Unit 3 - Finance and Accounts

Unit 3 - Finance and Accounts

3.1 Introduction to Finance 

3.2 Sources of Finance 

3.3 Costs and Revenues 

3.3 Decision Tree 

5.5 Break Even Analysis 

3.4 Final Accounts 

3.5 Profitability and Liquidity Ratio Analysis 

3.6 Efficiency Ratio Analysis (HL) 

3.7 Cash Flow 

3.8 Investment Appraisal 

3.9 Budgets (HL) 

3.1 Introduction to Finance 

• Role of finance for businesses (AO2):

  • • Capital expenditure

    • Revenue expenditure

3.2 Sources of Finance 

• The following internal sources of finance (AO2):

•  Personal funds (for sole traders)
•  Retained profit
•  Sale of assets

• The following external sources of finance (AO2):
  •  Share capital
  •  Loan capital
  •  Overdrafts
  •  Trade credit
  •  Crowdfunding
  •  Leasing
  •  Microfinance providers
  •  Business angels

• Appropriateness of short- or long-term sources of finance for a given situation (AO3)

3.3 Costs and Revenues 

• 3.3 Decision Tree 

• The following types of cost, using examples (AO2):

  • • fixed

    • variable

    • direct

    • indirect (overhead)

• Total revenue and revenue streams, using examples (AO2)

• Decision Tree (AO2)

5.5 Break Even Analysis 

• Total contribution versus contribution per unit (AO2)

• A break-even chart and the following aspects of break-even analysis. (AO2, AO4)

  • • Break-even quantity/point

    • Profit or loss

    • Margin of safety

    • Target profit output

    • Target profit

    • Target price

• The effects of changes in price or cost on the break-even quantity, profit and margin of safety, using graphical and quantitative methods (AO2, AO4)

• Limitations of break-even as a decision-making tool (AO3)

3.4 Final Accounts 

• The purpose of accounts to different stakeholders (AO2)

• Final accounts (AO2, AO4):

• Profit and loss account
• Balance sheet

• Different types of intangible assets (AO2)

• Depreciation using the following methods (HL only) (AO2, AO4):
  • Straight line method
  • Units of production method

• Appropriateness of each depreciation method (HL only) (AO3)

3.5 Profitability and Liquidity Ratio Analysis 

• The following profitability ratios (AO2, AO4):

•  Gross profit margin (GPM)
•  Profit margin
•  Return on capital employed (ROCE)

• Possible strategies to improve these profitability ratios (AO3)

• The following liquidity ratios (AO2, AO4):
  •  Current ratio
  •  Acid-test / quick ratio

• Possible strategies to improve these liquidity ratios (AO3)

3.6 Efficiency Ratio Analysis (HL) 

• The following further efficiency ratios (AO2, AO4):

• Stock turnover

• Debtor days

• Creditor days

• Gearing ratio

• Possible strategies to improve these ratios (AO3)

• Insolvency versus bankruptcy (AO2)

3.7 Cash Flow 

• The difference between profit and cash flow (AO2)

• Working capital (AO2, AO4)

• Liquidity position (AO2)

• Cash flow forecasts (AO2, AO4)

• The relationship between investment, profit, and cash flow (AO2)

• Strategies for dealing with cash flow problems (AO3)

3.8 Investment Appraisal 

• Investment opportunities using payback period (AO3 and AO4)

• Investment opportunities using average rate of return (ARR) (AO3 and AO4)

• Investment opportunities using net present value (HL only) (AO3 and AO4)

3.9 Budgets (HL) 

• The difference between cost and profit centres (AO2)

• The roles of cost and profit centres (AO2)

• Constructing a budget (AO2, AO4)*

• Variances (variance analysis) (AO2, AO4)

• The importance of budgets and variances in decision-making (AO2)

Formulas Provided in the Exam: