Financial Management Flashcards
1
Q
Questions
A
Answers
2
Q
1.2.1 Define the term business entity. (p. 11)
A
Any business organization that exists as an economic unit
3
Q
1.2.2 What is a single proprietor? (p.11)
A
Someone who is in business for themselves and the business is unincorporated
4
Q
1.2.3 Define the term partnership. (p.11)
A
This is a business owned by two or more persons and the business is unincorporated
5
Q
1.2.4 What is a corporation? (p.12)
A
This is a business that has been incorporated and is owned by stockholders
6
Q
1.3.1 Why is it important for a Fleet Manager to have a firm grasp of accounting? (p.12)
A
Fleet Managers are aware that external reporting may affect how decisions are made inside an organization
7
Q
1.3.2 What is an audit? (p.14-15)
A
2 Types - Internal: aimed at ensuring compliance to organizational operating procedures / External: The goal of an external audit is to ensure compliance with external reporting standards
8
Q
1.4.1 What information can be used to help in the vehicle acquisition decision? (p. 21)
A
Acquisition decisions require information from both external reporting and internal management system
9
Q
1.4.2 What does a cost accounting system track and what information can it provide? (p.21)
A
Tracks vehicle operating (fuel,maintenance, administration), as well as fixed (depreciation) costs
10
Q
1.4.3 What information does the Fleet Manager need to make the lease vs. owndecision? (p.22)
A
Cost Based Approach provides the necessafy info to make the decision
11
Q
1.5.1 What is a chart of accounts? (p.24)
A
Meant to define how money, or the equivalent, is spent or received. It is used to organize the finances of the organization and to segregate expenditures, revenue, assets, and liabilities.
12
Q
1.5.2 Define the term asset. (p.24)
A
Anything tangible or intangible that is capable of being owned or controlled to produce value
13
Q
1.5.3 What are the three categories of assets? (p.24-25)
A
- Short Term (Cash) 2. Long Term (bonds / Stocks) 3. Intangible (copyright / trademark)
14
Q
1.5.4 Define the term liability. (p.25)
A
A debt and obligation of an organization.
15
Q
1.5.5 What are the two categories of liabilities? (p.25)
A
- Short Term (Usually settled within 1 year / AP, Taxes paid) 2. Long Term (not expected to be settled within one year). ( Notes payable, long-term leases, pension) obligations, product warranties, bonds, etc)
16
Q
1.5.6 Define the terms income/revenue. (p.25)
A
Income: Income is reported on an organization’s income statement Revenue: (revenue is the amount of money that is brought into an organization)
17
Q
1.5.7 Define the term expense. (p.25)
A
Decrease in economic benefit during an accounting period - Examples are: Depreciation, salaries, supplies, interest expenses, etc
18
Q
1.6.1 What is depreciation and what methods can be used to calculate it? (p.28)
A
Declining in Value / The transfer of the value of an asset shown on the balance sheet to the income statement in the form of an expense
19
Q
1.6.2 How do you calculate straight line depreciation? (p.28-29)
A
Need the number of years this asset is expected to last and what the asset’s expected value will be at the end of its useful life - purchased a van for $25,000 and expects it to last for 5 years. At the end of those 5 years, the salvage value is $10,000. Therefore the asset needs to be depreciated $15,000 over the next 5 years.
20
Q
1.6.3 How would you calculate depreciation using the Double Declining BalanceMethod? (p.27-28)
A
Under the Straight Line Method, this asset depreciated at 20% per year. In this method, we will ‘double’ that to 40% in the early years.
21
Q
2.1.1 Why is it important to track vehicle expenses? (p.33)
A
- It provides guidance to fleet management personnel in classification of vehicle expenses for internal control and management 2. It provides common standards to measure the effectiveness of cost controls
22
Q
2.1.2 Describe the RACE system. (p.33)
A
Recommended Automobile Classification Expenses (RACE) system
23
Q
2.1.3 Describe fixed expenses and give some examples that are common in fleets.(p.33-34)
A
Costs are those expenses that will incur by just having a vehicle ( Depreciation, Insurance, Tax)
24
Q
2.1.4 What are the “rules of thumb” when deciding whether an expense is fixed or not?(p.34)
A
- Veh. Just sits in lot Fixed
- Add Upfit and it sits in Lot (Upfit is part of - Capital of unit
- Purchased veh, needs refurbishment, and the cost of refurbishing
the vehicle is more than 50% of its value , then cost of refurbishment is considered part of a - recapitalization cost. - Purchased a veh. needs refurbishment, and the cost of the refurbishment
is less than 50% of the vehicle’s value
(operational) - because it’s still in use
25
2.1.5 What are operating expenses? (p.34-35)
Anything or item that is consumed during the course of the vehicle’s life
26
2.1.6 List some common fleet operating expenses. (p.35)
Fuel - Oil - Tires - Maintainance
27
2.1.7 Should vehicle repairs and refurbishment be considered operating expenses?(p.35)
Yes, if less than 50% of value and still in use
28
2.1.8 What are incidental expenses? (p.35-36)
Everything else, i.e. carwashes, Floor mats,
29
2.1.9 Explain other terminology for expenses that may be used in fleets? (p.36)
1. Direct Costs: operating costs, or the costs that can be linked directly to fleet operations
2. Indirect Costs: includes some of the fixed and the incidental categories of fleet expenses
3. Overhead Costs: indirect costs
30
2.2.1 What is a cost allocation system? (p.36)
System deals with linking costs or groups of costs with one or more cost objectives, such as products, departments, or divisions ( cost center)
31
2.2.2 What does the Cost Allocation Spectrum illustrate? (p.36)
The array of approaches available for cost allocation
32
2.2.3 Describe the positions identified on the Cost Allocation Spectrum. (p.37)
A. organizations do not track the costs of fleet operations / Central Budget* SMALL FLEET
B: similar to A except that they know the majority of their costs
C. fleets know their costs and allocate them to customers, but do not recover from their customers by billing
D. fleets know and allocate operating costs and bill customers for them general (capital)
E. fleet departments know, allocate and bill for the majority of operating and capital costs related to fleet
F. fleets have a comprehensive system that tracks even incidental and all overhead costs
33
2.3.1 What is a General Fund? (p.37-38)
Annul Budget - The general fund may be sufficient to cover only capitalization costs, or all capital, operating, and incidental expenses of fleet operations
34
2.3.2 What are the determining factors in adopting a General Fund? (p.38)
1. Type of Organization 2. Management Goals
35
2.3.3 What is an Internal Service Fund (ISF)? (p.38)
Financing of goods and services provided by one department or unit to other departments or units of the same organization on a cost reimbursement basis
36
2.3.4 What types of organizations use an ISF? (p.38)
Government
37
2.3.5 What is an Enterprise Fund? (p.38)
Similar to ISF but at least some of the customers are external.
