BTEC Level 3 Personal and Business Finance.pptx

For business students; finance, breakeven point, profitability ratio, liquidity ratio, etc

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

2. 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=483C9856D306B0867C17483C9856D306B0867C17&FORM=VIRE

3. 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. Oguchi Martins Egbujor FHEA FCMI MBA 3

4. Learning Aims Oguchi Martins Egbujor FHEA FCMI MBA 4

5. 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. Oguchi Martins Egbujor FHEA FCMI MBA 5

6. The Functions of Money Oguchi Martins Egbujor FHEA FCMI MBA 6

7. The Role of Money Oguchi Martins Egbujor FHEA FCMI MBA 7

8. Functions and Role of Money https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-9-functions-of-money https://pressbooks-dev.oer.hawaii.edu/principlesofeconomics/chapter/27-1-defining-money-by-its-functions/ https://corporatefinanceinstitute.com/resources/economics/functions-of-money/ Video on Money: https://www.youtube.com/watch?v=kPE4NRakYR0 Oguchi Martins Egbujor FHEA FCMI MBA 8

9. 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 Oguchi Martins Egbujor FHEA FCMI MBA 9

10. 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). Oguchi Martins Egbujor FHEA FCMI MBA 10

11. 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 Oguchi Martins Egbujor FHEA FCMI MBA 11

12. 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 Oguchi Martins Egbujor FHEA FCMI MBA 12

13. Methods of Payment https://omni-pay.com/reads/payments/different-payment-schemes-uk/ Vidoe: https://www.bing.com/videos/riverview/relatedvideo?&q=video%2fmethods+of+payment+in+uk&&mid=D245532E9D8C39E31F5FD245532E9D8C39E31F5F&&FORM=VRDGAR Types of Borrowing Video: https://www.bing.com/videos/riverview/relatedvideo?&q=video%2ftypes+of+borrowing&&mid=FEB751F79267AEB9770BFEB751F79267AEB9770B&&FORM=VRDGAR Oguchi Martins Egbujor FHEA FCMI MBA 13

14. A3: Current Accounts Oguchi Martins Egbujor FHEA FCMI MBA 14

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

16. 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 Oguchi Martins Egbujor FHEA FCMI MBA 16

17. 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. Oguchi Martins Egbujor FHEA FCMI MBA 17

18. Different Types of Borrowing Overdraft Personal Loans Hire Purchase Mortgages Credit Cards Payday Loans Oguchi Martins Egbujor FHEA FCMI MBA 18

19. 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 Oguchi Martins Egbujor FHEA FCMI MBA 19

20. Individual Savings Account ISA) There are two types of Individual Savings Accounts: 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. 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/ Oguchi Martins Egbujor FHEA FCMI MBA 20

21. 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: Savings accounts provide easy access to funds and earn interest, while fixed deposit accounts offer higher interest rates but require a fixed-term commitment. Fixed deposit accounts impose penalties for early withdrawals, whereas savings accounts allow for more flexibility. Savings accounts promote regular transactions and money management, while fixed deposit accounts encourage long-term saving and financial discipline Oguchi Martins Egbujor FHEA FCMI MBA 21

22. 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/ Oguchi Martins Egbujor FHEA FCMI MBA 22

23. 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/ Oguchi Martins Egbujor FHEA FCMI MBA 23

24. 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. Oguchi Martins Egbujor FHEA FCMI MBA 24

25. 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. Anyone can have a savings bond, also known as a fixed interest savings account, which runs for a set amount of time. Anyone can buy government bonds (gilts), which are fixed interest products issued by the government. 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. 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. Oguchi Martins Egbujor FHEA FCMI MBA 25

26. Gilt Gilts are a form of bond or IOU issued by governments wanting to raise money, and they are known as gilts: Corporate bonds are issued by corporations and gilts are bonds issued specifically by the government. 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/# Oguchi Martins Egbujor FHEA FCMI MBA 26

27. 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: 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 Oguchi Martins Egbujor FHEA FCMI MBA 27

28. Pension A workplace pension is a way of saving for your retirement that is arranged by your employer: Some workplace pensions are called “Occupational Pension, works Pension, Company or Work-based Pension”. A percentage of your pay is put into the pension scheme automatically every payday. 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 Oguchi Martins Egbujor FHEA FCMI MBA 28

29. Different Insurance Products Products Types of Insurance Policies Features of Different Types of Insurance Advantages and Disadvantages of different types and features Oguchi Martins Egbujor FHEA FCMI MBA 29

30. 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# Oguchi Martins Egbujor FHEA FCMI MBA 30

31. Insurance Products Car Home and Contents Life Assurance and Insurance Travel Pet Health Business Oguchi Martins Egbujor FHEA FCMI MBA 31

32. 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 Oguchi Martins Egbujor FHEA FCMI MBA 32

33. 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 Oguchi Martins Egbujor FHEA FCMI MBA 33

34. 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 Oguchi Martins Egbujor FHEA FCMI MBA 34

35. 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 Oguchi Martins Egbujor FHEA FCMI MBA 35

36. Class Activities Give two advantages to the consumer of having a basic current account Give two ways a consumer can maintain a good credit rating Identify two features of a standing order as a method of payment Explain two advantages to the consumer of using mobile banking 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. Oguchi Martins Egbujor FHEA FCMI MBA 36

37. 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. Oguchi Martins Egbujor FHEA FCMI MBA 37

38. 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 Oguchi Martins Egbujor FHEA FCMI MBA 38

39. 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/ Oguchi Martins Egbujor FHEA FCMI MBA 39

40. B2: Communicating With Customers Methods of interacting with customers, advantages and disadvantages: Branch Online banking Telephone banking Mobile banking Postal banking Oguchi Martins Egbujor FHEA FCMI MBA 40

41. B3: Consumer Protection In Relation To Personal Finance Oguchi Martins Egbujor FHEA FCMI MBA 41

42. 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/ Oguchi Martins Egbujor FHEA FCMI MBA 42

43. 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 Oguchi Martins Egbujor FHEA FCMI MBA 43

44. 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 Oguchi Martins Egbujor FHEA FCMI MBA 44

45. 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 Oguchi Martins Egbujor FHEA FCMI MBA 45

46. 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: FSCS was set up in 2001 under the Financial Services and Markets Act 2000. FSCS is independent of the government and financial services industry. FCSC can pay compensation thanks to levies that authorised financial services firms pay. In 2022/23 we paid out £403m in compensation to 67,908 customers of failed firms. 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/ Oguchi Martins Egbujor FHEA FCMI MBA 46

47. 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. Oguchi Martins Egbujor FHEA FCMI MBA 47

48. Class Activities Identify two advantages of using hire purchase as a source of finance Identify four functions of money and discuss it to the understanding of your audience Name two financial institutions and explain the benefits of their products What are the duties and responsibilities of the financial ombudsmen? Explore the benefits of debit and credit cards, and explain their advantages and disadvantages as methods of payment What are the benefits of mobile banking (refer to your bank)? Present evidence-based answers!!! Oguchi Martins Egbujor FHEA FCMI MBA 48

49. C: Understand The Purpose of Accounting Oguchi Martins Egbujor FHEA FCMI MBA 49

50. C1: Purpose of Accounting Oguchi Martins Egbujor FHEA FCMI MBA 50

51. 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 Oguchi Martins Egbujor FHEA FCMI MBA 51

52. 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 Oguchi Martins Egbujor FHEA FCMI MBA 52

53. 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/accounting/accounting/ Oguchi Martins Egbujor FHEA FCMI MBA 53

54. 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# Oguchi Martins Egbujor FHEA FCMI MBA 54

55. 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/accounting-records Oguchi Martins Egbujor FHEA FCMI MBA 55

56. 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=kuoA6l7--oQ Oguchi Martins Egbujor FHEA FCMI MBA 56

57. 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://corporatefinanceinstitute.com/resources/accounting/accounting/ Oguchi Martins Egbujor FHEA FCMI MBA 57

58. Management and Control Oguchi Martins Egbujor FHEA FCMI MBA 58

59. Measuring Financial Performance Oguchi Martins Egbujor FHEA FCMI MBA 59

60. 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 https://www.bing.com/videos/search?q=what+is+the+purpose+of+accounting+youtube https://www.bing.com/videos/riverview/relatedvideo?&q=what+is+the+purpose+of+accounting+youtube&&mid=248462D75743F7FBE251248462D75743F7FBE251&&FORM=VRDGAR Oguchi Martins Egbujor FHEA FCMI MBA 60

61. Key Financial Terms Oguchi Martins Egbujor FHEA FCMI MBA 61

62. C2: Types of Income Capital Income Revenue Income Cash sales Credit sales Rent received Commission received Interest received Discount received. Oguchi Martins Egbujor FHEA FCMI MBA 62

63. 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# Oguchi Martins Egbujor FHEA FCMI MBA 63

64. Debenture Oguchi Martins Egbujor FHEA FCMI MBA 64

65. Debentures Debenture 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. Oguchi Martins Egbujor FHEA FCMI MBA 65

66. 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 Oguchi Martins Egbujor FHEA FCMI MBA 66

67. 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 Oguchi Martins Egbujor FHEA FCMI MBA 67

68. Class Activities Why is it important to keep accurate financial records? How will these records help a business organisation? What is meant by revenue and expenditure? What is the difference between capital income and revenue income? What types of revenue and capital expenditure do you expect businesses to incur? Identify and describe the purposes of accounting? Identify and explain different ways of payment? What are advantages and disadvantages of maintaining financial record? What is a debenture and who can issue it? What are tangible and intangible assets of a business? Oguchi Martins Egbujor FHEA FCMI MBA 68

69. C3: Types of Expenditure Oguchi Martins Egbujor FHEA FCMI MBA 69

70. 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 Oguchi Martins Egbujor FHEA FCMI MBA 70

71. Capital Expenditure Oguchi Martins Egbujor FHEA FCMI MBA 71

72. 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 Oguchi Martins Egbujor FHEA FCMI MBA 72

73. 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 Oguchi Martins Egbujor FHEA FCMI MBA 73

74. 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 Oguchi Martins Egbujor FHEA FCMI MBA 74

75. 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 Oguchi Martins Egbujor FHEA FCMI MBA 75

76. 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 Oguchi Martins Egbujor FHEA FCMI MBA 76

77. 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. Oguchi Martins Egbujor FHEA FCMI MBA 77

78. Inventory Oguchi Martins Egbujor FHEA FCMI MBA 78

79. Straight-line Depreciation Oguchi Martins Egbujor FHEA FCMI MBA 79

80. Discount Allowed Oguchi Martins Egbujor FHEA FCMI MBA 80

81. Capital and Revenue Income/Expenditure Video: https://www.youtube.com/watch?v=OagjiCTtlgM Video: https://www.youtube.com/watch?v=VYNTBWBqncU Oguchi Martins Egbujor FHEA FCMI MBA 81

82. 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 30 th 2023. Oguchi Martins Egbujor FHEA FCMI MBA 82

83. 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: Share capital (money from the owner) = £10,000 Sales = £17,350 Commission = £1,300 Discount to customer = £34.50 Bank interest payable = £37.27 Delivery truck/fueling £530 Cost of running production machine = £7,500 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 Sundry expenses = £457 Depreciation (£157x6months)? Oguchi Martins Egbujor FHEA FCMI MBA 83

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

85. 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. Oguchi Martins Egbujor FHEA FCMI MBA 85

86. Internal Sources of Business Finance Retained Profit Net Current Assets Sale of Assets

87. 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/ Oguchi Martins Egbujor FHEA FCMI MBA 87

88. 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/# Oguchi Martins Egbujor FHEA FCMI MBA 88

89. 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# Oguchi Martins Egbujor FHEA FCMI MBA 89

90. 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 Oguchi Martins Egbujor FHEA FCMI MBA 90

91. 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 Oguchi Martins Egbujor FHEA FCMI MBA 91

92. 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 Oguchi Martins Egbujor FHEA FCMI MBA 92

93. 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 Oguchi Martins Egbujor FHEA FCMI MBA 93

94. 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 Oguchi Martins Egbujor FHEA FCMI MBA 94

95. Sale of Asset Oguchi Martins Egbujor FHEA FCMI MBA 95

96. 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. Oguchi Martins Egbujor FHEA FCMI MBA 96

97. External Sources of Business Finance Owner’s capital Loans Crowd-funding Mortgages Venture capital Debt factoring Hire purchase Leasing Trade credit Grants Donations Peer to peer lending Invoice discounting Oguchi Martins Egbujor FHEA FCMI MBA 97

98. 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 Oguchi Martins Egbujor FHEA FCMI MBA 98

99. 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 Oguchi Martins Egbujor FHEA FCMI MBA 99

100. 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# Oguchi Martins Egbujor FHEA FCMI MBA 100

101. 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# Oguchi Martins Egbujor FHEA FCMI MBA 101

102. 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 Oguchi Martins Egbujor FHEA FCMI MBA 102

103. 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 Oguchi Martins Egbujor FHEA FCMI MBA 103

104. 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 Oguchi Martins Egbujor FHEA FCMI MBA 104

105. Peer To Peer Lending https://www.bing.com/videos/riverview/relatedvideo?q=what+is+peer+to+peer+lending&mid=A43EE86B32CDFE78A165A43EE86B32CDFE78A165&FORM=VIRE

106. 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/ Oguchi Martins Egbujor FHEA FCMI MBA 106

107. 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): Current Asset Net asset Factoring as a source of finance Invoice Discounting as a source of finance Retained profit as a source of finance Oguchi Martins Egbujor FHEA FCMI MBA 107

108. Learning Aim E Breakeven and Cash Flow Forecasts

109. 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. Oguchi Martins Egbujor FHEA FCMI MBA 109

110. E1: Cash Flow Forecast Oguchi Martins Egbujor FHEA FCMI MBA 110

111. 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. Oguchi Martins Egbujor FHEA FCMI MBA 111

112. 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 Oguchi Martins Egbujor FHEA FCMI MBA 112

113. 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 Oguchi Martins Egbujor FHEA FCMI MBA 113

114. 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 - ££££ Oguchi Martins Egbujor FHEA FCMI MBA 114

115. 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 Oguchi Martins Egbujor FHEA FCMI MBA 115

116. 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) Oguchi Martins Egbujor FHEA FCMI MBA 116

117. 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 Oguchi Martins Egbujor FHEA FCMI MBA 117

118. 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 Oguchi Martins Egbujor FHEA FCMI MBA 118

119. E1: Cash Flow Forecast Oguchi Martins Egbujor FHEA FCMI MBA 119

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122. 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. Oguchi Martins Egbujor FHEA FCMI MBA 122

123. 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 Oguchi Martins Egbujor FHEA FCMI MBA 123

124. 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 Oguchi Martins Egbujor FHEA FCMI MBA 124

125. 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 Oguchi Martins Egbujor FHEA FCMI MBA 125

126. 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. Oguchi Martins Egbujor FHEA FCMI MBA 126

127. 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 Oguchi Martins Egbujor FHEA FCMI MBA 127

128. Break-even Point Analysis Break-even analysis is the study of the amount of sales or units sold required to break even considering all fixed and variable costs. Break-even analysis helps companies determine how many units need to be sold to cover all of their costs and begin earning a profit. 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 Oguchi Martins Egbujor FHEA FCMI MBA 128

129. Breakeven Point 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. The breakeven point is the level of production at which the costs of production equal the revenues for a product. In investing, the breakeven point is said to be achieved when the market price of an asset is the same as its original cost. A breakeven analysis can help with finding missing expenses, limiting decisions based on emotions, establishing goals, securing funding, and setting appropriate prices. Oguchi Martins Egbujor FHEA FCMI MBA 129

130. 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 Oguchi Martins Egbujor FHEA FCMI MBA 130

131. 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 Oguchi Martins Egbujor FHEA FCMI MBA 131

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135. 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. Oguchi Martins Egbujor FHEA FCMI MBA 135

136. 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. Oguchi Martins Egbujor FHEA FCMI MBA 136

