1: Limited Company:

Format of Statement of comprehensive income:

Details £
Revenue XXX
Less, Cost of Sales (W-1) (XXX)
Gross Profit XXX
Add, Other income (W-2) XXX
Less, Distribution Cost (W-3) (XXX)
Less, Administration Cost (W-4) (XXX)
Profit before interest and tax XXX
Finance cost/Interest expenses (W-5) (XXX)
Profit after interest before tax XXX
Less, Corporation tax (XXX)
Profit after interest and tax XXX
Add, Comprehensive income (W-6) XXX
Profit for the year XXX

Page | 1
 Working 1: (Cost of sales)
Details £
Direct Material XXX
Discount received (XXX)
Direct Labour XXX
Factory Rent XXX
Factory fuel / overheads XXX
Production Machinery Depreciation XXX
Machinery Maintenance XXX
Factory supervisor XXX
Research and development XXX
Add, Opening inventory of : Raw material XXX
Finished goods XXX
Work in progress XXX
Less , Closing inventory of : Raw material (XXX)
Finished goods (XXX)
Work in Progress (XXX)
Total XXX

Woking 2 (Other Income)

Details £
Rent received XXX
Canteen Income XXX
Profit from disposal XXX
Commission received XXX
Total XXX

Page | 2
 Working 3: (Distribution cost)
Details £
Commission on sales XXX
Promotion & Advertisement XXX
Shop rent XXX
Shop wages XXX
Transport cost XXX
Delivery Cost XXX
Discount allowed XXX
Selling and distribution related any other expenses XXX
Total XXX

Working 4: (Administration cost)

Details £
Bad debts / Irrecoverable debts XXX
Finance director salary XXX
Office staff salary XXX
Legal fees XXX
Accountancy fees XXX
Office stationery XXX
Depreciation on office equipment XXX
Total XXX

Working 5: (Finance cost)

Details £
Interest on debenture XXX
Interest on bank loan XXX
Interest on overdraft XXX
Mortgage interest XXX
Total XXX

Page | 3
 Working 6: (Comprehensive income)
Details £
Income from Shares & Securities XXX
Interest received XXX
Investment Income XXX
Total XXX

Page | 4
 Format of Statement of Financial Position:
Details Cost (£) Accumulated Carrying Value
Depreciation (£) (£)
Asset:
Non-Current Asset:
Property Plant &
Equipment:
Land & Building XXX XXX XXX
Fixture & Fittings XXX XXX XXX
Equipment &Machinery XXX XXX XXX
Motor Vehicle& Lorries XXX XXX XXX
XXX
Intangible Asset
Goodwill XXX XXX XXX
Patent XXX XXX XXX
Trade mark XXX XXX XXX
License & Copyright XXX XXX XXX
Long term investment XXX XXX XXX
XXX XXX XXX
Current Asset:
Closing inventory XXX
Accounts Receivable XXX
Less: Allowance for D D (XXX)
Other Receivable XXX
Cash & Cash equivalent: XXX
Cash in hand XXX
Bank XXX
Short term investment XXX XXX
Total Asset XXX

Page | 5
Details Cost (£) Accumulated Carrying Value
Depreciation (£) (£)
Equity & Liabilities:
Equity & Reserves:
Ordinary Share XXX
Share Premium XXX
Preference Share XXX
Revaluation reserve XXX
General reserve XXX
Retained earnings XXX
Any kind of reserve XXX
XXX
Non-Current liability:
Bank Loan XXX
Debenture XXX
Mortgage XXX
XXX
Current liability:
Trade payables XXX
Other payables XXX
Taxation due XXX
Bank overdraft XXX
Short term provision XXX
XXX
Total Equity & XXX
Liabilities

Page | 6
 Important Theories:
1: Importance of Directors report accomping the financial statement of a
company?
Advantages
➢ The directors give information to the shareholders. eg: Shareholders which
they could use to make decision whether to invest or not.
➢ Shareholders may be assured that the company is acting in an ethical manner.
➢ Other stakeholders such as pressure group may use information from the
report to bring about changes in company policy such as maximum wages.
➢ Notes and disclosure may be required under stock exchange regulations
which may be appropriate in the director report.
➢ It enables shareholders to review the performance and position of business.
➢ It also enables other stakeholders such as bank, suppliers to show the
liquidity position of the business.
Disadvantages
➢ It is time consuming, costly to print and deliver.
➢ Directors may use reports to window dress accounts and give unrealistic
picture of the business.
➢ Directors may mislead stakeholders in future of them by manipulating the
accounts.
➢ Users of this account with no accounting knowledge may not understand.
2: Importance of Auditors report?
Advantages
➢ Auditors are independent who's duty is to report that whether the financial
statement gives a true and fair view.
➢ Auditors report on how directors have used shareholder funds therefore their
duty is to the shareholders.
➢ There report gives more confidence to the tax authority that the tax
corporation is correct.
➢ As their report based in accordance with International Accounting Standard
financial statement are more reliable.

