ACCA Paper F9 - The ExP Group

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ACCA Paper F9 MO

Financial Management DE

For exams in 2015

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ExPress Notes

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ACCA F9 Financial Management

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1.

Financial Management Function

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2.

Financial Management Environment

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3.

Working Capital Management

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4.

Investment Appraisal

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Business Finance

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Cost of Capital

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Business Valuations

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About ExPress Notes

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Contents

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© 2015 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

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ExPress Notes ACCA F9 Financial Management

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START About ExPress Notes

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We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief.

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First, we would like to draw your attention to the terms and conditions of usage. It’s a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy.

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You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering.

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WARNING! These notes are not designed to cover everything in the syllabus!

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They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system

On ExP classroom courses, we provide people with the following learning materials:

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The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.

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ExP classroom course students will also have access to various online support materials, including: The unique ExP & Me e-portal, which amongst other things allows “view again” of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database

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Everybody in the World has free access to ACCA’s own database of past exam questions, answers, syllabus, study guide and examiner’s commentaries on past sittings. This can be an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.

How to get the most from these ExPress notes

ExP recommended course notes, or ExPedite notes

Prior to study, e.g. deciding which optional papers to take

Skim through the ExPress notes to get a feel for what’s in the syllabus, the “size” of the paper and how much it appeals to you.

Don’t use yet

At the start of the learning phase

Work through each chapter of the ExPress notes in detail before you then work through your course notes.

Work through in detail. Review each chapter after class at least once.

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Don’t make any annotations on the ExPress notes at this stage.

ACCA online past exams

Don’t use yet

Have a quick look at the two most recent real ACCA exam papers to get a feel for examiner’s style.

W AT Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.

Nobody passes an exam by what they have studied – we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this.

Don’t use at this stage.

Try to do at least one past exam question on the learning phase for each major chapter.

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Don’t try to feel that you have to understand everything – just get an idea for what you are about to study.

ExP recommended exam kit

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These ExPress notes

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Your stage in study for each paper

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For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper.

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These ExPress notes

ExP recommended course notes, or ExPedite notes

ExP recommended exam kit

ACCA online past exams

Practice phase

Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident you’ll remember without reviewing them.

Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if there’s something in an answer that you don’t understand.

This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Don’t be tempted to fall into “passive” revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time.

Download the two most recent real exam questions and answers.

At the door of the exam room before you go in.

Read quickly through the full set of ExPress notes, focusing on areas you’ve highlighted, key workings, approaches to exam questions, etc.

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Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.

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The night before the real exam

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Your stage in study for each paper

Read through the technical articles written by the examiner. Read through the two most recent examiner’s reports in detail. Read through some other older ones. Try to see if there are any recurring criticisms he or she makes. You must avoid these!

Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still don’t understand. It’s too late now.

Don’t touch it!

Do a final review of the two most recent examiner’s reports for the paper you will be taking tomorrow.

Avoid looking at them in detail, especially if the notes are very big. It will scare you.

Leave at home.

Leave at home.


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ExPress Notes

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ACCA F9 Financial Management

Notes

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Our ExPress notes fit into our portfolio of materials as follows:

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Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses

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Provide a base understanding of the most important areas of the syllabus only.

Notes

Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.

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Notes

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To maximise your chances of success in the exam we recommend you visit www.theexpgroup.com where you will be able to access additional free resources to help you in your studies.

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START About The ExP Group

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Born with a desire to be the leading supplier of business training services, the ExP Group delivers courses through either one of its permanent centres or onsite at a variety of locations around the world. Our clients range from multinational household corporate names, through local companies to individuals furthering themselves through studying for one of the various professional exams or professional development courses.

As well as courses for ACCA and other professional qualifications, our portfolio of

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expertise covers all areas of financial training ranging from introductory financial awareness courses for non-financial staff to high level corporate finance and banking courses for senior executives.

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Our expert team has worked with many different audiences around the world ranging from graduate recruits through to senior board level positions.

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Full details about us can be found at www.theexpgroup.com and for any specific enquiries please contact us at [email protected].

