Topics Covered in this Unit - Financial Information and Decisions

5.1 Business finance: needs and sources

5.1.1 The need for business finance:

• The main reasons why businesses need finance, e.g. start-up capital, capital for expansion and additional working capital
• Understand the difference between short-term and long-term finance needs

5.1.2 The main sources of capital:

• Internal sources and external sources with examples
• Short-term and long-term sources with examples, e.g. debt or equity for long-term finance
• Importance of micro-finance in developing economies
• The main factors considered in making the financial choice, e.g. size and legal form of business, amount required, length of time, existing loans
• Recommend and justify appropriate source(s) of finance in given circumstances

5.2 Cash flow forecasting and working capital

5.2.1 The importance of cash and of cash-flow forecasting:

• Why cash is important to a business
• What a cash-flow forecast is, how a simple one is constructed and the importance of it
• Amend or complete a simple cash-flow forecast
• How to interpret a simple cash-flow forecast
• How a short-term cash-flow problem might be overcome, e.g. increasing loans, delaying payments, asking debtors to pay more quickly

5.2.2 Working capital:

• The concept and importance of working capital

5.3 Income statements

5.3.1 What profit is and why it is important:

• How a profit is made
• Importance of profit to private sector businesses, e.g. reward for risk taking/enterprise, source of finance
• Difference between profit and cash

5.3.2 Income statements:

• Main features of an income statement, e.g. revenue, cost of sales, gross profit, profit (‘profit’ was known as ‘net profit’ in the 2014 and previous syllabuses) and retained profit
• Use simple income statements in decision making based on profit calculations (constructing income statements will not be examined)

5.4 Balance sheets

5.4.1 The main elements of a balance sheet:

• The main classifications of assets and liabilities
• Examples to illustrate these classifications

5.4.2 Interpret a simple balance sheet and make deductions from it, e.g. how a business is financing its activities and what assets it owns, sale of inventories to raise finance (constructing balance sheets will not be examined)

5.5 Analysis of accounts

5.5.1 How to interpret financial statements by calculating and analysing accounting ratios:

• Gross profit margin
• Profit margin (‘profit margin’ was known as ‘net profit margin’ in the 2014 and previous syllabuses)
• Return on Capital Employed
• Current ratio
• Acid test ratio

5.5.2 Liquidity:

• The concept and importance of liquidity

5.5.3 Why and how accounts are used:

• Needs of different users of accounts and ratio analysis
• How users of accounts and ratio results might use information to help make decisions, e.g. whether to lend to or invest in the business