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Topic 5 of 6 · Form 5

Finance and accounting

Sources of finance (internal and external; short-, medium- and long-term); choosing finance; working capital management; cash flow forecasting.

Notes for this topic 1 file, in order

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Finance

Sources of finance (internal and external; short-, medium- and long-term); choosing finance; working capital management; cash flow forecasting.

Costs and break-even

Fixed, variable, semi-variable, direct and indirect costs; contribution; break-even analysis and margin of safety; full and contribution costing.

Accounting statements

Income statement and statement of financial position; ratio analysis (profitability, liquidity, gearing, efficiency, investor ratios).

Worked example: Current assets US$84 000 including inventory US$30 000; current liabilities US$60 000. Find the current and acid test ratios.

Current = 1.4 : 1; acid test = 54 000 ÷ 60 000 = 0.9 : 1

Budgets and variances

Purposes, flexible budgets, variance analysis.

Investment appraisal

Payback, ARR, NPV; qualitative factors.

Worked example: An investment of US$120 000 generates average annual profit of US$18 000. Find the ARR.

18 000 ÷ 120 000 × 100 = 15%

Exam tip: Recommend finance that matches the time period and purpose of the investment.

Check yourself

  1. What is working capital?
  2. Give one advantage of debt factoring.
  3. Why might NPV be preferred to payback?
Show answers
  1. Current assets minus current liabilities.
  2. Immediate cash from receivables, improving liquidity.
  3. It considers all cash flows and the time value of money.
Next topicStrategic management

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