2015 ACCA f9 essential text KAPLAN

Each chapter includes: 1 Detailed study guide and syllabus objectives2 Description of the examination 3 Study skills and revision guidance4 Complete text or essential text5 Question prac

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Introduction

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On­line subscribers Syllabus 

Syllabus objectives The examination Examination format Paper­based examination tips Study skills and revision guidance Preparing to study 

Effective studying Three ways of taking notes Revision 

Further reading 

You can find further reading and technical articles under the student section of ACCA's website. 

Introduction

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KAPLAN PUBLISHING ix

FORMULAE AND TABLES

Economic order quantity

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Miller-Orr Model

Return point = Lower limit + (31× spread)

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d e

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The Growth Model

)gr(

)g1(DP

V+kV+V

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=

d e

d e

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= F

b

c 0 0

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x KAPLAN PUBLISHING

Present value table

Present value of 1, i.e (1 + r)−n

Where r = discount rate

n = number of periods until payment

Discount rate (r) Periods

Where r = discount rate

n = number of periods until payment

Discount rate (r) Periods

xii KAPLAN PUBLISHING

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The financial management  function 

Chapter learning objectives

 Upon completion of this chapter you will be able to: 

• explain the nature and purpose of financial management

• distinguish between financial management and financial and management accounting 

• discuss the relationship between financial objectives, corporate objectives and corporate strategy

• identify and describe a variety of financial objectives, including: 

– shareholder wealth maximisation– profit maximisation

– earnings per share growth

• identify stakeholders, their objectives and possible conflicts

• discuss the possible conflict between stakeholder objectives

• discuss the role of management in meeting stakeholder objectives, including the use of agency theory

• explain ways to encourage the achievement of stakeholder objectives, including: 

– managerial reward schemes– regulatory requirements

• discuss the impact of not­for­profit status on financial and other objectives

• discuss the nature and importance of Value for Money as an objective in not­for­profit organisations

1 The nature and purpose of financial management

Financial management is concerned with the efficient acquisition and deployment of both short­ and long­term financial resources, to ensure the objectives of the enterprise are achieved. 

The financial management function

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The investment decision

The dividend decision

The financing decision

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• management accounting – concerned with providing information for the more day to day functions of control and decision making

• financial accounting – concerned with providing information about the historical results of past plans and decisions

2 The relationship between corporate strategy and corporate and financial objectives

Objectives and strategy

Maximising and satisficing

Additional question – Objectives and strategy

Financial objectives

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4 Stakeholder objectives and conflicts

Additional question – Stakeholder conflicts

The stakeholder view

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5 The role of management and goal congruence

Agency theory Agency theory is often used to describe the relationships between the various interested parties in a firm and can help to explain the various duties and conflicts that occur: 

Agency relationships occur when one party, the principal, employs another party, the agent, to perform a task on their behalf. In particular, directors (agents) act on behalf of shareholders (principals). 

How to reduce the problems caused by agency relationships

Finding ways to reduce the problems of the agency relationship and ensure that managers take decisions which are consistent with the objectives of shareholders is a key issue. 

Managerial reward schemes One way to help ensure that managers take decisions which are consistent with the objectives of shareholders is to introduce carefully designed remuneration packages. The schemes should: 

• remuneration linked to: 

– minimum profit levels– economic value added (EVA)– revenue growth

Corporate governance codes

The specific ratios covered in the F9 syllabus will be looked at in detail in chapter 19 although some of them may already be familiar to you from previous papers  

• Most key objectives are very difficult to quantify, especially in financial terms, e.g. quality of care given to patients in a hospital

• Multiple and conflicting objectives are more common in NFPs, e.g. 

quality of patient care versus number of patients treated

Value for money (VFM) and the 3 Es

VFM can be defined as ‘achieving the desired level and quality of service at the most economical cost’. 

The financial management function

Objective setting in NFPs

VFM

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Suggest appropriate measures of achievement that could be set for the service. 

Which of the following is NOT one of the three main types of decision facing the financing manager in a company? 

In this context, the 'agents' are the: 

Test your understanding 1 – Not for profit organisations

Test your understanding 3Test your understanding 2

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Which of the following is an example of a financial objective that a

company might choose to pursue? 

A Provision of good wages and salaries

B Dealing honestly and fairly with customers on all occasions

C Producing environmentally friendly products

D Restricting the level of gearing to below a specified target level

In the context of managing performance in 'not for profit'

organisations, which of the following definitions is incorrect? 

