BTEC Level 3 Personal and Business Finance.pptx

UNIT 3
PERSONAL AND BUSINESS FINANCE
By:
Oguchi Martins Egbujor FHEA FCMI MBA

Video
Questions and Answers
https://www.bing.com/videos/riverview/relatedvideo?q=btec+level+3+
answers+to+past+paper+unit+3+25+may+2017&mid=483C9856D306B0
867C17483C9856D306B0867C17&FORM=VIRE

The Aim
To study the purpose and
importance of personal
and business finance;
learners will develop the
skills and knowledge
needed to understand,
analyse and prepare
Financial Information.

Learning Aims
A: Understand the importance of managing personal
finance
B: Explore the personal finance sector
C: Understand the purpose of accounting
D: Select and evaluate different sources of business
finance
E: Break-even and cash flow forecasts
F: Complete statements of comprehensive income and
financial position and evaluate a business's performance

A1: Functions
and Role of
Money
This is to understand the functions
and the role of money. The ability
to handle money received, and to
control money paid, is a
fundamental requirement for
personal and business success.
This success relies on
understanding what ‘money’ is.

The Functions of Money
Unit of
account
Means of
exchange
Store of
value
Legal
tender.

The Role of
Money
Role of money is affected and influenced by a
number of factors:
• Personal attitudes towards risk and reward, borrowing,
spending and saving
• Life stages (childhood, adolescence, young adult, middle age,
old age), key features of each stage, financial needs and
implications at each stage
• Culture, including religious and ethical beliefs
• Life events can vary the personal life cycle from individual to
individual
• External influences/trends and the financial-related effects
• Interest rates, cost of borrowing versus reward of saving.

Functions and
Role of Money
1. https://www.stlouisfed.org/educatio
n/economic-lowdown-podcast-
series/episode-9-functions-of-money
2. https://pressbooks-
dev.oer.hawaii.edu/principlesofecono
mics/chapter/27-1-defining-money-
by-its-functions/
3. https://corporatefinanceinstitute.co
m/resources/economics/functions-
of-money/
4. Video on Money:
https://www.youtube.com/watch?v=
kPE4NRakYR0

Planning
Expenditure
Planning expenditure, common principles to be
considered in planning personal finances:
• To avoid getting into debt
• To control costs
• Avoid legal action and/or repossession
• Remain solvent
• Maintain a good credit rating
• Avoid bankruptcy
• To manage money to fund purchases
• Generate income and savings
• Set financial targets and goals
• Provide insurance against loss or illness
• Counter the effects of inflation

A2: Different Ways To Pay
The use of money as a payment method,
advantages and disadvantages of:
• Cash
• Debit card
• Credit card
• Cheque
• Electronic transfer
• Direct debit
• Standing order
• Pre-paid cards
• Contactless cards
• Charge cards
• Store cards
• Mobile banking
• Banker’s Automated Clearing Services (BACS)
• Faster Payments Service (FPS)
• Clearing House Automated Payment System
(CHAPS).

Standing Order
Standing Orders are recurring scheduled payments
for the same amount, with a frequency you choose,
which are often used to pay for things such as rent,
mortgage or any other fixed regular payment into
savings, pensions or investment accounts. They can
be executed to make automated payments either
daily, weekly, monthly, or on another fixed
schedule of your choice.
https://www.moneyhub.com/blogposts/2021/3/25
/standing-orders-one-of-the-many-api-features-
available-with-moneyhub

Banker’s Automated
Clearing Services (BACS)
BACS ensures that financial transactions flow
from one bank account to another throughout
the UK. The system allows account holders to
make payments and manage their bank accounts
in different ways. BACS is frequently used by
individuals and businesses alike. BACS services
essentially streamline business-to-business
transactions, especially for repeat customers and
regularly scheduled bulk payments.
https://www.moderntreasury.com/learn/what-
is-bacs

Methods of
Payment
https://omni-
pay.com/reads/payments/different-payment-
schemes-uk/
Vidoe:
https://www.bing.com/videos/riverview/related
video?&q=video%2fmethods+of+payment+in+u
k&&mid=D245532E9D8C39E31F5FD245532E9D
8C39E31F5F&&FORM=VRDGAR
Types of Borrowing Video:
https://www.bing.com/videos/riverview/related
video?&q=video%2ftypes+of+borrowing&&mid
=FEB751F79267AEB9770BFEB751F79267AEB97
70B&&FORM=VRDGAR

A3: Current
Accounts
Different types,
features,
advantages and
disadvantages,
different
services
offered:
• Standard
• Packaged, premium
• Basic
• Student.

A4: Managing Personal Finance
Suitability of different financial products and services against individual
needs

A4:
Managing
Personal
Finance
Suitability of different financial
products and services against
individual needs.
Different types of borrowing,
features, advantages and
disadvantages:
• Overdraft
• Personal loans
• Hire purchase
• Mortgages
• Credit cards
• Payday loans

A4:
Managing
Personal
Finance
Different types of saving and
investment features, advantages
and disadvantages:
• Individual savings accounts
(ISAs)
• Deposit and savings accounts
• Premium bonds
• Bonds and gilts
• Shares
• Pensions.
Risks and rewards of saving
versus investment.
Different insurance products:
• Products (car, home and
contents, life assurance
and insurance, travel, pet,
health)
• Different types of
insurance policy for each
product
• Features of different types
of insurance
• Advantages and
disadvantages of different
types and features.

Different Types of Borrowing
• Overdraft
• Personal Loans
• Hire Purchase
• Mortgages
• Credit Cards
• Payday Loans

Different Types of Saving and Investment
• Individual Savings Account (ISAs)
• Deposit and Savings Accounts
• Premium Bonds
• Bonds and Gilts
• Shares
• Pensions
Risks and Rewards of savings versus Investments

Individual Savings Account ISA)
There are two types of Individual Savings Accounts:
1. Cash ISA is a tax-free savings account that anyone can save up to
£20,000 tax-free each tax year. As with regular savings accounts,
there are both fixed-rate and instant or easy-access options
available. Anyone is eligible once you turn 16 years of age.
2. Stocks and Shares ISA are tax-free investment accounts, anyone
can save up to £20,000 tax-free each tax year and your money is
invested in the stock market. Depending on the account, you have
various options for investing and managing your ISA.
https://www.moneysupermarket.com/savings/isas-guide/

Deposit and Savings Account
Savings accounts and fixed deposit accounts are two such platforms
that allow investors to earn fixed returns easily despite the instability of
market situations:
1. Savings accounts provide easy access to funds and earn interest,
while fixed deposit accounts offer higher interest rates but require a
fixed-term commitment.
2. Fixed deposit accounts impose penalties for early withdrawals,
whereas savings accounts allow for more flexibility.
3. Savings accounts promote regular transactions and money
management, while fixed deposit accounts encourage long-term
saving and financial discipline