Page | 7
 ➢ As they are professionally supervisory bodies therefore, they are
professionally qualified. eg: Chartered Accountant.
➢ Without their opinion financial statement can't be authorized and published
therefore investors can make decision considering their report.
Disadvantages
➢ Auditors may not be very independent and may work according to their
clients wish.
➢ Auditors could be mislead by the directors and may provide inaccurate report.
➢ Auditors don't guarantee that material fraud has not occurred.
➢ As they are professional, they are costly to hire.
➢ Auditors’ duty is only to make opinion not to identify and correct errors.
➢ Inaccurate report may mislead stakeholders, directors and potential investors.
3: Explain the importance of disclosing continuing and discontinued activities?
Advantages
➢ Investors can see that the department is making profit or loss.
➢ It can help them to make decision.
➢ As discontinued the department will not realised the cost in future.
➢ Shutting down the department may create opportunity to open a new
profitable department.
➢ Losses are not sustainable in the long run.
➢ The company may use resources in this department to more profitable
department.
Disadvantages
➢ Discontinued the department may negatively affect the company’s reputation
and will reduce the product range.
➢ Investors may not be willing to invest in those business who are making loss.
➢ Unemployment will increase which will be a social cost.
➢ The department is absorbing fixed costs.
➢ Investors may be switch to rival suppliers.
➢ This may lead to a fall in market price of share.

Page | 8
4: Evaluate the statement of the Managing director, concerning the liquidity
position of the business?
Advantages
➢ Liquidity is the ability of a business to pay its short-term debts when they fall
due.
➢ Investors are willing to invest in those business who have better liquidity
position.
➢ There is a possible chance to increase bank loan.
➢ Reduce stock will improve the liquidity position.
➢ There is also a possible chance to increase debentures.
➢ The amount of bank may be enough and used to pay short term debts.
Disadvantages
➢ Investors are unwilling to invest in those business who have poor liquidity.
➢ The supplier may not deliver goods due to poor liquidity position.
➢ Business reputation may negatively affect by reducing liquidity position.
➢ Failure to pay this may result in possible closure of the business.
➢ The amount of cash of the business may be too low, which reduce the
liquidity position.
➢ Debentures interest is higher compare to bank loan, that's why need to
increase bank loan rather than debentures.

Important Math’s:
1. May 21 Q-1
2. May 17 Q-1
3. Jan 18 Q-4
4. May 23 Q-5
5. Jan 18 Q-4

Page | 9
 2: Equity change & Share issue:
Reserves:
Examples of Revenue & Capital Reserves
Capital Reserves Revenue Reserves
Ordinary Share Retained Earning
Share premium General Reserve
Revaluation Reserve Foreign Exchange reserve
Capital Redemption Reserve Capital Replacement Reserve
**Only Revenue reserves can be used to pay dividend
Journal entries:
When ordinary dividend is proposed:
Retained earnings Dr. £X
Ordinary Dividend Cr. £X

When Ordinary Dividend is paid:

Retained earnings Dr. £X
Ordinary Dividend Cr. £X

Ordinary dividend Dr £X
Bank Cr £X
** If Only Paid BOTH entries must be shown

When Rights issue takes place:

Bank Dr £X
Ordinary Share Cr £X
Share premium Cr £X
When bonus issue takes place:
Retained earnings Dr £X
Ordinary Share Cr £X
When non-current asset is revalued upward:

Non-current asset Dr £X
Revaluation reserve Cr £X
Page | 10
When Ordinary share is redeemed:

Ordinary Share Dr £X
Bank Cr £X

Share Premium Dr £X
Bank Cr £X

Retained earnings Dr £X
Capital Redemption reserve Cr £X

When Preference share is redeemed:

Retained earnings Dr £X
Preference share Cr £X

Preference share Dr £X
Bank Cr £X

Formula:

𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒 + 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑒𝑚𝑖𝑢𝑚

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑅𝑒𝑠𝑒𝑟𝑣𝑒

𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑟𝑑𝑖𝑎𝑛𝑟𝑦 𝑆ℎ𝑎𝑟𝑒

Page | 11
 Important Theories:
1: State how the following reserves are created and used?
Retained Earnings: are created by trading profits built up over past and present
year, and are used to pay dividends of ordinary shareholders.
General reserve: are created by retained earnings and are used to issue bonus
shares and transfer back to retained earnings.
Share premium reserves: are created by issue ordinary shares above their nominal
value and are used to pay dividend or issue bonus shares.
Capital redemption reserve: are created when share is redeemed and transfer from
revenue reserves. This reserve act as a creditors buffer.
Revaluation reserve: are created to upwards revaluation of non-current assets and
are used when assets are sold transferred to income statement and retained
earnings.
2: Explain the Advantages and Disadvantages of redeeming ordinary share?
Advantages
➢ The company may have excess funds. eg: large amount of cash which could be
used to improve liquidity by redeeming ordinary share.
➢ Less funds will have to be paid in future in terms of dividends.
➢ Some ratios may improve. eg: Return on capital employed, Earnings per
share.
➢ The market price of shares may increase as there will be less share on the
market.
➢ Redeeming share may enable managers and directors and the company look
better.
Disadvantages
➢ May reduce the liquidity position. Eg: cash or cash equivalents, current ratio.
➢ Gearing ratio will increase therefore the percentage of loan capital compare
to total capital may deteriorate.
➢ Redeeming the share will reduce the number of shares and the equity capital
which may give an impression of small company.
Page | 12
 ➢ The risk of the business may increase due to increased gearing.

