5. Financial information and decisions
- Syllabus
- 0264–2027–2028
- Section
- 5
- Level
- —
Exam analysis
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Recent 5 years
In this section
Topic 5.1
5.1. Business finance
Objectives in this topic
5.1.1—The need for business finance
- the main reasons why businesses need finance: start-up capital, capital for expansion/growth, replacing existing non-current assets, investing in new technology, working capital
- short-term and long-term finance needs of a business
- concept and importance of working capital
5.1.2—The main sources of finance
- internal sources of finance: owners’ investment, retained profit, sale of unwanted assets, working capital
- external sources of finance: share capital or issuing shares, venture capital, bank overdrafts, leasing, hire purchase, bank loans, trade credit, government grants, crowdfunding
- advantages and disadvantages of internal and external sources of finance
- the main factors to consider when selecting a source of finance: size of business, legal form of business, amount required, length of time, existing loans, cost, purpose
- recommend and justify an appropriate source of finance for a given situation
Topic 5.2
5.2. Cash flow forecast
Objectives in this topic
5.2.1—The importance of cash and cash flow forecasts
- why cash is important to a business
- what a cash flow forecast is and why it is important
- main features of a cash flow forecast: cash inflow, cash outflow, net cash flow, opening balance, closing balance
- amend or complete a simple cash flow forecast
- interpret a simple cash flow forecast
- how a short-term cash flow problem may be overcome: overdraft, delaying supplier payments, asking customers to pay more quickly, delay purchase of non-current assets Note: candidates will not be assessed on constructing a cash flow forecast.
Topic 5.3
5.3. Profit and loss
Objectives in this topic
5.3.1—What is profit and why it is important
- what profit is
- importance of profit to private sector businesses: reward for risk-taking, source of finance, measure of success, attract investors
5.3.2—Statement of profit or loss
- main features of a statement of profit or loss: revenue, cost of sales, gross profit, expenses, profit
- make simple calculations based on a statement of profit or loss: revenue, cost of sales, gross profit, expenses, profit
- make decisions based on simple statements of profit or loss Note: candidates will not be assessed on constructing statements of profit or loss.
Topic 5.4
5.4. Statement of financial position
Objectives in this topic
5.4.1—The main elements of a statement of financial position
- non-current assets, e.g. property (land and buildings), machinery
- current assets, e.g. inventory, trade receivables, cash
- non-current liabilities, e.g. bank loans
- current liabilities, e.g. trade payables, overdraft
- concept of capital employed
- make simple calculations based on statements of financial position: total assets, total liabilities, working capital
- make decisions based on simple statements of financial position Note: candidates will not be assessed on constructing statements of financial position.
Topic 5.5
5.5. Analysis of accounts
Objectives in this topic
5.5.1—Profitability
- concept of profitability
- calculate and interpret the following profitability ratios:
- gross profit margin
- profit margin
- return on capital employed (ROCE)
5.5.2—Liquidity
- concept of liquidity
- calculate and interpret the following liquidity ratios:
- current ratio
- acid test ratio
5.5.3—Users of accounts
- users of accounts and ratio analysis: internal, e.g. owners (sole traders, partnerships, shareholders), managers, employees
- users of accounts and ratio analysis: external, e.g. suppliers, government, lenders/banks
- how users of accounts may use financial information to help make decisions, e.g. whether to lend to or invest in a business
- limitations of using accounts and ratio analysis