AIMS
To
develop knowledge and understanding of the way
organisations finance their operations, plan and
control cash flows, optimise their use of working
capital and allocate resources to capital expenditure
projects.
OBJECTIVES
On
completion of this paper, candidates should be
able to:
- describe
the cash flow cycle
- describe
sources of short, medium and long-term finance
- prepare
cash budgets and cash flow forecasts
- explain
the principles of effective working capital
management
- calculate
working capital requirements
- describe
credit management methods and procedures
- describe
cash management methods and procedures
- evaluate
capital expenditure proposals.
POSITION
OF THE PAPER IN THE OVERALL SYLLABUS
Paper
10 will build on the knowledge of the main receipts
and payments that an organisation has and the
methods of recording these receipts and payments,
developed in the Introductory and Intermediate
Level papers.
There
are also links with other Advanced Level papers,
particularly:
- budgets,
forecasts, time series analysis and index
numbers in Paper 7, Planning,
Control and Performance Management
- interpretation
of limited company financial statements in
Paper 6, Drafting
Financial Statements.
However,
there will not be a presumption of any prior knowledge
from the other Advanced Level papers.
SYLLABUS
CONTENT
1
Cash receipts and payments
(a)
Types of receipts and payments
(b)
Cash budgets and forecasts
(i)
form and structure of cash budgets and forecasts
(ii)
basic statistical techniques for estimating future
trends: moving averages and allowance for inflation
(iii)
modelling of sensitivity of elements to change
(e.g. price, wage rate changes)
(iv)
preparation of cash budgets, including adjustments
for timing
(v)
preparation of simple cleared funds forecasts
(vi) budgets and forecasts as mechanisms of monitoring
and control
(c)
Accounting for cash
- (i)
relationship of cash flow accounting to accruals
accounting
- (ii)
profits and cash flow
(d)
Cash management
- (i)
role of the treasury function
- (ii)
cash handling procedures
2
Cash balances
(a)
Surplus funds
(i)
types of investments
(ii)
investment risk and exposure
(iii)
short and long-term investment management
(b)
Liquidity management
(i)
optimum liquidity levels
(ii)
liquidity ratios and the working capital cycle
(iii)
comparison with cash budgets and forecasts
(iv)
legal relationship between bank and customer
(v)
statutory and other regulations relating to cash
management of public sector organisations
3
Working capital management
(a)
Importance of working capital management
(b)
Working capital cycle
(c)
Stock control
(i)
stock ordering and storing policies
(ii)
economic order quantity
(iii)
impact of lean manufacturing and just-in-time
(d)
Creditor control
(i)
creditor monitoring
(ii)
payment procedures
(iii)
risks of excess credit
4
Credit granting
(a)
Information sources
(i)
internal sources of credit information
(ii)
external sources of credit information
(iii)
interpretation of credit information
(b)
Credit terms
(i)
credit policies
(ii)
individual customers
(c)
Debtor records
(i)
content of records
(ii)
data protection issues
(d)
Legal issues
(i)
basic contract
(ii)
terms and conditions of contracts relating to
the granting of credit
5
Debt collection
(a)
Monitoring of debtors
(i)
internal sources
(ii)
external sources
(b)
Collection of debts
(i)
methods of collection
(ii)
factoring arrangements
(iii)
invoice discounting
(iv)
debt insurance
(c)
Dealing with slow-paying debtors
(i)
identification of potential problems
(ii)
methods of contacting debtors
(iii)
legal procedures for recovery of debts and breach
of contract
(iv)
bankruptcy and insolvency of debtors
6
Sources of finance
(a)
Overview of the economic environment
(i)
banking system and money market in the UK
(ii)
relationship between financial institutions
(iii)
impact of government and central bank monetary
policy
(b)
Sources of finance
Discussion
of the relative risks and costs of various types
of finance and their suitability to different
circumstances and organisations (large and small,
listed and unlisted), including:
(i)
balance of short / medium / long-term finance
(ii)
the nature and importance of internally generated
funds
(iii)
capital markets
(iv)
bank finance (short, medium and long-term)
(v)
hire purchase, finance and operating leases
(vi)
trade credit
(vii)
government sources
(viii)
problems of small and medium-sized enterprise
financing
(ix)
venture capital and other financial sources particularly
suited to the small and medium sized enterprises
(c)
Calculations for relative gearing and EPS under
different financial structures
7
Capital investments
(a)
Nature of capital investment budgeting
(b)
Capital investment procedures (authorisation and
monitoring)
(c)
Non-discounted cash flow methods of project appraisal
(i)
accounting rate of return
(ii)
payback
(d)
Discounted cash flow techniques
(i)
time value of money
(ii)
compounding and discounting
(iii)
relevant cash flows
(iv)
net present value
(v)
internal rate of return
(vi)
discounted payback
EXCLUDED
TOPICS
The
following topics are specifically excluded from
Paper 10:
- detailed
knowledge of bankruptcy and insolvency legislation
- double
entry for bad and doubtful debts
- NPV
calculations for tax, inflation and working
capital.