38
2.3.6 What types of organizations use an Enterprise Fund? (p.38-39)
Airports, Ambulance parking
39
2.3.7 What three steps can an organization take to improve knowledge of fleet costs?(p.39)
1. w/ Sr. Management, determine it's position on Spectrum and ideal position for the future
2. Identify any impediments to moving to that ideal position
3. Implement cost accounting processes to allow it to reach to that position
40
2.3.8 What are common hurdles to an organization achieving an identified goal? (p.39-40)
1. Behavioral: ( attitudes )
2. Technical: lack of all info needed
3. Structural: Lack of Distinction, lines of authority
41
2.3.9 What four steps should an organization take once it is ready to implement a cost accounting system? (p.40)
1. Develop an activity dictionary
2. Determine Spending
3. Identify the Org's products, services, and customers,
4. Select Activity cost Drivers, that link activity costs to the Organizations produces, services, and customers
42
3.1.1 Describe some of the administrative tasks involved in purchasing a vehicle.(p.43)
Manage L&T, PPT
43
3.1.2 Describe the debt purchasing method. (p.43-44)
companies use debt as a part of their overall corporate financial strategy. Companies may use any one or a combination of all types of debt to finance vehicle acquisitions
44
3.1.3 List some of the other considerations involved in purchasing with debt. (p.44)
Equity securities do not ensure any payment to investors by the issuer - Bond prices are determined by the market
45
3.1.4 What are secured and unsecured debts? (p.44)
Secured: if creditors have recourse to the assets of the company on a proprietary basis, or otherwise ahead of general claims against the company
Unsecured debt: consists of financial obligations where creditors do not have recourse to the assets of the borrower to satisfy their claims
46
3.1.5 What is the difference between a public and private debt? (p.44)
Private Debt: Bank type loans Public Debt: General description covering all finiancial instruments tahat are freely tradable on public exchange
47
3.1.6 What is a term loan? (p.44)
Basic Loan / Simples form of Debt - consists of an agreement to lend a fixed amount of money, called the principal sum, for a fixed period of time, with this amount to be repaid by a certain date
48
3.1.7 What is a syndicated loan? (p.44)
A loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan
49
3.1.8 What are bonds, and how are they used? (p.45)
debt securities issued by certain institutions and are one of the three main asset classes, along with stock and cash equivalents - Many companies, municipalities, states and foreign governments issue bonds to investors in a marketplace when they wish to borrow money for the purpose of financing a variety of projects for a defined period of time at a fixed interest rate
50
3.1.9 What are stocks? (p.45)
While bonds are debt securities, stocks are considered as equity for the holder with ownership interest and no contractual obligation
51
3.1.10 What is mezzanine financing? (p.45)
Refers to a subordinated debt or preferred equity instrument, often used by smaller companies, that represents a claim on a company’s assets, which is senior only to that of the common shares. Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.
52
3.1.11 Describe some other options to finance debt. (p.46)
• Securitization – This occurs when illiquid assets are put through a financial process to transform them into a security. An example would be Mortgage Backed Securities (MBS), which is an asset-backed security secured by a collection of mortgages.
• Treasuries– A United States Treasury security is a government debt issued by the US Department of the Treasury, and comes in four types: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS).
• Swaps - Typically, a swap contract exchanges fixed rate obligations for afloating rate instrument in the same currency. In its simplest form, the two parties to an interest rate swap exchange their interest payment obligations
(no principal changes hands) on two different kinds of debt instruments, one being a fixed interest rate, the other being a floating rate.
• Certificate of Deposit (CD) – Is issued by commercial banks as a promissory
53
3.2.1 Define the term lease. (p.46)
A lease is a rental that, by contract, is clearly defined as to length, cost and stipulations
54
3.2.2 What four questions should be asked in order to categorize leases? (p.46-47)
• Does the ownership (title) transfer at the end of the lease?
• Does the lease contain an option to purchase the asset at a bargain price?
• Is the term of the lease at least 75% of the estimated economic life of the asset?
• Is the present value of the future minimum lease payments at least 90% of
the fair market value of the asset?
55
3.2.3 What is a capital lease? (p.47)
Is classified and accounted for by the lessee as a purchase and by the lessor as a sale or financing transaction - AKA Finance Lease / Direct Lease
56
3.2.4 What is the difference between a finance lease and direct financing lease?(p.47)
Finance Lease sometimes referred to as Lease-purchase) Lessee responsible for Maint. - Direct Financing Lease - Leaseplan
57
3.2.5 What is an operating lease? (p.47-48)
organizations that continually update or replace equipment, want to use equipment without ownership and want to return equipment at lease-end to avoid technological obsolescence
58
3.2.6 What are the advantages to using an operating lease? (p.48)
Excellent strategy for bypassing capital budgeting restraints - Under an operating lease, the leased asset is not considered an asset of the lessee; the lessee records the asset as an operating expense
59
3.2.7 Describe several types of operating leases. (p.48-49)
Open-End: Open-end leases account for 95% of all leases / unlike the closed-end lease, the lessee accepts the risk for; the residual value of a vehicle when sold at lease termination
Close End: The lessor assumes full risk for the re marketing of the vehicle. Closed-end leases are also known as “walk-away leases” or “net leases” and may also include vehicle. maintenance and/or insurance clauses. The organization never takes ownership of vehicles under this financing arrangement
- TRAC: Terminal Rental Adjustment This type of open-end lease may have significant tax advantages for non-public lessees Clause
60
3.2.8 Describe lease term. (p.49-50)
The lease term is defined as the contractual term plus renewals where the lessee has a “significant economic incentive” to exercise the options.
