ACF

Question 1

Role of Financial Institutions

Answer 1

Financial institutions offer business advice, financial planning, investment management, arrange
leases for non-current assets, insurance products, trade in shares and exchange currencies.

Question 2

Short term Finance Options

Answer 2

Cash management trusts; where small amounts from a range of investors are grouped and the
money invested in short-term money market securities. This product is usually offered through
merchant banks, banks and broking firms
* Money market; deposit on the short-term money market - such as commercial bills, bank bills
and promissory notes.
* Term deposits; deposits with a bank or financial institution.

Question 3

Long Term Finance Options

Answer 3

Shares; units of ownership interest in a corporation or financial asset that provide for an equal
distribution in any profits, if any are declared, in the form of dividends.
* Debentures; a type of debt instrument that is not secured by physical assets or collateral.
Debentures are backed only by the general creditworthiness and reputation of the issuer.
* Unsecured notes; a loan that is not secured by the issuer’s assets. Unsecured notes are similar
to debentures but offer a higher rate of return with less security than a debenture
* Trusts; a fiduciary relationship in which one party, known as a trustor, gives another party, the
trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.
* Term deposits; a fixed-term deposit held at a financial institution.

Question 4

Difference between management accounting + financial accounting

Answer 4

Financial accounting is the process of producing general purpose financial reports used by
parties external to the entity, such as shareholders, investors, lenders, suppliers, customers,
employees and government. Board of directors, stockholders, financial institutions and other
investors are the audience for financial accounting reports. Financial accounting presents a
specific period of time in the past and enables the audience to see how the company has
performed.
Whereas Management accounting is the process of producing reports and
providing financial information useful for decision-making purposes used by the managers of an enterprise in the day-to-day management of its trading operations. Reports will often be
detailed and frequent and compare actual performance with budget predictions

Question 5

Internal users

Answer 5

Internal users of accounting information are the managers of the firm who need information that
will assist them to plan, coordinate and control the business on a day-to-day basis and make
decisions that will maximise the profitability of the firm and ensure the security and integrity of
its assets. The information they need is some sort of profit statement and cash flow statement
at least monthly. They would also need information regarding the future such as capital
budgeting, CVP analysis and performance results.

Question 6

Product costs vs Period costs

Answer 6

• A product cost includes all those costs that are attributable to a product. For example direct
  materials used in the making of a surfboard. (Treated as an asset).
• Costs that are not product costs are period costs such as advertising. (Treated as an expense).

Question 7

2 Components of a master budget

Answer 7

• operating
• sales budget
• production budget
• cost of sales and inventory purchases
• expense budget
• financial
• budgeted balance sheet
• budgeted income statement
• cash budget
• capital expenditure budget

Question 8

Consequences of inadequate equity

Answer 8

lack of working capital to effectively carry out day-to-day trading operations
- insufficient non current assets, preventing the business from maximising profit
- inadequate returns to equity holders in times when the overall return on assets may fall
below the cost of borrowing
- liquidity problems caused by the need to maintain interest payments and repay loans
- a higher rate of interest required by the lender because of the increased risk

Question 9

NPV vs Payback method

Answer 9

Payback period method is the period of time it takes for the cash flows from an investment to
exceed the initial cost of the investment. The larger the payback period, the worse, as it
represents a larger amount of time for there to still be risk and cost the business. Contrary, the
smaller the payback period as it shows that the business will make a return on the expenditure
sooner with less risk.
* The Net Present Value method considers the time value of money, taking into account the
importance of cash flows rather than profit. A positive NPV result indicates that the investment
is acceptable, while a negative result indicated that it is not acceptable and should be rejected
as it creates a net loss to the business.