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ACCA F9 Financial Management Study Text Ebook for June 2013 Exam | Page 1 of 137
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ACCA F9 EBOOK ZOI 3

EXAM TOPICS
Note: click the cross—reference below for easy n a ,
press Ctrl + Home to see table ofexam topics
EXAM TOPICS .................................................................... ..
KEY TERMS ................................................................................ ..
INTENDED BENEFITS OF THE E-BOOK . . . . .. . . .. . . . . .. . . .. . . .. .. . . ..
AUTHOR’S PROFILE .................................................................................. ..
IMPORTANT! ....................................................................................... ..
USER GUIDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. . . .. . . .. . . . . . . . . ..
INTRODUCTION TO F9 FINAN IAL .................. ..
EXAMINER‘S GUIDANCE .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . ..
Exam Topic 11: SPECIFIC INVESTMENT DECISIONS .................................................................... .. 104

Exam Topic 12: SHORT & LONG TERM FINANCE .......................................................................... .. 108
Exam Topics 13: INTERNAL SOURCES OF FINANCE & DIVIDEND POLICY ................................. .. 112
Exam Topic 14: GEARING & CAPITAL STRUCTURE CONSIDERATIONS ..................................... .. 114
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Exam Topic 15: FINANCE FOR SMALL & MEDIUM SIZED ENTITIES (SMEs) .................................. 116
Exam Topic 16: ESTIMATING COST OF CAPITAL .......................................................................... .. 118
Exam Topic 17: RELATIONSHIP B/W COST OF CAPITAL, CAPITAL STRUCTURE & INVESTMENTS
............................................................................................................................................................ 121
Exam Topic 22: HEDGING TECHNIQUES FOR INTERE

RELATED PRODUCTS ........................................... ..
REPORT ABUSE............................................. ..
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KEY TERMS
Combine Probability - 98
A
Confidence - 42
Agency - 34 Contingent A
Aggregate demand - 42
Aggregate Supply - 42
Agreement Date - 124, 126
AnnuHy-94
Average Growth Rate - 114
Bad Debt Risk - 64

Balance Of Payments - 1 O
Barter Trade - 75
Basis Risk- 126,
Baumol Mo et Ratio - 59
Benefits -
Debt Finance - 105

Deep Discount Bonds - 105
Deflation - 94
Deflationary Gap - 47
Depression -47
Derivative - 127
Development Expenditure - 120
Direct Quote - 124
Discount Rate - 94
Capital t Pricing Model (CAPM) Discounted Payback Period -95
- 11
Discounting - 94
Capital Cash Flows - 97 Dividend Growth Model (DGl\/l)
Clientele Effect - 108 114
Collar- 129
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Dividend Valuation Model (DVl\/l)- Franchise - 102
120 Free Cash Flows - 95
Divisible Projects - 101 Future Contract Hedge - 126
Future Market- 126
E
Earnings Per Share - 118

Earnings Yield - 118
Economic Risk - 124
Efficient Market Hypothesis - 122
Equity Beta - 115
Equity Finance - 104
Equity Risk Premium Rm-Rf- 1
Equivalent Annual Cost (EA
Exchange Rate - 44
Expectation Theory - 130
Expected Values -
tion - 44, 94
Inflation Rate - 94
Inflation Rate Parity Theory - 126
Inflationary Gap - 47
Initial Investment - 97
Initial Public Offer (IPO) - 104
Interest Rate - 94
Interest Rate Option - 129
Interest Rate Parity Theory - 126
Interest Rate Risk - 129
_ Interest Rate Swap - 129
change Rlsk - 124
Invoice Discounting - 72
Forward Contract Hedge - 126
Invoicing In Home Currency - 124
Forward Rate - 126
Irredeemable Loan Notes - 105
Forward Rate Agreements (FRAs) -
129
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J N
Joint Venture - 102 Negative Gap - 129

Just in Time (JIT) - 86 Net Assets Valuation Model - 120
Netting- 124
L Non System
Lapse - 110
Lead & Lag Payment - 124
Lease - 100
Lesser & Lessee - 100
Letter Of Credit - 74
Liquidity - 5O
Liquidity Preference Theory -
Liquidity Ratios - 59
Loan Notes (Bonds or De ent
rtrading - 89
ing Order Theory - 117

Pension - 36
Permanent Assets - 89
Perpetuity - 94
Placing- 104
Positive Gap - 129
Pre-Emption Right - 104
odigliani (M&M) Theory Preference Share Capital - 104
Present Value (PV) - 94
iani Theory - 108 Price Earnings Ratio - 118
Miller-O odel - 89 Probability Analysis - 98
Monet y Policy - 40, 130 Profit Related Pay - 35
Money Market Hedge - 127 Project Specific Fixed Cost - 97
Mutually Exclusive Projects - 102
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Q Soft Capital Rationing - 101
Spot Rate - 126
Quick Asset Or Acid Test Ratio - 59
Stagnation -46
Strong Form Efficient- 122
R Subscribe - 110
Real Return - 130

Systematic
Recession -48
Recourse Factoring - 66
Recovery - 48
Redeemable Loan Notes - 105
Allowance
Redemption Value - 120
Redemption Yield - 121
Renounce-110
Residual Value - 97
Retained Earnings - 104
Return Of Equity (ROE) - 118 - - - 08 117
Return Of Inves
Revenue Ca
Uncertainty ' 98
Unemployment - 46
Variable Interest Rate Risk - 129

Venture Capitalist - 112
Weak Form Efficient - 122

ShortT rm Loan -104
Weighted Average Cost of Capital
Signalling Effect- 108
_ _ _ , _ (WACC) - 114
Slngle Perlod Capltal Ratlonlng - 101 _ _
_ Weighted Average Cost Of Capltal
Smoothlng-129
(WACC) - 94
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Working Capital Cycle - 53 Z
Working Capital Investment - 97
Zero Coupon Bond - 105
Yield Curve - 130 €
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USER GUIDE
E book
features Details ,
Past Papers Past papers provides a clue about the verbs(Explain,
Evaluate etc) and marks availabl ' the exams.
It provides list of main heading at the beginning of
Sub Exam . .\ . .
To ics each exam toplc. You have t CIICIKCIC t headm 1n a
p list to reach there. .
E It provides broad infor at1 n on compositio
xam . . .
A (theoretlcal v comp tlonaDand importance eac
wareness . \
paper 1n exam co ext. _ _ ,
Exam Exam Support vidatdetailed in mation on
Support application eory and ca‘l'culations n exam context.
E Example rovides pra ical appl' ation of technical
xample . ,
theorefiknowledge.
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theoretical knowledge.
. Explanations pipvide the ‘reasons f rrectness or un
Explanatlon - - .
correctness of partlcular statemen and calculatlon.
I1‘ormula is mathematical equati s and tabular
L‘mats. ‘
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INTRODUCTION TO F9 FINANCIAL
MANAGEMENT
1 Examiner
Antony Head is examiner for Paper F9 Financi
2 Aim \
To develop the knowledge and skills exp cted ofa financemNr, i
relation to investment, financing, and di 'dend policy decisions.
You are expected to have nowledge fro followi apers for the
purpose of this exam. ._ \
F1 Accountant in Business.
1
F2 Managem it Accounting.
nce Managpmen
AFlIll IP14]
T
FMI [FBI
5 Main Capabilities & Relationships

Diagram:
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RELATIICIIIIAL DIAGRAM OIF MAIN CAPABILITIES
Fina noial
management function
(A)
I
Financial management environment EB}
_, Working ca pital >

ma nagement (CI
I
_,, Investment appraisal
(D)
’ Business
finance (E)
I 1
Cost of capital (F) Business valuations (G)
, Risk management (H)
‘m Paper Format
4 questio1 s are examinable for 25 mark each. All questions must be
attemptedy
Questions could be comprised of many requirements (a, b, c, d, e etc).
Mathefi/atical questions are rewarded separately from text—based

questions. If you get calculations wrong, you can still earn marks by
commenting reasonably on wrong figures.
BEBE
Usually each question examines only one part of the syllabus. However,
any question may examine many chapters from that part (A, B, C, D, E
etc) of the syllabus.
Example:
Question examining PartA (Specialist cost and ma
accounting techniques) can cover chapters such
Marginal costing and ABC costing as require
7 Duration of Exam
Total time: 3 hours 15 minutes
3 hours are writing and reading .
Additional 15 minutes are reading an ~ anning t' e. However, yo can

annotate question paper only durin tha ' e.
8 Resources:
htt: www.a ' om en st 'ficati o -resources/acca—
a ualificatio gm 0
htt: e , en/stuent/ a. tials /pass—exams.html
h: u All;
Es...
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EXAMINER'S GUIDANCE
1 What was done well?

Nature, elements, importance of working capital (06/ 0)
Management of inventory, etc. (12/09, 12/10) /
Management of trade receivables (06/10, 12 10)
ROCE and payback calculations (06/ 09

NPV99 and IRRloo calculations (06/ 9, 12 09, 06/10, 12/10)
Allowing for inflation and taxa ' n (12/ 10
Specific investment decisiins (1&9, 0 10)

Calculating the cost of eb. (12/09, 06 2/ 10
WACC119 calculatio 06/09, 1509, 12/10)
Project—spec ity119 usin

el (olS/ 10, 12/10)
Dis Jssion of market efficiency

“' (12/ 1
exchange rafirisk (06/09, 12/ 09)
Cal? 0 'nterest rate fluct ati s (12/10)
1 . as not done
Nature an urpose o inancial management (06/10)
Measurin achievement of objectives (06/09, 06/10)
Rck of financial intermediaries (12/09)

Manage ent of cash, etc. (06/09, 06/10)
Working capital financing (06/09, 12/09)
Stages in capital budgeting (06/09)
Payback, ROCE discussion (12/ 10)

BEBE
Leasing evaluation (12/09)
Long—term finance (06/09, 12/09, 06/10, 12/10)
Dividend policy (12/ 09, 12/ 10)
Impact of financing on financial position (06/ 09, 12 10, 12/ 10)
WACC119 calculation (06/ 10)
Asset-based valuation methods (12/ 10)
Income—based valuations method (06/0
Causes of interest rate fluctuation
3 How to improve?
Practice past examinatio questions
Study examiners reports from previcm xam tion
Prepare revisio cards
Plan writte answers
Write egibly ‘
liide a orkings and label them clearly
fill
AUTHOR'S GUIDANCE
1 Preparing for Exams
2 Exam Day Guidance

Please! Buy Full Version
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STUDY PLANNER
Formula:
I * Number of days available = Number of days before exam — Revisio time — Idle time I
Idle time can be incurred due to sickness, computer cras‘h, social events
etc. It depends on your daily activities and envir ent. \
I recommend you to make a printed copy to ead when co ‘ uter is

available. A
Formula:
* Isumber of days per exam = * Number of days available X
* Slumber ojipages per exam

Number of pages
r owlloc at
Number of pages will include ,owance r so 'ng past paper questions,

student accountant artiqes etc.
Please note that different syllabus areas will take different amount of
time. Calculatipns will tak! more time than theoretical areas. Therefore,
it wi‘ll give you only rough ideaofyo progress.
maining total number of pages

day =
Number of days available
If revised number of p ge day is > than originally plan, which means

you are IMng behind now you have to do study more per day.
Study at~time of day when you are fresh. This will enable you to learn
more in availabl time.
Consider ski! reading examples, if you understood theory by reading

main te
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.
@
FORMULA SHEET 8: TABLES

Miller—Orr Model
Return point = Lower limit + 1% x‘ spread)