KEY
AREAS OF THE SYLLABUS
The
key topic areas are:
- sources
of finance
- cash
budgets
- working
capital management
- credit
management
- capital
investment appraisal.
APPROACH
TO EXAMINING THE SYLLABUS
The
examination is a three-hour written paper.
No.
of marks
One
case study: 40
Three
calculation and essay questions (20 marks each):
60
Total
100
The
case study will always consist of a mixture of
calculation and written elements, and may cover
more than one part of the syllabus.
The
case study will always include one or more key
areas of the syllabus may also include areas that
are not highlighted as key.
The
shorter questions may include scenarios that are
simpler than those given in the case study question.
RELEVANT
TEXTS
There
are a number of sources from which you can obtain
a series of materials written for the ACCA CAT
examinations. These are listed below:
Wider
reading is also desirable, especially regular
study of relevant articles in ACCA’s student
accountant magazine.
STUDY
SESSIONS
1
The nature of cash and cash flows
(a)
Define cash, cash flow and funds
(b)
Explain the importance of cash flow management
and its impact on liquidity and company survival
2
The cash flow cycle and accounting for cash
(a)
Outline the various sources and applications of
finance
(i)
regular revenue receipts and payments
(ii)
capital receipts and payments
(iii)
drawings or dividends and disbursements
(iv)
exceptional receipts and payments
(b)
Distinguish between the cash flow patterns of
different types of organisations
(c)
Explain the importance of cash flow for sustainable
growth of such organisations
(d)
Define "cash accounting" and "accruals
accounting"
(e)
Explain the difference between cash accounting
and accruals accounting
(f)
Reconcile cash flow to profit
3
Overview of financial markets
(a)
Explain the structure of a banking system
(b)
Explain the role and functions of various types
of banks (including central and commercial banks)
(c)
Identify the major financial intermediaries
(d)
Outline the general roles of financial intermediaries
(e)
Outline the key benefits of financial intermediation
(f)
Outline the relationships between financial institutions
(g)
Explain the basic nature of a money market
4
Cash in the economy
(a)
Define what is meant by "money supply"
in an economic context
(b)
Outline how money supply may be controlled in
an economy
(c)
Outline the basic relationship between the demand
for money and interest rates
(d)
Describe how the application of different monetary
policies can affect the economy (for example,
effect on inflation)
5
Types of finance and short-term finance
(a)
Discuss the relative merits and limitations of
short/ medium/long term finance
(b)
Outline the key factors that should be considered
in deciding the mix of short/medium/long term
finance in an organisation
(c)
Discuss the nature and importance of internally
generated funds
(d)
Outline the major sources of government funds
e.g. grants, regional and national schemes
(e)
Discuss situations where it may be appropriate
to raise short-term finance
(f)
Outline the different forms of bank loans and
overdrafts, their terms and conditions
(g)
Explain the legal relationship between bank and
customer
(h)
Explain the nature of trade credit and its use
as a short-term source of finance
(i)
Evaluate the risks associated with increasing
the amount of short-term finance in an organisation
6
Medium-term finance
(a)
Discuss situations where it may be appropriate
to raise medium-term finance
(b)
Describe the main features of hire purchase, finance
leases and operating leases
(c)
Compare and contrast the main features of hire
purchase, finance leases and operating leases
(NB
– lease or buy decisions are not examinable)
7
Long-term finance 1
(a)
Discuss situations where it may be appropriate
to raise long-term finance
(b)
Outline the key factors to be considered when
deciding on an appropriate source of long term
finance (debt or equity)
(c)
Calculate relative gearing and earnings per share
under different financial structures
8
Long-term finance 2
(a)
Describe the way in which a stock market (both
main and second tier) operates
(b)
Discuss ways in which a company may obtain a stock
market listing
(c)
Explain the advantages and disadvantages of having
a stock market listing
(d)
Outline the features of different types of securities
(equity, preference, debt, convertible debt, warrants)
9
Sources of finance for small and medium sized
enterprises 1
(a)
Outline the requirements for finance of SMEs (purpose,
how much, how long)
(b)
Describe the nature of the financing problem for
SMEs in terms of the funding gap, maturity gap
and inadequate security
(c)
Discuss the contribution of lack of information
in SMEs to help explain the problems of SME financing
(d)
Describe and discuss the response of government
agencies and financial institutions to the SME
financing problem
10
Sources of finance for small and medium sized
enterprises 2
(a)
Describe the main features of venture capital
(b)
Describe the key areas of concern to venture capitalists
when evaluating an application for funding
(c)
Explain how the use of such measures as trade
creditors, hire purchase, factoring and second
tier listing can help to ease the financial problems
of SMEs
(d)
Outline appropriate sources of finance for SMEs
11
Inflation
(a)
Define inflation
(b)
Explain the nature of inflation
(c)
Explain briefly the interaction between inflation
and interest rates
(d)
Evaluate and demonstrate the impact of inflation
on cash flow and profits (note calculations are
required)
(e)
Explain how organisations may protect themselves
against the effects of inflation
(f)
Discuss the possible consequences of inflation
in an economy
(g)
Discuss the effects of inflation on organisations
in general
12
Investing surplus funds 1
(a)
Define what is meant by "surplus funds"
(b)
Explain how surplus funds may arise
(c)
Discuss the objectives to be considered in the
investment of surplus funds
(d)
Define the risk-return trade-off
(e)
Outline what is meant by risk of default, systematic
risk and unsystematic risk
(f)
Outline how the Baumol cash management model works
(note – calculations are not required)
(g)
Discuss the limitations of the Baumol cash management
model
(h)
Suggest appropriate liquidity levels for a range
of different organisations
13
Investing surplus funds 2
(a)
Explain the purpose and main features of:
(i)
bank deposits
(ii)
certificates of deposit
(iii)
government stocks
(iv)
local authority short term loans
(v)
bills of exchange
(b)
Explain the purpose and main features of:
(i)
debentures
(ii)
unsecured loan stocks
(iii)
convertibles
(iv)
corporate preference shares (cumulative, participating,
convertible, redeemable)
(v)
permanent interest bearing securities
14
Review of sessions 1 – 13
15
Cash management
(a)
Outline the basic treasury functions
(b)
Discuss the advantages and disadvantages of a
centralised treasury function
(c)
Discuss the advantages and disadvantages of centralised
cash control
(d)
Describe cash handling procedures
(e)
Outline the issues to be considered when attempting
to hold optimal cash balances
(f)
Outline the statutory and the other regulations
relating to the management of cash balances in
public sector organisations.