3: Evaluate on behalf of the company, the issue of debentures to finance the

second marina?
Advantages
➢ Debentures interest is usually lower than bank loan interest.
➢ Over the life of the debentures no capital repayment is required.
➢ Debentures interest is allowed against tax therefore less corporation
tax need to be paid.
➢ Selling debentures will not dilute ownership and control.
➢ Fees are likely to below compare to the issue of shares.
Disadvantages
➢ When debentures mature a large capital sum has to be repaid.
➢ Debentures holders are likely to insist on a charge.
➢ Selling debentures will increase the gearing ratio.
➢ Debentures are easy to manage rather than bank loan.
➢ Debentures are loan capital together with interest.
4: Evaluate the use of a bank loan or ordinary shares as alternative methods of
raising finance?
Advantages Ordinary share:
➢ Shareholders don't have to be paid any dividends, if the business is
running at a loss or liquidated.
➢ They have voting rights in the annual general meeting.
➢ No interest has to be paid, so profits of the company is high.
➢ Dividends could be variable and interest on bank loan is fixed and must
be paid.
➢ Reduce gearing ratio and therefore the risk of the company is decrease.
➢ If bank loan used then the gearing ratio may increase.

Page | 13
Advantages Bank loan:
➢ Bank loan interest is allowable for tax.
➢ May be quicker to arrange bank loan rather than ordinary share.
➢ Issue of shares may dilute ownership and control.
➢ Bank may bring expertise and experience to company.
➢ Bank loan could be repaid more than a year.
➢ Bank loan interest may be lower than debentures interest.
5: Explain Issued and Called-up share capital?
Issued share capital: means share are used and are the equity capital of the
business and it also bring cash into the business.

Called-up share capital: is that part of the issued share capital for which
money has not been paid for.
6: Distinguish between capital reserves and revenue reserves?
Capital reserves: are those reserves which are famed when shares are issued
or when capital is redeemed. These reserves are not used to pay dividends.
eg: share capital, revaluation reserve, capital redemption reserve, non-
current asset replacement reserve.

Revenue reserve: are those reserve which are formed from the profit and loss
account, which are used to pay [Link]: retained earnings, general
reserve etc.
Important Math’s:
Share Issue: Equity Change:
Jan 19 Q-2 Jan 23 Q-2
May 16 Q-3 Jan 21 Q-1
May 12 Q-3 Jan 16 Q-1

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 CVP Analysis:
Formula:
1) 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
2) Break-even point =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

3) Break-even point in sales revenue = Break-even point in unit x selling price

4) Margin of safety (in units) = Actual sales unit – Break-even point in units

5) Margin of safety (in sales revenue) = Margin of safety in unit x selling

price

6) Profit = Total contribution – fixed cost

Or
Profit = Total revenue – Total cost

7) Contribution to sales ratio = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛

𝑆𝑎𝑙𝑒𝑠

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 +𝑡𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡

8) 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑡𝑜 𝑎𝑐ℎ𝑖𝑣𝑒 𝐵. 𝐸. 𝑃 / 𝑃𝑟𝑜𝑓𝑖𝑡 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Page | 15
 8) Margin of safety as a Percentage on sales = Margin of safety in sales X 100
Total sales

Total Contribution = Contribution per unit X Sales unit.

Important Theories:
1: Evaluate the effectiveness of breakeven analysis as an aid to business decision
making?
Advantages
➢ It is a useful tool for decision making.
➢ Breakeven analysis helps in decision making as it can identify, variable
cost, fixed cost, breakeven point, margin of safety, angle of incidence.
➢ It also helps a business to calculate total profit and contribution.
➢ It avoids the need to operate High low method.
Disadvantages
➢ It assumes that all units produced will be sold.
➢ It is time consuming and costly to prepare.
➢ It requires professional skills to prepare.
➢ It doesn't take inflation into account.
Conclusion: Though, it is time consuming and costly to prepare yet breakeven point
is useful for a business.
2: Is contribution the same as profit? Explain your answer?

Contribution is the difference between selling price and variable cost.

It is calculated as: selling price – variable cost.
Profit is the excess of income over expenditure. It is calculated as sales-total
cost. There-fore contribution and profit are not be same as contribution
towards fixed cost but profit is ascertained by deducting total cost from sales.

Page | 16
3: Evaluate the importance of Break-even analysis?
Advantages
➢ It is a useful tool for decision making.
➢ It helps to identify variable costs, fixed cost and total cost.
➢ It helps to calculate the break-even point.
➢ It also helps to calculate the margin of safety.
➢ It enables a business to identify the angle of incidence.
Disadvantages
➢ It is only an estimation and assumes that all units produced will be sold.
➢ It doesn't take inflation into account.
➢ It doesn't consider other factors such as: skills of work force, location of
business, quality of product etc.
➢ It is not suitable for multiple products for eg: a single break-even point
chart or analysis can't calculate the break-even point of two products at
a time.
4: Evaluate non-financial factors that may be considered by the business in making
the decision?
Advantages
➢ Selling at a reduced price will attract new customers.
➢ The market share of the business may increase.
➢ The business may enjoy the benefit of large-scale production,
economics of scale.
➢ This will enable the business to run efficiently probably at full capacity.
Disadvantages
➢ Poor quality product may adversely affect the business reputation.
➢ The supplier may increase the price in future.
➢ The supplier may not deliver goods on time.
➢ Forcing workers to work overtime may demotivate them.

Page | 17
5: Evaluate the suggestion of the managing director to increase the selling price
and reduce fixed costs?
Advantages:
➢ Increased selling price would give increased contribution and profit.
➢ Reducing rent and salaries may increase the profit.
➢ Paying a reduced wage rate to labour would increases the contribution
and profit.
Disadvantages
➢ Reducing fixed costs of rent may not be possible.
➢ Paying a lower salary to management may make them dissatisfied
which will increase labour turnover.
➢ Paying a lower rate of labours/workers may affect the quality of
product adversely.

