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It provides list of main headings at the beginning of each exam topic. You have to click relevant heading in a list to reach there. It provides broad information on composition theoretical v computational and importance of each paper in exam context.
Exam Support provides detailed information on application of theory and calculations in exam context. Example provides practical application of technical theoretical knowledge. Illustration provides numerical applications of theoretical knowledge.
Explanations provide the reasons for correctness or un correctness of particular statements and calculation. Formula is mathematical equations and tabular formats.
Diagrams are visual Graph, Charts, Tree formats etc presentations of theoretical knowledge. Cross-referencing are hyperlinks to other exam topics. Click previous view button to go back. Highlighting is used show the relationship or connection between words and figures. Click bookmark icon in the side bar see below to jump to specific exam topic in the e-book. If you not currently using adobe reader, then i recommend you to download adobe reader, to get most benefits from this e-book.
F1 Accountant in Business. F2 Management Accounting. All questions must be attempted. Questions could be comprised of many requirements a, b, c, d, e etc. Mathematical questions are rewarded separately from text-based questions.
If you get calculations wrong, you can still earn marks by commenting reasonably on wrong figures. Usually each question examines only one part of the syllabus. Example: Question examining Part A Specialist cost and management accounting techniques can cover chapters such as Absorption costing, Marginal costing and ABC costing as requirement a, b, c respectively.
Additional 15 minutes are reading and planning time. However, you can annotate question paper only during that time. Practice past examination questions Study examiners reports from previous examinations Prepare revision cards Plan written answers Write legibly Include all your workings and label them clearly.
It depends on your daily activities and environment. I recommend you to make a printed copy to read when computer is not available. Number of pages will include allowance for solving past paper questions, student accountant articles etc.
Please note that different syllabus areas will take different amount of time. Calculations will take more time than theoretical areas. Therefore, it will give you only rough idea of your progress. Study at time of day when you are fresh. This will enable you to learn more in available time.
Consider skip reading examples, if you understood theory by reading main text. Study in the end sub exam topics, which is less likely to be examined in your exam session.
You can see past paper analysis given below each sub exam topic. Above analysis is given to emphasis the comparative importance of each topic. This analysis can be used as guide for allocating time to topics accordingly. Do not attempt to guess future question paper from this analysis, as this is historical data and it is not helpful for reading examiners mind at a time of setting exam paper.
Also, see how different exam topics are examined together in single question. Exam Awareness This chapter explains the objective and scope of financial management. However, it will help you to make reasonable and relevant discussion for other topics. You can use these relationships found out to write relevant points in order to answer requirements in the exam. Requirement Marks Explain the nature of the agency problem and discuss the use of share option schemes as a Q1:e 8 way of reducing the agency problem in a stockmarket listed company such as Dartig Co.
Discuss the reasons why small and mediumsized entities SMEs might experience less Q3:a 4 conflict between the objectives of shareholders accasupport. Principal delegates some responsibility to be performed on behalf of principal. Principal also gives agent necessary decision-making authority. Agent can be responsible to more than one principal.
Example: Shareholders delegate responsibility to board of directors to management day-to-day operations of organization. Directors are granted necessary authority through articles of association and accasupport.
Shareholders being too many in numbers and may not have technical knowledge of the companys operations would not be able to protect their interest themselves.
Unfortunately, they have to rely on directors to look after their interest. Danger is that directors do not act in the best interest of shareholders. Directors acting other than in the interest of shareholders is an agency problem. Agency problem creates the need for building mechanism, which promotes goal congruence or Alignment of interest. Directors have their own needs and desires, which may be different from shareholders needs and desires.
It does not affect performance and risk attitudes of managers. It does not ensure that directors focus on shareholders wealth maximization. Profit related pay could lead to directors undertaking excessive risky investment projects, which may be over and above the wish of shareholders. Financial management primary objective is to focus on long-term shareholder wealth maximization. Share based payment encourages directors to focus their attention on increasing share price. Increase in share price leads to increase in shareholders wealth.