61
3.2.9 What consists of an estimated lease payment? (p.50)
Includes interim rents, contractual rents, renewal and purchase options
62
3.2.10 What are residual guarantees? (p.50)
Estimated payments (not the full amount of the guarantee) under residual guarantees are booked as an estimated payment with review and adjustment at each reporting date.
63
3.2.11 What are short term leases? (p.50-51)
12 months or less / Eligible for charge-off
64
3.2.12 What are four methods to identify lease types for lessors? (p.51)
• The “receivable & residual” (R&R) method is to be used for all leases of the entire asset to one lessee. This method produces results much like
direct finance lease accounting for third party equipment;
• Short-term leases may upon election be accounted for using the current GAAP operating lease method.
• Investment properties (land and buildings) for qualifying real estate lessors that are investment companies use the “investment properties” method, that is, operating lease accounting with fair valuing of the leased asset, and
• A “multi-lessee” exception allowing lessors in leases of investment property (commercial real estate) to use existing operating lease accounting.
65
3.2.14 What is floating rate financing? (p.52)
With floating rate financing, base rates are set each billing cycle, based on the prevailing rates at the time.
66
3.2.15 Describe fixed rate financing. (p.52)
fixed rate financing set the interest rate at time of lease inception, and do not vary it throughout the lease term
67
3.2.16 Describe the major lease fees to be aware of. (p. 53)
Admin - Lease Markup - Interest rounding - Issueance - Interem Rent
68
3.2.17 What two types of leases fall under from a tax accounting perspective? (p.53)
The first is the True Tax Lease (or “True Lease”) where the lessor is the owner of the equipment (in regards to federal income tax purposes) and receives the tax benefits of ownership, including depreciation and tax credits - The second is the Non Tax Lease. With regard to tax purposes, this lease is treated as if it were a purchase or a loan. In other words, the lessee receives the same tax benefits as ownership, including claiming depreciation and interest
69
3.2.18 What must be true for a lease to be a non-tax lease? (p.53-54)
any of the following are true:
• Any part of the lease payment is applied to an equity position in the asset leased.
• The lessee will, by default, acquire ownership (title) of the equipment upon payment of a specified amount of “rental payments” he or she makes.
• Over a short period of time the equipment is used, the total amount that a lessee pays is an exceedingly large proportion of the total sum required to outright buy the equipment.
• The agreed upon payments exceed the current fair rental value.
• At the time any purchase option may be exercised, the title to the equipment
may be acquired for an exceedingly small purchase option price in relation
to the actual value of the equipment.
• Any portion of the lease payments are specifically designated as interest
(or its equivalent.)
70
3.3.1 What should the Fleet Manager consider when making the decision to rent or not.(p.54)
Type of vehicle required - Time Required - Cost
71
3.3.2 What is the largest benefit of renting over leasing or purchasing? (p.54)
No long Term Obligation
72
3.3.3 What are the basic guidelines for vehicle rental? (p.54)
• Replace vehicles that are being repaired or undergoing scheduled maintenance inspections,
• Meet requirements during peak periods,
• Meet infrequent specialty requirements,
• A business case demonstrates that renting is the best option.
73
3.4.1 List some alternatives to providing an employee with a permanent vehicle. (p.55)
REIMBURSEMENT - Rentals
74
3.4.2 What should a fleet policy contain when considering a mix of reimbursement andemployee provided vehicles? (p.55-56)
Low Mileage Drivers - High Employee Turnover - Temp Drivers - New Hires (Allowance or rental pending unit assignment - Startup companies ( low capital)
75
3.4.3 What are the three types of reimbursement programs? (p.56)
Mileage Reimbursement - Fixed Allowance - Fixed and Variable Reimbursement. (Cent/ mile)
76
3.4.4 Why have some companies switched from flat allowances to accountable plan allowance programs? (p.56)
Disadvantage for low mileage drivers - doesn't account for Terrain
77
3.4.5 What is the dual reimbursement rate? (p.57)
employees qualify for reimbursement at a higher rate (typically the IRS rate) if no organization-provided vehicles are available for/applicable to the employees’ travel needs, but receive reimbursement at a reduced rate if they decline to use vehicles provided by the organization (such as assigned, shared-use or motor pool vehicles).
78
3.4.6 What criteria must a vehicle mileage reimbursement plan meet in order to be deemed non-taxable? (p.57-58)
• Business Connection - The costs being covered via the allowance and/or
reimbursement must be incurred in connection with business purposes
• Substantiation - Employee must provide information sufficient to substantiate the amount, time, place and business purpose of the expense, and
• Employer Reimbursement - An allowance arrangement must require an employee to return to his or her employer within a reasonable period of time any amount paid under the arrangement in excess of the expenses ubstantiated.
79
3.4.7 What are the two tax free programs in the US? (p.58)
Flat rate Per mile - Accountable Allowance Plan
80
3.4.8 What is the IRS standard mileage rate? (p.58)
intended to be a deduction guideline for taxpayers who opt for a standard deduction in lieu of tracking business vehicle expenses diligently
81
3.4.9 What criteria must an allowance plan meet in order for it to be non-taxable to the employee? (p.58-59)
• Reasonably calculated, not to exceed the amount of the expenses or the anticipated expenses;
• Provided on a uniform and objective basis with respect to expenses
• Periodically paid at a rate that combines a fixed rate and a variable rate; and
• Be consistently applied in accordance with reasonable business practices
82
3.4.10 What is a fixed and variable rate allowance plan? (p.59)
FAVR / Fixed Allowance
83
3.4.11 What are the guidelines provided by the IRS in order to help develop a FAVR compliance plan? (p.59)
• Data - Must be derived from base locality, reflect retail prices, and be
reasonable as well as statistically defensible in approximating costs of
standard vehicles. Most data elements have specific requirements.
• Insurance - Employees must maintain vehicle insurance consistent with
levels used in deriving allowance amount.
• Vehicle Age - Age of employees’ vehicles must not exceed depreciation
schedule used to derive amount of the allowance.