Deposit and Savings Account
In a savings bank account, an account holder is permitted to deposit
any sum of money at any time. The rate of interest in a savings account
is as low as 4-6%. In a fixed deposit account, an account holder is
allowed to deposit a fixed sum of money during a fixed period. It has a
high rate of interest.
https://askanydifference.com/difference-between-savings-account-
and-fixed-deposit-account-with-table/

Premium Bond
National Saving and Investment Premium Bonds are a savings account
anyone can put money into (and take out when you want), where the
interest paid is decided by a monthly prize draw. You buy £1 bond, and
each has an equal chance of winning, so the more you buy, the more
your chances improve.
https://www.moneysavingexpert.com/savings/premium-bonds/

Bond and Gilt
Bonds are investments that you
can use as an alternative to
savings accounts or shares or as
part of a balanced portfolio of
investments. Bonds carry more
risk than a straightforward cash
savings account but are not as
risky as stock-market investments
like stocks and shares (also known
as equities).
Gilts are fixed interest products
issued by the government and
people tend to buy and hold them
for the long term. Corporate
bonds are similarly designed
products but issued by companies
wanting to borrow money, usually
to expand.

Bond
A bond is like an IOU. It is issued by a bank, government or company and
pays a fixed interest to the person who holds it.
1. Anyone can have a savings bond, also known as a fixed interest savings
account, which runs for a set amount of time.
2. Anyone can buy government bonds (gilts), which are fixed interest
products issued by the government.
3. Anyone can buy company bonds, known as corporate bonds, which are
issued by companies. Corporate bonds are the most-risky type of bond,
because they are linked to the health and finances of a single company.
4. Bonds get credit rated, based on their issuer's underlying credit-
worthiness. The better the credit rating (higher the grade of the bond)
the lower the risk and the lower the interest rate paid.

Gilt
Gilts are a form of bond or IOU issued by governments wanting to raise
money, and they are known as gilts:
1. Corporate bonds are issued by corporations and gilts are bonds
issued specifically by the government.
2. There are different types of gilts, but the majority are conventional
gilts. These normally pay a fixed coupon twice a year and mature on
a set, fixed date in the future.
https://www.uswitch.com/investments/bonds-and-gilts/#

Bond and Gilt Payments
Gilts typically pay coupons twice a year, whereas corporate bonds are
more likely to pay coupons annually. They both offer a source of fixed
income and investment options; the opportunity for capital growth is
modest:
1. Different companies issue bonds with different levels of risk. When
you are looking at the best bond rates and bond yields, or
comparing bond fund options, you need to bear in mind that the
higher the rate of interest, the higher the potential risk

Pension
A workplace pension is a way of saving for your retirement that is
arranged by your employer:
1. Some workplace pensions are called “Occupational Pension, works
Pension, Company or Work-based Pension”.
2. A percentage of your pay is put into the pension scheme
automatically every payday.
3. In most cases, your employer also adds money into the pension
scheme for you. You may also get tax relief from the government.
https://www.gov.uk/workplace-pensions

Different Insurance Products
• Products
• Types of Insurance Policies
• Features of Different Types of Insurance
• Advantages and Disadvantages of different types and features

Insurance
Insurance is a contract, represented by a policy, in which a policyholder
receives financial protection or reimbursement against losses from an
insurance company. The company pools clients’ risks to make payments
more affordable for the insured. There are different types of insurance,
such as car, house, healthcare, life and others.
https://www.investopedia.com/terms/i/insurance.asp#

Insurance Products
• Car
• Home and Contents
• Life Assurance and Insurance
• Travel
• Pet
• Health
• Business

Assurance
Assurance refers to financial coverage that provides remuneration for
an event that is certain to happen. Assurance is similar to insurance,
with the terms often used interchangeably. However, insurance refers
to coverage over a limited time, whereas assurance applies to
persistent coverage for extended periods or until death. Assurance may
also apply to validation services provided by accountants and other
professionals.
https://www.investopedia.com/terms/a/assurance.asp

Life Assurance
Life Assurance is referred to as “Whole life insurance” that provides
coverage throughout the life of the insured person. In addition to
paying a tax-free death benefit, whole life insurance also contains a
savings component in which cash value may accumulate.
https://www.investopedia.com/articles/personal-finance/082114/how-
cash-value-builds-life-insurance-policy.asp

Types of Insurance Policies
• Life insurance will help provide financially for your survivors.
• Health insurance protects you from catastrophic bills in case of a
serious accident or illness.
• Long-term disability protects you from an unexpected loss of income.
• Auto insurance prevents you from bearing the financial burden of an
expensive accident.
• https://www.investopedia.com/financial-edge/0212/4-types-of-
insurance-everyone-needs.aspx

Comprehensive Insurance
Comprehensive insurance is a type of automobile insurance that covers
damage to your car from causes other than a collision. Comprehensive
insurance will cover your vehicle if destroyed by a tornado, dented by a
run-in with a deer, spray-painted by a vandal, damaged by a break-in,
or crushed by a collapsing garage, among other causes.
https://www.investopedia.com/terms/c/comprehensive-insurance.asp

Class Activities
1. Give two advantages to the consumer of
having a basic current account
2. Give two ways a consumer can maintain a
good credit rating
3. Identify two features of a standing order as a
method of payment
4. Explain two advantages to the consumer of
using mobile banking
5. Discuss the personal attitudes of people in
young adulthood towards borrowing and
saving money
You must answer all questions in your notebook
using pen and paper.

B: Explore
The Personal
Finance
Sector B1:
Features of financial
institutions
Types of organisations and their
advantages and disadvantages:
• Bank of England
• Banks
• Building societies
• Credit unions
• National Savings and
investments
• Insurance companies
• Pension companies
• Pawnbrokers
• Payday loans.

Bank of England
Bank of England was founded in 1694; the Bank
of England is the central bank of the United
Kingdom. Sometimes known as the ‘Old Lady’ of
Threadneedle Street, the Bank’s mission is to
promote the good of the people of the United
Kingdom by maintaining monetary and financial
stability.
https://www.bankofengland.co.uk/about

National Savings and
Investment Bank
The aim of National Savings and Investment
(NS&I) Bank is to attract funds from individual
savers in the UK for the purpose of funding the
government's deficit. NS&I attracts savers
through offering savings products with tax-free
elements on some products, and a 100%
guarantee from HM Treasury on all deposits
https://www.nsandi.com/

B2: Communicating
With Customers
Methods of interacting with customers, advantages and
disadvantages:
• Branch
• Online banking
• Telephone banking
• Mobile banking
• Postal banking

B3: Consumer
Protection In
Relation To
Personal
Finance
Function, role and
responsibilities of:
• Financial Conduct Authority (FCA)
• Financial Ombudsmen Service
(FOS)
• Financial Services Compensation
Scheme (FSCS)
• Legislation – consumer credit.