Test your understanding 5

Test your understanding 6

Test your understanding 4

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chapter 1

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The financial management function

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chapter 1

Answer to additional question – Objectives and strategy

Answer to additional question – Managerial reward schemes

Answer to additional question – Stakeholder conflicts

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Test your understanding answers

The financial management function

Test your understanding 1 – Not for profit organisations

Test your understanding 2

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Test your understanding 4

Test your understanding 6

Test your understanding 3

Test your understanding 5

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The financial management function

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Basic investment appraisal  techniques 

Chapter learning objectives

 Upon completion of this chapter you will be able to: 

• define a relevant cash flow (and distinguish it from an accounting profit)

• identify and calculate relevant cash flows in a scenario

• calculate the payback period and use it to appraise an investment

• discuss the usefulness of payback as an investment appraisal method

• calculate return on capital employed (ROCE) (accounting rate of return) and use it to appraise an investment

• discuss the usefulness of ROCE as an investment appraisal method

19

chapter

2

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1 Investment appraisal process

One stage in the capital budgeting process isinvestment appraisal. This appraisal has the following features: 

• assessment of the level of expected returns earned for the level of expenditure made

• estimates of future costs and benefits over the project’s life

Two basic appraisal techniques are covered in this chapter: 

More sophisticated methods of investment appraisal are dealt with in the next chapter. 

• ROCE

• Payback

Examination questions may ask you to compare and contrast the use of these two basic techniques. 

Basic investment appraisal techniques

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Average annual profits before interest and tax ROCE =  –––––––––––––––––––––––––––––––––––  × 100% 

Average capital investment 

Initial investment  + scrap value Average capital investment =  ––––––––––––––––––––––––––– 

In addition, at the end of the seven­year project the assets initially purchased will be sold for $100,000. 

Determine the project’s ROCE using: 

Cash inflows ($000)  100  200  400  400  300  200  150 

(a) initial capital costs(b) average capital investment

3 Advantages and disadvantages of ROCE

Advantages and disadvantages of ROCE

Initial capital costTest your understanding 2 – ROCE

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4 Accounting profits and cash flows

Test your understanding 3 – Relevant costs

Profits versus cash flows

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6 Payback method of appraisal

The payback period is the time a project will take to pay back the money spent on it. It is based on expected cash flows and provides a measure of liquidity. 

Decision rule: 

Constant annual cash flows

• only select projects which pay back within the specified time period

• choose between options on the basis of the fastest payback   

initial investment Payback  period =  ––––––––––––– 

A project will involve spending $1.8 million now. Annual cash flows from the project would be $350,000. 

What is the expected payback period? 

Uneven annual cash flows

In practice, cash flows from a project are unlikely to be constant. Where cash flows are uneven, payback is calculated by working out the cumulative cash flow over the life of the project. 

Basic investment appraisal techniques

Test your understanding 4 – Payback with constant annual cash

Test your understanding 5 – Payback in years and monthsAdditional question – Relevant costs

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A project is expected to have the following cash flows:  

What is the expected payback period? 

Test your understanding 6 – Payback with uneven cash flows

Test your understanding 7 – Payback with uneven cash flows

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• it favours quick return: 

– helps company growth– minimises risk

Which of the following is an example of a relevant cash flow to be considered in an investment appraisal process for a new project? 

A Market research expenditure already incurred

B Additional tax that will be paid on extra profits generated

C Centrally­allocated overheads that are not a consequence of undertaking the project

D Tax­allowable depreciation

Basic investment appraisal techniques

Advantages and disadvantages of payback

Test your understanding 8

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Ignoring the time value of money (covered later in Chapter 3),

what is the relevant cost of the machine to the new contract? 

Test your understanding 10

Test your understanding 9

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Which of the following statements is not true? 

A The return on capital employed method of investment appraisal takes account of the length of the project

Forecast operating profits to be generated by the machine are as follows: 

Select the payback period (PP) and the average return on capital employed (ROCE), calculated as average annual profits divided

by the average investment. 

Test your understanding 11

Test your understanding 12

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Basic investment appraisal techniques

Answer to additional question – Relevant costs

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Test your understanding answers

Average book value 

of assets  

(a) 

Average annual inflows = $1,750,000 ÷ 7  = $250,000 Average annual depreciation = ($800,000 – $100,000) ÷ 7  = $100,000 (A net $700,000 is being written off as depreciation over 7 years.) Average annual profit = $250,000 – $100,000  = $150,000 The average capital invested is (800,000 + 100,000) ÷ 2  = $450,000 

Average annual profit  $150,000  ROCE =  –––––––––––––––––  × 100 =  ––––––––  × 100 = 18.75% 

Initial capital cost   $800,000  

(b) 

Average annual profit  $150,000  ROCE =  –––––––––––––––––  × 100 =  ––––––––  × 100 = 33.33% 

Average capital investment  $450,000  

Only the $15,000 salary is relevant. The fixed overheads are not incremental to the decision and should be ignored.