicationsfor Managerial Decision Making, third edition.library of Congress Cataloging-in-Publication DataFabozzi, Frank J.the complete CFo handbook : from accounting to accountablity / FrankJ. Fabozzi, Pamela P. Peterson Drake, ralph s. Polimeni.p. cm.includes index.isbn 978-0-470-09926-1 (cloth)1. Chief inancial oficers—handbooks, manuals, etc. 2.Corporations—United states—Finance—handbooks, manuals, etc. i.Peterson Drake, Pamela, 1954- ii. Polimeni, ralph s. iii. title.hG4027.35.F33 2007658.15’1--dc222007018191Printed in the United states of america.10 9 8 7 6 5 4 3 2 1
FJFto my wife, Donna, and my children,karly, Patricia, and FrancescoPPDto my husband, randyRSPto my inspiration, maxine elko
ContentsPrefaceAbout the AuthorsCHAPTER 1The Changing Role of the CFO: From Accounting to AccountablesoX act of 2002 and the CFoexpanded responsibilities of the CFoour agendaxvxix12614PART ONEFundingCHAPTER 2Capital Structure DecisionsDebt versus equityConcept of leverageCapital structure and Financial leverageFinancial leverage and riskCapital structure and taxesCapital structure and Financial DistressCost of Capitalagency relationshipoptimal Capital structure: theory and Practicea Capital structure Prescriptionbottom lineappendix: Capital structure theory—the modigliani-millertheory and beyondCHAPTER 3Types of Debt FinancingGeneral Features of Debt obligations15171821252931374143475152536364vii
viiiCONTENTSterm loanssyndicated bank loansnotes and bondsshort-term Financingoff-balance-sheet Financingbottom lineCHAPTER 4Equity FundingCommon stockPreferred stockbottom lineCHAPTER 5Structured Financing: Asset Securitization and Structured Notesasset securitizationstructured notesbottom line65697186939599100115121123124139149PART TWOStrategy, Taxes, and Risk ManagementCHAPTER 6Strategy and Financial Planningstrategy and ValueFinancial Planning and budgetingimportance of Financial Planningbudgeting Processsales Forecastingseasonal ConsiderationsbudgetingPro Forma Financial statementslong-term Financial PlanningFinancial modelingPerformance evaluationstrategy and Value Creationbottom line151153155158158160161163165172179179183191195
ContentsCHAPTER 7Basics of Corporate Taxes and Tax Risk Managementtax managementtax riskU.s. tax law and taxation of Corporationsstate and local taxesnon-U.s. taxesbottom lineCHAPTER 8Corporate Risk Managementrisk Deinedenterprise risk managementmanaging risksrisk transferbottom lineix197199200205218218224227228230235237255PART THREEPerformance EvaluationCHAPTER 9Financial Ratio Analysisratios and their Classiicationreturn-on-investment ratiosliquidityProitability ratiosactivity ratiosFinancial leverage ratiosCommon-size analysisUsing Financial ratio analysisillustration: Pizer, inc., 1990–2005bottom line259261262264271279282284289290292307
xCONTENTSCHAPTER 10Cash Flow AnalysisDificulties with measuring Cash FlowCash Flows and the statement of Cash FlowsFree Cash FlowCalculating Free Cash Flownet Free Cash FlowUsefulness of Cash Flows in Financial analysisbottom lineCHAPTER 11Decentralized Operations and Responsibility Accountingorganization structures and Conceptsexamples of types of organization structure andresposibility reportingDecentralization Problemsresponsibility accountingControllable CostsCosts of service Departmentsexecutive incentive Compensation Plans and DysfunctionalDecision makingbottom lineCHAPTER 12Responsibility Center Performance Evaluationbasis for ComparisonCost Center Performance evaluationProit Center Performance evaluationProit Center Decision makinginvestment Center Performance evaluationbottom lineappendix: Gross Proit analysisCHAPTER 13Transfer Pricingtransfer Pricing methodsDual transfer Pricing systeminternational transfer Pricingbottom 47351353354356364372373394394405407418419424
ContentsxiPART FOURAsset ManagementCHAPTER 14Capital Budgeting and Cash Flow Analysisthe investment ProblemCapital budgetingCash Flow from investmentsbottom lineappendix 14.a: expected Cash Flows from the Dispositionof an assetappendix 14.b: expansion of the Williams 5 & 10CHAPTER 15Capital Budgeting Techniquesevaluation techniquesnet Present ValueProitability indexinternal rate of returnmodiied internal rate of returnPayback PeriodDiscounted Payback Periodissues in Capital budgetingComparing techniquesCapital budgeting techniques in PracticeConlicts with responsibility Center Performanceevaluation measuresCapital budgeting and the Justiication of new technologybottom lineCHAPTER 16Capital Budgeting and RiskProject riskmeasurement of Project riskmeasuring a Project’s market riskincorporating risk in the Capital budgeting Decisionreal optionsCertainty equivalentsassessment of Project risk in Practicebottom 82483486489490491495497498500505514518525526528
