Unit 3: Finance and Accounts

3.1 Sources of finance

  • Role of finance for businesses: capital expenditure, revenue expenditure

  • The following internal sources of finance: personal funds (for sole traders), retained profit, sale of assets

  • The following external sources of finance: share capital, loan capital, overdrafts, trade credit, grants, subsidies, debt factoring, leasing, venture capital, business angels

  • Short, medium and long-term finance

  • The appropriateness, advantages and disadvantages of sources of finance for a given situation

3.2 Costs and revenues

  • The following types of cost, using examples: fixed, variable, semi-variable, direct, indirect/overhead

  • Total revenue and revenue streams, using examples

3.3 Break-even analysis

  • Total contribution versus contribution per unit

  • A break-even chart and the following aspects of break-even analysis: break-even quantity/point, profit or loss, margin of safety, target profit output, target profit, target price

  • The effects of changes in price or cost on the break-even quantity, profit and margin of safety, using graphical and quantitative methods

  • The benefits and limitations of breakeven analysis

3.4 Final accounts (some HL only)

  • The purpose of accounts to different stakeholders

  • The principles and ethics of accounting practice

  • Final accounts: profit and loss account, balance sheet

  • Different types of intangible assets

  • Depreciation using the following methods: straight line method, reducing/declining balance method (HL)

  • The strengths and weaknesses of each method (HL)

3.5 Profitability and liquidity ratio analysis

  • The following profitability and efficiency ratios: gross profit margin, net profit margin, ROCE

  • The following liquidity ratios: current, acid-test/quick

  • Possible strategies to improve these ratios: gross profit margin, net profit margin, ROCE

  • Possible strategies to improve these ratios: current, acid-test/quick

3.6 Efficiency ratio analysis (HL only)

  • The following further efficiency ratios: inventory/stock turnover, debtor days, creditor days, gearing ratio

  • Possible strategies to improve these ratios

3.7 Cash flow

  • The difference between profit and cash flow

  • The working capital cycle

  • Cash flow forecasts

  • The relationship between investment, profit and cash flow

  • The following strategies for dealing with cash flow problems: reducing cash outflow, improving cash inflows, looking for additional finance

3.8 Investment appraisal (some HL only)

  • Investment opportunities using payback period and average rate of return (ARR)

  • Investment opportunities using net present value (NPV) (HL)

3.9 Budgets (HL only)

  • The importance of budgets for organizations

  • The difference between cost and profit centres

  • The roles of cost and profit centres

  • Variances

  • The role of budgets and variances in strategic planning

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