1\
gr: transaction cost at variance of cash flows 3
Spread = 3‘ I
Interest rate
The Capital Asset Pricing Model \
Eiri) = a, +,iiiI|E(rm]— Rf)
The asset beta formula
IV:— + To I1 _ TI)
The Growth Model
_ DO [1+ g)
P"- Ir—g]
Gordon's growth approximation
g=br
E1
fill
ACCA F9 Financial Management Study Text Ebook for June 2013 Exam I Page 34 of 137
The weighted; average cost of capital
‘if V
WACC: t“ r + E‘ rah-r)
‘at +0’ 8 V +0’ I
r: it 12 ct
The FISII‘lEl' formula
(1+1) =I1+rII1+irI
Purchasing pow-er parity and interest rate parity
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Present Value Table
Present value of 1 Lo. (1 + 0'"
Where r = discount rate

n = number of periods until payment
Discount rate I'r)
Periods
In) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0-990 0-980 0-971 0-962 0-952 0-943 0-935 0-926 0-917 0-909 1
2 0-980 0-961 0-943 0-925 0-907 0-890 0-873 0-857 0-842 0-826 2
3 0-971 0-942 0-915 0-889 0-864 0-840 0-816 0-794 0-772 0-751 3
4 0-961 0-924 0-888 0-855 0-823 0-792 0-763 0-735 0-708 0-683 4
5 0-951 0-906 0-863 0-822 0-784 0-747 0-713 0-681 0-650 0-621 5
6 0-942 0-888 0-837 0-790 0-746 0-705 0-666 0-630 0-596 0-564 6
7 0-933 0-871 0-813 0-760 0-711 0-665 0-623 0-583 0-547 0-513 7
8 0-923 0-853 0-789 0-731 0-677 0-627 0-582 0-540 0-502 0-467 8
9 0-941 0-837 0-766 0-703 0-645 0-592 0-544 0-500 0-460 0-424 9
0 0-905 0-820 0744 0-676 0-614 0-558 0-508 0-463 0-422 0-386 10
11 0-896 0-804 0-722 0-650 0-585 0-527 0-475 0-429 0388 03-05 11
12 0-887 0-788 0-701 0-625 0-557 0-497 0-444 0-397 0-356 0-319 12
13 0-879 0-773 0-681 0-601 0-530 0469 0-415 0-368 0-326 0-290 13
14 0-870 0-758 0-661 0-577 0-505 0-442 0-388 0-340 0-299 0-263 14
15 0-861 0-743 0-642 0-555 0-481 0-417 0-362 0-315 0-275 0-239‘ 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
0-901 0-893 0-885 0-877 0-870 0-862 0-855 0847 0-840 0-833 1
0-812 0-797 0-783 0-769 0-756 0-743 0-731 0-718 0-706 0-694 2
0-731 0-712 0-693 0-675 0-658 0641 0-6-24 0-609 0-593 0-579 3
0-659 0-636 0-613 0-592 0-572 0-552 0-534 0-516 0-499- 0-482 4
0593 0" 567 0543 0-519 0-497 0-476 0-456 0437 0419 0-402 5
0-535 0-507 0-480 0-456 0-432 0-410 0-390 0-370- 0-352 0-335 6
0-482 0-452 0-425 0-400 0-376 0-354 0-333 0-314 0-296 0-279 7
0-434 0-404 0-376 '0-351 0-327 0-305 0-285 0-266 0249 0-233 8
0-391 0-361 0-333 0-308 0-284 0-263 0-243 0-225 0-209' 0-194 9
0-352 0-322 0-295 0-270 0-247 0-227 0-208 0-191 0176 0-162 10
0-317 0-287 0-261 0-237 0-215 0-195 0-178 0-162 0-148 0-135 11
0-286 0-257 0-231 0-208 0-187 0-168 0-152 0-137 0-124 0-112 12
0-258 0-229 0-204 0-182 0-163 0-145 0-130 0-116 0- 104 0-093 13
0-232 0-205 0-181 0-160 0-141 0-125 0-111 0-099 0-088- 0-078 14
0-209 0-183 0-160 0-140 0-123 0-108 0-095 0084 0-074 0-065 15
fill
Annuity Table
Present value of an annuity of 1 Le. M

r
Where r = discount rate

n = number of periods
Discount rate (r)
Periods
In) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0-990 0-980 0-971 0-962 0-952 0-943 0-935 0-926 0-917 0-909 1
2 1-970 1-942 1-913 1-886 1-859 1-833 1-808 1-783 1-759 1-736 2
3 2-941 2-884 2-829 2-775 2-723 2-673 2—624 2-577 2-531 2-487 3
4 3-902 3-808 3-717 3-630 3-546 3-465 3-387 3-312 3-240 3-170 4
5 4-853 4-713 4-580 4-452 4-329 4-212 4-100 3-993 3-890 3-791 5
6 5-795 5-601 5-417 5-242 5-076 4-917 4-767 4-623 4-486 4-355 6
7 6-728 6-472 6-230 6-002 5-786 5-582 5-389 5-206 5-033 4-868 7
8 7-652 7-325 7-020 6-733 6-463 6-210 5-971 5-747 5-535 5-335 8
9 8-566 8-162 7-786 7-435 7-108 6-802 6-515 6-247 5-995 5-759 9
'0 9-471 8-983 8-530 8-111 7-722 7-360 7-024 6-710 6-418 6-145 10
11 10-37 9-787 9-253 8-760 8-306 7-887 7-499 7-139 6-805 6-495 11
12 11-26 1058 9-954 9-385 8-863 8-384 7-943 7-536 7-161 6-814 12
13 12-13 11-35 10-63 9-986 9-394 8-853 8-358 7-904 7-487 7-103 13
14 13-00 12-11 11-30 1056 9-899 9-295 8-745 8-244 7-786 7-367 14
15 13-87 12-85 11-94 11-12 10-38 9-712 9-108 8-559 8-061 7-606 15
I— _/
(n) 11% 12% 13 14% 15% 16% 17% 18% 19% 20%
0-901 0-893 0-885- 0-877 0-870 0-862 0-855 0-847 0-840 0-833 1
1-713 1-690 1-668 1-647 1-626 1-605 1-585 1-566 1-547 1-528 2
2-444 2-402 2-361 2-322 2-283 2-246 2-210 2-174 2-140 2-106 3
3-102 3-037 2-974 2-914 2-855 2-798 2-743 2-690 2-639 2-589 4
3-696 3-605 3-517 3-433 3-352 3-274 3-199 3-127 3-058 2-991 5
4-231 4-111 3-998 3-889 3-784 3-685 3-589 3-498 3-410 3-326 6
4-712 4564 4-423 4-288 4-160 4-039 3-922 3-812 3-706 3-605 7
5-146 4-968 4-799 4-639 4-487 4-344 4-207 4-078 3-954 3-837 8
5-537 5-328 5-132 4-946 4-772 4-607 4-451 4-303 4-163 4-031 9
5-889 5-650 5-426 5-216 5-019 4-833 4-659 4-494 4-339 4-192 10
6-207 5-938 5-687 5-453 5-234 5-029 4-836 4-656 4-486 4-327 11
6-492 6-194 5-918 5-660 5-421 5-197 4-988 4-793 4-611 4-439 12
6-750 6-424 6-122 5-842 5-583 5-342 5-118 4-910 4-715 4-533 13
6-982 6-628 6-302 6-002 5-724 5-468 5-229 5-008 4-802 4-611 14
7-191 6-811 6-462 6-142 5-847 5-575 5-324 5-092 4-876 4-675 15
fill
PAST EXAM PAPERS’ ANALYSIS

Key Exam Topics 06/1212/1106/1112/1006/1012/0906/0912/0806/0812/07P/P
Financial management function
Financial management environment
The nature, elements & importance of working capital
Management of working capital elements
Determining working capital needs & funding strategies
The nature of investment decisions & the appraisal process
Non discounted cash flow techniques
Discounted cash flow techniques
Allowing for inflation & taxation in DCF

Adjusting for risk & uncertainty in investment appraisal
Specific investment decisions ‘
Short & long term finance
Internal sources of finance & dividend policy T
Gearing & capital structure considerations /

Finance for small & medium sized entities
Estimating cost of capital
Relationship between cost of capital, capital structure &
investments 4
Business valuation techniques
Efficient market hypothesis
Basics of financial risk management
Hedging techniques for reign currency risk
\
Hedging techniques Interest rate risk
Above analysis 1slg~iven to emphasis the comparative importance of each
topic. his analysis can be used as g 'de for allocating time to topics
acc ingly. ,
Do no attempt to guesgfu re questio paper from this analysis, as this

is'hist ' al data and it is not helpful for reading examiners mind at a
of se 'ng exa‘iin paper’
how differekexa topics are examined together in single
fill
Exam Topic 1: FINANCIAL MANAGEMENT FUNCTION
Exam Topic 1:
FINANCIAL MANAGEMENT FUNCTION

Sub Exam Topics ‘
S.no Headings (click the cross—ref below for easy r . Pg.no
1 Agency 39
2 Financial Objectives in Profit Vs Not-for- 42
Exam Awareness
This chapter explains the objective and pe of financial management.
Knowledge of this chapter is not frequently examined. Howeven‘t will
help you to make reasonable arylevant discussion for otheiiopics.
See PAST EXAM PAPERS’ A1U YSIS to expTore relaénships betw n
exam topics. You can use these relatio ips fou out to‘ivrite relevant
points in order to answfr'frequirements in the exa
fill
1 Agency
Exam Q.no Requirement Marks
Explain the nature of the agency problem and
discuss the use of share option schemes as a 8
12/08 Q1:e
way of reducing the agency problem in a\stock—
market listed company such as Dartig Co.
Discuss the reasons why small an edium—
sized entities (SMEs) might ex ience less‘
06/12 Q3za
conflict between the objectives of share lders j 4
and directors than large listed companie '
1.1 Definition ofAgency Relationship}
Agency is a relationship between p incipal and agent. Principal delegates
some responsibility to be perfor onbefi‘of principal. Principal also
gives agent necessary decisio akin aut h o 'ty.
Agent can be responsiblfito more than one princi |
Example:
Shareholders del I I - responsl 1 rd ofdir
management ' '
granted n ' ssociation and
'I u
1.2 .‘~ cy Problei. '

In the-‘cont 0 company, directors are required to protect the interest
of share olders. Shareholders being too many in numbers and may not
' ha e tec 'cal knowledge of thcycompany’s operations would not be able
to p ect their interest themselves.
Unfoitu ely, they hawrely on directors to look after their interest.

Danger is th t director do not act in the best interest of shareholders.
Director ’ acting other than in the interest of shareholders is an agency
p oblem. en problem creates the need for building mechanism,
whiBh promotes goal congruence or Alignment of interest.
1.3 Gwngruence
Goal congruence means making directors act in the interest of
shareholders. Directors have their own needs and desires, which may be
different from shareholders needs and desires. Goal congruence can be
@
achieved by aligning the goals of directors in line with the goals of
shareholders.
1.4 Ways to Reduce Agency Problem
1.5 Reward Schemes
1.5.1 Salary
Salary is the most basic form of financial recor/d/given to directors and
employees. It does not affect performance and risk attitu of
managers. L
1.5.2 Bonus \
Bonus is financial reward given to motivat directo and em oyees i
expectation that motivation wiMead to 1m ved performance.
It does not ensure that directorsfocus shareho‘ers wealth

maximization. \
It does not affect performance and risk attitud of managers.
1.5.3 Profit Rf‘ ‘ \ !

Directors’ r neration based on profit encourag directors to focus
their attention towards ge6erating profit for the shareholders.
Prof' elated pay\could lead to directors ifdertaking excessive risky

investment _rojects, which may be ove and above the wish of
shareh lders. accasuppor
Progrelafid pay ocuses direcyrs’ attention on short—term performance

rath than long—term performance. Financial management primary
objective ikto focus on long—term shareholder wealth maximization.
I
hare Based Payment
Share based payment is the reward given to directors in the form of
shares with yidition to hold those shares for certain period.
SharBased payment encourages directors to focus their attention on

increas' share price. Increase in share price leads to increase in
shareholders wealth. It is consistent with the primary objective of
financial management i.e. maximization of shareholders wealth.
fill
Share based payment also encourages directors to take controlled risk in
line with shareholders expectation.
1.5.5 Share Options

Share options are incentive given to directors to buy shares in the
company at specified future exercise date and at pre—defined exercise
price. I \
It encourages directors to increase share price of the company above the
exercise price in order to realize gain through buying shares at lowe
share price than market price at exercisedate. ‘
Share options direct management ttentipgn on p mary objective of
financial management i.e. maxidtion of shareholders wealth.
Share option also encourages director 0 take co trolled risk in li with

shareholder expectatiox
1.5.6 Benefits i ,
Benefits are non—financial reward given to directors .' nd employees. It is
given to motivate directors so that work can be perfo ed efficiently.
I "he ca trav , workplace, attend

\
It does not e courage directors to maximize shareholders wealth.

1.5 7%“. \ T
PeiMn is the financial rewar({as a percentage of basic salary given to
directorfila employees when they retire.
Security of nsion funé depends on stability of the organization.