The Consumer
Rights Act 2015
The Consumer Rights Act 2015 ensures
that consumers can buy, and businesses
can sell to them with confidence. On the
rare occasions when problems arise,
disputes can now be sorted out more
quickly and cheaply. Alternative Dispute
Resolution, for example through an
Ombudsman, offers a quicker and
cheaper way of resolving disputes than
going through the courts. The changes
are relevant to all consumers and every
business which sells directly to them. UK
consumers spend £90 billion a month.
https://www.citizensadvice.org.uk/the-
consumer-rights-act-2015/

The Consumer
Protection Act
1987
The Consumer Protection Act 1987
consumers the right to claim
compensation against the producer of a
defective product if it has caused
damage, death or personal injury. The act
also contains a strict liability test for
defective products in UK Law making the
producer of that product automatically
liable for any damage caused.
https://www.which.co.uk/consumer-
rights/regulation/consumer-protection-
act-1987-a5xTL3w6L9OI#consumer-
protection-act-1987

Financial Conduct
Authority (FCA)
Financial services play a critical role in the lives of
everyone in the UK, from junior ISAs to pensions,
direct debits to credit cards, loans to investments.
The Financial Conduct Authority (FCA) is an
independent public body funded entirely by the fees
charged to regulated firms. The role is defined by
the Financial Services and Markets Act 2000 (FSMA)
and they are accountable to the Treasury, which is
responsible for the UK’s financial system, and to
Parliament. FCA protects the consumer, the integrity
of financial market system, and promotes effective
competition.
https://www.fca.org.uk/about/what-we-do/the-fca

Financial
Ombudsmen
Services
The Financial Ombudsman Service is a free and
easy-to-use service that settles complaints
between consumers and businesses that provide
financial services. We resolve disputes fairly and
impartially and have the power to put things
right regarding the following:
• Bank accounts, payments and cards
• Payment protection insurance (PPI)
• Home, car, travel and other types of insurance
• Loans and other credit, like car finance
• Debt collection and repayment problems
• Mortgages
• Financial advice, investments and pensions
https://www.financial-ombudsman.org.uk/who-
we-are

Financial
Services
Compensation
Scheme (fscs)
FSCS protects customers of financial services firms that have
failed. If the company you have been dealing with has gone bust
and cannot pay claims against it, we can step in to pay
compensation. It is completely free to claim compensation direct
with us. The following are the key facts about fscs:
1. FSCS was set up in 2001 under the Financial Services and
Markets Act 2000.
2. FSCS is independent of the government and financial
services industry.
3. FCSC can pay compensation thanks to levies that
authorised financial services firms pay.
4. In 2022/23 we paid out £403m in compensation to 67,908
customers of failed firms.
5. Where possible and cost-effective, FSCS makes recoveries
from failed firms to help offset the levies financial services
firms pay. Since the 2015/16 financial year, the have
recovered more than £310m.
https://www.fscs.org.uk/about-us/

B4: Information,
Guidance and
Advice
Function, role and responsibilities,
advantages and disadvantages of:
• Citizens Advice
• Independent financial advisor
(IFA)
• Price comparison websites
• Debt counsellors
• Individual Voluntary
Arrangements (IVAs)
• Bankruptcy.

Class Activities
1. Identify two advantages of using hire
purchase as a source of finance
2. Identify four functions of money and
discuss it to the understanding of your
audience
3. Name two financial institutions and
explain the benefits of their products
4. What are the duties and responsibilities of
the financial ombudsmen?
5. Explore the benefits of debit and credit
cards, and explain their advantages and
disadvantages as methods of payment
6. What are the benefits of mobile banking
(refer to your bank)?
Present evidence-based answers!!!

C: Understand The Purpose of Accounting
C1: Purpose
of accounting
C2: Types of
income
C3: Types of
expenditure

C1: Purpose of Accounting
Recording transactions.
Management of
business (planning,
monitoring and
controlling).
Compliance (preventing
fraud, compliance with
law and regulations).
Measuring
performance.
Control – assisting with
the prevention of fraud,
trade receivables and
trade payables.

Recording
Transactions
Keeping business records accurately and up-
to-date is very important for the smooth
running of a business. The business owner
or whosoever responsible for recording
business transactions must record all the
money coming into the business (sales and
other income) and all the money going out
of the business (expenses). Recording
transactions is necessary to monitor
financial performance, and to report profit
and loss to HM Revenue and Customs.
https://www.gov.uk/running-a-limited-
company/company-and-accounting-records

Accounting
Transactions
• Sale in cash to a customer
• Sale on credit to a customer
• Receive cash in payment of
an invoice owed by a
customer
• Purchase fixed assets from a
supplier
• Record the depreciation of a
fixed asset over time
• Purchase consumable
supplies from a supplier
• Investment in another
business
• Investment in marketable
securities
• Engaging in a hedge to
mitigate the effects of an
unfavourable price change
• Borrow funds from a
lender
• Issue a dividend to
investors
• Sale of assets to a third
party

What Is Accounting
The process of consolidating financial information
to make it clear and understandable for all
stakeholders and shareholders. Accounting is a
term that describes the process of consolidating
financial information to make it clear and
understandable for all stakeholders and
shareholders. The main goal of accounting is to
record and report a company’s financial
transactions, financial performance, and cash
flows.
https://corporatefinanceinstitute.com/resources/a
ccounting/accounting/

The Purpose of
Accounting
The purpose of accounting is to accumulate and
report on financial information about the
performance, financial position, and cash flows of
a business. This information is then used to reach
decisions about how to manage the business, or
invest in it, or lend money to it.
https://www.accountingtools.com/articles/what-
is-the-purpose-of-accounting.html#

Accounting
Records
Accounting records are the original source
documents, journal entries, and ledgers that
describe the accounting transactions of a
business. Accounting records support the
production of financial statements. They are
to be retained for a number of years, so that
outside entities can inspect them and verify
that the financial statements derived from
them are correct. Auditors and taxing
authorities are the entities most likely to
inspect accounting records.
https://www.accountingtools.com/articles/a
ccounting-records

The Importance of
Accounting
Accounting is important as it keeps a
systematic record of the organization’s
financial information. Up-to-date records
help users compare current financial
information to historical data. With full,
consistent, and accurate records, it enables
users to assess the performance of a
company over a period of time.
Video on the Purpose of Accounting:
https://www.youtube.com/watch?v=kuoA6l
7--oQ

Two Types of
Accounting
1. Financial Accounting
involves the preparation of
accurate financial statements.
The focus of financial
accounting is to measure the
performance of a business as
accurately as possible. While
financial statements are for
external use, they may also be
for internal management use
to help make decisions.
2. Managerial Accounting
analyzes the information
gathered from financial
accounting. It refers to the
process of preparing reports
about business operations.
The reports serve to assist
the management team in
making strategic and tactical
business decisions.
https://corporatefinanceinsti
tute.com/resources/accounti
ng/accounting/