It is consistent with the primary objective of financial management i. Share based payment also encourages directors to take controlled risk in line with shareholders expectation. It encourages directors to increase share price of the company above the exercise price in order to realize gain through buying shares at lower share price than market price at exercise date.
Share options direct management attention on primary objective of financial management i. Share option also encourages directors to take controlled risk in line with shareholder expectations. It is given to motivate directors so that work can be performed efficiently.
Pension may not be realized if organization gets bankrupt. It encourages directors to take long-term view organizational performance. However, it has no contribution towards motivating directors to maximize shareholders wealth beyond existing level.
Financial objectives in not for profit and public organizations are different from financial objective in profit motive organizations. Profit motive organizations have profitability as its primary objective. On the other hand, not for profit organizations do not have profitability as its primary objective. However, not for profit organizations also need to focus on profitability for meeting day-to-day expenses.
Example: Rent of the premises used as office of the organization. Payment of stipends remuneration to volunteers. Not for profit organization usually exists to provide services to the society.
Society involves more than one legitimate stakeholder such as donors, users of services, government, public at large etc. Not for profit organization may have more than one objective such as providing quality service, providing services to greater number of people, efficient use of funds provided by donors etc.
Stakeholders are interest holders, which can affect claim or be affected by organizational activities. It becomes difficult to decide which is the primary objective and deciding priority for rest of the secondary objectives. However, profit motive organization may also have objectives other than profit making. These objectives are necessary for achievement of primary financial objective.
This objective supports the primary objective of profit making. Existing customers may also prefer to buy related goods from the same organization. This will give cross selling selling more than one product to same customer benefits to organization. However, performance of profit motive organization can also be assessed in terms of value for money. Profit motive organizations must provide value for money to its customers if it has to achieve its financial objectives in short term such as profitability, liquidity as well as long term such as growth.
Exam Awareness This exam topic introduces students with basic terminologies relevant to subsequent study. If you are running short of time, then i recommend you to just skim read it in the end if you have extra time. Macro-economics include all the economic activities of private as well as public sector. Micro-economics refers to study of one economics entity at a time. Government may decide to operate market without any regulation as free market in the hope that free movement of capital will result in best economic growth.
In practice, government generally intervenes through making regulations to promote economic growth. Macroeconomic policy has following objectives.
Government has following two main policies to achieve its objectives. Interest rate influences individual investment decisions. Government can encourage investment by reducing interest rates and conversely reduce investments by increasing interest rates. Reduction in interest rate changes public preference from savings to investment. Example: Reduction in interest rates leads to increased activity in stock market and bullion market. Similarly, government can encourage exports from the country by reducing exchange rate of its home currency.
Reduction in exchange rate will make goods produced by the country cheaper to foreign countries. Conversely, government can reduce exports from the country by increasing exchange rate of its home currency. Increase in exchange rate will make goods more expensive to foreign countries. Taxation is the source of revenue for government.
It influences public spending on consumer and capital goods by increasing or decreasing the level of disposable income for private sector. Increase in taxation results in decreased disposable income for spending on satisfaction of needs and capital investments.
Conversely, decrease in taxation results in increased disposable income for spending. Disposable income is the earnings remaining after meeting all liabilities. Level of spending influences demand for goods or services and prices of goods or services. If demand exceeds in relation to supply then prices of goods or services arises inflation.
Conversely, if demand lacks in relation to supply then prices of goods or services reduces deflation. Government spending also influences the demand for goods or services and prices of goods or services. Government spending can be used to reduce the economic imbalance between rich and poor by providing basic goods or services to society at subsidised or free of charge. Formula: accasupport.
Government aim is to equal aggregate demand and aggregate supply at a level where workforce is fully employed. Full employment is one of the objectives of the macroeconomic policy of government. Confidence is the expectation of future stability and growth of economic activities. Confidence among consumers makes them to spend higher percentage of income on goods or services. Confidence among firms makes them invest more money in the business.
Confidence depends on expectation of political, environmental, employment level, inflation, demand, expected future conditions etc.