• Vehicle Value - Cost for a calendar year may not exceed 95% of retail dealer invoice plus state and local sales or use taxes up to $28,000 for automobiles, or $29,300 for trucks and vans.
• Minimum Mileage - 5,000 annual business miles (80% of 6,250)
• Business Use Percentage - Annual business mileage may not exceed 75%
• Enrollment - At least five employees in the program
• Management Employee Enrollment - Cannot exceed 50% of program
enrollees at any time during the calendar year and enrollee cannot be a
controlling employee of the corporation
84
3.4.12 Compare a FAVR compliant plan with a non-FAVR accountable plan. (p.59-61)
NON FAVR, Drivers have to report & more Flexible
85
3.4.13 What administrative tasks must be completed for both FAVR and non-FAVR plans? (p.62)
• Identify qualifying drivers (FAVR) or assign driver tiers by miles and/or job (non-FAVR);
• Determine vehicle standards;
• Collect driver information, proof of license and insurance, validation of
vehicle make/model and purchase price/value; and
• Verify driver-provided info (e.g., review registrations, compare against
databases).
86
3.4.14 Why is reimbursement often more costly than other transportation options? (p.62)
The math
87
3.4.15 What are some liability issues involved in reimbursing employees for personal vehicle use? (p.62-63)
Does not eliminate an organization’s risk of liability. / vicarious liability,
88
3.4.16 What are the advantages and disadvantages of a reimbursement program to the employees? (p.63)
employees have the freedom to choose their own vehicle, and the reimbursement program may allow them to afford a higher end vehicle they may not be able to finance in their personal budget. The downside is that eimbursement programs may under-compensate employees for business
driving.
89
3.4.17 How might vehicle choice and reimbursement programs affect a company’s image? (p.63)
Co. has no control
90
3.4.18 List the pros and cons of a vehicle reimbursement program. (p.64)
Pros: Short-Term Temp Reqs - Replace need for motor pool - Employee Satisfaction - May be Tax Free - May reduce corporate Risk during personal use time
CONS: Cost based on Retailer - Vehicle may not fit need - Less control - may have slewed data
91
3.4.19 Define the term allowance. (p.64)
An allowance is any payment that employees receive from an employer for using their own vehicle in connection with or in the course of their employment, without having to account for its use.
92
3.4.20 What questions can be used to clarify if something is an allowance or taxable benefit in Canada? (p.64-65)
• What is and what is not an automobile?
• When does a benefit arise (the personal use)?
• How do you calculate the benefit for employer provided automobiles and
other vehicles?
• How do you calculate the allowance you give to your employee for using
his or her own automobile or other vehicle?
93
3.4.21 What conditions must apply for an allowance to be deemed reasonable in Canada? (p.65)
• The allowance is based only on the number of business kilometers driven in
a year.
• The rate per-kilometer is reasonable.
• The employee has not otherwise been reimbursed for expenses related to
the same use of the vehicle. This does not apply to situations where the
employer reimburses an employee for toll or ferry charges or supplementary
business insurance, if the allowance has been determined without including
these reimbursements
94
3.4.22 What is averaging allowances? (p.66)
To comply with the rules on reasonable per-kilometer allowances, employees have to file expense claims with the employer on an ongoing basis, starting at the beginning of the year.
95
3.4.23 What are some of the expenses that an employee can claim on their income tax and benefit return? (p.66-67)
CPP contributions, EI premiums, and income tax should be deducted.
96
3.4.24 What are some strategies for employers who pay their employees automobile expenses? (p.67)
• A flat per-diem rate to offset the employee’s fixed expenses for each day the
vehicle is required; and
• A reasonable per-kilometer rate for each kilometer driven to offset the
operating expenses
97
3.5.1 What does a comprehensive fleet strategy require? (p.68)
optimizing use of all viable transportation alternatives, including permanently assigned vehicles, short-term rentals from motor pools, commercial rentals/mini-leases, POV reimbursements or allowances, and other forms of transportation (e.g., taxi, airline, mass transit).
98
3.5.2 List some transportation options to consider. (p.68)
POOL - Public Transportation - Rentals - Virtial meetings - carsharing
99
4.1.1 What are some of the main differences between Canada and the US? (p.70)
US has more Tax Exemptions / More rates / rules / More rules on commuting
100
4.1.2 What are the three exemptions from personal use fringe benefits? (p.70)
• De minimis (minimal) use
• Qualified transportation commuter highway
vehicle between employee’s home and work
place
• Qualified non-personal use vehicles
101
4.1.3 What vehicles are considered non-personal-use vehicles? (p.71-72)
Any vehicle the employee is not likely to use more than minimally for personal purposes because of its design. I.E. Police car / Ambulance / School bus
102
4.1.4 What is the General Valuation Rule for calculating personal use? (p.73-74)
The value of a fringe benefit is its fair market value (FMV)
103
4.1.5 What are Safe-harbor Value Rules? (p.74-75)
• Cents-Per-Mile
• Commuting
• Annual Lease Value Rule
104
4.1.6 Describe the Fleet Average Valuation Rule. (p.74)
An employer with a fleet of 20 or more passenger automobiles, vans, or trucks may determine the value of the personal use by using the Fleet-Average Valuation Rule to calculate the Annual Lease Value - The employer must average all eligible passenger automobile FMVs separately from all eligible truck and van FMVs
105
4.1.7 Define the Cents-per-mile Safe-harbor Rule. (p.74-75)
The employer determines the value of a vehicle provided to an employee for personal use by multiplying the standard mileage rate by the total miles the employee drives the vehicle for personal purposes.
106
4.1.8 What consistency requirements must be met when using the Cents-per-mile Rule? (p.75)
• Begin using the cents-per-mile rule on the first day the vehicle is made
available to any employee for personal use and continue to do so for all later years in which the vehicle is available to any employee. However, employers may switch from the commuting rule (discussed later) to the cents-per-mile rule on the first day for which it does not use the commuting rule.
• The employer must continue to use the cents-per-mile rule when providing a replacement vehicle to the employee (and the vehicle qualifies for the use of this rule) and the employer’s primary reason for the replacement is to reduce federal taxes.
• If the vehicle no longer qualifies for the cents-per-mile rule during a later
year, the employer can use any other rule for which the vehicle later qualifies
107
4.1.9 What is the Commuting Rule, and what requirements must be met to use it? (p.75-76)
The employer determines the value of a vehicle provided to an employee for commuting use by multiplying each one-way commute (that is, from home to work or from work to home) by $1.50
108
4.1.10 What is the Annual Lease Value Rule? (p.76)
The employer determines the value of a vehicle provided to an employee by using its Annual Lease Value
109
4.1.11 What must be calculated in order to use the Annual Lease Value Rule? (p.77)
percentage of personal miles out of the total miles driven by the employee & FMV
110
4.1.12 What is the Prorated Annual Lease Value? (p.77)
Driver didn't have it all year
111
4.1.13 How is the daily lease value calculated? (p.77)
Annual Lease Value (x) a fraction, using four times the number of days of availability as the numerator and 365 as the denominator. * For If the employer provides a vehicle to an employee for a
continuous period of less than 30 days
112
4.1.14 What are employee and employer responsibilities for record keeping? (p.78)
Employee: Maintain adequate records to substantiate business miles, purpose and date. May prorate if vehicle is used on a regular
basis - Employer: Obtain annual driver statement of use. Validate that the employee has kept adequate - records to substantiate business miles, purpose and date
113
4.1.15 When is record keeping not required? (p.78)
if the employer’s written policy prohibits personal use (other and de minimis) and the vehicle is garaged at the employer’s facility
114
4.1.16 What are the three methods that employers can use to meet the IRS requirements of personal use fringe benefits? (p.79)
• The least-common method is to treat all miles as personal use and force the employee to deduct expenses from the employee’s tax return. This method can result in overpayment of FICA and unemployment taxes and can only be used in conjunction with the Lease Value Rule method to value the benefit. Some employers treat all miles as personal use if the employee fails to report business use by the required due date.
• The second method is to impute income for the personal use miles determined by calculating the difference between starting and ending odometers and subtracting business miles.
• Another method requires the employee to pay the employer for the value of
personal use. Under this scenario, the employer is reducing the amount of
business expense that is ultimately written off for tax purposes.
115
4.2.1 What vehicles do the CRA personal use tax regulations apply to? (p.79-80)
The Canada Revenue Agency (CRA) personal use tax regulations apply to motor vehicles, meaning automotive vehicles designed or adapted for use on highways and streets
116
4.2.2 What is a Standby Charge and how is it calculated? (p.81)
The standby charge is based on the capital cost of the automobile. - riginal cost of the vehicle plus the cost of post-delivery capital improvements, excluding the cost of radio receiving or transmission equipment required for business use
117
4.2.3 What is Operating Cost Benefit and how is it calculated? (p.82)
An operating cost benefit is included in the employee’s income when the employer pays operating costs that relate to personal use Personal milease (x) rate
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4.2.4 What vehicles are exempt from the deductibles stated above? (p.82)
their use is “primarily” (i.e., more than 50 percent) for the transport of goods, equipment and/ or passengers in the year of acquisition meets relevant benchmarks.
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4.2.5 What conditions must be met for an employee to be an on-call employee? (p.82- 83)
• The motor vehicle is especially designed or significantly modified to carry
tools, equipment or merchandise for the business or trade and is essential in a
fundamental way for the performance of the employment duties.
• The motor vehicle is suited for and consistently used to carry and store heavy,
bulky or numerous tools and equipment and is essential in a fundamental way
for the performance of the employment duties, e.g. pick-up trucks and vans.
The tools and equipment contemplated are those of a nature that cannot easily
be loaded and unloaded from the vehicle, and exclude tools and equipment
such as office supplies, work documents, laptops, and personal travel items.
• The motor vehicle is used on a regular basis to carry material that is noxious
and malodorous, such as veterinary samples or fish and game, or
• The employee is on-call for emergencies as described above, the motor vehicle
is a clearly marked emergency-response vehicle, or specially equipped so
as to provide for rapid response, or for the purposes of carrying specialized
equipment to the scene of the emergency
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4.2.6 What must be documented in regards to personal use? (p.83)
Mileage per day personal and Business
121
5.1.1 What are some considerations to make when acquiring new vehicles? (p.85)
LCA - History
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5.1.2 What can a lifecycle analysis be used for? (p.86)
Determine Replacement Times - Lease vs. Buy - Allowance? - In-house vs. Outsoursing
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5.1.3 What is the formula for depreciation? (p.86)
Net Acquisition Cost (purchase price plus cost to place into service), - Net Remarketing Revenue (resale price - cost to remove from serviceand sell)
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5.1.4 List some common mistakes to be avoided when doing a Lifecycle Cost Analysis. (p.87)
• Omission of necessary data
• Lack of a systemic structure or analysis
• Misinterpretation of data
• Wrong or misused estimating techniques
• A concentration on wrong or insignificant facts
• Failure to check all calculations
• Estimation of the wrong items
• Using incorrect or inconsistent escalation data
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5.1.5 What are some factors that may affect the credibility of an LCA? (p.87)
The Data/ Gargbage in Garbage out
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5.2.1 What items need to be determined before an analysis can be done? (p.88)
• Target Months in Service
• Target Replacement Mileage
• Expected Mileage Per Month
• Lease Annual Interest Rate
• Lease Management Fee
• Book Depreciation Rate - a negotiated amount that will be included in the monthly lease rate to cover the anticipated cost of depreciation. A rate of 2% would fully depreciate a vehicle on a straight-line basis in 50 months.
