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10. Finance and accounting

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  1. 10.1 Financial statements

    1. 10.1.1Statement of profit or loss

      • Statement of profit or loss - the meaning and purpose of the statement of profit or loss - the contents of a statement of profit or loss: revenue, cost of sales, gross profit, expenses, profit from operations (operating profit), taxation, profit for the year, dividends, retained earnings - amendment of a statement of profit or loss - the impact on the statement of profit or loss of a given change

    2. 10.1.2Statement of financial position

      • Statement of financial position - the meaning and purpose of statement of financial position - the contents of a statement of financial position including non-current assets, current assets, current liabilities, net current assets, net assets, non-current liabilities, reserves and equity - amendment of a statement of financial position - the relationships between items in the statement of profit or loss and the statement of financial position

    3. 10.1.3Inventory valuation

      • Inventory valuation - the difficulties of valuing inventory - the net realisable value method

    4. 10.1.4Depreciation

      • Depreciation - the role of depreciation in the accounts - the impact of depreciation (straight-line method only) on the statement of financial position and the statement of profit or loss

  2. 10.2 Analysis of published accounts

    1. 10.2.1Liquidity ratios

      • Liquidity ratios - the meaning and importance of liquidity - current ratio: calculation and interpretation - acid test ratio: calculation and interpretation - methods of improving liquidity

    2. Formula reference—Liquidity ratios

      • Liquidity ratio formulae - current ratio = current assets / current liabilities; acid test ratio = (current assets - inventory) / current liabilities; answers are presented as ratios

    3. 10.2.2Profitability ratios

      • Profitability ratios - the meaning and importance of profitability - return on capital employed: calculation and interpretation - gross profit margin: calculation and interpretation - profit margin: calculation and interpretation - methods of improving profitability

    4. Formula reference—Profitability ratios

      • Profitability ratio formulae - gross profit margin = gross profit / revenue x 100; operating profit margin = profit from operations / revenue x 100; return on capital employed = profit from operations / capital employed x 100; capital employed = issued shares + reserves + non-current liabilities

    5. 10.2.3Financial efficiency ratios

      • Financial efficiency ratios - the meaning and importance of financial efficiency - rate of inventory turnover: calculation and interpretation - trade receivables turnover (days): calculation and interpretation - trade payables turnover (days): calculation and interpretation - methods of improving financial efficiency

    6. Formula reference—Financial efficiency ratios

      • Financial efficiency ratio formulae - trade receivables turnover = trade receivables / credit sales x 365 days; trade payables turnover = trade payables / credit purchases x 365 days; rate of inventory turnover = cost of sales / average inventory

    7. 10.2.4Gearing ratio

      • Gearing ratio - the meaning and importance of gearing - gearing ratio: calculation and interpretation - methods of improving gearing

    8. Formula reference—Gearing ratio

      • Gearing ratio formula - gearing = non-current liabilities / capital employed x 100

    9. 10.2.5Investment ratios

      • Investment ratios - the meaning and importance of return to investors - dividend yield: calculation and interpretation - dividend cover: calculation and interpretation - price/earnings ratio: calculation and interpretation - methods of improving investor return

    10. Formula reference—Investment ratios

      • Investment ratio formulae - price/earnings ratio = market price per share / earnings per share; dividend yield = dividend per share / market price per share x 100; dividend cover = profit for the year / annual dividend

  3. 10.3 Investment appraisal

    1. 10.3.1Investment appraisal concept

      • The concept of investment appraisal - the need for investment appraisal

    2. 10.3.2Payback and ARR

      • Basic methods: payback, accounting rate of return (ARR) - the meaning, calculation and interpretation of payback and ARR (ARR = (average profit / average investment) × 100)

    3. 10.3.3NPV

      • Discounted cash flow method: net present value (NPV) - the meaning, calculation and interpretation of NPV

    4. 10.3.4Investment appraisal decisions

      • Investment appraisal decisions - quantitative results and their impact on investment decisions - qualitative factors and their impact on investment decisions - comparison of investment appraisal methods, including their limitations

  4. 10.4 Finance and accounting strategy

    1. 10.4.1Accounting data for strategy

      • The use of accounting data to enable strategic decision-making - the use of financial statements in developing strategies - the contents of an annual report and their usefulness to business and other stakeholders

    2. 10.4.2Ratio analysis for strategy

      • The use of accounting data and ratio analysis in strategic decision-making - assessment of business performance over time and against competitors - the impact of accounting data including ratio results on business strategy - the impact of debt or equity decisions on ratio results - the impact of changes in dividend strategy on ratio results - the impact of business growth on ratio results - the impact of other business strategies on ratio results - the limitations of using published accounts and ratio analyses