Accounting and Finance

What Accounting and Finance covers

Accounting and Finance is examined in all three written papers — the specification is assessed in full on every one of them, and they differ by the context questions are set in rather than by content. It covers accounting and finance objectives, sources of finance and the choice between them, A true and fair view and the accounting conventions, costs, revenue and profit, cost classification and costing methods, contribution and the break-even point, margin of safety and target profit, break-even charts, stepped fixed costs and special orders, payback period and average rate of return, net present value and the investment decision, budgets and variance analysis, cash-flow forecasts and cash-flow statements, cash-flow problems and working capital, the income statement and measures of profit, the statement of financial position, depreciation and the valuation of assets, liquidity and solvency ratios, profitability and efficiency ratios, shareholder ratios and the limits of ratio analysis and external influences and the finance strategy.

The 20 subtopics

Each one has its own page.

• Accounting and finance objectivesRecall questions on accounting and finance objectives, the financial targets a business might set, quantifying them with deadlines, cost minimisation against profit maximisation, cash-flow objectives for start-ups, how financial objectives guide resources and corporate aims, their effect on shareholders and employees, and revising them.Open →
• Sources of finance and the choice between themRecall questions on internal and external finance, retained profit, sale and leaseback, share and loan capital, rights issues, short- and long-term finance, overdrafts, bank loans, trade credit, debt factoring and venture capital, matching finance to assets, sole traders' options, and the factors behind the choice.Open →
• A true and fair view and the accounting conventionsRecall questions on a true and fair view, Generally Accepted Accounting Practice and comparability, and the conventions of consistency, going concern, accruals, materiality, objectivity, prudence and realisation, applied to prepayments, bad debts, deposits and legal claims.Open →
• Costs, revenue and profitRecall questions on fixed and variable costs, calculating total and average cost, fixed cost per unit, total and average revenue, profit and profitability, why material price rises hit manufacturers hardest, raising profit without selling more, and judging a profit figure.Open →
• Cost classification and costing methodsRecall questions on direct and indirect costs and overheads, cost centres and profit centres with their benefits and drawbacks, full, absorption and marginal costing, calculating an overhead absorption rate, how the absorption basis changes apparent profitability, and pricing in the short and long run.Open →
• Contribution and the break-even pointRecall questions on contribution per unit and total contribution, the break-even point and break-even revenue, the contribution ratio, rounding break-even output, how price, fixed cost and variable cost changes move break-even, producing at a loss in the short run, and lowering the break-even point.Open →
• Margin of safety and target profitRecall questions on calculating the margin of safety in units and as a percentage, profit as margin of safety times contribution, what a small margin means, target profit and the output needed to reach it, capacity limits, the effect of rising fixed costs, and forecast reliability.Open →
• Break-even charts, stepped fixed costs and special ordersRecall questions on drawing and reading a break-even chart, including the revenue and fixed cost lines, break-even point, profit and margin of safety, the chart's assumptions, stepped fixed costs and their effect on break-even and profit, and financial and non-financial special order decisions.Open →
• Payback period and average rate of returnRecall questions on investment appraisal and why it is needed, calculating the payback period and the average rate of return, the advantages and weaknesses of each method, comparing a project with money on deposit, and why a cash-strapped business may prefer a shorter payback.Open →
• Net present value and the investment decisionRecall questions on the time value of money, discount factors, calculating present value and net present value, the decision rule, how higher discount rates and risk change the result, the advantages and weaknesses of net present value, qualitative factors, and using several appraisal methods.Open →
• Budgets and variance analysisRecall questions on budgets, income and expenditure budgets, zero and historical budgeting, the purposes of budgets, calculating favourable and adverse variances and a profit variance, why favourable cost variances and adverse sales variances can mislead, over-tight budgets, and investigating variances.Open →
• Cash-flow forecasts and cash-flow statementsRecall questions on cash flow, cash-flow forecasts and statements, cash flow against profit, calculating net cash flow and opening and closing balances, the effects of customer credit, supplier terms and price rises, the purposes and limitations of forecasts, and why shareholders read the cash-flow statement.Open →
• Cash-flow problems and working capitalRecall questions on working capital and its formula, the working capital cycle, the causes of cash-flow problems and the ways a business can ease them.Open →
• The income statement and measures of profitRecall questions on the income statement, calculating gross profit, operating profit and profit for the year, cost of sales and operating expenses, finance costs and tax, what diverging gross and operating profit show, dividends and retained profit, and the uses and limitations of the statement.Open →
• The statement of financial positionRecall questions on the statement of financial position, current and non-current assets and liabilities, receivables and payables, calculating net current assets and net assets, retained earnings and shareholders' equity, why net assets equal equity, its use to suppliers, and its limitations.Open →
• Depreciation and the valuation of assetsRecall questions on depreciation and why it is not a cash outflow, straight-line and reducing balance calculations, net book value, choosing a method, goodwill, valuing inventory prudently, bad debts, valuing patents, brands and investments, and how the depreciation method affects reported profit.Open →
• Liquidity and solvency ratiosRecall questions on liquidity and solvency, calculating and interpreting the current ratio, acid test ratio, gearing and interest cover, why inventory is excluded from the acid test, the risks of a high current ratio and gearing above 50%, and when a highly geared business can still be sound.Open →
• Profitability and efficiency ratiosRecall questions on calculating the gross and net profit margins, return on capital employed and capital employed, return on equity, inventory turnover and days, debtor and creditor days, and non-current asset turnover, plus raising the gross margin and reading a falling net margin or rising debtor days.Open →
• Shareholder ratios and the limits of ratio analysisRecall questions on shareholder ratios, calculating dividend per share, dividend yield, earnings per share and the price/earnings ratio, what a high price/earnings ratio suggests, why dividend yield moves with the share price, and the limitations of ratio analysis.Open →
• External influences and the finance strategyRecall questions on how interest rates, recession, inflation and a weaker pound affect a business's accounts, legal, ethical, environmental, technological, social and political influences on finance, window dressing, international reporting, and financial strategy, its fit with stage of growth and the risk of heavy borrowing.Open →