137. 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# Oguchi Martins Egbujor FHEA FCMI MBA 137

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139. Statement of Comprehensive Income 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/statement-of-comprehensive-income/ Oguchi Martins Egbujor FHEA FCMI MBA 139

140. Statement 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 Oguchi Martins Egbujor FHEA FCMI MBA 140

141. Statement of Comprehensive Income Oguchi Martins Egbujor FHEA FCMI MBA 141

142. Statement of Comprehensive Income 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# Oguchi Martins Egbujor FHEA FCMI MBA 142

143. Trading Account and Gross Profit Calculation Sales turnover – is the money coming into a business from providing a trade (selling good, producing goods, providing a service) Cost of goods sold – costs directly linked to buying in goods or raw materials used to produce the product or service. Gross profits/loss is the surplus after cost of production has been deducted from the sales turnover. Fixed costs and other expenses are deducted from the gross profit Net profit is the leftover after fixed costs and other expenses have been deducted from the gross profit. HMRC Tax – a percentage (nationally set) deductible from Net profit. Oguchi Martins Egbujor FHEA FCMI MBA 143

144. Key Accounting Terms Cash flow forecast Opening balance Closing balance Overdraft Credit period Debtors Creditors Receipts Payments Liquidity Insolvent Capital Employed Drawings Oguchi Martins Egbujor FHEA FCMI MBA 144

145. 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). Oguchi Martins Egbujor FHEA FCMI MBA 145

146. 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 Oguchi Martins Egbujor FHEA FCMI MBA 146

147. Liabilities Current Liabilities Bank overdraft Accruals Trade payables Non-Current Liabilities Bank loan Mortgage) Oguchi Martins Egbujor FHEA FCMI MBA 147

148. Key Terms Current liabilities Net current assets/liabilities Non-current liabilities Net assets Capital (opening capital Transfer of profit or loss Drawings Closing capital Oguchi Martins Egbujor FHEA FCMI MBA 148

149. 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

150. 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.

151. 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) Oguchi Martins Egbujor FHEA FCMI MBA 151

152. Capital Employed Owner’s capital +Add Retained profit =Total is Capital employed Drawings – money taken out of the business by the owners or shareholders Oguchi Martins Egbujor FHEA FCMI MBA 152

153. F2: Statement of Financial Position Oguchi Martins Egbujor FHEA FCMI MBA 153

154. F3: Measuring Profitability Oguchi Martins Egbujor FHEA FCMI MBA 154

155. 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) Oguchi Martins Egbujor FHEA FCMI MBA 155

156. Profitability Ratio Examples Pross Profit Margin = Gross profit (/) divide by sales turnover, and multiply by 100 = % (£11,000 (gross profit)/(£72,000 total sales) Net Profit Margin = Net profit (/) divide by sales turnover, and multiply by 100 = % (£5,000 profit)/(£72,000 total sales) 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) Oguchi Martins Egbujor FHEA FCMI MBA 156

157. 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 Oguchi Martins Egbujor FHEA FCMI MBA 157

158. 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. Oguchi Martins Egbujor FHEA FCMI MBA 158

159. 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) £150,000 (Current Asset)/£78,750 (Current Liability) = 1:9 Net Assets Ratio £150,000 (Current Asset) + £748,000 (Fixed Asset)/£78,750 (Current Liability) + £780,000 (Long-term Liability) = 1:05 Oguchi Martins Egbujor FHEA FCMI MBA 159

160. 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 Oguchi Martins Egbujor FHEA FCMI MBA 160

161. Video Exam Questions and Answers https://www.bing.com/videos/riverview/relatedvideo?q=btec+level+3+answers+to+past+paper+unit+3+25+may+2017&mid=0EE64C341CA6A5FD72920EE64C341CA6A5FD7292&FORM=VIRE

162. Unit 3 Questions and Answers https://www.bing.com/videos/riverview/relatedvideo?q=btec+level+3+answers+to+past+paper+unit+3+25+may+2017&mid=FCF6BC4ECA6F1200BA97FCF6BC4ECA6F1200BA97&FORM=VIRE

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