Technical Skills

Question 1

What are the 3 areas of technical skills that will be assessed on the CGMA exam?

Answer 1

1) Corporate Finance and Treasury Management
2) Risk Management and Internal Control
3) Accounting Information Systems

Question 2

What are the two sources of financing from equity and what are the advantages and disadvantages of using each of them?

Answer 2

1) Retained Earnings

Advantages:

• no special processes or costs of acquiring
• no fixed cost commitments
• can be flexible- repay it later as dividend from reserves

Disadvantages:

• Depends on firm having good positive profits and cash flows
• May disappoint investors who want a dividend
• can appear to be a loss of control of the balance sheet

2) New Issues of Stock

Advantages:

• no cash flow costs to pay interest
• capitalizes on market sentiment and support for the business

Disadvantages:

• Dilutes existing shareholders
• may reduce share price of capital not going to high profit project
• may change votes and control
• Hard to repay if capital not needed later

Question 3

What are sources of debt that can be used for working capital?

Answer 3

1) Supplier credit - no interest costs but may cause lost discounts, harm relationship with supplier and even be unethical
2) Bank overdraft - flexible, easy to arrange and interest is tax deductible, but carries high fees, and high overdrafts can signal cash flow problems
3) Commercial Paper - flexible and quick, but depends on good credit rating and market may dry up for them
4) invoice financing - either using unpaid accounts receivable as collateral for a loan (invoice discounting) or the sale of AR (factoring) - improves working capital mgmt, but costly and loses control of customer relations