xiiCONTENTSCHAPTER 17Leasinghow leasing Workstypes of equipment leasesFull-Payout leases versus operating leasesreasons for leasingtypes of lessorslease brokers and Financial adviserslease ProgramsFinancial reporting of lease transactions by lesseesleveraged lease FundamentalsFederal income tax requirements for true lease transactionssynthetic leasesValuing a lease: the lease or borrow-to-buy Decisionbottom lineCHAPTER 18Managing Short-Term AssetsCash managementmarketable securitiesreceivables managementinventory managementbottom 81589591601607PART FIVECost and Managerial AccountingCHAPTER 19Classifying Costselements of a Productrelationship to Productionrelationship to Volumeability to traceDepartment Where incurredFunctional areasPeriod Charge in incomerelationship to Planning, Controlling, and Decision makingtechniques for new Product Cost estimationbottom line609611612615616622623624625626629633
ContentsCHAPTER 20Costing and Control of Materials, Labor, and Factory Overheadmaterials (stores)laborFactory overhead Costsactivity-based Costingbottom lineCHAPTER 21Job Order and Process CostingComparison of Job order and Process Costaccumulation systemsJob order Costingoperation CostingProject CostingProcess Costingbacklush Costingbottom lineappendix: spoiled Units, Defective Units, scrap material, andWaste material in Job order and Process Costing systemsCHAPTER 22Joint Product and By-Product CostingJoint Productsby-Productseffects of Joint Cost allocation upon Decision makingbottom lineCHAPTER 23Master BudgetConventional master budget systembudgeted schedulesbudgeted summariesbottom lineCHAPTER 24Standard Costingactual, normal, and standard CostingUses of standard 5697703703711715716719721723740744749750751
xivCONTENTStypes of standardsestablishment of standardsJust-in-time Philosophy and Cost accountingVariance analysisDisposition of all Variancesbottom lineCHAPTER 25Direct and Absorption Costingmeaning of Direct CostingDirect Costing versus absorption Costingadvantages of Direct CostingDisadvantages of Direct Costingadjusting Financial statements for external reportsbottom 9
PrefaceThe role of inancial executives in any business has expanded signiicantlyin recent years as companies become more accountable to their stakeholders and regulators. Combine this increase in accountability with theincreasing sophistication of technology, risk management, inancial analysis, and inancial records processing, and we see that the responsibilities ofinancial executives in any organization have expanded signiicantly.our goal with The Complete CFO Handbook is to provide inancialexecutives with the background and tools for managing a company’s inancial functions. the Handbook consists of ive parts, each focusing on a different dimension of the inancial executives’ role.in Part one we focus on funding issues, including the capital structuredecision, the choice of debt inancing, equity inancing issues, and structuredinancings. We include the traditional capital structure theory and analysis,but our focus really is on the analysis of what companies do in practice. tothis end, we include coverage of: how the sarbanes-oxley act of 2002 affects the responsibilities and therole of the CFo.the governance value of debt inancing.Costs of inancial distress.Factors to consider when designing a bond issues.alternative methods of repurchasing stock.structured inance transactions.Credit enhancement in securitization.structured notes.in Part two we address strategic planning, taxes, and risk management.the CFo is often playing a larger role in developing and executing the company’s strategic plan, which means taking a broader view of the sources of valuecreation and of the company’s risk management strategies. We include coverageof current issues to help the CFo better prepare for this broader view: sources of value creation.the relation between economic value added and the balanced scorecardto strategic planning.xvFrontmatter.indd 157/12/07 10:44:57 AM