Management
and Control
A manager is someone who is responsible for the
planning, monitoring and controlling of the
resources of the business which they are responsible
for. Understanding the business’s account will
enable the manager to make informed decisions and
to plan for the future. Management of a business
involves careful co-ordination of resources:
• Staff
• Materials
• Stock
• Money

Measuring
Financial
Performance
Without
recording
financial
transactions,
it would be
difficult, if not
impossible to
know if the
business was
making a
profit or a
loss, or
whether or
not the
business was
owed money
or in debt to
others. There
are indicators
of measuring
financial
performance
as below:
Gross profit
Net profit
Profit and Loss Account
Value owed to the business
Value owned by the business
Balance sheet

Purpose of
Accounting
• Record income and expenditure
• Ensure payments are made and bills are paid
• To plan and monitor the budget, and control finance
• To measure business performance
• Comply with legal objectives
1. https://www.bing.com/videos/search?q=what+is+the+p
urpose+of+accounting+youtube
2. https://www.bing.com/videos/riverview/relatedvideo?&
q=what+is+the+purpose+of+accounting+youtube&&mid
=248462D75743F7FBE251248462D75743F7FBE251&&F
ORM=VRDGAR

Key Financial
Terms
Profit
Loss
Gross profit
Net profit
Sales revenue
Capital income
Fixed assets
Assets
Depreciation
Share capital and shares

C2: Types of Income
Capital Income
Loan
Mortgages
Shares
Owner’s capital
Debentures.
Revenue Income
• Cash sales
• Credit sales
• Rent received
• Commission received
• Interest received
• Discount received.

Types of Income
Capital Income
Capital Income is income that comes
from capital, which is to say, comes
from wealth itself, rather than any
specific production or direct work.
Examples are stock dividends or any
sort of capital gains, as well as
income an owner gets from a
business that he owns but not from
the work he does there.
https://www.smartcapitalmind.com/
what-is-capital-income.htm
Revenue Income
Revenue is the total amount of
income generated by the sale of
goods or services related to the
company's primary operations.
Income, or net income, is a
company's total earnings or profit.
When investors and analysts speak
of a company's income, they're
actually referring to net income or
the profit for the company.
https://www.investopedia.com/ask/
answers/122214/what-difference-
between-revenue-and-income.asp#

Debenture
A debenture is a loan agreement in writing
between a borrower and a lender that is
registered at Companies House. It gives the
lender security over the borrower's assets.
Typically, a debenture is used by a bank, factoring
company or invoice discounter to take security for
their loans.
https://legalvision.co.uk/corporations/debenture/

Debentures
Debenture
A debenture is a type of bond or other
debt instrument that is unsecured by
collateral. Since debentures have no
collateral backing, they must rely on the
creditworthiness and reputation of the
issuer for support. Both corporations and
governments frequently issue debentures
to raise capital or funds.
https://www.investopedia.com/terms/d/d
ebenture.asp
Indenture and Maturity
• Similar to most bonds, debentures may
pay periodic interest payments called
coupon payments. Like other types of
bonds, debentures are documented in an
indenture. An indenture is a legal and
binding contract between bond issuers
and bondholders. The contract specifies
features of a debt offering, such as the
maturity date, the timing of interest or
coupon payments, the method of interest
calculation, and other features.
Corporations and governments can issue
debentures.

Shares
The company may issue shares which are to be redeemed or
are liable to be redeemed at the option of the company or
the holder, and the directors may determine the terms,
conditions and manner of redemption of any such shares.
The company must issue each shareholder, free of charge,
with one or more certificates in respect of the shares which
that shareholder holds.
https://www.gov.uk/government/publications/model-
articles-for-private-companies-limited-by-shares/model-
articles-for-private-companies-limited-by-
shares#differentclasses

Authorised
and
Outstanding
Shares
Authorized shares are the total number of shares that
companies can legally issue to their investors while
outstanding shares are any shares that are held by all
shareholders. Understanding stock market terminology
allows investors to make appropriate, intelligent decisions.
Knowing the difference between authorized shares and
outstanding shares is relevant in accurately calculating
important ratios that speak to the financial stability of a
company. Both are shares issued by companies. But there is a
distinct difference between the two.
https://www.investopedia.com/ask/answers/011315/what-
difference-between-authorized-shares-and-outstanding-
shares.asp

Class Activities
1. Why is it important to keep accurate financial records?
2. How will these records help a business organisation?
3. What is meant by revenue and expenditure?
4. What is the difference between capital income and
revenue income?
5. What types of revenue and capital expenditure do you
expect businesses to incur?
6. Identify and describe the purposes of accounting?
7. Identify and explain different ways of payment?
8. What are advantages and disadvantages of maintaining
financial record?
9. What is a debenture and who can issue it?
10. What are tangible and intangible assets of a business?

C3: Types of
Expenditure
Capital Expenditure
Revenue Expenditure
Class Activity:
Explore capital and revenue expenditures

Types of Expenditures
Capital Expenditure
• Capital expenditures are funds
used to purchase, maintain or
upgrade assets, such as buildings,
equipment, infrastructure,
computer hardware and other
tangible property. Capital items are
fixed assets and intangible assets.
Revenue Expenditure
• Revenue expenditure refers to
those expenditures which are
incurred during normal business
operation by the company, the
benefit of which will be received in
the same period and the example
of which includes rent expenses,
utility expenses, salary expenses,
insurance expenses, commission
expenses, manufacturing

Capital
Expenditure
Non-current assets –
tangible (land, buildings
and premises, machinery
and equipment, vehicles,
fixtures and fittings)
Intangible (goodwill,
patents, trademarks,
brand names).

Capital Expenditure
Fixed Assets (Tangible)
Fixed assets are items owned by a
business that will remain in the
business for a reasonable period of
time:
• Land and buildings
• Office equipment
• Machinery
• Furniture and fittings
• Motor vehicles
Intangible Assets
Intangible assets are somethings
owned by the business that cannot
be touched but instead add value to
the business. Tangible and intangible
assets are shown on the “Balance
Sheet”:
• Goodwill
• Patents
• Trademarks

Goodwill
Goodwill is value added to a business name and reputation
with established customer base or set of clients. The business
has been in operation and the brand is known to the public.
This increases the value of the business and therefore,
increases the selling price of the business. A sum of money is
added to the value of the business to reflect the value of the
goodwill.
https://www.accaglobal.com/gb/en/student/exam-support-
resources/fundamentals-exams-study-
resources/f7/technical-articles/accounting-for-goodwill.html

Patents
Patent is a legal protection of an invention, such as a unique
feature of a product or a new process. A business may patent
its idea to stop entrepreneurs or organisations from copying
the idea. Having a patent allows a business to exploit the
business idea or feature in the future launching an innovative
product or service at a premium (more expensive) selling
price.
https://cameronintellectualproperty.com/services/patents/?
ppc_keyword=patent

Trademarks
Trademark is a symbol, logo, brand name, words or even
colour that sets apart one business’s goods or services
from those of its competitors. Trademarks can be a key
influence on consumer choice and build a strong brand
loyalty. A trademark therefore is of value to the business
and consequently recorded as an intangible asset.
https://www.gov.uk/how-to-register-a-trade-mark

Revenue
Expenditure
Revenue expenditure is spending on items on a
day-to-day or regular basis. These are the
expenses incurred by a business that are shown
on the “Profit and Loss” account as below:
• Premises
• Administrative cost
• Staff costs
• Sales and distribution costs
• Stock purchases
• Marketing costs
• Financial costs

Revenue
Expenditure
• Inventory
• Rent
• Rates
• Heating and lighting
• Water
• Insurance
• Administration
• Telephone
• Postage
• Stationery
• Salaries
• Wages
• Marketing
• Bank charges
• Interest paid
• Straight-line depreciation
• Reducing balance
depreciation
• Discount allowed.