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Financial Management Function

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Chapter 1

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KEY KNOWLEDGE The Nature and Purpose of Financial Management

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The main purpose of financial strategy is to ensure that financial resources are available to the organization in support of its overall corporate objectives, which include financial objectives.

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Management accounting is a set of tools and disciplines measuring corporate performance and to facilitate decision-making; it is designed and implemented in coordination with the company’s strategy.

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Financial accounting is concerned with maintaining the records of the transactions of the firm and preparing financial statements for the benefit of shareholders (and other external audiences) in conformity with established accounting standards.

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KEY KNOWLEDGE Financial Objectives and the Relationship with Corporate Strategy

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In pursuing its financial objectives, the firm must ensure that those objectives are congruent – i.e. consistent – with its overall corporate strategy.

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KEY KNOWLEDGE Stakeholders and Impact on Corporate Objectives Stakeholder groups

Shareholders: As owners of the business, they rank supreme, as reflected in US/UK models of corporate governance;

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Lenders: Important if the business relies heavily on providers of loan capital (banks, bondholders);

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Directors: The executive directors or senior management of the business are central since they have “hands-on” power and can serve their own interests (giving rise to agency risk);

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Employees: Often referred to as a company’s “most valuable asset”; they must be motivated and adequately compensated;

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Customers: No customers, no business! How influential they are or how carefully management needs to listen to their concerns depends on the type of business activity and the competitive environment;

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Suppliers: Good and reliable suppliers can be critical to corporate success;

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Government: They have two major interests: (a) they receive revenue via taxes and (b) benefit indirectly when firms create employment. Environmental and other regulatory concerns are also within the scope of the government’s interest;

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Public: The general public, its opinions and ability to exert pressure through lobby groups are all relevant factor for businesses that pollute, are involved in nuclear power, or carry out other activities that may be controversial (e.g. abortion clinics).

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Conflicting stakeholder interests

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Conflicting interests can exist between various stakeholder groups.

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Management must examine the degrees of stakeholder influence and actively manage the relationship with relevant stakeholders.

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Agency theory

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Agency theory addresses the risk that management will not act in the best interest of the shareholders, but will make decisions that will serve its own interests.

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Examples of self-serving management behavior could include: (a) artificially boosting corporate profits in the short-term in order to earn bonuses; (b) paying too much to acquire another company for reasons of prestige or in order to “build empires”; (c) rejecting opportunities, such as takeover bids, or restructuring initiatives, that might jeopardize their positions (an orientation to maintaining the “status quo”).

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Influencing managerial behavior

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In order to cause managers to behave in a way consistent with stakeholder interests, rewards and bonus schemes need to be carefully designed. This can be seen as the “internal” dimension to corporate governance. The other dimension -- “external” – comes in the form of regulation.

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Scope of strategic performance measures in private sector

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Shareholder value measurements focus on creation of shareholder value as fundamental aim of profit oriented companies.

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Long-term wealth maximization is not always consistent with the “artificial” inflation of profits in the short-term. If a company stops investing, for example, it can boost its shortterm profitability, but this may come at the expense of the company’s medium- to long-term competitiveness.

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The following are some of the financial measures typically used by companies to measure performance.

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Return on Investment (ROI/ROCE) (Accounting PBIT / Accounting Capital Employed) * 100%

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Accounting Capital Employed = Total Assets – Current Liabilities = Total Non-Current Assets, net + Working Capital

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Disadvantage: ROI/ROCE increases as investment centre’s fixed assets grow older, thus a ROI improvement over time (or a better ROI compared to another division) may be partly attributable to the age of the assets used.

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Consequently, gross value of fixed assets may be used in measuring performance based on ROI.

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Earnings Per Share (EPS)

Net income less any preferred dividends divided by the number of shares outstanding.

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Net income divided by shareholders’ equity.

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Return on Equity

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KEY KNOWLEDGE Financial and Other Objectives in Non-for-Profit Organisations Profit and Not-for-profit organisations

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Profit-seeking organizations exist ultimately to create wealth for their owners.

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Non-profit (or not-for-profit) organizations are created to accomplish a pre-defined mission, such as the delivery of a service; they are expected to do so in an economical manner.