• Cost of Fuel Per Gallon
• Estimated Personal Use
• Daily Bridge Rental Rate – cost of a rental vehicle if the new vehicle is notreceived and the old vehicle is already sold
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5.2.2 What does the Fleet Manager need to know in order to determine if company policy must be changed? (p.89)
If a manager knows the target months in service, target replacement mileage and expected mileage per month,
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5.2.3 How might the Fleet Manager determine the resale price of a vehicle? (p.89)
FMV - One might be to look at older models of the same vehicle and find out what they sold for based on age and mileage. Another way might be to look at auction figures for older or comparable models
129
5.2.4 What methods can the Fleet Manager use to calculate interest? (p.89)
Step Rate Formula
130
5.2.5 What fixed costs should be considered during the LCA? (p.90)
Management - Deprieciateion - Interest
131
5.2.6 What are the two sections that operating cost can be split into and how are they calculated? (p.91)
Fuel & Repairs / Maint - FUEL: If a vehicle is scheduled to be replaced at 83,600 miles, the vehicle gets 20 miles-per- gallon, and fuel is $2.00 per gallon, then the estimated fuel costs over the life of the vehicle is:
(83,600 / 20) x $2.00 = $8,360.00 REPAIRS / MAINT: companies have data on the cents-per-mile cost of many vehicles and even the manufacturer may have an estimated lifetime repair/maintenance cost. Given cents-per-mile information (as an example, $0.14 cents-per-mile), then the estimated maintenance cost over the life of the vehicle would be 83,600 x $0.14 = $11,704.00
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5.2.7 How is personal use factored into the LCA? (p.92)
Personal use is calculated against both fixed and operating costs. If an employee drives 20% of the time for personal use, then 20% of the fixed and 20% of the operating costs of the vehicle over its life are attributable to the employee’s use
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5.2.8 How can you determine the lifecycle costs-per-mile? (p.92)
Net Acquisition Cost + Fixed Costs + Operating Costs = Total Lifecycle Cost
134
5.3.1 What are the advantages and disadvantages of extending a vehicle’s lifecycle? (p.92-93)
Advantage; Keeping older vehicles reduces the amount of money an organization has tied up in these assets / Disadvantage: Lower resale value and more repairs
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5.3.2 What information must be collected for the analysis to be complete? (p.93)
• Annual Miles Driven – Estimated or actual number of miles driven
• Annual Shifts – Number of 8-hour shifts a vehicle is used per year. Typically, a vehicle used by one person puts in 256 shifts per year.
• Maximum Replacement Years – Number of years vehicle is estimated to be in the fleet
• Maximum Replacement Miles – Number of miles vehicle is estimated to be driven before replacement
• Net Acquisition Cost – Acquisition cost of vehicle and all make-ready costs
• Interest Rate (or Return on Investment) – Interest rate on money borrowed to acquire the vehicle, or return on investment if money had been used for something other than an asset purchase
• Miles Per Gallon
• Fuel Cost Per Gallon
• Loaner Vehicle Cost (per mile) – Cost of a loaner vehicle when the main vehicle is down for maintenance/repairs
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5.3.3 What should be considered when determining the maintenance cost for a vehicle? (p.94)
Manufature recommendation / cost / rental cost
137
5.3.4 When do you include the cost of a rental vehicle in maintenance cost? (p.94)
If the time necessitates a rental vehicle
138
5.3.5 What are some factors that would determine whether a vehicle should be kept? (p.95)
If the resale value is too little
139
5.3.6 When is the optimal time to replace a vehicle? (p.96)
Since the costs in year seven are greater per mile than the costs in year six, it makes prudent financial sense to replace the vehicle during year six and before year seven starts
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5.4.1 What elements do all LCA calculations have in common? (p.97)
• Planned Vehicle Life
• Cost of Money
• Management Fees
• Book Depreciation
• Build Time Delay
• Personal Use
• Downtime Cost
• Predicted Resale Values
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5.4.2 How do you calculate the future cost of a vehicle and why is it important in the LCA process? (p.97-98)
one (1) plus the inflation rate, to the number of years, multiplied by the present cost (Future Cost = Present Cost x (1 + inflation rate)t)
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5.4.3 Describe the process of strategic planning. (p.98)
Top management establishes the organization’s philosophies, guidelines and mission and provides overriding policies for the organization. It is the department manager’s responsibility to actively participate in this process, to ensure they are involved in the communication process and to show (through actions and communication) their support for the strategic plan.
143
5.4.4 What is the Fleet Managers role in the strategic planning process? (p.98)
Take the lead in providing Formal Feedback to Management
144
5.5.1 What are the main sections of a lifecycle model? (p. 100)
An acquisition section, a fixed costs section, an operating costs section, a personal use section and overall totals
145
5.5.2 What parameters can be changed to affect the outcome of the analysis? (p.101)
Original Parameters of the Veh.
146
5.6.1 How is depreciation affected over the lifetime of the vehicle? (p.101)
down as expected, sharply at first and then more gradually.
147
5.6.2 How is maintenance cost affected over the lifetime of the vehicle? (p.101)
Increase
148
5.6.3 What is usually the deciding factor in an optimum replacement analysis? (p101)
LCA
149
5.6.4 What is the Fleet Manager’s objective and how can they achieve it? (p102)
The fleet manager’s objective is to convey information in order to achieve approval.
150
6.1 Why Benchmark?
Process of comparing performance with other organizations, or industry standards - used to develop an understanding of fleet conditions and performance attributes that cannot be attained through first-hand observation or second-hand information.
151
6.1.1 How can benchmarking be used? (p.106)
Provide focus to processes and performance improvement efforts
152
6.1.2 How can Benchmarking create value? (106)
• Focusing on areas of performance within an organization that require improvement.
• Identifying ideas from other organizations that may assist in improving performance.
• Creating an agreed upon strategy on how to move an organization forward
• Making more informed decisions based on improved knowledge of potential
performance.