Inventory
Inventory or stock are the items that your business has bought, with
the intention of on-selling to customers. The items may be resold
without change, or they could be combined into a new product.
Inventory can be broadly classified into three categories: raw
materials/components, work in progress, and finished goods.
Manufacturing companies purchase raw materials or components,
store them until ready for production, and transform them into finished
goods. Nonmanufacturing companies, such as wholesale distributors
and retailers, stock finished goods for sale to final consumers.
https://www.oracle.com/uk/scm/inventory-management/what-is-
inventory-management/

Straight-line
Depreciation
Depreciation can be worked out in two different ways in the UK.
The simpler method is called 'straight-line depreciation', whereby
the amount of depreciation posted as a cost each year is the asset's
original cost divided by the number of years it's going to be useful
to the business. A straight-line method depreciation calculator is a
tool that calculates the value of an asset over time using a
depreciation method where the asset's value decreases by a fixed
amount each year, based on its initial value and the expected
lifespan.
https://www.businessaccountingbasics.co.uk/straight-line-
depreciation/

Discount
Allowed
A discount allowed is when the seller of goods or
services grants a payment discount to a buyer. This
discount is frequently an early payment discount on
credit sales, but it can also be for other reasons, such
as a discount for paying cash up front, or for buying in
high volume, or for buying during a promotion period
when goods or services are offered at a reduced price.
https://www.accountingtools.com/articles/what-is-
discount-allowed-and-discount-received.html

Capital and Revenue Income/Expenditure
Video:
https://www.youtube.com/watch?v=OagjiCTtlgM
Video:
https://www.youtube.com/watch?v=VYNTBWBqncU

Class Individual Activity 16/11/2023
Peter Jones & Brothers is a private limited organisation, selling “Event
Management” for birthdays and weddings. Price per event is £489 and
the have decoration expenses of £236 per event. The organisation has
two party decorators contracted for three hours per event at £25 per
hour for each. The Salary is £7,600 per month. Business insurance £35
per month. Sundry expenses 275 per month. Rent is £550 per month.
Please work out the “Contribution Margin” and the “Breakeven Point”.
Use the above figures to prepare “Profit and Loss” account to establish
the profit or loss for the month of November 30th 2023.

Class Activity
Using a Spreadsheet work out the
“Profit and Loss” account of your
business (give it your name) in the
month of September 2023 as follows:
1. Share capital (money from the
owner) = £10,000
2. Sales = £17,350
3. Commission = £1,300
4. Discount to customer = £34.50
5. Bank interest payable = £37.27
6. Delivery truck/fueling £530
7. Cost of running production machine
= £7,500
8. Machine operators’ wages = £5,600
9. Salary = £8,700
10. Office furniture = £1,300
11. Stock = £3,200
12. Purchased stock = £850
13. Insurance = £57
14. Accountant’s fee = £720
15. Electricity and gas = £157
16. Business rate = £125
17. Rent = £650
18. Stationery = £67
19. Sundry expenses = £457
20. Depreciation (£157x6months)?

D: Select and Evaluate
Different Sources of
Business Finance
D1
Sources of Finance

D: Select and
Evaluate
Different
Sources of
Business
Finance
D1 Sources of finance
Advantages, disadvantages,
short term and long term:
Internal:
• Retained profit
• Net current assets
• Sale of assets
External:
• Owner’s capital
• Loans
• Crowd-funding
• Mortgages
• Venture capital
• Debt factoring
• Hire purchase
• Leasing
• o trade credit
• Grants
• Donations
• Peer to peer lending
• Invoice discounting.

Internal Sources of Business
Finance
1. Retained Profit
2. Net Current Assets
3. Sale of Assets

Retained Profit
Retained profit is profit that has been made by the business in previous
years that is then reinvested back into the company. When it comes to
profit, you have options. Some profits are used to finance daily
operations, while others are paid out to shareholders as dividends.
https://gocardless.com/guides/posts/advantages-and-disadvantages-
of-retained-profit/

Net Current Asset
Net current assets (NCA) is a term used to describe the value of a
company's current assets minus its current liabilities. In other words,
it's a measure of a company's liquidity and its ability to pay off its short-
term debts. A company with positive NCA is said to be solvent, while a
company with negative NCA is said to be insolvent.
https://www.annetteandco.co.uk/what-is-net-current-assets/#

Current Asset
The Current Assets account is a balance sheet line item listed under the
Assets section, which accounts for all company-owned assets that can
be converted to cash within one year. Current assets include cash, cash
equivalents, accounts receivable, stock inventory, marketable
securities, pre-paid liabilities, and other liquid assets. Current Assets
may also be called Current Accounts.
https://www.investopedia.com/terms/c/currentassets.asp#

Account Receivable (AR)
Accounts receivable (AR) are the balance of money due to a firm for
goods or services delivered or used but not yet paid for by customers.
Accounts receivable are listed on the balance sheet as a current asset.
Any amount of money owed by customers for purchases made on
credit is “account receivable”
https://www.investopedia.com/terms/a/accountsreceivable.asp

Balance Sheet
The term balance sheet refers to a financial statement that reports a
company's assets, liabilities, and shareholder equity at a specific point
in time. Balance sheets provide the basis for computing rates of return
for investors and evaluating a company's capital structure.
https://www.investopedia.com/terms/b/balancesheet.asp

Capital Structure
Capital structure is the particular combination of debt and equity used
by a company to finance its overall operations and growth.
• Equity capital arises from ownership shares in a company and claims
to its future cash flows and profits.
• Debt comes in the form of bond issues or loans, while equity may
come in the form of common stock, preferred stock, or retained
earnings.
https://www.investopedia.com/terms/c/capitalstructure.asp

Financial Statements
Financial statements are written records that convey the business
activities and the financial performance of a company. Financial
statements are often audited by government agencies, accountants,
firms, etc. to ensure accuracy and for tax, financing, or investing
purposes. For-profit primary financial statements include:
• Balance sheet
• Income statement
• Cash Flow Statement
• Changes in equity State
https://www.investopedia.com/terms/f/financial-statements.asp

Examples of Current Asset
Current Asset is any item that a company can convert into cash within
one year
• Cash and cash equivalents, such as cash accounts, money markets,
and certificates of deposit (CDs)
• Accounts receivable, which are the amounts owed by customers for
goods or services delivered
• Inventory, which are the goods available for sale or in the process of
production
• Short-term investments, which are securities that can be easily sold
or redeemed

Sale of Asset
Sale of business asset is treated differently than the sale of consumer
goods. In a sale of assets, the buyer typically must be fully informed of
the nature and quality of the types of assets being transferred.
• Real property, such as the building in which the business is located
• Other kinds of physical property, such as equipment, fixtures,
furniture, and machinery
• Non-physical items, including business names, patents, copyrights,
trademarks, permits, insurance policies, contracts, and future
interests
• Stocks, trust funds, and other types of securities.