6: Evaluate whether it would be advisable to pay direct labour a lower rate per
tray, to achieve a target profit per month?
Advantages
➢ Lower rate of wages would give higher contribution per unit hence
higher profit.
➢ Higher contribution will contribute towards fixed costs.
➢ As a result, less units need to be sold to achieve breakeven point.
➢ This may increase the margin of safety and make the business less risky.
Disadvantages
➢ Lower rate may demotivate workers.
➢ Quality of production may fall.
➢ Decrease quality may affect the businesses brand image.
➢ Reduce wage rate may increase labour turnover.

Page | 18
 Important Math’s:
Normal & Graph: Limiting Factor:

Jan 23 Q-1 Jan 17 Q-1

Jan 23 Q-5 Jan 19 Q-1
Oct 18 Q-5 May 14 Q-2
Jan 22 Q-2 Jan 21 Q-2
Jan 19 Q-5
May 20 Q-2

Page | 19
 Marginal & Absorption Costing:
1) Closing Inventory Valuation using marginal costing =
𝐶𝐿𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑢𝑛𝑖𝑡𝑠 𝑥 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

2) Closing Inventory valuation using absorption costing=

𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑢𝑛𝑖𝑡𝑠 𝑥 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Closing inventory in unit = Opening inventory in unit + Production unit – Sales

unit.

Sales unit = Opening inventory in unit + Production unit – Closing inventory

unit.

Important Theories:
1: Advantages and Disadvantages of Marginal Costing:
Advantages Marginal costing
➢ It helps in decision making whether to accept a price, make or buy
decision.
➢ It also helps to decide whether to continue or discontinue a product or
department.
➢ Using marginal costing would give a more accurate profit calculation as
it is drawn on the basis of a time period.
➢ It is prudent to write off cost in time period incurred.

Disadvantages Marginal costing:

➢ Use of marginal costing in processing leads to low prices when
demands are low – customers may expect this all the time.
➢ Profit more consistent under absorption costing.
➢ Inventory valuation at the marginal cost not allowed under IAS 2.
➢ Less significant for firms as it is based only on variable costs.

Page | 20
2: Advantages and Disadvantages of Absorption Costing:
Advantages Absorption costing
➢ It includes all cost to a product as a result could be useful for
management when fixing selling price.
➢ It also helps management to identify whether a product or project will
be profitable.
➢ It is accepted or recommended by SSAP (Statement of standard
accounting principles) which will give a true and fair view.
Disadvantages Absorption costing:
➢ Overheads may be inaccurately estimated or apportioned.
➢ Difficult and time consuming to collect data from various cost centres.
➢ It requires Professional skills to prepare
➢ It is costly.

Important Math’s:
1. Jan 18 Q-3
2. May 17 Q-6
3. Jan 20 Q-6
4. Jan 22 Q-6

Page | 21
 Merger and Takeover:
Format:
• 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 = Capital + 𝐺𝑜𝑜𝑑𝑤𝑖𝑙𝑙
• Capital = 𝑅𝑒𝑣𝑎𝑙𝑢𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑣𝑎𝑙𝑢𝑒𝑑 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒
• 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒 =
𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Acquisition account
Date Details £ Date Details £
Property plant XXX Trade payables XXX
& Equipment
Fixture & XXX Debenture XXX
Fittings
Motor Vehicle XXX Other payables XXX
Premises XXX Purchase Price XXX
Trade XXX
receivables
Cash & bank XXX
Goodwill XXX
XXX XXX
**ALL VALUES ARE REVALUED AMOUNT

Sundry Shareholders account:

Date Details £ Date Details £

Retained Earning XXX Ordinary Share XXX
(IF LOSS/Debit
balance)
Purchase price XXX Share premium XXX
Retained Earning XXX
(IF Profit/Credit
balance)
Any kind of XXX
reserve
**Loss on XXX Profit on XXX
Realisation Realisation(**)
XXX XXX

Page | 22
 Realisation Account:

Date Details £ Date Details £

Property XXX Trade XXX
plant & payables
Equipment
Fixture & XXX Debenture XXX
Fittings
Motor XXX Other XXX
Vehicle payables
Premises XXX Purchase XXX
Price
Trade XXX
receivables
Cash & XXX
Bank
*Profit on XXX *Loss on XXX
Realisation Realisation
XXX XXX