153
6.2 How to Benchmark
Steps 1 Define Objectives
Step 2: Performance Measures
154
6.2.2 What data should be collected in order to benchmark? (p.107)
Internal Data / Cost Data maint / statistics
155
6.2.3 What are some common performance measurements? (p.107)
• Total operating cost per mile/km (based on similar vehicle platforms)
• Total lifecycle costs per mile/km
• Fuel efficiency
• Vehicle utilization
• Vehicle downtime
• Crash costs
156
6.2.4 How can benchmarking identify what conditions and practices should be changed within the organization? (p.108)
Comparing quantitative performance levels across organizations because their focus is on identifying best business practices
157
6.2.5 List some common processes that can be improved in order to improve performance. (p.109)
• Work scheduling
• Exception reporting
• Employee Training
• Communication
• Quality assurance
• Incentives/rewards
• Acquisition methods/policies/practices
158
6.3 Examples of Benchmarking Topics
• Vehicle availability or downtime rate
• In-service breakdown rate
• Ratio of actual to budgeted expenses
• PM schedule adherence rate
• Work order turnaround rate
• Average maintenance and repair backlog
• Mechanic productivity rate
• Total life cycle cost
• Total cost per mile/kilometer
• Direct/billable hours by mechanic
• Efficiency rate by mechanic
• Repair comeback rate by mechanic
• Parts order fill rate: percentage of orders filled from stock
• Parts order fill time
159
6.4.1 What are performance metrics? (p.110)
Defined as a system of parameters or ways of quantitative and periodic assessment of a process that is to be measured, as well as the system to carry out and assess such measurements
160
6.4.2 List some common performance metrics. (p.110)
• Maintenance cost per mile or km
• Maintenance cost per vehicle specification
• Overall fuel consumption
• Number and frequency of breakdowns
• Number and frequency of technician road calls
• Hours of service lost
• Schedule hours versus actual hours
• Average vehicle utilization
• Average collision rate
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6.4.3 What can performance metrics be used to achieve? (p.111)
• Identify areas for improvement
• Illustrate good performance (particularly to management)
• Help achieve goals and objectives
• Build a business case to obtain more resources
• Build a business case to change method of doing business (i.e. outsource, in-house, etc,)
• Emphasize value to clients or management
• Improve client satisfaction
• Help establish budgets
• Refocus priorities
• Measuring a contractor’s performance
• Regulatory compliance
• Improve productivity
• Improve equipment productivity and effectiveness
• Control maintenance cost
162
6.4.4 What do performance metrics show? (p.112)
Tactical day-to-day performance of fleet operations, as well as strategic long-term performance trends
163
6.4.5 List some performance reports appropriate for each level of audience. (p.112)
Executive Manager, Customer • Vehicle availability or downtime rate
• In-service breakdown rate
• Ratio of actual to budgeted expenses
• Crash rate
Fleet Manager • PM schedule adherence rate
• Work order turn-around time
• Average maintenance and repair backlog
• Technician productivity rate
• Fuel consumption rates
• Total life cycle cost by spec
Maintenance Manager • Direct/billable hours by technician
• Efficiency rate by technician
• Repair comeback rate by technician
Parts Manager • Parts order fill time
• Parts order fill rate
• Inventory turnover rate
• Percentage of inventory with no
movement in last 12 months
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6.4.6 What are some of the more common reporting tools? (p.112)
Balanced Scorecard and Dashboard
165
6.5.1 Why is it important to measure performance? (p.113)
To know if you need to make changes
166
6.5.2 What are some objectives of an effective fleet operation? (p.113)
• Support organizational objectives by keeping vehicles and equipment in good operating condition.
• Keep maintenance facilities in a safe and functional state.
• Perform quality work.
• Anticipate and prepare for future organizational priorities
• Strive for continued improvement, by evaluating performance, taking corrective action and measuring progress.
167
6.5.3 What do you need in order to have an effective fleet operation? (p.113-114)
Policies and expectations that serve to guide staff in supporting activities
168
6.6.1 What is the biggest obstacle facing Fleet Managers? (p.114)
Being forced to do more with fewer resources
169
6.6.2 What are some components of an FIMS that would be useful to a Fleet Manager? (p.114)
Fleet Information Management System-equipment data management, work-order control, preventive maintenance, inventory control, documentation control, system security, ease of use, customizable reports, user configuration and metrics
170
6.6.3 What are two events when the FIMS should alert the Fleet Manager? (p.114)
When work is covered by warranty and When costs deviate from contract rates
171
6.7.1 What are some key steps to establishing effective exception reporting? (p.114- 115)
First, you need to decide what is important enough to track - Once you decide what to measure and report on, you need to establish exception reporting thresholds.
172
6.7.2 What are exception reporting thresholds? (p.115)
The primary difference between an “exception report” and standard informational reports is that only data outside the norm is shown, or at least clearly highlighted for easy identification
173
6.8.1 What is a Service Level Agreement (SLA)? (p.116)
An SLA is a negotiated agreement designed to create a common understanding about services, priorities and responsibilities
174
6.8.2 What service elements must be clarified in the SLA? (p.116-117)
• Maintenance or other services to be provided
• Service Standards, such as time frames
• Responsibilities of both parties
• Costing details, including escalation factors
175
6.8.3 What management elements must be clarified in the SLA? (p.117)
• How service effectiveness will be tracked
• Communication (how effectiveness will be reported)
• Conflict resolution
• Review/revision procedures
176
6.8.4 What are the key steps in establishing maintenance services? (p.117)
• Data gathering (highly dependent upon the effectiveness of computerized fleet management software)
• Consensus between parties
• Outline responsibilities of both parties
• Draft, implement and manage the agreement
177
6.8.5 What are the benefits of a service level agreement? (p.117)
• Sets clear performance expectations of the customer and service provider.
• Clarifies the roles and responsibilities of both parties.
• Focuses attention on customer’s priority needs.
• Encourages a service quality culture and continuous improvement.
• Provides a mechanism for both parties to plan for the future.
• Puts purchasing power into the hands of the customer.
• Provides a useful tool for the customer to monitor performance.
• Service providers are in a better position to plan their delivery function.
• Can provide greater certainty of income for service providers
178
6.8.6 What is a service level? (p.118)
Similar to standards, but the term is usually used for organization-wide performance.
179
6.8.7 List some performance indicators that could be included in an SLA. (p.118)
Service faults should be reported immediately and prompt action should be taken
180
6.8.8 Why is it important to consult with customers when establishing performance indicators? (p.119)
Creating performance measurements is a crucial part of the benchmarking process. And a most crucial part of this creation process is to consult with your customers to find out what they really want and with your employees to find out what they need to
achieve success.
181
6.8.9 List some best practices for developing accountability. (p.119)
• Lead by example.
• Cascade accountability: share it with the employee.
• Keep the employee informed.
• Keep the customer informed.
• Make accountability work: reward the employee
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6.8.10 What are some guidelines for collecting data? (p.120)
• Be willing to invest both time and money to make it right.