External Sources of Business Finance
• Loans
• Crowd-funding
• Mortgages
• Venture capital
• Debt factoring
• Hire purchase
• Leasing
• Trade credit
• Grants
• Donations
• Peer to peer lending
• Invoice discounting

Venture Capital
Venture capital (VC) is a form of private equity and a type of financing
that investors provide to startup companies and small businesses that
are believed to have long-term growth potential. Venture capital
generally comes from well-off investors, investment banks, and any
other financial institutions. Venture capital doesn't always have to be
money. In fact, it often comes as technical or managerial expertise. VC
is typically allocated to small companies with exceptional growth
potential or to those that grow quickly and appear poised to continue
to expand.
https://www.investopedia.com/terms/v/venturecapital.asp

Equity
Equity capital is the amount of money collected from owners and other
investors in exchange for a portion of ownership right in the company.
Equity, typically referred to as shareholders' equity (or owners' equity
for privately held companies), represents the amount of money that
would be returned to a company's shareholders if the assets were
liquidated, and the company's debt was paid off in the case of
liquidation.
https://www.accountingtools.com/articles/what-is-equity-capital.html

Factoring
Factoring, receivables factoring or debtor financing, is when a company
buys a debt or invoice from another company. Factoring is also seen as
a form of invoice discounting in many markets and is very similar but
just within a different context.
https://tradefinanceanalytics.com/what-is-factoring#

Hire Purchase
Hire purchase is an arrangement for buying goods, where the buyer
makes an initial down payment and pays the balance plus interest in
instalments. The term hire purchase is commonly used in the United
Kingdom, and the ownership of the good purchased is not transferred
until the end of the agreement
https://www.investopedia.com/terms/h/hire-purchase.asp#

Leasing
Leasing is a contract outlining the terms under which one party agrees
to rent an asset—in this case, property—owned by another party. It
guarantees the lessee, also known as the tenant, use of the property
and guarantees the lessor (the property owner or landlord) regular
payments for a specified period in exchange.
https://www.investopedia.com/terms/l/lease.asp

Trade Credit
Trade credit is an important source of short-term finance available to
businesses. It is an arrangement with suppliers to buy goods and/or
services on account without making immediate cash or cheque
payments. Suppliers will require businesses to complete a trade credit
application form that may go through credit check.
https://www.accaglobal.com/gb/en/business-finance/applying-
finance/trade-credit.html

Peer To Peer Lending
Peer to peer loans are an alternative investment providing
opportunities for individuals to lend directly to other people or
businesses without using a bank.. Peer to peer lending operates on a
‘many to many’ lending model through internet intermediaries, also
called a lending platform, who arrange and manage the loans.
https://www.gov.uk/guidance/peer-to-peer-lending

Peer To Peer Lending
https://www.bing.com/videos/riverview/relatedvideo?q=what+is+peer+
to+peer+lending&mid=A43EE86B32CDFE78A165A43EE86B32CDFE78A1
65&FORM=VIRE

Invoice Discounting
Invoice discounting is a financing technique where a business sells its
outstanding invoices to a third party at a discounted rate in exchange
for immediate cash. The third party is usually a financial institution that
lends a certain percentage of the invoice’s value, often up to 95%.
Invoicing discount is a financial term that allows you to gain access to
money in your customer’s unpaid invoices.
https://www.invoiceowl.com/invoicing-guide/invoice-discounting/

Group Class Activity
Working in a group, carry out intensive research to gain knowledge and
understanding of the following topics, and reflecting on the research
explain the topics and identify and evaluate the advantages and
disadvantages to a chosen business (could be imaginary business
organisation):
1. Current Asset
2. Net asset
3. Factoring as a source of finance
4. Invoice Discounting as a source of finance
5. Retained profit as a source of finance

Learning Aim E
Breakeven and Cash Flow Forecasts

E: Break-
even and
Cash Flow
Forecasts
Formulas used in this topic will
not be given in external
assessment.
E1 Cash flow forecasts
Inflows/receipts:
• Cash sales
• Credit sales
• Loans
• Capital introduced
• Sale of assets
• Bank interest received.
Outflows/payments:
• Cash purchases
• Credit purchases
• Rent
• Rates
• Salaries
• Wages
• Utilities
• Purchase of assets
• Value Added Tax (VAT)
• Bank interest paid.

E1: Cash Flow
Forecast
Prepare, complete, analyse, revise and
evaluate cash flow.
Use of cash flow forecasts for planning,
monitoring, control, target setting.
Benefits and limitations of cash flow
forecasts.

Cash Inflow or Receipts
• Cash sales
• Credit sales
• Loans
• Capital introduced in the business by the owners
• Sales of assets
• Bank interest received
• Other investments
• Etc.

Cash Outflow or Payments
• Cash purchases
• Credit purchases
• Rent
• Rates
• Salaries
• Wages
• Utility bills
• Purchase of business assets
• VAT paid out
• Bank interest paid out
• Other expenses

Cash Flow Forecast
Cash flow is the movement of money in and out of a business over a
period of time. Cash flow forecasting involves predicting the future flow
of cash in to and out of a business’ bank accounts. A cash flow forecast
will usually be for a 12-month period.
https://www.bbc.co.uk/bitesize/guides/zmtrrj6/revision/2

Cash Flow Forecast
The Structure:
A cash flow forecast is a simple statement showing opening balance,
cash in, cash out, and closing balance. It is normally shown on a
monthly basis and drawn up for a twelve (12) month period:
• Opening balance - ££££
• Sales - ££££
• Expenses - ££££
• Closing balance - ££££

Importance of Cash Flow Forecast
Cash flow forecasts are very helpful tools for businesses and can be
used to help inform business decisions, such as whether they need a
loan or to decrease spending. Cash flow forecasting is also very useful
for a number of business stakeholders. Businesses need positive cash
flow to reduce the risk of failure and insolvency.
https://www.bbc.co.uk/bitesize/guides/zmtrrj6/revision/4