Pension may not be realized if organization gets bankrupt.
It‘encourageeyxectors to take long—term view organizational

perfo‘nanc . However, it has no contribution towards motivating
director to maximize shareholders wealth beyond existing level.
fill
2 Financial Objectives in Profit Vs Not-for-Profit
Compare and contrast the financial objectives
of a stock exchange listed company such as Bar
12/11 Q4:d 11
Co and the financial objectives of a not—for—
profit organisation such as a large charity.
Financial objectives in not for profit and publicYizations are
different from financial objective in profit moti organizatiofi
\
Profit motive organizations have profitzl?ity as its pri ry
objective. Profit motive organization is gally account b ‘e to
shareholders/owners (primary s holder » ‘
On the other hand, not for profi 'zations do n t have profitability

as its primary objective. Howey er, not for pmit organizations also need
to focus on profitability fo ee 'ng -to—da xpenses.
Example:
Not
soclfiiySocietykinvolves usually exists
for ofit‘organizationmoigthan to provide
ne le services tosuch
' imate stakeholder the as
dog rs, users of seryices, government u ic at large etc. Not for profit
organizatibl may havqm‘d‘re than one bjective such as providing quality
'cegviding serviceitohreater umber of people, efficient use of
furQpr ded by donors eta"
takeholders are inte est holders, which can afi‘ect (claim) or be

aflecwrganizatuyllactivities.
It beco es difficult to decide which is the primary objective and

decidin§kiority for rest of the secondary objectives. However, profit
mo‘tive organiz tion may also have objectives other than profit making.
These objectives are necessary for achievement of primary financial
objective.
I
Example:
Increase in number ofproducts ofi’ered by organization by 30% in next
2 years. This objective supports the primary objective ofprofit making.
fill
Existing customers may also prefer to buy related goodsfrom the same
organization. This will give cross selling (selling more than one product
to same customer) benefits to organization.
Performance of not for profit organization is usually me sured against its

ability to provide Value for money (economy, efficie , effectiveness) to
the users of services. However, performance of pr Otis
organization can also be assessed in terms of v are for oney. rofit
motive organizations must provide value fo moneyyto iixstomer ' it
has to achieve its financial objectives in s rt term (su h a profitabi ity,
liquidity) as well as long term (such a
fill
Exam Topic 2 FINANCIAL MANAGEMENT ENVIRONMENT
Exam Topic 2:
FINANCIAL MANAGEMENT
ENVIRONMENT
Sub Exam Topics
S.no Headings (click the cross—ref below for Pg.no
1 Macro Vs Micro Economics
2 Macro—economic Policy _
3 Macro—Economic Factors Affecti"
Exam Awareness /
This exam topic introduces st¢th basic terminologies relevan
subsequent study. You may h e already familiar with‘these terms m
ACCA Paper F1 Accountant in BusinesNf you ar unning short v time,
then i recommend youy) just skim read iii? e ' you Wextra
time. "'
Screeflip:
Click '- w button to go back.
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1 Macro Vs Micro Economics
1.1 Macro-Economics
Macro—economics is study of effects of total activities of households,
firms & government on the national & international eco omy.
Macro—economics include all the economic activitie of private as well as

public sector. {
p
1.2 Micro-Economics
Micro—economics is study of effects of separate activities of individuals,
individual households and firms. ,. ‘ ‘ \
Micro—economics refers to study f one ecoRmics entity at a t' e.
2 Macro-economic Policy \
Macro—economic polic ' e government decisions on the o eration of
markets. Government may decide to operate merket withougany
regulation as fregmaifket in thaope that free movemen of capital will
result in best conomic : owth. K.
support.com \ I
In practic t generally intervenes through making
regulations economic gr wth. Macroeconomic policy has
following 0 ,
I
Governmen has following two main p licies to achieve its objectives.
L___
\
2.1 Mo ry Po. .
Mowry policy de s with the interest and exchange rates.
Interest rate influence;individual investment decisions. Government

can encourage investmé’nt by reducing interest rates and conversely
reduce investments by increasing interest rates. Reduction in interest
rate changes pu lic preference from savings to investment.
Reduct' in interest rates leads to increased activity in stock market

and bu lion market.
Exchange rate influences imports and export from/to the country.

Government can encourage the use of imported goods by increasing
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exchange rate of home currency and conversely reduce the use of
imported goods by decreasing exchange rate of home currency.
Similarly, government can encourage exports from the country by
reducing exchange rate of its home currency. Reductionjn exchange rate
will make goods produced by the country cheaper to oreigrkcountries.
Conversely, government can reduce exports from country by
increasing exchange rate of its home currency. crease in exchange rate
will make goods more expensive to foreiwuntries.
2.2 Fiscal Policy ‘

Fiscal policy deals with taxation and government spending. \
. . \ .
Taxation 15 the source of revenu governi ent. It‘nfluences public
spending on consumer and c 1tal goods by increasing or decreasin the
level of disposable incomi for pri ate s\r.
Increase in taxation re ults in decreased disposabgncomegpending
on satisfaction of needs and capital investments. Conversely, decrease in
taxation resultsin'increased disposable income for s 1ding. Disposable
income is the earnings remaining after meeting al abilities.
Level of spending influences demand for goods or services and prices of

goods or services. if
If demand exceeds in relation to suppbi then prices of goods or services

arises (inflation). Converselyfif deimand lacks in relation to supply then
pri es of Qods 0‘ services reduces (deflation).
ent spending also in uences the demand for goods or services

of goods or services. Government can spend its income
(taxa 'on) o industrieflsectors in which government wishes to raise
supply goods or services to provide goods or services to private sector
and to contrwice inflation.
Government spending can be used to reduce the economic imbalance

betweefh and poor by providing basic goods or services to society at
subsid sed or free of charge.
fill
3 Macro-Economic Factors Affecting Business Activity
3.1 Aggregate Demand

Aggregate demand is the sum of demands for different goods or services
produced in country.
Formula:
Aggregate demand
= Total consumption + Total in
— Total imports
3.2 Aggregate Supply 4

Aggregate supply is the sum of supplies for different goods orservices
produced in country.
Formula:
Aggregate supply
= Total consump otal exports
+ U '
ccasupportc
Governme ' aim is to equal aggregate emand an aggregate supply at a
level where wqpkfofbe is fully emplo ed. Full el’l'iployment is one of the
objeytives of the macroeconomic 011 of)overnment.
onfi \ ‘
' lice is sychologicalfactoriin uencing economic activities.
is th‘e‘expectation of future stability and growth of economic
, among cons ers makes them to spend higher percentage of

income\on g ods or se 'ces.
Confidence‘- among firms makes them invest more money in the business.
Codfidence depends on expectation of political, environmental,

employment level, inflation, demand, expected future conditions etc.
I
3.4 Government Policy
Government can encourage economic activities in following ways.
fill
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 acti 'ties.
legislations and providing policing service
3.5 Use ofare

Resources Resources
factors of productio , whic enable production of good
or services. ) ' \
\
To promote maximum economic growY‘all the resources (labour, "

materials, money and machine) in an econ my shouldbe full/yfefnployed.
I \ E
Resources can be used mord‘éfficiently b p ro ' ion f training and use
of advanced tech K
h depend on using lesources to its‘maxim capacity and
effidiently.
Finance e ables us to employ other resources such as labour, material

and workers. \ _ I ,
‘ \
Fi ncmecisions depend we cost of using finance such as interest

rafexxinterest rate‘vill rise in ividual and firms will reduce their
orrowin s and individual will consume less and firms will abandon
theirinvexient projegefwhich were previously attractive. As
investment projects will reduce, demand for goods or services of
suppliers t the firm will reduce, which lead to decrease in aggregate
demand.
If interest rate will fall individuals and firms will increase their
borrowings and individual will consume more and firms will undertake
investment project, which were previously unattractive. 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.
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3.7 Exchange Rate
Exchange rate is the rate at which home currency can be traded in return
for other currency.
Exchange rates can impact balance of payment (import)(ersus export).

Adverse balance of payments makes government to borrow foreign
exchange for repayment. It affects credit rating of uni-Ry in the long
term, as beyond certain level it can be difficult orrow foreign
exchange. \
Exchange rate need to be stable. Volatili in xchange rate increases risk

of foreign exchange gains or losses and leads to‘i‘hcrease in cost of‘
Hedging129. /
Wide fluctuation in exchange ,te also discourages investment by eign

firms in a country. It increases thekriskxforeign Qrchange gain losses
in assets of the firms when assets are translated in their hot? currency.
3.8 Inflation \
Inflation is the ' 1crease in prices of goods or services for consumption
and capital i estment. Inflation results in reduce urchasing power of
Certain percentage of ation is consider as indication of economic

growth. It is because demand is allowing t e use of economic resources
(labour, capital, naturalresources and machinery) to its full capacity.
Increase i prices (inflatiop) is‘considered as an indication of full
em oym‘egit of resources. Pri are increased to take the advantage of
exce emand by providin vgoods or services to people that are able to
pay or limited good or services.
» I
Inflatiop increases the economic imbalance between rich and poor by
redistributing wealth in a society. Rich get richer as assets increase in
market value alfi poor get poorer if he/she is not able to increase his/her
servili charges in proportion to inflation.
Housefils 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.
fill
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 neveipdistribution

of wealth. It is possible to achieve economic growt times‘oi high
inflation but this growth will not benefit all the embers of the ociety in
equal.
Inflation has impact on other objectives economic policy also.

Inflation will lead to depreciation of change rates. Exchange rahe
depreciation will make imports e pensive or a hoii’le country and
exports cheaper for foreign co riesEXpiiMVe imports will res lt '
less demand for imported goodmnd c aper exp rts will result in ore
demand for goods to export. This will In balan f payment
favourable. ' \ P 1. ,
. . . . b .
All these events will be beneficial for economic growth but benefits may
not be eviyistributeckmong the memberséif swety.
In times , igh inflation, people tendFo invest their earnings as earlier

as possible. Bequsekeepingmpney‘for‘m o’cash will erode the
purchasing power of their earnings. ,
High inflatan leads to uncertainty about future economic wellbeing for

individu s and firms. Individualtends consume less to save money for
‘ theqture.
‘a
Inflation has some addition!I drawbacks as well.
Inflatpn makes plannifig/and budgeting difficult for individuals and

firms. Mqre time have to spend on revising budgets and selling prices for
goods or serviy. This will put additional cost burden on firms.
Customers have to face frequently new prices, which forces them

comparing’price again and again.
0
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.
fill
3.9 Unemployment
Unemployment is the unavailability of opportunities for individual to
contribute their services to the economy.
Rate of unemployment is determined by dividing unem loyed labours

with total labours.
Unemployment means certain portion of count bour

resource) is not utilized to promote economic growth. \
- \
3.9.1 Side Effects ofUnemployment
Unemployment will lead to reduced st ndard living in the e omy as
whole
Crime rates and illiteracy incr ' crease 11'! unemployment

rate.
\
Unemployment will als‘fleads to reduction in wage rates. Ho ver,
employment legislation has given some prfjtflon t labou s by
implementing minim-um wage ‘rate require ent. As the level of
unemployment increases, bargaining power er also increase in
compariso 'th employees.
Unem loymen may‘esult inreduced deman for goods or services.

This!put strain on business profitabilitylfid 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
sensixtiwnsumers. 7
Une loyment forflig per' will result in loss of skill due to lack of
work 1avai ble to retain‘evel of skill. Loss of skilled workforce is the loss
of human c ital to thdcountry.
Unemployment increases the government expenditure for providing
benefits (suppft) to unemployed people.
3.9.2 tion
Stagnawn is the period of significant slow economic growth of long
period.
WEBB
3.9.3 International Payments Disequilibrium
International payments disequilibrium is the surplus or deficit in the
balance of payments.
Surplus results where total exports exceeds total imporg
Deficit results where total imports exceeds total exports.

