Scribd
Upload
72 views

Acca FM

ACCA FM TOOL

Uploaded by

Shafna Shamnas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
72 views

Acca FM

ACCA FM TOOL

Uploaded by

Shafna Shamnas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
You are on page 1/ 9
MISHHAL HAMZA PK ACCA FINANCIAL MANAGEMENT (FM) SEPTEMBER 2022 Kindly note that the content of this hand note is a summary of past ACCA exams and should be used in line with the lectures provided. The purpose of this note is to provide my students with an insight to write their examination properly. It isnot meant for any commercial purpose. This is not a substitute for the complete textbook. Please also refer materials from ACCA approved publishers for good results. MISHHAL HAMZA PK LAKSHYA - IIC Youtube ; Mishhal Hamza PK Instagram : mishhtagram FINANCIAL MANAGEMENT FUNCTION MISHHAL HAMZA PK FINANCIAL MANAGEMENT AND FINANCIAL OBJECTIVES Financial Management Financial management is concerned with the efficient acquisition and deployment of both short- and long-term financial resources, to ensure the objectives of the enterprise are achieved. It includes decisions like: i. Financing decisions ii, Investing decisions iii. Working capital decisions VED pa ke HA he - 7 iv. Dividend decisions These decisions are undertaken to achieve the primary objective of maximising the wealth of the shareholders. Financial objectives Financial targets may include targets for: earnings; earnings per share; dividend per share; gearing level; profit retention; operating profitability. Financial management objective Prot maxirisation Tiasiaation of ‘weal oF eculy shareholders Pamary objective) Marenance The usual assumption in financial Management for the private sector is that the primary financial objective of the company is to maximise shareholders EE Tera wealth. [Pope ni sig | ertunes contents Wealth of the shareholders is the dividend which they get and share price appreciation. It can be calculated as: (D + P1- Po)/PO Where, PO is thé share price at the beginning of the period P1 is the share price-at the end of period D is the dividend paid Profit maximisation vs Wealth maximisation (a) Profits can be manipulated to some extent by choices of accounting policies. Shareholder wealth cannot be. (b) Profit does not take account of risk. Risk faced by the investor is considered while making investment decisions. (c) Profits does not consider the size of the investment. (d) Profit is a measure of short-term performance. Wealth maximisation concept is long term as growth can happen only in long term. MISHHAL HAMZA PK Non-Financial objectives A company may have important non-financial objectives which must be satisfied in order to ensure the continuing participation of all stakeholders. It includes welfare of employees and management, responsibility towards customers, suppliers and other stakeholders etc Stakeholders These are individuals or groups who are affected by the activities of an organisation. They may be classified into: * Internal - Employees, Managers * Connected - Shareholders, Debtors, Creditors, Customers, Competitors, Suppliers * External - Government, Public, Pressure groups Objectives of stakeholder groups The various groups of stakeholders in a firm will have different goals which will depend in part on the particular situation of the enterprise. (a) Equity shareholders - are the providers of the risk capital of a company. Usually their goal will be to maximise the wealth which they have as a'result of the ownership of the shares in the company. (b) Trade payables (creditors) - They have the objective of being paid the full amount due by the date agreed and may sometimes be prepared to accept later payment to have a continuous trading relationship (c) Long-term payables (creditors) - Their objective is of receiving payments of interest and capital on the loan by the due date for the repayments. (d) Employees - They usually want to maximise their rewards paid to them in salaries and benefits, according to the particular skills and the rewards available in alternative employment, Most employees will also want continuity of employment. (ec) Government =" Government agencies impinge on the firm's activities in different ways including through taxation of the firm's profits, the provision of grants, health and safety legislation, training initiatives, and so on. (f) Management - Management has the objective of maximising its own rewards. Directors, and the managers to whom they delegate responsibilities, must manage the company for the benefit of shareholders. The objective of reward maximisation might conflict with the exercise of this duty. Measuring the achievement of corporate objectives Ratios can be grouped into the following four categories. i. Profitability and return ii. Debt and gearing Liquidity iv. Working capital turnover MISHHAL HAMZA PK v. Shareholders’ investment ratios Profitability and Return 1. ROCE = PBIT / Capital employed x 100 Capital employed Total asset- Current Liability Equity + Debt ROCE component ratios 2. Gross Profit ratio = Gross Profit / Sales x 100 3. Net Profit ratio = PBIT / Sales x 100 4, Asset Turnover Ratio = Sales / Capital Employed ROCE = Net Profit Ratio x Asset Turnover ratio 5. ROE = PFTY/Equity x 100 Gearing Ratios 1. Debt Equity ratio = Debt / Equity * 100 2. Debt to Capital Employed © = Debt/Debt + Equity x 100 3. Interest coverage ratio ='PBIT/ Interest charge Liquidity Ratio 1. Current ratio = Current asset / Current Liability 2. Quick ratio = Quick asset / Current Liability Quick asset = Current assets - Inventory Working capital turnover ratios 1. Inventory turnover period = Avg inventory / COS x 365 2. Inventory turnover ratio = COS / Avg inventory 3. Receivables collection period = Avg receivables / Credit sales x 365 4. Payables payment period = Avg payables / Credit purchase