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Chapter 2

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Financial Management Environment

The economic environment for business

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The general economic environment, and in particular the influence of governments – through its monetary and fiscal policies – has a far-reaching impact on most businesses.

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The impact of macro-economics Businesses must also take macro-economic factors into account: Projected level of market demand for goods and services in the economy;

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In a recovery phase, how government policies are likely to be adjusted with respect to: (a) Monetary policy: Effect on interest rates, exchange rates and inflation, (the latter may eventually increase with economic recovery);

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(b) Labor policy: If labor markets tighten, how fast will restrictions (imposed on foreign labor, for example) be relaxed? (c) Fiscal policy: Tax increases (both personal and corporate);


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(d) Trade policy: to what degree is any protectionism likely to stay in place?

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Again, actively keeping up with reading on these issues will be the best way to prepare for this section of the exam.

The nature and role of financial markets and institutions

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Financial markets and institutions have achieved such a degree of global integration that shocks in one part – as shown with the onset of the financial crisis in 2008 – can have systematic implications across all markets.

Stock markets

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A stock exchange is an organized and regulated market place which permits:

Companies to raise capital through the issuance of new shares or debentures (collectively known as securities); the proceeds of such issuances go to the company issuing them -- this is called the “primary market”; and

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Investors to buy and sell already-issued securities – called the “secondary market”.

How stock markets operate

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Traditionally, the operation of a stock market is accomplished through an auction system where prices are publicly posted after trades are executed; “specialists” on the trading floor have the role of creating a market in shares that are listed on the exchange: they are expected to provide two-way prices, i.e. to quote buy and sell prices, thus ensuring liquidity to the market. The New York Stock Exchange operates in this way.

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Outside the US, electronic trading systems have become more typical, in which traders interact not personally but by computer and telephone.

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START The Big Picture

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Working Capital Management

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Chapter 3

1. The nature, elements and importance of working capital This is a core function of management which has day-to-day implications.

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Working capital definition: Current assets – Current liabilities

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Cash Inventory Receivables Payables

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This is an accounting definition. The discussion and analysis of working capital management focuses on the “operating” elements of current assets and liabilities:

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2. Management of inventories, accounts receivables, accounts payable and cash

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These elements are linked through the Cash conversion cycle, also known as the Cash Operating Cycle.

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Raw materials received

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Receipt of cash

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Payment to supplier

Conversion into finished goods

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Sale of goods

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The above diagram shows the operating cash flows for a typical manufacturing company converting raw materials into finished goods for sale. The company needs its own cash to pay the supplier and can only recover this from the sale of the finished goods.

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The cash invested in inventories and receivables represents a cost to the company. This is most directly obvious in opportunity cost terms: the cash could be earning interest, reducing interest-bearing debt, or ultimately find its way into shareholders’ pockets as a dividend payment.

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The presence of payables indicates that cash payments (outflows) are delayed; this is beneficial to the company as long as it is not overdue on its payments, as late payment could lead to penalties or damage to the company’s reputation (creditworthiness).

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Managing the individual parts of working capital means managing the “whole picture” in an optimal way; doing this well can give a firm a significant competitive advantage over its competitors.

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Liquidity ratios

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Ratio Analysis

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The relationship between current assets and current liabilities is used as a measure of liquidity in the firm:

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Current ratio = Current assets Current liabilities

Quick ratio = Current assets - Inventories Current liabilities

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Turnover ratios

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(1) Trade debtors (receivables)

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Trade Debtors x 365 Sales

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(2) Inventory turnover

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Inventory x 365 COGS

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(3) Trade creditors (payables)

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Trade Payables x 365 COGS

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Economic Order Quantity (EOQ)

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Within a company, there is a natural temptation to accumulate buffer stocks (raw materials and semi-finished goods) so that production is never interrupted.

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Similarly, in order to avoid stock-outs, sales managers will insist on maintaining a plentiful level of finished goods. All of this costs money. The EOQ is a method which seeks to minimize the costs associated with holding inventory.

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Q = order quantity

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To determine the total costs, the following data is required:

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D = quantity of product demanded annually

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P = purchase cost for one unit C = fixed cost per order (not incl. the purchase price)

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H = cost of holding one unit for one year

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