Profit and Loss Account
The purpose of Profit and Loss account is to give an accurate
calculation showing how much profit or loss a business has made. It
records sales, costs and profits over a period of time (usually a year).
Once produced, the profit and loss account can be used interbally by
the management to help measure the performance of the business and
to inform future decision making. It is also used externally by the
potential investors and creditors. (BTEC, 2010)

The Main Components of Profit and Loss
Account (Gross Profit)
• Sales revenue – this is the money coming into the business from
selling goods or services. It can also be referred to as sales turnover.
• Cost of sales – these are the direct costs of supplying the goods or
services such as wages, buying raw materials to make the products,
packaging costs and energy costs such as gas and electricity.
• Gross profit – this is the revenue minus the cost of sales.
• https://www.bbc.co.uk/bitesize/guides/zkwnnrd/revision/1

Components of Profit and Loss Account
(Net Profit)
• Expenses (overheads) – these are the costs that do not change as
production increases or decreases. This includes interest paid on
loans, insurance, salaries and maintenance costs.
• Net profit – this is calculated by taking the expenses away from the
gross profit. This is the final part of the profit and loss account. If the
net profit figure is negative, the business has made a loss

E2: Break-
even Analysis
Costs:
• Variable
• Semi-variable
• Fixed
• Total.
Sales:
• Total revenue
• Total sales
• Selling price per unit
• Sales in value and/or units.

Variable Cost
A variable cost in accounting is an expense that changes in proportion
to production output or sales. When production or sales increase,
variable costs increase; when production or sales decrease, variable
costs decrease. Examples of variable costs include a manufacturing
company's costs of raw materials and packaging—or a retail company's
credit card transaction fees or shipping expenses, which rise or fall with
sales.
https://www.investopedia.com/terms/v/variablecost.asp

Fixed Cost
Fixed cost in accounting refers to the cost of a business expense that
doesn’t change even with an increase or decrease in the number of
goods and services produced or sold. Fixed costs are commonly related
to recurring expenses not directly related to production, such as rent,
interest payments, insurance, depreciation, and property tax.
https://www.investopedia.com/terms/f/fixedcost.asp

Semi-Fixed Cost
A semi-variable cost, also known as a semi-fixed cost or a mixed cost, is
a cost composed of a mixture of both fixed and variable components.
Costs are fixed for a set level of production or consumption, and they
become variable after this production level is exceeded. If no
production occurs, a fixed cost is often still incurred.
https://www.investopedia.com/terms/s/semivariablecost.asp

E2: Break-even Analysis
• Calculation using/manipulating break-even formula (units
and/or sales value), completion of break-even chart, break-
even point.
• Identification of area of profit, area of loss.
• Identify and calculate margin of safety (units and value).
• Calculation of total contribution, contribution per unit benefits
and limitations.
• Use of break-even for planning, monitoring, control, target
setting.
• Prepare, complete, analyse, revise and evaluate break-even.

Breakeven Points (BEPs)
Breakeven points (BEPs) can be applied to a wide variety of contexts.
For instance, the breakeven point in a property would be how much
money the homeowner would need to generate from a sale to exactly
offset the net purchase price, inclusive of closing costs, taxes, fees,
insurance, and interest paid on the mortgage—as well as costs related
to maintenance and home improvements. At that price, the
homeowner would exactly break even, neither making nor losing any
money.
https://www.investopedia.com/terms/b/breakevenpoint.asp

Break-even Point Analysis
1. Break-even analysis is the study of the amount of sales or units sold
required to break even considering all fixed and variable costs.
2. Break-even analysis helps companies determine how many units
need to be sold to cover all of their costs and begin earning a profit.
3. Companies use break-even analysis to determine the price they
need to charge to cover both their variable and fixed costs.
https://www.investopedia.com/ask/answers/032715/how-can-i-
calculate-breakeven-analysis-excel.asp

Breakeven Point
1. In accounting, the breakeven point is calculated by dividing the
fixed costs of production by the price per unit minus the variable
costs of production.
2. The breakeven point is the level of production at which the costs of
production equal the revenues for a product.
3. In investing, the breakeven point is said to be achieved when the
market price of an asset is the same as its original cost.
4. A breakeven analysis can help with finding missing expenses,
limiting decisions based on emotions, establishing goals, securing
funding, and setting appropriate prices.

Breakeven Analysis
• Break-Even Units = Total Fixed
Costs / (Price per Unit - Variable
Cost per Unit)
• We already know that the
product sells for $200 each, and
the total variable costs are $80
per unit, resulting in a
contribution margin of $120
($200 - $80).
• Break-even Sales = Total Fixed
Costs / (Contribution Margin)
• Contribution Margin = 1 -
(Variable Costs / Revenues)
• https://www.investopedia.com/
ask/answers/032715/how-can-i-
calculate-breakeven-analysis-
excel.asp

Breakeven Analysis
• To calculate the break-even
analysis, we divide the total fixed
costs by the contribution margin
for each unit sold. Using the
earlier example, let's say that
the total fixed costs are $10,000.
• The break-even point for sales is
83.33 or 84 units, which need to
be sold before the company
covers their fixed costs. From
that point on, or 85 units and
beyond, the company will have
paid for their fixed costs and
record a profit per unit

F: Complete statements of
comprehensive income and
financial position and
evaluate a business's
performance
This relates to sole traders only. Formulas used in this
topic will not be given in external assessment.

F1: Statement of
Comprehensive Income
• Purpose and use.
• Completion, calculation and amendment to include gross
profit (revenue, opening inventories, purchases, closing
inventories, cost of goods sold), calculation of profit/loss for
the year (expenses, other income).
• Adjustments for depreciation (straight-line and reducing
balance).
• Adjustments for prepayments, accruals.
• Interpretation, analysis and evaluation of statements.

Statement of Comprehensive Income
What's the Difference Between Net Income and Comprehensive
Income? Net income is the actual profit or gain that a company makes
in a particular period. Comprehensive income is the sum of that net
income plus the value of yet unrealized profits (or losses) in the same
period.
https://www.investopedia.com/terms/c/comprehensiveincome.asp#

The statement of comprehensive income is a financial statement that
summarizes both standard net income and other comprehensive
income (OCI). The net income is the result obtained by preparing an
income statement. Whereas other comprehensive income consists of
all unrealized gains and losses on assets that are not reflected in the
income statement. It is a more robust document that often is used by
large corporations with investments in multiple countries.
https://corporatefinanceinstitute.com/resources/accounting/statemen
t-of-comprehensive-income/

Statement of Comprehensive Income refers to the statement which
contains the details of the following that is not realized when a
company prepares the financial statements of the accounting period,
and the same is presented after net income on the company’s income
statement:
• Revenue
• Income
• Expenses
• Loss of the company

Comprehensive income provides a complete view of a company's
income, some of which may not be fully captured on the income
statement. A company's income statement details revenues and
expenses, including taxes and interest. Its bottom line is net income.
However, net income only recognizes earned income and incurred
expenses.
• https://www.investopedia.com/terms/c/comprehensiveincome.asp#

Trading Account and Gross Profit Calculation
1. Sales turnover – is the money coming into a business from providing a
trade (selling good, producing goods, providing a service)
2. Cost of goods sold – costs directly linked to buying in goods or raw
materials used to produce the product or service.
3. Gross profits/loss is the surplus after cost of production has been
deducted from the sales turnover.
4. Fixed costs and other expenses are deducted from the gross profit
5. Net profit is the leftover after fixed costs and other expenses have been
deducted from the gross profit.
6. HMRC Tax – a percentage (nationally set) deductible from Net profit.