**ALL VALUES ARE BEFORE REVALUATION.

Important Theories:
1: As Sandra's accountant evaluate the merger on her behalf?
Advantages
➢ Sandra's share price may rise in the near future due to the merger.
➢ Highlands net loss of £m will be absorbed by Andrews plc.
➢ The merger will be enabling Andrew's plc to enjoy economic of scale.
eg: on bulk purchase.
➢ Highland plc will be able to use Andrew's resources. eg: labours,
machineries which may lead to reduce labour cost.
➢ Andrew's plc will now enjoy increased market share as competitors has
merged.
Page | 23
Disadvantages
➢ The merger has a realization loss of £m.
➢ Highland’s debtors contain a large number of bad debts was retained of
due to the merger.
➢ Highlands’s plc needs a stronger company to take them over.
➢ Share price of Highland plc may fall due to the loss on realization.
➢ Ownership and control will be diluted which means less voting power.
2: Sharmin was a shareholder in Femme Fatalle limited. As sharmins accountant,
evaluate the merger on her behalf? Advantages
➢ Shareholders of Femme ltd. would receive a profit on realization.
➢ They will also receive a goodwill.
➢ The company would enjoy benefits of vertical integration as they are in
the same line of business.
➢ The new company may also enjoy economic of scale. eg: on bulk
purchase.
Disadvantages
➢ Ownership, control and voting power will be diluted.
➢ Most of the assets were revalued downwards.
➢ The liquidity position is not in a good stated after the merger.
➢ The market price of shares is unknown it may fall.
3: Evaluate the treatment of the goodwill created in the accounts?
Advantages
➢ Goodwill is an intangible non-current asset and purchased goodwill
should be treated in the balance sheet of the business.
➢ The correct amount of goodwill must be amortized over its useful
economic life.
➢ It is benefit is expected to flow over a number of years according to the
accruals and matching concept.
➢ Gives a true and fair view of the accounts by following the prudence
concept.
➢ To write off goodwill immediately may reduce the profit, which may
also reduce the tax charge.
Page | 24
Disadvantages
➢ Writing of goodwill by the full amount in the first year would result in
an inaccurate profit calculation.
➢ The amount of goodwill paid by the business may negatively affect the
liquidity position.
➢ The Calculation of goodwill is difficult.
4: Evaluate non-financial factors that may be considered by the business in making
decision.
Advantages
➢ 1: Selling at a reduced price will attract new customers.
➢ 2: The market price of the business may increase.
➢ 3: The business may enjoy the benefit of large-scale production
economic of scale.
➢ 4: This will enable the business to run efficiently probably at full
capacity.
Disadvantages
➢ 1: Poor quality product may adversely affect the business reputation.
➢ 2: The supplier may increase the price in future.
➢ 3: The supplier may not deliver goods on time.
➢ 4: Forcing workers to work overtime may demotivate them.

Important Math’s:
1. Jan 24 Q-5
2. Jan 23 Q-4
3. May 23 Q-3
4. May 22 Q-1
5. May 20 Q-1

Page | 25
 Variance Analysis:
Formula:
Labour Variance
1) Labour rate variance= (𝐴𝑐𝑡𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 − 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑟𝑎𝑡𝑒) 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑟

2) Labour effeiciency variance = (𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑟 − 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑟) 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑟𝑎𝑡𝑒

3) Total Labour Variance = (𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑟 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝑟𝑎𝑡𝑒) −

(𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑟 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑟𝑎𝑡𝑒)

Material Variance

1) Material Usage Variance = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑈𝑠𝑎𝑔𝑒 − 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑢𝑠𝑎𝑔𝑒)𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑

𝑝𝑟𝑖𝑐𝑒

2) Material Price Variance = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 − 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑝𝑟𝑖𝑐𝑒) 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙

𝑈𝑠𝑎𝑔𝑒

3) Total Material Variance = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑢𝑠𝑎𝑔𝑒 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙

𝑝𝑟𝑖𝑐𝑒) − (𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑢𝑠𝑢𝑎𝑔𝑒 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑝𝑟𝑖𝑐𝑒)

Page | 26
 Important Theories:
1: Explain the stages in establishing a standard costing system?
1: The management should obtain a product specifications and collect
standard quantities for material and labour. Standard prices for material
should be obtained by consulting with buyers and suppliers.
2: Standard rate of labour can be obtained by consulting with human
resources department or trade and labour union.
3: Standard fixed overheads can also be obtained by consulting with finance
department.
2: Evaluate the usefulness of a standard costing system to a business?
Advantages
➢ It allows performance to be compared with standard.
➢ It enables management to analyses variances and take necessary action
to control cost.
➢ It also helps management to eliminate waste such as idle time,
inefficiency.
➢ It allows management by exception to analyses large variances and take
necessary action.
Disadvantages
➢ It requires expert and professional skills.
➢ It is time consuming and costly to prepare.
➢ Inaccurate standard could be misleading.
➢ It is difficult to set standards.
3: If there is an adverse variance this must be bad for the business?
Advantages
➢ If this is a cost variance then expenditure has been more than
expected.
➢ If budget is realistic, this is bad.
➢ Workers not working as hard as they could.
➢ Workers being paid more than a market rate wage.
➢ Inefficiency machinery and materials being wasted.
Page | 27
 ➢ Paying more than the market rate for materials.

Disadvantages
➢ Budget set may be unrealistic and actually the business has performed
well.
➢ There may be positive aspect to the adverse variance.
➢ Adverse variance may be due to production being greater than
expected, which is good for the business
4: Management by exception?
Advantages
➢ Management by exception establish a standard costing system into a
business.
➢ They only deals with large variances therefore helps to establish control
measures.
➢ Saves management time as there is no need to take any action if there
is no variance.
➢ Owners don't need to worry about time or variances for material,
labour variances.
➢ Cost may well be reduced this variances and adverse.
➢ Management by exception helps to control any wastage idle time,
inefficiency etc.
Disadvantages
➢ Standard could be poor.
➢ Management may have to spent large time or collecting information.
➢ They usually deals with large variances therefore small variances are
usually ignored.
➢ When there are no variances, management by exception may not take
actions to further improved performance.
➢ Information obtain by arrange by them could be used by rival
companies.