[A
3.10 Inflationary Gap

Inflationary gap is the excess of demand over supply whe‘n workforc‘is
fully employed. It results in increased priye. Supply cannot be increased
using domestic factors of productionmen, machine, materiammey).
Inflationary gap can be reduced b either r ducing‘iemand or by

importing goods to satisfy dyd. K
3.11 Deflationary Gap
Deflationary gap is laclyéf actual sup ly ha fully en;11ployed orkforce
can supply, as aggregate demand is be ’ tlixvel require for the full
employment of th orkforce. Prices tend 0 remain onstant or fall.
3.12 Businer;
Recovery
Recesslon
Depression
fill
3.12.1 Depression
Depression is the extremely adverse economic condition. Demand, prices
and employment level falls and at their bottom. Businesses tend to shut
down and investors lose their confidence in the market.
3.12.2 Recession ,. I
Recession is the less serious economic condition than depress'on. If
recession continues for long period time, it may tfi’rn in depre ' n.
However, government intervention and technological ch es can
in situation. \
3.12.3 Boom
Boom is the extremely favourable onorrg'p condi on. Demand, price
employment level all increasesfieaches aLpeak. Businesses launc
new products and investors ave opti istic view of the ‘future econo '
growth.
3.12.4 Recovery
fill
Exam Topic 3 THE NATURE ELEMENTS & IMPORTANCE OF WORKING CAPITAL
Exam Topic 3:
THE NATURE, ELEMENTS &

IMPORTANCE OF WORKING CAPITAL
Sub Exam Topics
S.no Headings (click the cross—ref below for Pg.no
1 Objectives of Working Capital Manage
Exam Awareness
Working capital is regularly examined topic in 9 Financial
Management. This exam topic sets urpose of woiking capital
management and its relevance t Financial Management.
see PAST EXAM PAPERS" explore elatioilships between

exam topics. You can use these relations ' s foun t to write relevant
points in order to ansvx’er requirements in:
fill
1 Objectives ofWorking Capital Management
Identify the objectives of working capital
12/ o7 Q4:a management and discuss the conflict that may 3
arise between them. a
Discuss whether profitability or liquidity ' the
06/ 10 Q1:c primary objective of working cap' \ 4
management. 1
Working capital is material item in balance sheet mosx‘ganizat' ns.
Working capital is the blood of any organization wit ' “11 i cannot
continue its operations regardless of ho much fixed assets arwned by
the organization.
Working capital management h wo main (‘bjective‘st
1.1 Profitability
Profitability is related 9 the PI‘lIIlElI'KObJGCTlVG of f‘ancial 1n gemcnt
i.e. maximization of shareholders wealth. ess must be rofitable in
the short term to add sharehoRler value iltkhe ng term.
1.2 Liquidity "\ /

Liquidity ' o n‘jeet cash requirements or settling day—to—day
expens .- ent of wages Qd salaries, electricity bills, office
rent
I
Liqui ity is'essential - r siirvival and king—term profitability of the
K
organiza ion. ‘Failure to IRecfHay—to—day expenses can force organization
into diss tion or liquidation b the creditors. Hence, without survival
0 'll be no wealth maximizing opportunities available.
, rganizationfy not have enough cash to day—to—day

liabili’ies. It s due to t e application of accrual accounting concept to
arrive at rofit for the year for financial reporting purpose.
Pr 1tabilityéa}filiquidity are two conflicting objectives. Favourable

perfo‘r'rnanc a one objective inevitably leads to adverse performance at
other ofiective.
fill
Example:
Maintaining higher cash balance will result in loss ofsales to
customers. It is due to cash is not usedfor producing or purchasing
finished goods.
Effective working capital management depends on a a balance

between these two objectives.
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fill
Exam Topic 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Exam Topic 4:
MANAGEMENT OF WORKING CAPITAL

ELEMENTS
Sub Exam To ics
S.no Headin (click the cross—ref below for navi atio
1 Workin Ca ital cle
2 Workin Ca ital Ratios
3 Li uidi Ratios
4 Account Receivable Mana em
5 Factors Affectin Trade Rec '
6 Credit Polic Evaluation
7 Factorin
8 Evaluatin Pro os ' 72
9 Invoice Discoun ' 76
10 Forei Trade ce1 77
j-i j-l
Calculatin & Commen ettle nt 80
j-i NJ
Discount u liers 83
j-\ 00
Econo anti ( 85
1 O ' 'c Order u 8
15 O Reo anti withB ase Discount 89
16 e( 91
A‘KnAw
This exam to ic is most imp rtant am ng all exam topics on working

capitalfiitent‘s of this topip canTbe examined as complete 25 marks
quwp Please
' terre ated. dO‘iO’E skip
Inventory, an’of these sub—topics.
trade'lreceivables Thesecan
& trade payable extremely
arebe
examine&single queyfin.
See ‘QT EXAM PAPERS’ ANALYSIS to explore relationships between
exam topics. Y? can use these relationships found out to write relevant
poihts in order 0 answer requirements in the exams.
@
1 Working Capital Cycle
Calculate the size of the overdraft of FLG Co,
06/08 Q3zc the net working capital of the company and the 6
total cost of financing its current asset
For HGR Co, calculate:
(i) the bank balance in three mo time if no
action is taken; and ‘
(ii) the bank balance in three mogths’ t '
06/09 Qgzb the finance director’s pnyosals are
implemented. t
Comment on the forecast cash ow position 0
HGR Co and rtfiimen a suita le course of
action. ~ ' l
Explain the{weaning of the rm ‘cask
operating c cle’\ and dkcuss the slakfionship
between the cash operating cycle (1 the level
12/ 11 Q2:a of inv(stment in workingca ital. our answer 7
should include a discussion&elevant working
capital policy and the nature of business
operations. 3 \ '
Working cyital cycle is also called cash managenfi cycle.
Working capuis fund required to 'nance trading activities

orgaflization. Trading Iactivities can be pawient of wages to workers,
purchasing goods and selling for profit etc.
Of
ot for profit 0 nizatioii needsworking capital in the same way as

pr 't maldng organization.
orlgin capital is asdinportant for organizations as blood for human

/ x i
I
Workin capital is excess of current assets over current liabilities.
fill
Formula:
Working capital = Current assets — Current liabilities
Or
greater than current liabilities or net current 1i ities ifqrrent assets
customers in 40 da 5. We will
to meet day to ' '
ted elsewhere to earn interest
Thuefore, onger » orking cap'Vl cycle requires more cash and cost of
raising cash
personal to finanae
savings working
are u‘j?t()v capital
finance will erode
working profitability.
capital it involvesEven, if
opportunityvzost beca e of not being able to earn interest by investing it

elsewhere.
@
Credit purchase or Credit sales or Trade
Trade payables receivables
Cash paid to Working capital or cash Cash received

suppliers requirement from customers
2 WorkingCapital Ratios
Exam Q.no
Calculate the cash operating cycl of Bold Co.
12/ 11 Q2:b (Ignore the facjlr’s offer in this part of the
question). ' '‘
Criticallyjiscusithe
differences between W0
06/ 12 Q2:b the foilowi areas:\
(i) Working c pital investmen
(i-Hworking capital financing.
Working capital c cle depends on the following:
ge number ofdays customers
\ \ Trade recel ableb lance give? the balance sheet is taken as

representative of balance owe from customers at any point in time
during the accounting period.
\
Increase’ in trade receivables level increases working capital. Similarly,
decrease igtrade receivable level decrease working capital.
If we assume credit sales are made as constant rate, then increase in

trade Feceivable turnover in days increases trade receivables level and
workirlcapital 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.
Credit sales for the year are $200,000.
Trade receivable turnover in days is 40 days.
Required:
Calculate the change in trade receivable level if custome s woul have
taken 45 days on average to pay their debts.
Trade receivables turnover
To find trade receivables level , we can manipulate the

equation as follows:
_ >< cre sales

Trade T€C€l176lbl€$
Tia d erecetva
_ bl es -
_ %365
40 ><$2 0,000_
-
\ 45 X 00,000
Trcide receiv bles = = $24,658
‘ \ - v 36
Trade receivable lev 0 amount is increased to $2,740 ($21,918
$24,658) and working capital requirement to finance credit sales of
$200foo<xis increased bythe sam‘éiamount. It is because of increase in
tra - receivable turnover fronfio to 45 days.
Invent ry balance given in the balance sheet is taken as representative of

balancgof 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.
fill
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.
Credit purchases for the year are $150,000.
Inventory turnover in days is 30 days.
Required:
Calculate the change in inventory level if inventory is sold to cu me
after 25 days from the date of purchase. ‘
25 ><$1 0,000
Inventory : W = $10,274
IIIVMEOI‘YIEVOI or‘amount is decreased to $2,055 ($12,329—$10,274) and

workinij‘ capital requirement decreased by the same amount. It is
becaus ecrease in iy’entory turnover from 30 to 25 days. Inventory
is conve It e o trade receivables 5 days earlier.
Trade p able turnover is average number of days taken by

organ ation to pay its suppliers.
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.
fill
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
requirement.
Credit purchases for the year are $150,00
Required:
Calculate the change in trade
50 XllSQOOO
Trade pajibles = $20,548
‘
/ 60 X $150,000
Trade ayables = T = $24,658
Trade 50% level or a‘ount is increased to $4,110 ($20,548-$24,658)

and working capital requirement is decreased by the same amount. It is
because of incregse in trade payable turnover from 50 to 60 days.
Trade payabl 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.
fill
2.4 Overdraft
Overdraft is a current liability. It is used to makeup shortfall in working
capital requirement.
3 Liquidity Ratios
Working capital should be monitored for liquidity. ing curr nt
liabilities for financing working capital needs m work well f0;
increasing profitability and it will deteriorate liqui ity o e
organization.
Following ratios is calculated for det rmining ll uidity pos'tion the

organization. k
3.1 Current Asset Ratio I k
Current asset ratio suggests the a ility \ organiz 'on to repay its ebt
when they fall due. /
Formula:
' rent ass
sset rati
‘
W ities
Current‘as ‘ " atio uld not be interprted in isolation it should be

considered 1 bin . tion wi ' g capital ratio.
4
w n le:
' yab » often suppliers demand their
9 pa men . supp
asse should be av .
y
d ~ ore often, then high levels of current
will have less time to arrangefor
CO
‘ recei able turnver suggests how often customers pay us. If

pay us more often, then low levels ofcurrent assets will
k a n rrange cashfor payment to supplier in lesser time.
3.2 C ick ‘ set or Acid Test Ratio

Quick . ' et ratio suggests the ability of organization to convert its
current assets into cash quickly.
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@
Formula:
Current assets — Inventory
Current asset ratio =
Current liabilities
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 conve into cash.
4 Account Receivable Management

Exam Q.no Requi -
P/P QSIC Identlfy and explalnjhe key aYeas of accounts
receivable management.
Discuss ways i 'hP Co could improve
12/ 07 Q4:c the manage t of domes accounts
\
There are four key areegif account receivable management.
4.1 Credit Policy ‘ \ \

Credit policy is a fr mework for managing ccounts ece1 ables in the
business. A /
An effective credit policy should consi r following elements:

J I I / I ‘I i i 9 ee - 0
In swrt, credit Inlicyinrovides guidance fwnplementing below three

areas of account ceivable management.
it or ‘ nalyX'
r e of c edit analysis is'to ensure that goods or services are sold
onl those custoiilers that have goods credit rating. It means those
customers who are reasonably likely to settle their debts within due date.
Quality oxcedit analysgdepends on the source and quality of

informa 'on used to assess customer creditworthiness.
Falowing sourges of information would be helpful in performing credit

analysis.
4.3 CrAIontrol
Credit control involves monitoring customers to limit the risk of bad
debts and cost of interest expense to the organization for financing
increased requirement of working capital.
fill
Credit control involves the following tasks
4.4 Collection Procedures

Funds collection procedures should ensure that organization receives
funds from debtor within agreed terms and conditions
are aware and understand those terms and condition
Sales ledger staff should ensure that custyner understands the terms
and conditions at the time of issuing i voice. Terms and condiiMs could
They should send monthly stat mers and ensure that afiy
differences are reconciled in timely mwer. They hould also deal with
any issues raised by customers in timely manner.
Sales ledger staff should follo‘v up overd e s. F owing are the
should not exceed the a o of debt.
bl Poli Credit Policy

0 “Ir merit Marks
den‘tify and discugthe factors to be
06/10 Q1: ‘a considered in formulating a trade receivables 8
§ management p licy for ZSE Co.
Discuss the fa tors that should be considered in
12/ 10‘ Q3zd form‘lllating'working capital policy on the 8
A manayent of trade receivables.
ThBSKII‘C fa tors affec rig the formulation of trade receivable
managei ent policy or credit policy.
cy Evaluation
Exam .no Requirement Marks
Evaluate whether the proposed changes in
P/P Qgza credit policy will increase the profitability of 6
Ulnad Co.
Points to consider for evaluating credit policy are as follows.
@
6.1 Incremental Cost/Savings of Financing Trade Receivables
Support:
Please keep reading till the end. You will probably do not understand
the text below. However, illustration given at the end ' I make you
understand the text below.
Trade receivables need to be financed just like i entory and n -

current assets. Trade receivables are usuallyjinanced thmugh short‘
term source of finance such as overdraft d short—term ban loan.
Financing trade receivables involve financing‘éost such as ink charge
on overdraft and bank loan.
However, even if organization s 1ts o n reiained plofits to finance

trade receivables, then it has portur\ty cost of not being used to
generate interest through investmegi‘t in marketab1e securities. v
In addition, time taken by customers to rep heir debt ha\(ffect on

the profitability of the organizaiflon. Interest expense incurred in
financing trad re‘c-e'fiiables will erode profita ility. nversely, savings in
interest expie will improve profitability
Incremental financing cosf is additi al cost 0 interest incurred due to

extending credlt term) Reduction 1n fmangng cost is savlngs 1n cost of
interest incurred duc‘fo reduction in credit term.
'
financing trade receivables is most
lculating Incremental Cost/Savings of Financing Trade Receivables
“0 'on Cost/Savings
Receivables results in administration cost to the organization.
MaintainingIsales ledger and monitoring customers result in additional
cost tofife organization.