xvi PREFACEtax risk management.transfer pricing and thin capitalization.enterprise risk management.retention risk management.risk transfer management.in Part three we focus on performance evaluation, providing analysistools for inancial analysis that includes cash low analysis and the analysisof budget variances. We include tools and topics to help the CFo analyzedifferent dimensions of performance: DuPont system of analyzing return on investment ratios.Free cash low and discretionary cash low analysis.responsibility accounting.Performance reports.Flexible budgets.Variance analysis.transfer pricing systems and related tax issues.in Part Four we look at asset management, which includes long-termand short-term asset management. With respect to long-term asset management, we examine traditional capital budgeting methods, including estimating cash lows and applying valuation techniques. in addition, we take alook at how capital budgeting is applied in practice. the CFo faces an arrayof asset management techniques and tools. to help prepare the CFo for thisarray, we include coverage of: adjusted present value method.real options applied to capital budgeting.tax and non-tax-oriented leasing.leveraged leasing.Cash conversion cycle analysis.in Part Five we cover the traditional managerial accounting topics ofclassifying costs, job order costing, direct and absorption costing, and standard costing. the costing methods are fairly detailed and we have summarized the primary methods. in addition, we include coverage to help theCFo gain a perspective on these costs, including: Frontmatter.indd 16the relation between costs and planning, controlling, and decisionmaking.activity-based costing.7/12/07 10:44:58 AM
Preface xviiProcess costing.Costing for by-products.Comparison of direct and absorption costing.Jit management and the costs of manufacturing.the interrelationships among the different budgets within a company.AcknowledgmentWe wish to thank Jacob thomas of Yale University for his helpful commentson several chapters of this book.Frank J. FabozziPamela Peterson Drakeralph s. PolimeniFrontmatter.indd 177/12/07 10:44:58 AM
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About the AuthorsFrank J. Fabozzi, PhD, CFa, CPa, is Professor in the Practice of Financein the school of management at Yale University. Prior to joining the Yalefaculty, he was a Visiting Professor of Finance in the sloan school at mitfrom 1986–1992. he is a Fellow of the international Center for Finance atYale University and on the advisory Council for the Department of operations research and Financial engineering at Princeton University. ProfessorFabozzi earned a doctorate in economics from the City University of newYork in 1972. he has authored and edited numerous books in inance.Pamela Peterson Drake, PhD, CFa, is the J. Gray Ferguson Professor of Finance and Department head of Finance and business law at James madisonUniversity. Previous to joining James madison University, she was an associate Dean and Professor of Finance at Florida atlantic University. ProfessorPeterson Drake received her Ph.D. from the University of north Carolinaat Chapel hill and joined the faculty of Florida state University in 1981.Professor Peterson Drake is an author and co-author on a number of books,including Analysis of Financial Statements (2nd ed., John Wiley & sons,inc., 2006) and Financial Management and Analysis (2nd ed., John Wiley& sons, inc., 2003), both with Frank Fabozzi, and Real Options (aimrresearch Foundation, 2002), with Don Chance. Professor Peterson Drakehas published numerous articles in academic and practitioner journals.Ralph S. Polimeni, PhD, CPa, is the Vice Provost for accreditation and assessment and holds the Chaykin endowed Chair in accounting at hofstraUniversity. Prior to his current position, Professor Polimeni served as Deanof the Frank G. zarb school of business for 11 years. he was also Department head of the accounting, taxation and legal studies in businessDepartment at hofstra University for 21 years. in 1978 Professor Polimenireceived the University’s Distinguished teacher award. he has a Ph.D. inbusiness with a major in accounting. Professor Polimeni is an author andco-author on numerous articles and books in accounting.xixFrontmatter.indd 197/12/07 10:44:59 AM
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CHAPTER1The Changing Role of the CFO:From Accounting to AccountableJOB DESCRIPTION: oversee inancial accounting systems, reporting, anddisclosures; assure compliance of inancial reporting with generally acceptedaccounting principles and securities law accounting requirements; assure compliance with local government, federal government, and international tax laws,regulations, and rules; expert in disclosure compliance with federal and statesecurities laws; establish, monitor, and evaluate internal controls; work withthe Ceo in the development of the strategic goals and plans, execute the strategic plans, and evaluate performance relative to the strategic goals; participatein long-term and short-term budgeting; exceptional communication and teamleadership skills; able to raise capital and manage the irms’ capital structureto maximize the value of the company and minimize the company’s cost ofcapital; develop, monitor, and evaluate a program of risk management; communicate with the company’s board of Directors, shareholders, creditors, andcredit rating agencies; no sensitivity to the effects of kryptonite.Many years ago, the role of the chief financial officer (CFO) was to keepthe inancial records, and had accounting, internal control, budgeting,and treasury responsibilities. but the role has changed over the years tobe much more comprehensive and to include decision-making that extendsbeyond the accounting and treasury functions. the CFo of today is responsible for measuring and monitoring performance, but the CFo is also nowinvolved in managing risk and creating value for owners.What has caused this change? there is not just one cause; but rather several forces that have resulted in the expanded role of the CFo. in the 1990s,we saw the role expanded from inancial accounting and accounting systemsto include inancial analysis and an active role in strategic planning.1 thisexpanding role is apparent in the Chief Financial oficers act of 1990, which1The Practice of Management Accounting, institute of management accountants(montvale, nJ, 1996), and Reinventing the CFO: Moving from Financial Managementto Strategic Management, Coopers and lybrand (new York, 1997).1c01-ChangingRole.indd 17/12/07 10:50:20 AM
2THE CHANGING ROLE OF THE CFO: FROM ACCOUNTING TO ACCOUNTABLEspeciically addressed the changing role of the CFo in federal governmententities.2 in the 1980s and 1990s, with the continued globalization and technological innovations, the CFo in some companies became a starring role asa deal-maker who sought out growth opportunities for the company.the role of the CFo widened further because of the inancial scandals of the 1990s and early 2000s that included enron, WorldCom, and,unfortunately, many more companies. the resultant changes in laws andregulations focused attention on the CFo and broadened the responsibilities of this position. this resulted in a renewed emphasis on the CFo’s rolein accounting and inancial reporting, but also added responsibilities forrestoring conidence in the integrity of the company’s inancial accounting,internal control systems, and risk management.throughout this book, we discuss the responsibilities of the CFo in anorganization. We recognize that in large companies the responsibilities ofthe CFo may be shared with the controller, a vice-president of inance, thecorporate treasurer, a chief risk oficer, or some other, similarly titled individual. however, in referring to the CFo, we are referring to responsibilities of the inancial oficer with the ultimate responsibility for the inancialdecision making of a company, responsibilities that may be shared or splitamong persons in the organization.SOX ACT OF 2002 AND THE CFOthe Sarbanes-Oxley Act of 2002 (soX act) is the most wide-sweeping legislation to affect the securities industry since the securities act of 1933 andthe securities exchange act of 1934.3 the soX act was passed as a reactionto the failures of corporate governance that were pronounced in scandalssuch as enron.4 the soX act affects many participants in our inancial markets: investors,
note: the previous edition of this work is titled Cost Accounting: Concepts and Applications for Managerial Decision Making, third edition. library of Congress Cataloging-in-Publication Data Fabozzi, Frank J. the complete CFo handbook : from accounting to accountablity / Frank J. Fabozzi, Pamela P. Peterson Drake, ralph s. Polimeni. p. cm.
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VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 5 / CFO'S ROLE Only 26% of CFO's report their current role as their first corporate CFO role 46% have previously held a PE CFO role The primary reason for their selection for the role is prior PE experience (55%) followed by industry expertise (39%) 73% of CFO's are responsible for functions beyond finance including Legal (73%), IT .
9fl gfq KlY Ô]ja CFO, Rogers Communications Inc. Robin Stalker CFO, adidas Group Francesco Tanzi CFO, Pirelli & C. S.p.A Jacques Tierny CFO, Gemalto Zlatko Todorcevski CFO, Brambles Kmc]lm Kmcq! MhY\ qYq Executive Vice President and CFO, Endo International plc H]l]j N]ckdmf\ Executive Vice Pr
Chính Văn.- Còn đức Thế tôn thì tuệ giác cực kỳ trong sạch 8: hiện hành bất nhị 9, đạt đến vô tướng 10, đứng vào chỗ đứng của các đức Thế tôn 11, thể hiện tính bình đẳng của các Ngài, đến chỗ không còn chướng ngại 12, giáo pháp không thể khuynh đảo, tâm thức không bị cản trở, cái được