16
& 17 Cash Budgets
(a)
Explain the objectives of a cash budget
(b)
Prepare a cash budget, including adjustments for
timing of receipts and payments
(c)
Discuss how cash budgets can be used as a mechanism
for monitoring and control
(d)
Carry out simple sensitivity analysis on a cash
budget or forecast
(e)
Apply basic statistical techniques for estimating
future trends: moving averages and allowance for
inflation
(f)
Prepare a simple cleared funds forecast
18
Capital budgeting
(a)
Discuss the importance of capital investment planning
and control
(b)
Outline the issues to consider and the steps involved
in the preparation of a capital expenditure budget
(c)
Define and distinguish between capital and revenue
expenditure
(d)
Compare and contrast investment in fixed assets
and investment in working capital
(e)
Describe capital investment procedures (authorisation
and monitoring)
(f)
Calculate the payback of a project and assess
its usefulness as a method of investment appraisal
(g)
Calculate accounting rate of return of a project
and assess its usefulness as a method of investment
appraisal
19
Financing concepts
(a)
Explain the differences between simple and compound
interest
(b)
Calculate future values
(c)
Discuss the concept of time value of money
(d)
Discuss the concept of discounting
(e)
Calculate present values, making use of present
value tables to establish discount factors
20
Capital investment decisions 1
(a)
Discuss the concept of relevant cash flows for
decision making
(b)
Identify and evaluate relevant cash flows for
individual investment decisions
(c)
Explain the concept of net present value and how
it can be used for project appraisal
(d)
Calculate net present value and interpret the
results
(Note:
NPV calculations will not include adjustments
for inflation, tax or working capital)
21
Capital investment decisions 2
(a)
Outline the concept of internal rate of return
and how it can be used for project appraisal
(b)
Calculate internal rate of return and interpret
the results
(c)
Discuss the relative merits of NPV and IRR, including
mutually exclusive projects and multiple yields
(d)
Explain the superiority of DCF methods over payback
and accounting rate of return
22
Working capital management
(a)
Define working capital
(b)
Explain why working capital management is important
(c)
Explain the relationship between cash flows and
the working capital cycle
(d)
Demonstrate the calculation of the working capital
cycle (also known as the cash operating cycle)
(e)
Outline the possible relationships between stock
levels and sales
(f)
Define and explain over-trading and over-capitalisation
(g)
Identify and calculate over-trading and over-capitalisation
financial indicators
23
Stock control
(a)
Discuss the key considerations when developing
a stock ordering and storage policy
(b)
Define and explain work in progress
(c)
Define economic order quantity (EOQ)
(d)
Apply the EOQ model
(e)
Discuss the effects of just-in-time on stock control
(Note:
Economic Batch Quantities, where all items in
a batch do not arrive simultaneously, will not
be examined)
24
Creditor control
(a)
Explain the role of creditors in the working capital
cycle
(b)
Explain the need to monitor creditors
(c)
Explain creditor control operations and the importance
of creditor management
(d)
Describe the various types and form of creditors
(e)
Describe the various creditor payment methods
and procedures (for example, direct debit, cheque)
(f)
Evaluate and demonstrate the issues involved with
early payment and settlement discounts
(g)
Identify the risks of taking increased credit
and buying under extended credit terms
25
Debtor control 1
(a)
Explain the role of debtors in the working capital
cycle
(b)
Explain the importance of credit management, including
the level of trade credit, the role of the credit
control function and the activities of the credit
control function
(c)
Explain the need to establish a credit policy
and outline the steps involved, including setting
maximum credit amounts
and periods and total credit levels
(d)
Explain the key categories that should be considered
when assessing the credit-worthiness of a customer
(e)
Outline the various internal sources of information
that may be used in assessing the credit-worthiness
of a customer
(f)
Outline the various external sources of information
that may be
used in assessing the credit-worthiness of a customer
(g)
Define and explain credit scoring
(h)
Identify possible reasons for rejecting an application
for credit
26
Debtor control 2
(a)
Outline how the financial statements of a customer
can be used to assess the credit-worthiness of
a customer
(b)
Identify and apply the common ratios that may
be used to analyse the financial statements of
a customer in order
to assess their credit-worthiness
(c)
Evaluate the usefulness and limitations of ratio
analysis in assessing credit-worthiness
27
Debtor control 3
(a)
Identify the main contents of debtors’ records
(b)
Identify the main data protection issues that
should be considered when dealing with debtors’
records
(c)
Describe the main internal sources that may be
used to monitor debtors (including aged debtor
analysis, average periods of credit, incidence
of bad and doubtful debts). Note
- you may be required to prepare an aged debtor
analysis
(d)
Describe the main external sources that may be
used to monitor debtors (including credit agencies,
industry sources, financial reports, press coverage)
(e)
Outline ways in which debtors could be encouraged
to pay promptly
28
Collection of debts
(a)
Identify the main methods used to identify potential
problems with debtors meeting their payment obligations
(b)
Outline the main techniques that may be used to
assist in the collection of overdue debts
(c)
Describe how factoring works and the main types
of service provided by factors
(d)
Define invoice discounting and outline how this
form of factoring works
29
Legal issues
(a)
Explain the key elements of a basic contract (offer,
acceptance, etc)
(b)
Briefly outline specific terms and conditions
that may be included in contracts with credit
customers (e.g. length of credit period, amount
of interest on late payments, retention of title)
(c)
Outline the basic legal procedures for the collection
of debts
30,
31, 32 Revision
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