Giving extended credit terms requires more frequent monitoring of
customers to reduce the increased risk of bad debts associated with
longer credit terms.
fill
In addition, early settlement discounts give rise to more record keeping
and reviewing cost. Customer may attempt to claim discounts even if
they are not entitled.
Incremental (additional) administration cost needs to b taken into

account in the evaluation.
Reduction is credit term usually leads to savings '
Formula:
Admin (cost) saving : Sales revenue(Current a
6.3 Cost of Early Settlement Discoun“A

Early settlement discounts are giventoencourage early payment by
customer. It is done to improveflorkingml cyclefEarly payme '
customers results in savings in finance osts to thgorganization.
However, it results in 10 s of reveIi e by amount of disco t offered.
) “s. x
Reduction in early settlemea~ discount leéds avings in finance cost.
. . . . . x .
Savmg in financing costis already accounted for when calculating
incrementalcost of financing. Now, only incremegl cost of early
settlement discount should be included in evalua ion.
supportc rrent ESD % — Revised ESD %)
Extending o r cont acting credit period can result in increased or

decreased sales
additional sales revenue
needs tb respec'tively. Incremental
bé’vtaken account contribution
or loss of from
contribution from
reduced saM should be‘taken into account. Later, can happen rarely, as
organization would not evaluate credit policy that will obviously result in
reduced sales.
Only‘ncrem ntal contribution is relevant for the purpose of credit policy

evaluati n./
Formula:
Contribution gain(loss) = C/S ratio (Revised Sales revenue — Current Sales revenue)
Exam Support:
fill
Contribution to sales ratio may be given. Ifnot, you have to calculate
using data given.
6.5 Bad Debt Expense/Savings

Risk of bad debts increases with the increase in credit term. Organization
may have estimates available for range of credit ter I Bad debt expense
needs to be included in the evaluation of credit pgg
If reduction in credit term is proposed, thenpad debt expenses cou be

saved. Then these savings should be included in the evaluatiofi of cr '
policy.
Formula:
Bad debt (expense) savings = Sales r
Exam Support:
Bad debts estimates ma b
Illustration: .
Ulnad Co has annual sales revenue of $6 million a all sales are on 30
day’s credit‘: althou , h custpmers on average take ten day more than this
to pay Contri tior!1‘>resents\60"/ of sales athid the company currently
has Abad debtsAccounts receivable are. financed by an overdraft at an

annual interest rateof 7%.
nad Co plans‘ to offer arxearly settlement discount of 1.5% for payment
forpayme‘fit within 15 days an o extend the maximum credit offered to
60 days; The company‘ expect that these changes will increase annual
credit sales by 5%, whil? also leading to additional incremental costs
equal {0 0:596 of turnover. The discount is expected to be taken by 30%
of custoi ers, with the remaining customers taking an average of 60 days
hether the proposed changes in credit policy will increase the

profita ility of Ulnad Co.
Current average trade receivable period = 30 + 10 = 40 days
30 days are official and 10 days for delay by customers.

@
Trade receivables turnover >< Credit sales
Trade receivables =
365
_ $6,000,000 X 40
current trade receivable = — = $657,534
365 4.
Accountable receivable turnover formula is ma?ated to calculate
account receivable amount. I
A” \
Average revised trade receivable period = ( .3 X 5) + (0.7 X 60)\day
Weighted average is taken for 30% custorgers that would pa in 15 day

and 70% customers that would in 60 ays.
W a
New level of crew sales = $6,800IOOCK1.35% = $6,,0,000
To account for new credit salys those are increased by 50 from existing
_ 300,000 x 46.5 _ $802 603

T 365 T '
‘_
1 financing c0 = (Revised tr rec — Current tr rec) >< Interest expense
Increrrieital financing cost = (802,603 — 657,534) X 7% = $10,155
$
Incremental
In vental in interest cost costs ($6.3m x 0.5%)
administration (10,155)
(31,500)
C t of discount ($6.3m x 1.5% x 30% (28,350)
Contribution from increased sales ($6m x 5% x 60%) 180,000
Net benefit of credit policy change 109,995
@
7 Factoring
Discuss the ways in which factoring and invoice
06/08 Q3zb discounting can assist in the management of 6
accounts receivable. a
Comment on the financial acceptab' ity of he
12/ 11 Q2:d factor’s offer and discuss the pos ' bone& 7
to Bold Co of factoring its trade eceivables.
Financial institution providing factoring services is knoixas factor‘
Generally, factoring services are providerw insurance co panies and
banks. ‘ ‘I \
Factor takes over organization’s sales ledger administration. iactor 7

performs following tasks on behdf on orgafigation: i.
Usually, factor provides advanced pa nt of up 80% !gainst sales

made on credit. Rest of e 20% is paid 11 recei f paym from
customer. Factor also educts its flat fe ercentage of ' terest on
advanced payment made by fzfrsor.
A
Factoring transfers contrpl of receivable managem from organization
to factor. Ea‘ftdr‘tan use its own policies and procedures, which can
upset cilstome s, particularly those xho have to’pay their debt now
earli ‘ I
‘ \
Factoring service is obtained to impro e the account receivable turnover.

\
Factoring particularly useful for organizations lacking expertise and

exp ience of trade receivable m'anagement.
Factorin is suitable fo‘smfil sized organizations that have not enough

resources (1 expertise
Factoringxallows organization to direct their skills and resources toward

c e activities sych as making sales to customer without having to worry
for payment recovery.
Factornls of two types

7.1 Recourse Factoring
In with—resource factoring, factor does not bear the risk of bad debts.
fill
7.2 Non-Recourse Factoring
In non—resource factoring, factor bears the risk of the bad debts.
Exam Support
Look carefully in the exam which type offactoring (wi TQCOUT‘SQ 07‘
without recourse) is under consideration by lookin
provided in the scenario.
8 Evaluating Proposal for Factoring

Exam Q.no Reoi" \
Evaluate whether the proposal‘to factor trade
receivables is financially acceptable. Assume. an
12/08 Q2:c
average cost 0 ort—term finance in this part
of the questififlly. ‘
Calculate the value of I factor’ ffer:
12/11 Q2:c (i) on with—recourse basis;
(ii) on a ndYq—recourse basis
Performa for ing pro Qtorin

$
Savings in finance cost of trade receivables (see w rking 1) x
Savings in administration cost of sales ledger per year x
Savings in bad debt expensesTm—r ourse) per year >_(
lg benefit of factoring ' X
Factoring fee per year (see workings 2) (x)
_terest cost on cash received in advanced (see workings 3) Q)
Total cosfif factoring ‘ . Q)
Net nefit/ cost of factoring X/(X)
@
Formulae:
Savings in finance cost of trade receivable = Decrease in tr. rec >< Current interest rate
Decrease in trade receivables = Current receivables — Revisedm
Trade receivables turnover in days >< Credit sales

Trade receivables =
365
’‘
Factoring fees per year = Revised trade receivables >< % fees
Interest cost = Revised receivables X % 0f receivables advaflgncremental interest rate

l
Incremental interest rate = Interest rate chargeable by factor — Current interest rate
The following financial information related to Gorwa Co;
2007 2005
$000 $000
Sales (all on credit) 32,400 25,720
Cost of sales 34,405 23,751
Operating profit 2,992 2,939

Finance costs 1interest payments} 355 224
Profit before taxation 2 ,53? 2,555
200? 2005
$000 $000 $000 $000
Non-current assets 13,532 12,750
Current assets
Inventory 4,500 2,400
Trade receivables 4,500 2,200
9,200 4,600
‘ '
IZurrent liabilities
Trade payanles 4,250 2,000
0verd raft 3 ,2 2 5 1,500
7,075 3,500
Net current assets 1,225 1,000
14,857 13,750
5% Bonds 2,425 2,425
12,432 11,325
fill
Capital and reserves
Share capital 6,000 6,000
Reserves 6,432 5,325
12,432 11,325
The average
bonds variable overdraft
are redeemable interest
in ten years’ time.rate in each ear
A facgtysv wa 5%. Theover
offerektake 8%
the administration
annual fee of 3% of of tradesales.
credit receivables on a n‘'II maintainsxade
The factor ecour basis for an
receivables collection period of 30 days Gorwa Co will save

$100,000 per year in administrationpsts and‘$350,000 per ye}: in bad
debts. A condition of the factoring agreement is that the factopwould
advance 80% of the face value e'ceivables at an annual interest rat f
7%. i
\
Required: \
Evaluate whether the propo al to factor treMceivable is inancially
acceptable. Assume an averag‘e‘ost of short—term financ in this part of
the questiyly. ~
. \ \ a a $
Saviwfinance 0 tot e receivables per year (see 76,300
WOFKII‘IQ 1)
Savings' in adfigistration cost of sales ledger per year 100,000
Savings i »bad debt expenses per year (non-recourse) 350,000
Tot I benefit factoring per year , 526,000
Fact&9 fee per year (see working 2) (1,122,000)
terest cost on cash received in advanced per year(see (49,184)
working 3g
Total cost of fa toring peryéar (1,171,184)
Net benefit/cost of factoring per year (644,884)
Factoring is no orthwhile on financial grounds because cost of
factoring exceeds benefits.
In addy non-financial aspects of factoring are also necessary to be

consid red such as impact on customers and reaction of shareholders.
Shareholders may perceive factoring as lack of expertise of management
in controlling trade receivables.
fill
Trade receivables turnover in days >< Credit sales

Revised trade receivables I
365
30 X $37,400,000
Revised trade receivables = T $3,074,000
Factor has claimed that they will reduce credit pc to 3

Therefore, we needed to determine new receivable bala . e for this new
credit period.
Decrease in trade receivables = C
Decrease in trade receivaws = $4,6 0,000 — $3,074,000

\,
Factoring is always expected to decrease trade 1§eivables f actoring
is expected to increasefrade receivable p then actorin is obviously
}
worthless.
\
= cr e in tr. rec >< Current interest rate
I Savi gs in \nanc answ- r i-ivables = X 5% = $76,300 per year
As digikd earlier, receivible requires to be financed somehow.