x 365 5. Cash operating cycle = Receivables days + Inventory days - Payable days MISHHAL HAMZA PK Shareholders’ investment ratios 1. Dividend yield = DPS / MPS x 100 2. EPS = PFTY / WANS 3. PE ratio = MPS / EPS 4. EY = EPS / MPS The role of management and goal congruence Agency theory sccounissie10 Agency relationships o¢cur when one party, the principal, employs another party, the agent, to perform a task on their behalf, In particular, directors (agents) PERFORM act on behalf of shareholders (principals). TASK Encouraging the achievement of stakeholder objectives It is argued that management will only make optimal decisions if they are monitored and appropriate incentives are given. There canvarise a situation where, management puts their interest before the interest of stakeholders. This is known as agency problem. It can be solved by Providing the management with 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: «be clearly defined, impossible to manipulate and easy to monitor « link rewards to changes in shareholder wealth ‘© match managers” time horizons to shareholders’ time horizons © encourage managers to adopt the same attitudes to risk as shareholders. Common types of reward schemes include: 2 remuneration linked to: - minimum profit levels - economic value added (EVA) - revenue growth 5 executive share option schemes (ESOP). Corporate governance codes The director/shareholder conflict has also been addressed by the requirements of a number of corporate governance codes. MISHHAL HAMZA PK The following key areas relate to this conflict. © Non-executive directors (NEDs) - important presence on the board - must give obligation to spend sufficient time with the company - should be independent. © Executive directors - separation of chairman and chief executive officer (CEO) - submit for re-election - clear disclosure of financial rewards - outnumbered by the NEDs. Not for profit organization The primary objective of not-for-profit organisations (NFPs or NPOs) is not to make money but to benefit prescribed groups of people. As with any organisation, NFPs will use a mixture of financial and nonfinancial objectives. However, with \NFPs the non-financial ‘ objectives. are often more important and = more complex because of the following. The primary objective of many NFP organisations will be the effective provision of a service, not the creation of profit. This has implications for reporting of results. ‘SOCIAL ORGANIZATIONS COMMUNITY ORGANIZATIONS © 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. Not for profit. and public sector organisations have their own objectives, generally concerned with achieving specified objectives effectively and efficiently. Value for money can be defined as getting the best possible combination of services from the least resources, which means maximising the benefits for the lowest possible cost. This is Usually accepted as requiring the application of economy, effectiveness and efficiency (sometimes known as the 3Es). Economy: Minimising the costs of inputs required to achieve a defined level of output. Efficiency: Ratio of outputs to inputs - achieving a high level of output in relation to the resources put in (input driven) or providing a particular level of service at reasonable input cost (output driven) Effectiveness: Whether outputs are achieved that match the predetermined objectives MISHHAL HAMZA PK At. Ashareholder purchased 1,000 shares in ABC Co on 1 January at a market price of $2.40 per share. On 31 December the shares had an ex-div market value of $2.92 per share. The dividend paid during the period was $0.31 per share. What is the total shareholder return and what are the elements of total shareholder return? A2. The share price of XYZ plc at 1 January 2015 was $5.80 per share. During the year a dividend of $0.30 per share was paid, and the share price at the end of the year was $6.00. Calculate the total shareholder return over the year A3. Chelsea is a public company. Its most recent financial statements are shown below: ‘STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH 20Xt 20X0 $'000 $1000 Revenue 25,500 17,250 Cost of sales (14,800) (10,350) Gross profit 10,700 6,900 Distribution costs (2,700) (1,850) ‘Administrative expenses (2,100) (1,450) Finance costs (650) (100) Profit before taxation 5,250 3,500 Income tax expense 2,250) (1,000) Profit for the year 3,000 2,500 STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH 20X1 20x0 $000 $'000 $000 $'000 Non-current assets Property, plant and equipment 9,500 5,400 Intangibles 6,200 it 15,700 5,400 Current assets Inventory 3,600 1,800 Trade receivables 2,400 4,400 Bank nil 4,000 Non-current assets held for sale 2,000 8,000 ail 200 Total assets 23,700 12,600 Equity and liabilities Equity Equity shares of $1 each 5,000 5,000 Retained earnings 4500 2.250 9,500 7,250 Non-current liabilities 5% loan notes 2,000 2,000 8% loan notes 7,000 nil Current liabilities Bank overdraft 200 nil Trade payables 2,800 2,150 Current tax payable 2,200 1,200 Total equity and liabilities MISHHAL HAMZA PK Additional information: (i) A disappointed shareholder has observed that although revenue during the year has increased by 48%, profit for the year has only increased by 20%. Required: Comment on the performance (including addressing the shareholder's observation) and financial position of Chelsea for the year ended 31 March 20X1. Aa. A school changes its stationery suppliers to save money, and increases class sizes. As a result the latest set of exern results are lower than previous years. How has the school performed in terms of the value for money framework? {Well on economy and efficiency, but at the cost of effectiveness Well on ef iency, but not well with economy or effectiveness Well on afficiancy and elasticity, badly on e Welton effectiveness iveness

You might also like