Government can increase demands for goods or services through fiscal policy taxation and government spending and monetary policy exchange rates, interest rates and money supply. Government can provide infrastructure transportation, roads, power, sewage, communication media etc to boost economic activities.
Government can boost confidence by providing security to the assets of individuals, household and firms. This can be done by making legislations and providing policing services. To promote maximum economic growth all the resources labour, materials, money and machine in an economy should be fully employed.
Resources can be used more efficiently by provision of training and use of advanced technology. Economic growth depends on using resources to its maxim capacity and using it more efficiently. Financing decisions depend on the cost of using finance such as interest rate. If interest rate will rise individual and firms will reduce their borrowings and individual will consume less and firms will abandon their investment projects, which were previously attractive.
As investment projects will reduce, demand for goods or services of suppliers to the firm will reduce, which lead to decrease in aggregate demand. As investment projects will be undertaken, demand for goods or services of suppliers to the firm will increase, which lead to increase in aggregate demand.
Exchange rates can impact balance of payment import versus export. Adverse balance of payments makes government to borrow foreign exchange for repayment. It affects credit rating of a country in the long term, as beyond certain level it can be difficult to borrow foreign exchange. Volatility in exchange rate increases risk of foreign exchange gains or losses and leads to increase in cost of Hedging Wide fluctuation in exchange rate also discourages investment by foreign firms in a country.
It increases the risk of foreign exchange gain or losses in assets of the firms when assets are translated in their home currency. Inflation results in reduced purchasing power of money.
Certain percentage of inflation is considered as indication of economic growth. It is because demand is allowing the use of economic resources labour, capital, natural resources and machinery to its full capacity.
Increase in prices inflation is considered as an indication of full employment of resources. Prices are increased to take the advantage of excess demand by providing goods or services to people that are able to pay more for limited goods or services. Inflation increases the economic imbalance between rich and poor by redistributing wealth in a society. Households require more money to continue consuming same quantity and quality of goods or services.
Households with limited income pension, government relief etc have to limit their consumption. Thus, inflation results in reduced standard of living. Businesses having sound assets may enjoy capital gains on its asset. Similarly, businesses having greater liabilities with enjoy economic profits on repayment. As the money borrowed will have lesser value purchasing power when making repayment.
Government aim is to control inflation to reduce the uneven distribution of wealth. It is possible to achieve economic growth in times of high inflation but this growth will not benefit all the members of the society in equal.
Inflation has impact on other objectives of economic policy also. Inflation will lead to depreciation of exchange rates. Exchange rate depreciation will make imports expensive for a home country and exports cheaper for foreign countries. Expensive imports will result in less demand for imported goods and cheaper exports will result in more demand for goods to export. This will make balance of payment favourable.
All these events will be beneficial for economic growth but benefits may not be evenly distributed among the members of society. In times of high inflation, people tend to invest their earnings as earlier as possible. Because keeping money in form of cash will erode the purchasing power of their earnings. High inflation leads to uncertainty about future economic wellbeing for individuals and firms.
Individual tends consume less to save money for the future. Inflation has some additional drawbacks as well. Inflation makes planning and budgeting difficult for individuals and firms.
More time have to spend on revising budgets and selling prices for goods or services. This will put additional cost burden on firms.
Customers have to face frequently new prices, which forces them comparing price again and again. In times of high inflation, financial figures have little meaning in evaluating performance of managers and entire organization, which makes financial and resource allocating decisions difficult and less meaningful.
Rate of unemployment is determined by dividing unemployed labours with total labours. Unemployment means certain portion of countrys workforce labour resource is not utilized to promote economic growth. Crime rates and illiteracy increases with the increase in unemployment rate. Unemployment will also leads to reduction in wage rates. However, employment legislation has given some protection to labours by implementing minimum wage rate requirement. As the level of unemployment increases, bargaining power of employer also increase in comparison with employees.