The fore, it incurs finance cov , which is the interest payable on
overdraft at 5%. Thati‘s whflny reduction in receivable balance under
this newxlit period i ‘ avings to the organization. Interest will be
saved at 5% ecause organization will no longer be required to pay
interest 30 1 amount saved.
g fees per year = Revised trade receivables >< % fees
Fact ring fees per year = $37,400,000 X 3% = $1,122,000 per year
Factor has demanded 3% of credit sales as factoring fee. It is possible to

come across question in the exam in which factor would demand flat fee.
@
Interest cost = Revised receivables X % 0f receivables advanced X Incremental interest rate
Interest cost = $3,074,000 X 80% X 2% = $49,184
Incremental interest rate = Interest rate chargeable by facto
Incremental interest rate = 7%
5% of interest rate already been chargedlby the bank, ha

incurred regardless of factoring proposa 1s accepted or not.
5% of interest rate is irrelevant for decisi'pn—making purpose. Ris in
interest rate due to factoring only not 7% and‘this 2% is relevant
for evaluating proposal for fac ing. \
After factoring average receivable balaMof $3,0M,ooo 'll be

outstanding during th Factor will advanced 802 of rcaeivables on
which interest is charged at 2/0 per year. \
Average receiv ble balaEce means receivables bilye uring the year
will rise and 1 such as ue to seasdhal demand f goods or services.
However 'f we take the average of those balanc , then it will be equal to
$3.07 00. ,
A -‘\ I
Reduction in ‘financing cost 2
Admininstratlon cost and bad debt savings 1
Facior's fee 1
Interest on advance 2
Net cost of factoring 1
Conclusion 1
8
ice Discounting
Q.no Requirement Marks
» Discuss the ways in which factoring and invoice
06 8 Q3zb discounting can assist in the management of 6
accounts receivable.
Invoicfiscounting is raising cash through pledging sales invoices. In
other words, invoice discounting is raising short—term loan by providing
sales invoices (Receivables as an asset) as security to the invoice
discounter (lender).
fill
Invoices are used to raise cash at discount. It means cash received will be
lower than the total value of invoices. Usually, up to 75% of the invoices
value can be received in cash.
Invoice discounter pays rest of the amount when customers settle their
debts and charges a percentage of interest on cash advanced.
To be benefit from invoice discounting, organizatmood

quality invoice. It is because invoices represent the secu ' to the i voice
discounter. " .
Risk of bad debt rests with the organization. I e customer de lts,

organization has to repay the amo nt advanced by the invoice
discounter.
Invoice discounting is one gaff transact . Each t' e, invoice is
discounted represents separate transact
Unlike factoring, invoice discounting does no takeover administration of

sales ledger. 4r.’
Invoice discounting does ot setup customers. Cu mers only become

aware owie arrangement when they default.
Invo' discounting can be used to ralse s -term finance. It can be

u by drganization having cash flow >)I‘O lem.
In practice, those who provide factoring services also provide invoice—

dis oun services.
Trade Recei es
Requirement Marks
Discuss how risks arising from granting credit
06/09 : to foreign customers can be managed and 8
reduced.
In foreign trade, customers are given credit for longer period than in
domestic trades.
fill
Selling organization may not be able to monitor foreign customers’
financial position as closely as domestic customers.
In the event of default, customers have to be pursued according to their

own countries legislation. ‘
Foreign trade receivables require higher levels of investment in working

capital due to cash is invested for longer period ore it igkrefived to
make another sale transaction. \
10.2 Reducing Risks Involved In Foreign T --

4
10.2.1 Advance Payment
It is insisting foreign customers to pay casll in advance or on delivery.
Exam Support:
Do not hesitate to write 5'
can attract marks in t
marking. Therefore, it is bet
relevant rather t hinking ' lar point or
10.2.2 'xport i
Expo factorin can e usedto reduce ris oreign trade. Export
fact ing is same as domestic factoring the only different is that
facto is situated overseas in customer’s country.
10. . Bil‘ \ '5

Bil of exc ange are used prirrjflily in international trade. Bill of
exrke is uncondi‘tl'onal rder by issuer to his/her bank to pay the
bearer a specified sum on ?specific date written at the face of document.
It is not frequently use credit instrument.
\Igconditignal order means it does not require any action by the bearer
to ash the billfi exchange.
Bill ofixchange can be dishonoured if the issuer does not have sufficient
cash balance to accept the bill of exchange.
fill
10.2.4 Letter ofCredit (LC)
Letters of credit are used primarily in international trade transactions of
significant value, for deals between a supplier in one country and a
customer in another.
Letter of credit is demanded by supplier from a custo 1er. Bank

guarantees to a beneficiary (supplier) to pay specif' ‘
m ofgney on
completion of sales in accordance with agreed t and cond1 ns on
behalf on his client (customer).
\
Letter of credit is sent to the supplier, which he/ she can use to receiv
payment and send goods to customer according to term anim 'tion
written on letter of credit. ~
Bill of laden can be used as e“ ' ence of\trans r of goods to customer.

\
Issuing letter of credituiyostly and time—consuming process. However, it
is safer way to carry 0 foreign transaction. qlikelbill of eyhange,
which can be dishonoured, letter of credigi‘lnvo es guarantee by the bank
to pay on behalf .of cliRt\(custom\er) even e/she get bankrupt.
It is not id for urgent sales orders.

wt‘ In}.I ~ a ,, \
nsurance 's risk management pro t used to used cover the risk
of default“ foreign customers. It covers the risk of default due to
bankruptcy, death, deliberate non—payment etc.
supportcom '7 .
‘ Thc\costo 1nsurance1s called mlum.
It can b continuousmig—term contract or one off transaction insure

against &fic custom7.
Barter Trade
Barter trade isjéceiving goods rather than cash in return for selling
goods. Goods a e exchanged (despatched) at the same time so it reduces
the risk of bad debt.
Barterfiade does not involve goods in exchange of promise to supply

goods.
fill
11 Calculating & Commenting Early Settlement Discounts
Calculate and comment on whether the
proposed changes in receivables management
will be acceptable. Assuming that only
12/10 Q3zc
customers take the early settlement
what is the maximum early settle
that could be offered?
Early settlement discount is different from trade discount.
Early settlement discount is given to red inance cost of trade

receivables and improve working cap' 1 cycle\ ‘
Early settlement discount is give - percentage of ales. It is given to

those who pay early within spy ied period‘lkfore usual credit peri
WQZ Co is considering making th follo 'ng chan s in the area of

working capital managflientz
Inventory management
,A
It has been s ggested that the order size for Produ N5 should be
determine ising the economic ordehluantity model (EOQ).
WQZ ‘o forecasts that demandQr duc 5 will be 160.000 units in

the oming year and it has traditional 0 ered 10% of annual demand
per order. The ordering costis expecte to be $400 per order while the
lding cost is expectedtqbhyape'r unit per year. A buffer inventory
of .oomits of Product KN5 'll be maintained, whether orders are
y the traditiaal IIIG’EhOKH‘ using the economic ordering quantity
Receivables managcéent
WQZ Co could introduce an early settlement discount of 1% for
customers who pay within 30 days and at the same time, through
improved operational procedures, maintain a maximum average
payme period of 60 days for credit customers who do not take the
discount. It is expected that 25% of credit customers will take the
discount if it were offered.
fill
It is expected that administration and operating cost savings of $753000
per year will be made after improving operational procedures and
introducing the early settlement discount.
It is expected that administration and operating cost savings of

$753,000
and per year
introducing thewill be settlement
early made after discount. [ational procedures
improving oper
Credit sales of WQZ Co are currently $876 million per y r and tra e
receivables are currently $18 million. Cred't sales arepot ‘ ected t
change as a result of the changes in receidablbs management...
company has a cost of short—term fi e of 55% per year.
Required: \
Calculate and comment on whether t proposed changes in receiva les
management will be acce able. \
Assuming that only 25/0 of customers takethe early settlemgliscount,
what is the maximum early settlement discourRthat could be offered?
,, $18m
Curre e receivables in d s =% X 365 = 75 days
Curre tly‘\ \ 75.days to repay their debts.

customers take
‘ '_ \ . I I
Revis trade receivabll tur in days I (25% X 30) + (75% X 60) I 52.5 days
Introduc of early se ement discount will result in 25% of customers

paying within 30 days. Therefore, it means those customers that take 60
day on average will be 75%.
a!
Trade receivables >< Credit sales
Rev;ed trade receivable level = 365
52.5 X $87.6m
Revised trade receivable level = T = $12.6m
BEBE
$12.6m of cash will remain invested in trade receivables and working
capital during the year according to revised trade receivable days of 52.5
days.
Decrease in trade receivable level = $18m — 12.6m =§4m
Reduction in trade receivable turnover from 7 52.5 ys wil result in

decrease in trade receivable level by $5.4w18m
i _ \ \
Savings in finance cost of trade receivables $5.4m >< L.5% : $29R00 per year
As discussed earlier, trade rec ' 'nance cost, decrease '

trade receivable level will r less rking ca 'tal resulting in
savings in finance cost.
Savings in a ministration cost 0'' trade receivables I 3,000 per year
Cost of e y settlement discountl $87.6m >< % X 1% = $219,000
Cost of early settlement discoumxis fixance c0 t for the organization

rat r than admin |pxrjielling and distr utlin expense, because it is given
for reducing the cost of financing trade receivables.
\
\
.
Savings in finance 0st of trade receivables per year
i
297,000
Savii in adminis tion and operating cost per year 753,000
Finance cost of ear y settlement discount (219,000)
Total benefit of early settlement discount per year 831,000
% ly Settlement Discount
Maximum early settlement discount should be the rate at which savings
from giy‘ing early settlement discount becomes zero.
If 25% of credit sales will receive early settlement discount, which is

Credit sales subject to early settlement discount = Credit sales X % of Credit sales
Credit sales subject to early settlement discount = ($87,600,000 X 25%) = $21,900,000
fill
Then, maximum early settlement discount that could be offered is
Total Savings
% of early settlement discount =
Credit Sales
$297,000 + $753,000
% of early settlement discount = < 7 00 = 4.8%
$21,900,000
It is because sales revenue could be lowered by or 4. % at

max after, which savings will be zero.
Screen Tip:
Open new window and arrange bo
vertically to view question &sol ' .
windows. To toggle between ndows Press LT+TA .
\ x
Reduction in trade receivables 2
Financing cost saving 1
00st of early settlement discount 1
Comment on net benefit l
Maximum early settlement discount 1
Marks
Determine whether ccepting the discount
offered by the supplier will minimise the total 3
cost of inventorywfdr the raw material.
Calculate if Z S Co will benefit financially by
a epting th offer of:
(1) he early settlement discount;
(2) bybulk purchase discount.
ZPS C9 pla s monthl orders with a supplier for 10,000 components
that aré‘used in its manufacturing processes. Annual demand is 120,000
components. T current terms are payment in full within 90 days,
whTch ZPS Co eets, and the cost per component is $750. The cost of
ordering is $200 per order, while the cost of holding components in
inventfly is $100 per component per year.
The supplier has offered either a discount of 05% for payment in full
within 30 days, or a discount of 36% on orders of 30,000 or more
components. If the bulk purchase discount is taken, the cost of holding
Buy Full ACCA F9 Study Text Book (380 i) at ACCASUPPORTCOM I SHARE I COMMENT I FORUMS I JOBS
@
components in inventory would increase to $220 per component per
year due to the need for a larger storage facility.
Assume that there are 365 days in the year and that ZPS Co can borrow
short-term at 45% per year.
Required:
Calculate if ZPS Co will benefit financially by ac ting the o of the
early settlement discount.
\
Purchase cost = 120,000 X $7.“ = $900,000 per year
Savings from early settlement discou 900,00Fx 0.5% whoa y ar

Obtaining early settlement disc income.
nt w1 resukt in safings of $4, 00
\ i
year. It is considered as fina
ver in days
Trade payable level I
365
$900,000 ><
Cur nt trade payable level — — = $221,918
\ 365
_ \ '2' $9 , 00 X 30
Revised trade‘payable level 365 = $73,973
Reductiorkilw‘ade payable level = $147,945
Re uction 'n tra& payables wilyrequire the use of other source of

fina to makeup the short fall in working capital.
7— 1
\Increase in financing cost = $147,945 X 4.5% = $6,657
Trade payable ' usually used as free source of finance because suppliers
generally do vnot charge interest for late payment. Short—term finance will
now be (1 for refinancing working capital, which will give rise to
financ' g (interest) cost.
fill
$
Savings from early settlement discount 4,500
Refinancing cost of working capital (6,657)
Net benefit/ cost of early settlement discount (2,157)
Increase in financing cost exceeds benefits/ savings fro early settlement
discount. Organization will be better by not taking e lement
discount.
1'llalue of early settlement discount offered
Increase in financing cost
Loss if earlyr settlement discount taken
13 Economic Order Quantity (E0

Exam Q.no Requi nt
Calculatejhe cost of‘he; current ordering
12/07 Q4:b policy nd determine e savrng‘hat coul$m
mad y using the economic order quantit
model. " \
Calculate the otal cost of invento forthe
06/ 08 Q3:d(i) raw material when using tlfecon 1c order 4
quantity.
Calculate the cost of the curren ordering
13 policy add the chapge in the costs of inventory
12/y Q3:a .managemefit that will a ' e if the economic 6
order quantity is used t determine the
optimum order size for Product KN5.
14 Qlma % antity (EOQ)

Eco n ‘ ic order quantity is e quantity (order size) at which combine
cost of inventory ordering'and holding is minimized.
m:
@
n
‘\ Ordering cost
Total
cost Holding cost
EOQ
Reorder quantity
14.1 Calculating Economic Order Quant'ty
Formula (given in theformul
Where
C0 = ordering c '
>< Ordering cost per unit
>< Holding cost of per unit
PKA Co is a European c pany that sells goods solely within Europe.