What you need to know

Answer each one before you reveal it.

Take Accounting and Finance further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Profit vs Cash flow

  Profit: revenue earned minus the costs incurred in the same period, whether or not the money has yet changed hands. Cash flow: the movement of money into and out of a business over a period, counting only sums actually received and actually paid.

• Cash-flow forecast vs Cash-flow statement

  Cash-flow forecast: a prediction of the receipts and payments a business expects in future periods. Cash-flow statement: a historical record of the money that actually moved in and out during a period that has ended.

• Gross profit vs Operating profit

  Gross profit: revenue less the cost of sales alone, before overheads such as administration and marketing are deducted. Operating profit: what is left once the cost of sales and overheads such as administration, marketing and distribution have all been deducted, but before interest and tax.

Questions from this topic

Each one with the model answer underneath.

1. 1

   What is an accounting and finance objective?

   Model answer

   A specific financial target a business sets itself, such as a level of profit, cash flow or return on capital, to be achieved within a stated period.

2. 2

   Name four financial objectives a business might set.

   Model answer

   A target level of profit, a cash-flow target, a revenue or sales growth target, and a cost minimisation target.

3. 3

   State two features a financial objective needs if performance is to be judged against it.

   Model answer

   It must be quantified as a figure and given a deadline, so the outcome can be measured and someone held accountable for it.

4. 4

   How does a cost minimisation objective differ from a profit maximisation objective?

   Model answer

   Cost minimisation seeks the lowest achievable cost for a given output, while profit maximisation seeks the widest gap between total revenue and total cost, which may mean spending more to sell more.

5. 5

   Why is a start-up more likely to set a cash-flow objective than a profit objective?

   Model answer

   Most start-ups make a loss in their early trading, and running out of cash forces closure long before low profit does, so survival depends on liquidity.

6. 6

   How do financial objectives help a business decide where to put its resources?

   Model answer

   They set the return each department or project is expected to deliver, so budgets and capital can be directed to the uses most likely to meet the target.

What is inside Levo

Six ways to work the same material.

Accounting and Finance revision questions

What does Accounting and Finance cover in OCR A-Level Business (H431)?

20 subtopics: accounting and finance objectives, sources of finance and the choice between them, a true and fair view and the accounting conventions, costs, revenue and profit, cost classification and costing methods, contribution and the break-even point, margin of safety and target profit, break-even charts, stepped fixed costs and special orders, payback period and average rate of return, net present value and the investment decision, budgets and variance analysis, cash-flow forecasts and cash-flow statements, cash-flow problems and working capital, the income statement and measures of profit, the statement of financial position, depreciation and the valuation of assets, liquidity and solvency ratios, profitability and efficiency ratios, shareholder ratios and the limits of ratio analysis and external influences and the finance strategy. Each one has its own page with questions and model answers.

How is Accounting and Finance organised?

By the OCR H431 specification, subtopic by subtopic, so it matches the order you are taught it in.