Unemployment may result in reduced demand for goods or services. This is put strain on business profitability and increase competition on the grounds of prices rather than quality among businesses. Quality may deteriorate to produce goods or services at reduced prices to attract price sensitive consumers. Unemployment for long period will result in loss of skill due to lack of work available to retain level of skill.
Loss of skilled workforce is the loss of human capital to the country. Unemployment increases the government expenditure for providing benefits support to unemployed people. Surplus results where total exports exceeds total imports. Deficit results where total imports exceeds total exports. It results in increased price. Supply cannot be increased using domestic factors of production men, machine, material, money.
Inflationary gap can be reduced by either reducing demand or by importing goods to satisfy demand. Prices tend to remain constant or fall.
Diagram: Boom accasupport. Depression 3. Demand, prices and employment level falls and at their bottom. Businesses tend to shut down and investors lose their confidence in the market.
If recession continues for long period time, it may turn in depression. However, government intervention and technological changes can rescue in situation. Demand, prices, employment level all increases and reaches at peak. Businesses launches new products and investors have optimistic view of the future economic growth. Recovery is generally considered a slower process than recession.
This exam topic sets purpose of working capital management and its relevance toaccasupport. Working capital is the blood of any organization without it cannot continue its operations regardless of how much fixed assets are owned by the organization.
Working capital management has two main objectives. Business must be profitable in the short term to add shareholder value in the long term.
Liquidity is essential for survival and long-term profitability of the organization. Failure to meet day-to-day expenses can force organization into dissolution or liquidation by the creditors. Hence, without survival there will be no wealth maximizing opportunities available. Profitable organization may not have enough cash to day-to-day liabilities.
It is due to the application of accrual accounting concept to arrive at profit for the year for financial reporting purpose. Profitability and liquidity are two conflicting objectives. Favourable performance at one objective inevitably leads to adverse performance at other objective. Example: Maintaining higher cash balance will result in loss of sales to customers. It is due to cash is not used for producing or purchasing accasupport. Effective working capital management depends on achieving a balance between these two objectives.
Exam Awareness This exam topic is most important among all exam topics on working capital. Contents of this topic can be examined as complete 25 marks question. Please do not skip any ofaccasupport. These are extremely interrelated. You can use these relationships found out to write relevant points in order to answer requirements in the exams.
Comment on the forecast cash flow position of HGR Co and recommend a suitable course of action. Your answer should include a discussion of relevant working capital policy and the nature of business operations. Working capital cycle is also called cash management cycle.
Working capital is fund required to finance trading activities organization. Trading activities can be payment of wages to workers, purchasing goods and selling for profit etc. Not for profit organization needs working capital in the same way as profit making organization.
Working capital is as important for organizations as blood for human body. Working capital is excess of current assets over current liabilities. Working capital is also called net current assets if current assets are greater than current liabilities or net current liabilities if current assets are less than current liabilities. Efficiency of working capital depends on efficient control over elements of working capital as above.
Working capital requirement depends on time taken to pay suppliers and time taken to receive payment from customers. Example: Suppose, we pay supplier in 30 days, but we receive payment from customers in 40 days.
We will need working capital cash for ten days to meet day to day trading expenses between 10 days. This need can be fulfilled through personal savings or raising finance. If we pay suppliers in 25 days but we receive payment from customers in 20 days. We will have surplus cash for 5 days after settling all liabilities.
Surplus cash can be invested elsewhere to earn interest income. Therefore, longer working capital cycle requires more cash and cost of raising cash to finance working capital will erode profitability. Even, if personal savings are used to finance working capital it involves opportunity cost because of not being able to earn interest by investing it elsewhere. Diagram: accasupport. Working capital cycle depends on the following: 2.
Revision Trade receivable turnover is the average number of days customers take to repay their debts. Trade receivable balance given in the balance sheet is taken as accasupport. Increase in trade receivables level increases working capital. Similarly, decrease in trade receivable level decrease working capital. If we assume credit sales are made as constant rate, then increase in trade receivable turnover in days increases trade receivables level and working capital requirement.