The recentl appointe financial manager of PKA Co has been
investigating the working capital management of the company and has
gathered t fo wing information:
Inventory management
The cufibnt policy is to order 100,000 units when the inventory level
falls to 35,000 units. Forecast demand to meet production requirements
during the next year is 625.000 units. The cost of placing and processing
an order is C250, while the cost of holding a unit in stores is C050 per
unit per year. Both costs are expected to be constant during the next
@
year. Orders are received two weeks after being placed with the supplier.
You should assume a 50-week year and that demand is constant
throughout the year.
Required:
Calculate the cost of the current ordering policy and
saving that could be made by using the economic
Total cost under current ordering policy:
Annual demand
Ordering cost =
No of units per
Ordering cost = 61,56 per year

V’
Ordering inventory in batches of 1 oxho units w‘l require 25
(625,000/ 100,000) orérs to fulfil annualdqnd of 625,0 units.
However, it is not possible to‘place 0.25'irder practice.
‘ A a
It is a ed tliat always half of t e inventory ordered will be held in

waMouse, whichbb the averaggof inventory getting at lower and higher
levels1 during the year‘FEach unit will require 60.5 of holding cost per
year. , \
Annual demand
he No of days or weeks per year
625,000
>< Lead time — Current order level
: ffer stock = — >< 2weeks — 35,000 = 10,000 units

50 Weeks
Inventory usage per week is 12,500 (625,000/50) units. If supplier takes

2 weeks, then inventory should be ordered when 25,000 (12,500 x 2)
units remaining in stock to prevent stock outs. However, supplier may
fill
delay delivery or unexpected demand can arise during the lead—time.
Therefore, organization has kept 10,000 (35,000—25,000) units as buffer
(safety) stock for unexpected situation.
Holding cost per unit of buffer stock = 10,000 X 60 €5,0 per year
Buffer stock is held in the warehouse during w e year. Each unit of

buffer of stock will incur holding cost. Therefore, 10 000 its of
inventory has incurred €5,000.
‘I
Total holding cost = €2 "+'€5,0g = E30, 00 per year
Total cost = Tot ing t + Tot holdin
Total cost e1, 4- 63 + 1330,00 31,563 per y r
Total cost A‘
zrgrez 0)(625,000)
e05
EOQ = 25,000 units
ainual demand
rdering cost = EOQ >< Ordering cost per unit
625,000
Ordering cost = —><
25,000 €250 : €6,250 per year
Orderslsmaller quantity than under current ordering policy increased

ordering cost by €4,687 (€ 1,563 — 66,250) because of more frequent
ordering from 6.25 orders to 25 (625,000/25,000) orders.
fill
E0
Holding cost = (Buffer stock + >< Holding cost per unit
25,000
Holding cost = (10,000 + 2 )X 50.5 = 511,250 per year
A
Ordering as per EOQ resulted in decrease in holding cpst of
518,750 (530,000 — 511,250). It is due to reduct' in averagerinventory
level. \
I
\
Total cost = 5 6,250 + 5 50 = 1 ,500 per year \
EOQ policy Will save = 53 — 00 = ah063 per ear
Cost of current ordering policy 3

Cost of E00-based ordering poiicy 3
Saving by using E00 modell l
T
15 Optimal
Exam Rc Marks
Calculate ifZ‘PS 0Q vxfilwfit financially by
.. ~ acce
Q4:b(n) (1) tllietin thesettlemzntfliscount;
eagrly offer f: 7
(2)\theb_l01k purchase discount.
I Q can§t be used whelksupplier offers bulk purchase discount for
or ring a ove certain quanti e must find out economical order size
thro trial and err If, supplier offers different discount rate for
different ‘order size we haveto calculate total cost of purchasing for each
order size. 4
purchase : Purchase cost + Ordering cost + Holding cost
ZPS Co‘places monthly orders with a supplier for 10,000 components

that aroused in its manufacturing processes. Annual demand is 120,000
components. The current terms are payment in full within 90 days,
which ZPS Co meets, and the cost per component is $750. The cost of
ordering is $200 per order, while the cost of holding components in
inventory is $100 per component per year.
@
The supplier has offered a discount of 3.6% on orders of 30,000 or more
components. If the bulk purchase discount is taken, the cost of holding
components in inventory would increase to $220 per component per
year due to the need for a larger storage facility.
Assume that there are 365 days in the year and that PS C can borrow
short—term at 45% per year. \
Required:
Calculate if ZPS Co will benefit financially by accepting the offer ofihe
bulk purchase discount. ‘
Totalpurchase cost of current
Ordering cost =
20,000
Ordering cost = X
15,000
‘ 10,00
Holding cost :
Tot cost = $2,400 $5,000 + $00,000 = $907,600 per year
eMer size at 30,000 units:
al demand
>< Ordering cost per unit
r size or quantity
120,000
Ordering cost = W X $200 = $800 per year
30,000
Holding cost = X $2.2 = 33,000 per year
Purchase cost I Annual demand >< Purchase price X (1 — discount rate)
Purchase cost = 120,000 X $7.50 X (1 — 0.036) = $867,000 per year
Total cost = 800 + 33,000 + $867,000 = $901,400 per year

fill
Savings due to obtaining bulk purchase discount is $6,000 (907,600—
901,400) per year.
Inventory cost under current ordering policyr l

Revised holding and ordering costs 1
Inventory cost if discount is taken 1
Benefit ii bulk purchase cliscclu nt tail-ten l
16 just in Time (JIT) ‘ 1

Exam Q.no R691» M —
12/10 Qgzb Briefly describe the benGfitEHf—a just—in—tim
(JIT) procurement policy. . .. i
Just in time is modern inventory manager ent phi osophy. It-{neans
inventory should only be prod or pur§age wherfihere is custo
available for it. Ideally, invent \ leve 's assumed $0. However, in
practice, some butter stock is maintaine 0 meet expected demand.
I \
16.1 Benefits ‘ ’
JIT reduces inventory—holdlng osts.. However, it increasgs inventory
. IX’ '. .
ordering costs :but theseare not so hlgh because of a 1cat10n of
informatio hnology.
Inventory does‘notgenerate revenu unti it is old. Cash invested in

inve ory can be used to earmiteres n wrt—term investments. JIT
r ts inYio or little inventory level. i
ventory occupies floor area. Floor aTea is valuable asset of the
orggnizati‘bn, which can be use'yfor producing other products.
Invento possesses grisk of theft and deterioration due to dust, water,

fire, sto kt c.
I
Some kind of inventory is perishable in nature such as groceries and
chemicals. Inve tory may become obsolete or out of fashion as people
tastes and beh 'our changes over time. JIT saves cost of inventory
obsolésces.
fill
16.2 Limitations
JIT is not suitable for organizations operating in health and safety and
rescue services sector. Cost of stock outs far more exceeds benefits in
such sectors.
Example:
Stock out oflife saving drug in a hospital can be
situation, cost of holding inventory isjustifie
in stock outs.
Organization may not be able to meet unexpected demand a1 ffer lost

sales from both existing and potential‘customenAt worst, customer m} y
turn to buy competitors product (i may n:return. \ ‘i
A
Efficient operation of JIT deé1on liable sup lieglocation and

distance of organization emises from pliers infrastructure
available for communigm and deliveryof goods.
fill
Exam Topic 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Exam Topic 5:
DETERMINING WORKING CAPITAL

NEEDS & FUNDING STRATEGIES
Sub Exam Topics
S.no Headings (click the cross—ref below for
1 Cash Management Models
2 Funding Working Capital Requirem
3 Level of Investment in Working C 1t
4 Symptoms of Overtrading
fill
1 Cash Management Models
1.1 Miller-Orr Model
1.1.1 Benefits
1.1.2 Limitations
1.2 Baumol Model
1.2.1 Benefits
1.2.2 Limitations
2 Funding Working Capital Req '
2.1 Non-Current Assets
2.2 Permanent Assets
2.3 Fluctuating Assets
2.4 Matching olicy
2.5 Aggreive v "king pital Policy
able to Organization
. ‘y in Which Organization Operates
4.1.1 Working Capital to Sales Ratio
4.1.2 Increase in Trade Receivable Turnover
fill
4.1.3 Increase in Inventory Turnover
4.1.4 Increase in Trade Payable Turnover
4.1.5 Overdraft
4.1.6 Liquidity Ratios i
fill
Exam Topic 6:
THE NATURE OF INVESTMENT

DECISIONS & THE APPRAISAL
PROCESS
Sub Exam Topics
S.no Headings (click the cross—ref below ' or eas
1 Capital Investment Process
1 Capital Investment Process
1.1 Identifying Investment 0 ' ortunit'es
1.2
1.3
1.4
1.5
fill
Exam Topic 7:
NON DISCOUNTED CASH FLOW

TECHNIQUES
Sub Exam Topics
S.no Headings (click the cross—ref below for ' Pg.no
1 Accounting Rate of Return (ARR)
2 Payback Period
1 Accounting Rate of Return (ARR)
1.1 Benefits & Limitations ofA
2 Payback Period
2.1 Benefits & Limitations 0
fill
Exam Topic 8:
DISCOUNTED CASH FLOW (DCF)

TECHNIQUES
Sub Exam To ics
S.no Headin s (click the cross—ref below for navi atio
O\OOO\]
O‘\O‘l-I>ODIOi-i
Time Value of Mon
Present Value (PV)
Discount Rate
Discountin
Annui
Pe etui
Conventional & Non—c entional Cas flows
Net Present Value
Benefits & Limit Pre Value V)
H Internal Rate 0 e
I-\ H Benefits & Limitations te Re
I-i NJ
IRR & No entional
H 00 Disco Period
I-i
Co en ent Pr
F h Fl
@
1 Time Value of Money
1.1 Inflation or Deflation
1.2 Postponing Consumption
1.3 Risk
2 PresentValue (PV)
3 Discount Rate
3.1 Inflation Rate
3.2 Interest Rate
3.3 WeightedAverage
4 Discounting
its 81 Limitations of Net Present Value (NPV)
9.1 Benefits
9.2 Limitations
fill
10 Internal Rate of Return (IRR)
11 Benefits & Limitations of Internal Rate of Return (IRR)
11.1 Benefits
11.2 Limitations
12 IRR & Non-Conventional Cash flows
13 Discounted Payback Period
14 Commenting on Investme
15 Free Cash Flows
fill
Exam Topic 9:
ALLOWING FOR INFLATION &

TAXATION IN DCF
Sub Exam Topics
S.no Headings (click the cross—ref below for -' y navigatio
U'l-PODNH Discounting & Timing Of Cash Flows
Capital & Revenue Cash Flows i
Nominal & Real Cash flows ‘_
Nominal & Real Discount Rate '
Cash flows & Discount Rate
fill
1 Discounting & Timing Of Cash Flows
2 Capital & Revenue Cash Flows
2.1 Capital Cash Flows
2.2 Initial Investment
2.3 Residual Value
2.4 Tax Savings on Capital Allowance
2.5 With No Delay in Tax Payment
2.6 With Delay in Tax Payment
2.7 Revenue Cash Flows
2.7.1 Sales Revenue
2.7.2 Variable Cost
2.7.3 Project
ws & Discount Rate
fill
Exam Topic 10:
ADIUSTING FOR RISK & UNCERTAINTY

IN INVESTMENT APPRAISAL
Sub Exam Topics
1 Adjusting Risk for Investment Apprais
2 Risk & Uncertainty
3 Sensitivity Analysis
4 Probability Analysis
1 Adjusting Risk for Inve
2 Risk & Uncertainty
Probability of Negative & Positive Outcome
Probability of Specific Condition
fill
Exam Topic 11:
SPECIFIC INVESTMENT DECISIONS

Sub Exam Topics ‘
S.no Headings (click the cross—ref below for easy r . t'on) Pg.no
1 Lease 105
2 Types of Lease 105
3 Buying 5
4 Lease or Buy 1
65 Asset
Approaches Investment
Replacement Appraisa
Decisions I 10
10 if
7 Capital Rationing 106
8 Investment Decisions & 0' . . 1’
9 Relaxing Capital Ratio ' g a7
fill
1 Lease
1.1 Timing ofLease Rental Payments
1.2 Lessor & Lessee
1.3 Benefits of Lease
1.4 Limitations ofLease
2 Types ofLease
2.1 Finance Lease
2.1.1 Benefits & Limitations of F'
2.1.2 Benefits for Lessee
Lea
4 Le eor Buy
5 Approaches InvestmentAppraisal
@
6 Asset Replacement Decisions
6.1 Financial Factors to Consider
6.1.1 Efficiency & Economy
6.1.2 Resale Value
6.1.3 Tax Savings
6.2 Non-Financial Factors to Consider
6.2.1 Competitive Advantage
6.2.2 Compatibility
6.3 Equivalent Annual Cost (E
6.4 Benefits
6.5 Limitations
6.6 EquivalentAn al Benefit(
itations of Profitability Index
8.1.1.3 Postponing Projects
@
8.1.2 Non Divisible Projects (Non-Postponing Projects)
8.1.3 Mutually Exclusive Projects (Non-Postponing Projects)
9 Relaxing Capital Rationing
9.1 Outsourcing
9.2 Ioint Venture
9.3 Franchise
9.4 Working Capital Management
9.5 Government Grant
9.6 Leasing
fill
Exam Topic 12:
SHORT & LONG TERM FINANCE