Page | 28
5: Evaluation:
Labour efficiency variance:
Favourable: Good performance by the production department by completing the
job quickly, skilled worker.
Adverse: indicate that the worker are not working fast enough to meet the target,
could improve training.
Labour rate variance:
Favourable: workers have been paid at a lower rate than expected, or due to a
good performance by HR department.
Adverse: due to poor performance by the HR department or a strong union or
overtime rate is higher.
Material usage variance:
Favourable: due to wastage has been less than expected, workers work their job
properly.
Adverse: due to wastage by labour, lack of training of staff or use poor quality
material.
Material price variance:
Favourable: there was still material in inventory at a lower price or the company
purchase from alternative suppliers, negotiate better prices or pay quickly to
ensure discounts.
Adverse: poor performance from the purchasing department or external factors
outside the company’s control eg: world price.
Important Math’s:
1. Jan 17 Q-2
2. Jan 24 Q-4
3. May 23 Q-4
4. May 22 Q-6
5. May 19 Q-3
6. Oct 19 Q-5
Page | 29
CH- Ratios
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
1) Gross profit margin = 𝑥100
𝑆𝑎𝑙𝑒𝑠

𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟

2) Net Profit Margin = 𝑥100
𝑆𝑎𝑙𝑒𝑠

𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥

3) Return on Capital Employed = 𝑥100
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡
4) Current Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡−𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

5) Acid test Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑙𝑏𝑙𝑒𝑠
6) Accounts Receivables collection period = 𝑥365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
7) Accounts Payables collection Period = 𝑥365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒

𝐷𝑒𝑏𝑡
8) Gearing Ratio= 𝑥100
𝐷𝑒𝑏𝑡+𝐸𝑞𝑢𝑖𝑡𝑦

9) Earnings Per Ordinary Share (E.P.S)=

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐴𝑛𝑑 𝑇𝑎𝑥 − 𝐼𝑟𝑟𝑒𝑑𝑒𝑒𝑚𝑎𝑏𝑙𝑒 𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒

𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

10) Price Earnings Ratio =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
 𝑇𝑜𝑡𝑎𝑙 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
11) Dividend per Ordinary Share =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒

12) Dividend Cover =

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐴𝑛𝑑 𝑇𝑎𝑥−𝐼𝑟𝑟𝑒𝑑𝑒𝑒𝑚𝑎𝑏𝑙𝑒 𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
𝑇𝑜𝑡𝑎𝑙 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

13) Dividend Yield = 𝑥100
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝑐𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠
14) Inventory Turnover=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦+𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

** Average Inventory=
2

**Capital employed = Equity + Non-current Liabilities

**Profit before interest & Tax = Profit for the year + Interest expenses +
Corporation Tax.
 Important Theories:
1: Evaluate how the business has performed as a business compared to the
industry average for the financial year?
Advantages
➢ The price earnings ratio of the business is more than the industry
average.
➢ The dividend per share of the business is also more than the industry
average.
➢ The dividend yield is better from the point of view of shareholders.
➢ The dividend cover is also good from the point of view of
shareholders.
Disadvantages
➢ The return on capital employed is lower than the industry average.
➢ The earnings per share is also lower than the industry average.
➢ The dividend cover is lower which means the company is not
retaining much profit for future.
➢ The market price of the share is lower than the nominal value which
means investment in this company will be risky.

2: Stating how the highly gearing ratio could be improved?

➢ Issuing more ordinary share.
➢ Redeeming preference share.
➢ Paying of bank loan.
➢ Redeeming debentures.

3: State 2 ways in which each of the ratios could be improved for the business?
1: Earnings per share: 1: By increasing profit.
2: By redeeming ordinary share.
2: Price-earnings ratio: 1: By raising share price.
2: Increasing profit.
3: Dividend cover: 1: By increasing annual profit.
2: By paying lower dividend.

Page | 31
 4: Dividend yield: 1: By paying higher dividend.
2: After earning higher profit.
4: A director has stated at a board meeting ''liquidity is more important than
profitability''?
Advantages profitability
➢ Without profit a business will not continue in the long run.
➢ Lower profit may fall the share price and investors lose their
confidence.
➢ Lower profit may result in firm unable to attract investors.
➢ If short term liquidity problem, many sources of a business are
available as source of finance.
Advantages liquidity
➢ Liquidity is the ability of a business to pay short term debts such as
wages, electricity etc.
➢ Unable to pay debts may result in closure of the business.
➢ Unable to pay debts may mean the business is unable to operate.
➢ If liquidity position is not in a good stated which may give a bad
impression of the business.

Important Math’s:
1. Jan 22 Q-1
2. Jan 24 Q-1
3. May 19 Q-2
4. Jan 23 Q-6
5. Jan 17 Q-4
6. Oct 18 Q-6

Page | 32
Ch- Investment Appraisal
Tools for evaluating a project
 Net present value (NPV)
 Payback period
 Average rate of return
𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑓𝑙𝑜𝑤 − 𝑇𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑓𝑙𝑜𝑤
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑡𝑢𝑟𝑛 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑡𝑢𝑟𝑛
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 = 𝑥100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 /𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

 Internal Rate of return (IRR)

𝑁𝐿
𝐼𝑅𝑅 = 𝐿 + 𝑙 𝑥(𝐻 − 𝐿)
𝑁 − 𝑁𝐻

𝑊ℎ𝑒𝑟𝑒 𝐿 = 𝑙𝑜𝑤𝑒𝑟 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡

𝐻 = 𝐻𝑖𝑔ℎ𝑒𝑟 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑁 𝐿 = 𝑁𝑃𝑉 𝑎𝑡 𝑙𝑜𝑤𝑒𝑟 𝑟𝑎𝑡𝑒
𝑁 𝐻 = 𝑁𝑃𝑉 𝑎𝑡 ℎ𝑖𝑔ℎ𝑒𝑟 𝑟𝑎𝑡𝑒

 Weighted Average Cost of Capital (WACC)

𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑊𝐴𝐶𝐶 = 𝑥100
𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

 Profitability Index (PI)

𝑁𝑒𝑡 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒
𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝐼𝑛𝑑𝑒𝑥 = 𝑥100 𝑂𝑅
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑚𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