Similarly, decrease in trade receivable turnover in days decreases trade receivables level and working capital requirement. Trade receivable turnover depends on credit term offered by organization and effectiveness of credit control system. Trade receivable turnover in days is 40 days. Required: Calculate the change in trade receivable level if customers would have taken 45 days on average to pay their debts.
To find trade receivables level or amount, we can manipulate the equation as follows: accasupport. It is because of increase in trade receivable turnover from 40 to 45 days. Inventory balance given in the balance sheet is taken as representative of balance of inventory held at any point in time during the accounting period. Increase in inventory levels increases working capital. Similarly, decease in inventory level decreases working capital.
If we assume inventory is purchased at constant rate, then increase in inventory turnover in days will lead to increase in inventory levels and working capital requirement. Similarly, decrease in inventory turnover in days will lead to decrease in inventory levels and working capital requirement. Inventory turnover in days is 30 days. Required: Calculate the change in inventory level if inventory is sold to customer after 25 days from the date of purchase.
To find inventory level or amount, we can manipulate the equation as follows accasupport. It is because of decrease in inventory turnover from 30 to 25 days.
Inventory is converted to trade receivables 5 days earlier. Trade payable balance given in the balance sheet is taken as representative of balance owed to customers at any point in time during the accounting period. Decrease in trade payable level increases working capital. Similarly, increase in trade payable level decreases working capital.
If we assume credit purchases are made at constant rate, then increase in trade payable turnover in day increase trade payable level and decrease working capital requirement. Similarly, decrease in trade payable turnover in days decrease trade payable level and working capital requirement. Account trade payables turnover in days is 50 days. Required: Calculate the change in trade payable level if trade payable is sold to customer after 60 days from the date of purchase. It is because of increase in trade payable turnover from 50 to 60 days.
Trade payable has inverse relationship with working capital. Increase in trade payable leads to decrease in working capital requirement. However, Trade receivables and inventory has direct relationship with working capital.
Increase in trade receivables and inventory leads to increase in working capital requirement. It is used to makeup shortfall in working capital requirement. Using current liabilities for financing working capital needs may work well for increasing profitability and it will deteriorate liquidity of the organization. Following ratios is calculated for determining liquidity position of the organization. Current asset ratio should not be interpreted in isolation it should be considered in combination with working capital ratio.
Example: Trade payable turnover suggests how often suppliers demand their payment. If suppliers demand more often, then high levels of current assets should be available. We will have less time to arrange for payment. Trade receivable turnover suggests how often customers pay us. If customers pay us more often, then low levels of current assets will suffice. We can arrange cash for payment to supplier in lesser time. Inventory is excluded as it takes more time than other current assets to be converted into cash.
Inventory is distant from cash in that it first has to be converted into receivables before it is converted into cash. There are four key areas of account receivable management. An effective credit policy should consider following elements: In short, credit policy provides guidance for implementing below three key areas of account receivable management.
It means those customers who are reasonably likely to settle their debts within due date. Quality of credit analysis depends on the source and quality of information used to assess customer creditworthiness.
Following sources of information would be helpful in performing credit analysis. Credit control involves the following tasks 4. Issuing of invoice and collection of funds from customers is the responsibility of sales ledger staff. Sales ledger staff should ensure that customer understands the terms and conditions at the time of issuing invoice. Terms and conditions could include mode of payment, delivery date, early settlement discounts etc.
They should send monthly statements to customers and ensure that any differences are reconciled in timely manner. They should also deal with any issues raised by customers in timely manner. This includes being able to calculate annuities and perpetuities, and to use the discount and annuity tables to calculate net present values.
This Study Text revises these topics and added ahead information is identified. If you fighting with the examples and questions used, you must go lower back and revisit your preceding work. The ACCA examination team will expect you comprehend this fabric and it may also structure part of an examination question. The F9 Financial Management FM examination team The ACCA examination team expects you to be capable to operate and comment on calculations, exercising essential abilities, sincerely show understanding of the syllabus and use question information.
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