• Make sure your performance data means something.
• Recognize that not everything is online or in one place.
• Measure the right thing, and then measure it right.
• Centralize the data collection function at the highest level possible.
183
6.8.11 What are some guidelines for analyzing the data collected? (p.120)
• Combine feedback and performance data for a more complete picture.
• Conduct root-cause analyses.
• Make sure that everyone sees the results of analyses.
184
6.8.12 What critical elements must be connected in order to drive actions? (p.121)
• Connect to employees and customers.
• Connect to the business plan.
• Integrate with data systems.
• Integrate with the budget process.
185
6.8.13 What are some qualities and activities that a good leader possesses? (p.121)
1. Good leadership relies on good communication
2. All members of the organization must have clearly-defined responsibilities. • Report back to the employees, customers and other stakeholders • Use self-assessment tools
• Involve the legislative/legal branch through consultation or representation on working groups and committees
• Involve the customer, stakeholder and employee at every phase of the management process
• Involve the unions early and often.
186
7.1.1 Why is it important to understand the organization’s strategy? (p.123)
Each organization will have short term and long term strategies, which will impact budgets
187
7.1.2 Why is it important to have a vehicle replacement policy? (p.123)
The greatest impact to any budget is the acquisition of new vehicles and remarketing of aged vehicles. Therefore, having a vehicle replacement policy is an important element to accurate budgeting.
188
7.1.3 How might the budget structure for acquiring new vehicles affect the depreciation of the asset? (p.123)
vehicle replacement policy can assist in predicting depreciation costs - • Driving Patterns: Are territories static or dynamic?
• New Hires: Should you anticipate a new product launch or corporate expansion
that will result in new hires that will need company vehicles?
• Total Losses: Based on your historical crash rates, how many total losses
should you anticipate? (This is especially important for organizations self-
insured for comprehensive and collision).
189
7.1.4 What are the two biggest fleet expenses? (p.124)
Depreciation and fuel
190
7.1.5 What are some recommendations for budgeting for depreciation? (p.124)
Strive to break even at end of Lease
191
7.1.6 What are some factors that might impact fuel budgeting? (p.124)
• Cost per gallon
• Driving patterns: Static or dynamic territories?
• Change in average fleet age: Older fleets will consume more fuel than newerfleets
• Change in average vehicle fuel economy: Are you introducing a large numberof hybrids into the fleet?
192
7.1.7 How can a Fleet Manager budget for maintenance costs? (p.124-125)
Grouping your vehicles into mileage-band categories, Then project the number of vehicles in each mileage-
band category in each budget period based on average monthly miles driven.
193
7.1.8 How can a Fleet Manager budget for crash costs? (p.125)
• Instituting a safety training program
• Weeding out high-risk drivers from the fleet
• Influx of younger, less experienced drivers
• Expansion of driver territories (pressure to cover more area in same time equals increased incidents of speeding)
194
7.1.9 How can a Fleet Manager budget for lease finance? (p.125)
Lease schedules for a coming year are fairly predictable with stable interest rates, even for floating rate financing
195
7.1.10 How can a Fleet Manager budget for used vehicle settlements? (p.126)
For open-end leases, the goal should be to break even at the back end of the lease. - For closed-end leases, the used vehicle market is not a concern at settlement time; however, budgets for these leases should include estimates for back-end charges
such as excess mileage and returned vehicle damage
196
7.1.11 How can a Fleet Manager budget for violations? (p.126)
past driver behavior will predict future driver behavior, the CPI factor should account for more aggressive violation collections.
197
7.1.12 How can a Fleet Manager budget for licensing? (p.126)
these expenses generally remain the same year over year except for increases in state fee
198
7.1.13 How can a Fleet Manager budget for administration? (p.126)
Outsourced fleet management fees are reasonably predictable based on prior year fees. Internal administration resources would include salaries and benefits for all fleet staff and an allotment for overhead that is based on headcount
199
7.1.14 How can a Fleet Manager budget for facilities and equipment? (p.126)
Replacement for capital tools, (e.g. garage lifts, diagnostic machines, etc.) are typically included in the capital budget
200
7.2.1 When should a Fleet Manager establish their budget for the next year? (p.126)
Beginning one to two months prior to the end of the fiscal year
201
7.2.2 What is the 10 step process for creating next year’s budget? (p.126-127
Step One - Beginning one to two months prior to the end of the fiscal year, fleet managers need to establish their budget for the next fiscal year.
Step Two – Put together a schedule of the organization’s planned activities for the coming year, and identify their impact to the fleet budget.
Step Three – Determine available funds, including carryover balance from prior year, cash on hand, funds in the bank, etc Step Four – Identify sources of income and estimate when it will come available,
Step Five – Identify expenses, both regular and periodic. Be sure to plan for events such as:
• Organizational activity (e.g. new product launch brings in 200 new hire sales
reps needing cars in fall)
• Fleet initiatives (e.g. launch of new safety training program which all drivers
will complete in the spring)
• Scheduled travel and training (e.g. NAFA I&E Convention, site visits, supplier
site visits)
Step Six – Get price quotes for planned expenses, such as new vehicle acquisitions
with updated model year information.
Step Seven – Negotiate expenses as necessary.
Step Eight - Submit initial budget recommendations Step Nine – Executive committee reviews submitted budgets, advises of any bottom- line changes that need to be made.
Step Ten – Review and revise the budget, keeping intact budget for most critical
202
7.2.3 What are some sources of income that should be identified? (p.127)
Employees’ payroll deductions for personal use of company vehicles, charge backs to other departments for use of pool vehicles, etc.
203
7.2.4 What are some Expenses that should be identified? (p.127)
• Organizational activity (e.g. new product launch brings in 200 new hire sales reps needing cars in fall)
• Fleet initiatives (e.g. launch of new safety training program which all drivers will complete in the spring)
• Scheduled travel and training (e.g. NAFA I&E Convention, site visits, supplier site visits)
204
7.3.1 How can the Fleet Manager control expenses? (p.127)
Have procedures in place for expense approval and allow only approved expenditures
205
7.3.2 What are the two most common metrics for measuring performance against the
budget? (p.128
Cost per mile and cost per vehicle per month