𝑁𝑒𝑡 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒

𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝐼𝑛𝑑𝑒𝑥 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡+𝑁𝑒𝑡 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒
 Important Theories:
1: Evaluate the project for the company using the calculations made and
considering any other relevant factors?
Advantages
➢ The project will give a profit of £XXX.
➢ The project has a pay-back period of years. and months which is
acceptable.
➢ The project has an accounting rate of return of % which is more then
the company policy of % therefore it is worthy to invest.
➢ Completing the project will improve the company’s image and
reputation.
➢ Completing the project successfully may also give opportunities for
future projects or increased more customers.
➢ Winning the bid from the government will improve relationship and
business opportunities for the business.
Disadvantages
➢ It is only a prediction actual figures may be even worse.
➢ A return of only % may not be enough for a large investment of £.
➢ The director of the business should also consider other projects
before investing on it.
➢ The calculation made doesn't include discontinuing factor and net
present value.
➢ The initial investment of£ would be difficult to arrange.
➢ As there is no other yardstick/benchmark to compare it is not clear
whether the business will improve or not.

2: Evaluate the Internal rate of return?

The internal rate of return of discounted cash flow analysis is to calculate
the exact discounted cash flow rate of return that the project is expected to
achieve.
If an investment has a positive net present value it means it is earning more
than the cost of capital. If the net present value is negative, it is earning less

Page | 34
 than the cost of capital. This means that if the net present value is zero it
will be earning exactly the cost of capital
On the other hand the percentage return on the investment must be
the rate of discount or cost of capital at which the net present value equals
zero This rate of return is called Internal rate of return or discounted cash
flow yield and if it is higher than the target rate of return the project is
financial worthy to invest. Therefore, if the Internal rate of return is greater
than the cost of capital the project should be accepted.
3: Profitability Index
Definition
The profitability index is an index that attempts to identify the relationship
between the costs and benefits of a proposed project through the use of a
ratio calculated below. As the value of the profitability index increases, so
does the financial attractiveness of the proposed project.
Profitability Index Method Formula:
Use the following formula where PV = the present value of the future cash
flows in question. Or = (NPV + Initial investment) ÷ Initial Investment: As
one would expect, the NPV stands for the Net Present Value of the initial
investment

Important Math’s:
1. Jan 24 Q-2
2. Jan 20 Q-1
3. May 22 Q-2
4. Jan 19 Q-3
5. Jan 23 Q-3

Page | 35
 Cash flow statement:
Format:
Specimen Format of Cash Flow Statement (Indirect Method) According to IAS 7:

Details £ £
Cash flow from operating Activities:
Profit before taxation XXX
Adjustments for:
Depreciation XXX
Amortisation of Intangible assets XXX
Interest expense XXX
Interest received (XXX)
Profit on disposal (XXX)
Loss on disposal XXX
Operating profit before working capital changes XXX
Increase/Decrease in inventories XXX/(XXX)
Increase/Decrease in trade receivables XXX/(XXX)
Increase/Decrease in other receivables XXX/(XXX)
Increase/Decrease in trade payables XXX/(XXX)
Increase/Decrease in other payables XXX/(XXX)
Cash generated from operation XXX
Interest paid (XXX)
Tax paid (XXX)
Net cash flow from operating activities XXX/ (XXX)
Cash flow from Investing Activities:
Purchase of tangible/Intangible non-current asset (XXX)
Proceed from the sale of non-current asset XXX
Purchase of shares in another companies XXX
Interest received XXX
Dividend received XXX
Net cash flow from investing activities XXX/ (XXX)
Cash flow from Financing Activities:
Proceed from the issue of Ordinary/Preference XXX
Share
Debenture / Loan Repaid (XXX)
Loan/Debenture Issue XXX
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 Redemption of Ordinary/Preference Share (XXX)
Ordinary Dividend paid : Interim & Final (XXX)
Preference dividend paid (XXX)
Net Cash flow from Financing Activities XXX/ (XXX)
Increase / Decrease in cash (XXX)/XXX
Cash & Cash equivalent at beginning of the year XXX
Cash & Cash equivalent at the end of the year XXX

Important Theories:
1: Importance of cash flow statement?
Advantages
➢ It is a mandatory requirement of financial statement.
➢ It shows the cash inflows and outflows of a business from beginning
and till the end of the financial year.
➢ It enables a business to calculate net cash flow from different
activities, such as operating, investing, and financing.
➢ It is of use for existing and potential investors such as: decision
making.
➢ Users of financial statement such as stake holders can compare cash
flow statement of different years, to sell the performance and
position of the business.
➢ It is prepared according to IAS-7 (International Accounting Standards-
7) which means complies accounting standards.
Disadvantages
➢ It requires professional skills to prepare which is costly.
➢ It is time consuming and therefore it increases administrative work.
➢ Failure to prepare cash flow statement may produce inaccurate financial
statement.
➢ A decrease in cash or bank balance may lead to a fall in market price of shares.
➢ Investors may not be willing to invest in those business who are not financially
solvent.
➢ It doesn't consider depreciation into account.

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2: Evaluate the raising of capital for business by issuing a debenture instead of
taking out a bank loan?
For Bank loan
➢ Bank loan interest is allowable for tax.
➢ May be quicker to arrange bank loan rather than debentures.
➢ Issue of shares may dilute ownership and control.
➢ Bank may bring expertise and experience to company.
➢ Bank loan could be repaid more than a year.
➢ Bank loan interest may be lower than debentures interest.
For Debentures
➢ Debentures interest are usually lower then what a company pay a
dividend.
➢ Over the life of the debentures no capital repayment is required.
➢ Debentures interest is allowed against tax therefore less corporation
tax need to be paid.
➢ Selling debentures will not dilute ownership and control.
➢ Fees are likely to below compare to the issue of shares.
➢ May be quicker to issue then ordinary share.