Sub Exam Topics
S.no Headings (click the cross—ref below for easy r .
1 Short Term Sources of Finance
2 Long Term Sources of Finance
3 Role of Intermediaries
4 Sources of Finance & Investment A
fill
1 Short Term Sources of Finance
1.1 Account Payables
1.2 Overdrafts
1.3 Short Term Loan
1.4 Operating Lease
2 Long Term Sources of Finance
2.1 Finance Lease
2.2 Retained Earnings
2.3 Equity Finance
2.3.1 Benefits
2.3.2 Limitations
2.5.2 Convertible & Non-Convertible Preference Shares
2.5.3 Benefits
2.5.4 Limitations
fill
2.6 Debt Finance
2.6.1 Benefits
2.6.2 Limitation
2.7 Ways of Raising OfDebt Finance
2.7.1 Loan Notes (Bonds or Debenture)
2.7.1.1 Par Value
2.7.1.2 Issue or Redemption at Discount
2.7.1.3 Issue or Redemption at Pre
2.8 Types of Loan Notes
2.8.1 Redeemable Loan N
2.8.2 Irredeemable Lo
2.8.3 Convertible
Benefits
Intermediaries
fFinance & Investment Appraisal
4.2 Duration
4.3 Volatility
@
92$)
fill
Exam Topics 13:
INTERNAL SOURCES OF FINANCE &

DIVIDEND POLICY
Sub Exam Topics
S.no Headings (click the cross—ref below for ' Pg.no
1 Dividend Policy
2 Factors Affecting level of Dividend
3 Script Dividend
4 Ex-dividend or Cum—divided S
fill
1 Dividend Policy
1.1 Miller & Modigliani Theory
1.2 Traditional View
1.3 Tax
1.4 Transaction Cost
1.5 Preference for Dividends
1.6 Clientele Effect
1.7 SignallingEffect
1.8 Financing
2 FactorsAffectingle o
2.1 Liquidity
2.2 Consiste c
fill
Exam Topic 14:
GEARING & CAPITAL STRUCTURE

CONSIDERATIONS
Sub Exam Topics
1
Evaluating Sources of Finance
2 Theoretical Ex—Right Share Price
3 Calculating Theoretical Ex-Ri; ' Share ' .
4 Impact of Right Issue on Sh lers Wea
fill
Evaluating Sources of Finance
Theoretical Ex-Right Share Price
Calculating Theoretical Ex-Right Share Price
4 Impact of Right Issue on Shareholders Wea
4.1 Subscribe
4.2 Renounce
4.3 Lapse
$
fill
Exam Topic 15:
FINANCE FOR SMALL & MEDIUM SIZED

ENTITIES (SMES)
Sub Exam Topics
1 SMEs (Small & Medium Sized Entities
2 Sources of Finance for SMEs
3 Islamic Finance
4 Islamic Financial Instruments
fill
1 SMEs (Small & Medium Sized Entities)
2 Sources ofFinance for SMEs
2.1 Business Angels
2.2 Venture Capitalist (joint Venture)
2.3 Leasing
2.4 Borrowing From Family & Friends
2.5 Government Aid
2.6 Bank Loan
3 Islamic Finance
3.1 Riba
3.1.1 Limitatio '
Ijar '1 Thumma Al Bai (Hire Purchase)
Ijarah-Wa (Finance Lease)
4.7 Mu : rakah (Ioint Venture)
4.8 Sukuk (Debt Finance)
fill
Exam Topic 16:
ESTIMATING COST OF CAPITAL

Sub Exam Topics ‘
\OC>0\1CJ'\QJ‘I- >OIJN :-l
Weighted Average Cost of Capital (WACC) 119
Calculating Market Value of Equity & De
Cost of Equity \
Systematic Risk & Non Systematic ' '
Capital Asset Pricing Model (CAP ‘7
Gearing & Ungearing Betas
Benefits & Limitations of C ‘
Calculating Cost of Debt i
Calculating Weighted : erage (lost of apital
fill
1 Weighted Average Cost of Capital (WACC)
2 Calculating Market Value of Equity & Debt
2.1 Benefits & Limitations ofWACC
2.1.1 Benefits
2.1.2 Limitations
3 Cost of Equity
3.1 Dividend Growth Model (DGM
3.2 Calculating Growth Rate
3.2.1 Average Growth Ra
3.2.1.1 Limitations
3.2.2 Gordon'sG '
5 Capl Asset Pricing Model (CAPM)
5.1 Risk Free Rate of Return
5.2 Market Rate of Return
fill
5.3 Equity Risk Premium (Rm — Rf)
5.4 Equity Beta
6 Gearing & Ungearing Betas
7 Benefits & Limitations of CAPM
7.1 Benefits
7.2 Limitations
8 Calculating Cost of Debt
9 Calculating Weight Av f I
fill
Exam Topic 17:
RELATIONSHIP B/W COST OF CAPITAL,

CAPITAL STRUCTURE & INVESTMENTS
Sub Exam Topics
S.no Headings (click the cross—ref below for -' y navigatio Pg.no
O‘\O‘|-I>OQI\Ji-l
Financial Risk & Business Risk 22
WACC & Investment Appraisal 1 :
CAPM & Investment Appraisal ‘ _i 12
WACC & Capital Structure '
Pecking Order Theory
Impact of Sources of Fin '
fill
1 Financial Risk & Business Risk
1.1 Financial Risk
1.2 Business Risk
2 WACC & Investment Appraisal
3 CAPM & Investment Appraisal
3.1 Conclusion
4 WACC & Capital Structure
4.1 Traditional View
4.1.1 Assumptions
4.2 Miller & Modigliani (M&M)
4.2.1 Assum
IIIIOBI‘ ctioii ieory
’. - clusioii
6 Impact of Sources of Finance on Key Ratios
6.1 Profitability Ratios
6.1.1 Return of Investment (ROI)

fill
6.1.2 Return of Equity (ROE)
6.2 Liquidity Ratios
6.3 Current Asset Ratio
6.4 Quick Asset Ratio
6.5 Gearing Ratios
6.5.1 Interest Cover
6.5.2 Debt to Equity Ratio
6.5.3 Debt to Debt Plus Equity Ratio
6.6 Investor Ratios
6.6.1 Dividend Cover
6.6.2 Dividend Yield
6.6.3 Earnings Yield
6.6.4 Earnin
fill
Exam Topic 18:
BUSINESS VALUATION TECHNIQUES

Sub Exam Topics ‘
1 Business Valuation 125
2 Net Assets Valuation Model 125
3 Price Earnings (P/E) Ratio Method \ 5
4 Earnings Yield Valuation Method 1
5 Dividend Valuation Model (DVM 12
6 Valuation of Debt & other Fin ial Asse
7 Evaluating Financial Perfor A
8 Preparing Forecast Fina ' . ts 1 'l
fill
1 Business Valuation
2 Net Assets Valuation Model
2.1 Assets Excluded
2.1.1 Goodwill
2.1.2 Development Expenditure
2.1.3 ContingentAssets
2.2 Assets & Liabilities Included
2.2.1 Brand, Copyright & Patents
2.2.2 Tangible Assets
2.2.3 Contingent Liabilit'
2.3 Benefits & Limitations
2.3.1 Benefits
5.1.2 Llmitations
6 Valuation of Debt & other Financial Assets
fill
6.1 Redemption Value
6.2 Redemption Yield
6.3 Floor Value
6.4 Conversion Premium
7 Evaluating Financial Performance
8 Preparing Forecast Financial Statements
fill
Exam Topic 19:
EFFICIENT MARKET HYPOTHESIS

Sub Exam Topics
S.no Headings (click the cross—ref below for easy r . Pg.no
1 Features of Efficient Markets
2 Benefits of Efficient Markets
3 Efficient Market Hypothesis
1 Features of Efficient Markets
2 Benefits ofEfficient Markets
3 Efficient Market Hypo
3.1 Weak Form Efficient
3.1.1 Publishe
3.1.2 Past V
3.1.3 '
S€Ifll Strong F0 0 F “icient
fill
Exam Topic 20:
BASICS OF FINANCIAL RISK

MANAGEMENT
Sub Exam Topics
S.no Headings (click the cross—ref below for -' y navigatlo
GOT-BOSNIA
OO\1 Direct Vs Indirect Quote
Buying & Selling Rate
Agreement & Settlement Date ‘_
Foreign Exchange Risk 7
Types of Foreign Exchange !
Managing Foreign Excha v _ -
Netting
Lead & Lag Paymen
fill
1 Direct Vs Indirect Quote
1.1 Direct Quote
1.2 Indirect Quote
2 Buying & Selling Rate
2.1 Direct Quote
2.2 Indirect Quote
3 Agreement & Settlement Date
3.1 Agreement Date
3.2 Settlement Date
7 Netting
8 Lead & Lag Payment

fill
Exam Topic 21:
HEDGING TECHNIQUES FOR FOREIGN

CURRENCY RISK
Sub Exam Topics
S.no Headings (click the cross—ref below for - ' y navigatio
0000\1
Chm-bo mer Step by Step Solution
Spot & Forward rate
Inflation Rate Parity Theory ‘_
Interest Rate Parity Theory 7
Forward Contract Hedge
Future Contract Hedge
Money Market Hedge
Currency Option
Currency Swap
I-i
Derivative
fill
1 Step by Step Solution
2 Spot & Forward rate
2.1 Spot Rate
2.2 Forward Rate
3 Inflation Rate Parity Theory
4 Interest Rate Parity Theory
5 Forward Contract Hedge
5.1 Receipt
5.1.1 Scenario 1 (Gain on For
5.1.2 Scenario
5.2 Payme '
6.5 Tick
6.6 Agreement Date
@
6.7 Settlement Date
6.8 Benefits
6.9 Limitations
7 Money Market Hedge
7.1 Step By Step Process
7.1.1 Money Market Hedge for Receipt
7.1.2 Money Market Hedge for Paym
7.2 Benefits
7.3 Limitations
8 CurrencyOption
8.1 Benefits
8.2 Limita '
fill
Exam Topic 22:
HEDGING TECHNIQUES FOR INTEREST

RATE RISK
Sub Exam Topics
O\OOO\]
O‘\O‘l-I>ODNJH Interest Rate Risk
Types of Interest Rate Risk
Managing Interest Rate Risk ‘A
Forward Rate Agreements (F ' » ) 7
Future Contracts
Interest Rate Option
Interest Rate Swap ,
Effects of Interest R ' erfo ~ ance
Factor Affecting '_ s
j-i
Yield Curve ‘
j-\ j-\ Macroeconomic Factor tere t Ra ’ 135
@
1 Interest Rate Risk
2 Types of Interest Rate Risk
2.1 Variable Interest Rate Risk
2.2 Basis Risk
2.3 Negative Gap
2.4 Positive Gap
2.5 Fixed Interest Rate Risk
3 Managing Interest Rate Ri
3.1 Matching
3.2 Smoothing
3.3 Hedging
ching Between Types of Interest Rate
7.2 Borrow Loan at More Competitive Terms
8 Effects oflnterest Rate on Performance

fill
9 Factor Affecting Interest Rates
9.1 Risk
9.2 Level of Gearing
9.3 Spread on Interest Rate
9.4 Size of Loan
9.5 Flexibility & Marketability
9.6 Liquidity Preference Theory
9.7 Expectation Theory
9.8 Market Segmentation Th
9.9 Government Policy
10 Yield Curve
11 Macro ' Affecting In
11.1 I ation
11.6 B ance Of Payments
fill
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ACCA F9 Financial Management Study Text Ebook for June 2013 Exam | Page 1 of 137

ACCA F9 EBOOK ZOI 3

Exam Topic 11: SPECIFIC INVESTMENT DECISIONS .................................................................... .. 104

Exam Topic 22: HEDGING TECHNIQUES FOR INTERE

“m link at an ONE of your E ii lil'l

mail should contain Web RL where you have placed a

Bad Debt Risk - 64

Debt Finance - 105

Earnings Per Share - 118

Joint Venture - 102 Negative Gap - 129

ing Order Theory - 117

Real Return - 130

Variable Interest Rate Risk - 129

Weak Form Efficient - 122

Yield Curve - 130 €

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