Key Accounting Terms
• Cash flow forecast
• Opening balance
• Closing balance
• Overdraft
• Credit period
• Debtors
• Creditors
• Receipts
• Payments
• Liquidity
• Insolvent
• Capital Employed
• Drawings

F2: Statement of
Financial Position
Purpose and use.
Completion, calculation and amendment of
statement using vertical presentation to include:
• Non-current assets (tangible and intangible,
cost, depreciation and amortisation, net book
value)
• Current assets (inventories, trade receivables,
prepayments, bank, cash)
• Current liabilities (bank overdraft, accruals,
trade payables)
• Net current assets/liabilities
• Non-current liabilities (bank loan and
mortgage)
• Net assets
• Capital (opening capital, transfer of profit or
loss, drawings, closing capital).

Key Terms
Non-Current Assets
• Tangible
• Intangible
• Cost
• Depreciation
• Amortisation
• Net book value
Current Assets
• Inventories (Stock)
• Trade receivables (Debtors)
• Prepayments
• Cash in Bank
• Cash in Hand

Liabilities
Current Liabilities
• Bank overdraft
• Accruals
• Trade payables
Non-Current Liabilities
• Bank loan
• Mortgage)

Key Terms
• Current liabilities
• Net current assets/liabilities
• Non-current liabilities
• Net assets
• Capital (opening capital
• Transfer of profit or loss
• Drawings
• Closing capital

Amortisation
Amortization is an accounting technique used to periodically lower the
book value of a loan or an intangible asset over a set period of time.
When you have a fully amortized loan, like a mortgage or a car loan, you
will pay the same amount every month. The lender will apply a gradually
smaller part of your payment toward interest and a gradually larger part
of your payment toward the principal until the loan is paid off.
Amortization calculators make it easy to see how a loan’s monthly
payments are divided into interest and principal.
https://www.investopedia.com/amortization-calculator-5086959

Balance Sheet
The purpose and use of Balance Sheet is a “snapshot” of a business’s
net worth at a particular moment in time, normally at the end of a
financial year. Balance Sheet is a summary of everything that the
business owns (assets) and owes (liabilities). Balance Sheet therefore
states the value of a business.

Balance Sheet Presentation
• Intangible Assets
• +Add Fixed Assets
• +Add Current Assets
• -Less Current Liabilities
• -Less Long-term Liabilities
• =The total balance is “net” Assets
(BTEC, 2010)

Capital Employed
• +Add Retained profit
• =Total is Capital employed
• Drawings – money taken out of the business by the owners or
shareholders

F2:
Statement
of
Financial
Position
Adjustments for straight line (cost
x%) depreciation, reducing balance
(cost – depreciation to date x%).
Adjustments for prepayments,
accruals.
Interpretation, analysis, and
evaluation of statements.

F3:
Measuring
Profitability
Calculation, interpretation,
analysis and evaluation of:
• Gross profit margin: (gross
profit/revenue) × 100
• Mark-up: (gross profit/cost of sales)
× 100
• Profit margin: (profit/revenue) × 100
• Return on capital employed (ROCE):
(profit/capital employed) × 100

Profitability Ratio
Profitability is a measure of the profit of a business in relation to
another. It allows more comprehensive assessment of the performance
of a business. There are three types of profitability ratios:
• 1) Gross profit percentage of sales
• 2) Net profit percentage of sales
• 3) Return on capital employed (ROCE)

Profitability Ratio Examples
1. Pross Profit Margin = Gross profit (/) divide by sales turnover, and
multiply by 100 = % (£11,000 (gross profit)/(£72,000 total sales)
2. Net Profit Margin = Net profit (/) divide by sales turnover, and
multiply by 100 = % (£5,000 profit)/(£72,000 total sales)
3. Return on Capital Employed = Net profit before tax (/) dive by
capital employed (owners’ capital plus retained profit), multiply by
100 (£5,000 profit)/(£25,000 Capital)

Depreciation is taken out of the fixed assets of an organisation. Fixed
Assets are those items of value that are owned by the business and are
likely to stay within the business for more than one year. There are
tangible assets, such as premises , fixtures and fittings, equipment,
vehicle, machinery, etc. These assets lose value by depreciation (most
assets lose value or depreciation over time due usage. Annually the
cost of depreciation is deducted from the “historic cost” (purchase
price). There are two ways of calculating depreciation; the common
one is “straight line depreciation reduces the value by a fixed amount
yearly: Historic cost less residual value, divide by the number of years.
£30,000 – (£7,000 residual value/the number of years (5) in use =
£4,6000.
Depreciation Ratio

F: Income and Financial Position
F4: Measuring Liquidity
Calculation, interpretation, analysis and
evaluation of:
• Current ratio: current assets/current
liabilities
• Liquid capital ratio: (current assets –
inventory)/current liabilities
F5: Measuring Efficiency
Calculation, interpretation, analysis and
evaluation of:
• Trade receivable days: (trade
receivable/credit sales) × 365
• Trade payable days: (trade
payables/credit purchases) × 365
• Inventory turnover: (average
inventory/cost of sales) × 365
F6 Limitations of ratios
• Limitations of ratios when assessing
business performance.

Liquidity and Acid Test Ratio
• Acid Test: Current Assets – Stock/(divide) by Current Liability (X:1.
• Current Ratio: Current Assets/(divide) by Current Liability
Current Assets are those items of value owned by a business whose values
are likely to fluctuate on a regular basis (stock, debtors, cash in hand, cash at
the bank).
Current Liability is something owed by the business that should be paid back
within one year (overdraft and creditors)
1. £150,000 (Current Asset)/£78,750 (Current Liability) = 1:9
2. Net Assets Ratio £150,000 (Current Asset) + £748,000 (Fixed
Asset)/£78,750 (Current Liability) + £780,000 (Long-term Liability) = 1:05

Stock Turnover Ratio
• Average Stock/(divide) by cost of goods sold, multiply by 365 days
(Opening stock + closing stock/(divide) by cost of goods sold

Video
Exam Questions and Answers
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Unit 3
Questions and Answers
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BTEC Level 3 Personal and Business Finance.pptx

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