Important Math’s:
1. May 23 Q-1
2. Jan 24 Q-3
3. May 21 Q-3
4. Jan 22 Q-5
5. Jan 19 Q-6

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 Budget:
Important Theories:
1: Access the value of cash budgets as a decision making aid?
Advantages
➢ The cash budgets will show the sales receipts will be sufficient to
cover all outgoings.
➢ It is an organized may to calculate or estimate cash to be received or
spend.
➢ It will show the availability of cash at the end of each month.
➢ It will also indicate the months were there will be cash shortfall.
Disadvantages
➢ It is only an estimation actual figures may be even worse.
➢ The quality of information is important as poor quality of information
may produce inaccurate budget.
➢ Potential investors may be unwilling to invest in those business who
have negative cash flow and net losses.
➢ Budget are usually prepared from the past events therefore doesn't
considers future changes such as changes in demand.
➢ It is time consuming and costly to prepare.
Conclusion: Overall cash budget is an excellent tool to assets the future of a
business.
2: Evaluate the use of Flexible budgets to managers?
Advantages
➢ It allows good decision making as it can be compared with the most
recent figures.
➢ It's save time and money. eg: actions can only be taken when there is
variance
➢ It allows a business to choose the optimum level which would give
the maximum profit.
➢ Meeting the targets would motivate the work force.

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Disadvantages
➢ It is time consuming to prepare as it is done frequently.
➢ It is only an estimation actual figures may be even worse.
➢ Some variances may be misleading which may result in-appropriate.
➢ It may also influence in taking wrong decision.
Conclusion: It is a budget which is prepared frequently, considering the
most recent information and the variance from the previous budget. It
sometimes takes inflation and recession. Therefore it is a useful tools for a
business.
3: Evaluate the usefulness of Budgeting?
Advantages
➢ It helps to make decision.
➢ It can be compared with actual figures.
➢ Budget can act as a method of control.
➢ Budgets can be compared and variance can be analysed which can
help to take actions.
Disadvantages
➢ Inaccurate information may produce incorrect budget.
➢ It is only an estimation therefore it took precision.
➢ It is time consuming to prepare therefore it is costly.
➢ Budgets are usually prepared from past record therefore doesn't
considers future changes such as changes in demand.

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4: Importance of Flexible Budget:

Advantages of Flexible Budget:

The most significant advantage of flexible budgets over static ones is the ability to
adapt to changes in the real world. Nothing ever stays the same, and management
has the responsibility to respond to unanticipated adverse conditions and to take
advantage of unexpected opportunities.
1. Range Of Activity: Generally, static budget is prepared for single level only, but
flexible budget is prepared for a range of activity.
2. Easy Comparison: Flexible budget helps to compare actual output, cost or
performance with standard or budgeted output, cost and performance.
3. Cost Control: It can be used as an effective tool for cost control because flexible
budget reacts to adverse situation.

4. Knowledge Based: Static budget is based upon assumptions, judgment,

estimates and approximations. But flexible budget is prepared on the basis of
knowledge and principles.
5. Flexibility: It is more flexible than static budget. It can be modified or changed
according to the market situation and environment.

6. Performance Measurement: Flexible budget helps to measure managerial and

operational performance

Disadvantages of Flexible Budget:

1: Flexed budgets assume linearity of costs and, therefore, take no account of, for
example discounts for bulk purchases of materials. ‘Labour’ costs are unlikely to
behave in a linear fashion unless a piecework scheme is in operation.

2: Such budgets also rely on the assumption of continuity when costs may actually
behave in a stepped or discontinues manner.

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 3: The method of determining the fixed and variable elements of costs is often
arbitrary and hence the flexed cost bear little relation to the correct budgeted
cost for the flexed level of activity.

4: Although flexed budgets tend to maintain fixed costs at the same level
whatever the level of output/sales, very often fixed costs are actually fixed only
over a relevant output range.

Important Math’s:
1. May 23 Q-2
2. Jan 22 Q-4
3. Jan 16 Q-5
4. May 19 Q-1
5. Jan 17 Q-7

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Information Communication Technology
Advantages and Disadvantages of ICT?

Advantages
➢ It saves time and therefore money, compare to preparing accounts by
hand.
➢ Making one entry allows the computer to automatically make the
second of the double entry, updating the ledger account and the trial
balance.
➢ Many accounting packages are available and these can produce sales
invoices, discounts, aged list of debtors, payroll, cash flow, tax
returns, creates final accounts etc.
➢ Automatic updating ensures accounts and books are always up-to-
date. eg: money owed to supplier on the purchase ledger control
account.
➢ EPOS (Electronic point of sales) ensures a perpetual up-to-date stock
control system for stock levels, stock valuation and re-ordering.
➢ Some packages are widely used, which allows auditors to be familiar
with their use making audits more through and meaningful.
➢ Spreadsheets can also be used for budgets, job costing etc.

Disadvantages
➢ Financial cost of hardware, software, staff training, running cost,
maintenance etc.
➢ If staffs are not trained or are unskilled they can make errors.
➢ Security risks are specially if the public can access the system to make
purchases online and also from staff who may have to be restricted to
certain areas.
➢ Computer crashes, freezes which may result in a loss of information.
➢ Computers keep updating frequently therefore losses its value
quickly.

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