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1.9.Financial Management
Advance Financial Accounting (The University of the West Indies Mona)
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ACCA – FM
FINANCIAL MANAGEMENT
STUDY NOTES
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Contents
Sr. # TOPIC Page #
1. Investment Appraisal 01
2. Inflation 20
3. Risk & Uncertainty 32
4. Cost of Capital 39
5. Cost of Irredeemable Debt 46
6. Capital Structure and WACC 51
7. Business Valuation 57
8. Sources of Finance 64
9. Cost of Convertible Debt 70
10. 77
Islamic Financing
11. Small and Medium Enterprises (SME) 80
12. Working Capital Management 94
13. Inventory Management 99
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Study Notes Financial Management - FM
Investment Appraisal
Decision making
Short term Long term
(Single period effect) (Having multi period effects)
Investment Appraisal:-
A detailed evaluation of projects/investments to assess the viability, its effects on shareholders wealth is called
investment appraisal,
What is Appraisal:-
Any expenditure in the expectation of future benefits. There are two types of investment:
Capital expenditure:
Capital expenditure is an expenditure which results in the acquisition of non-current assets or an improvement in
their earning capacity. It is not charged as an expense in the income statement; this expenditure appears as a non-
current asset in the balance sheet.
Revenue expenditure:
Charged to the income statement and is expenditure which is incurred.
(i) For the purpose of the trade of the business this includes expenditure classified as selling and distribution,
administration expenses and finance charges.
(ii) To maintain the existing earning capacity of non-current asset.
The capital budgeting process:
The process of identifying, analyzing and selecting investments projects whose returns are expected to extend
beyond one year.
These steps are being followed in capital budgeting process.
I. Creation of capital budgets
This steps involves assessing the time required by projects, when they are anticipated to start, how they
will be financed, how they would effect the current production budget, expected levels of production and
long term development of organization.
II. Investment Decision making process
It involves the following steps
Origination of Proposals Project screening Analysis Monitoring
and Acceptance and Review
1
Downloaded by kuchy kuchy ()
1.9.Financial Management
Advance Financial Accounting (The University of the West Indies Mona)
Scan to open on Studocu
Studocu is not sponsored or endorsed by any college or university
Downloaded by kuchy kuchy ()
, lOMoARcPSD|53991452
ACCA – FM
FINANCIAL MANAGEMENT
STUDY NOTES
Downloaded by kuchy kuchy ()
, lOMoARcPSD|53991452
Contents
Sr. # TOPIC Page #
1. Investment Appraisal 01
2. Inflation 20
3. Risk & Uncertainty 32
4. Cost of Capital 39
5. Cost of Irredeemable Debt 46
6. Capital Structure and WACC 51
7. Business Valuation 57
8. Sources of Finance 64
9. Cost of Convertible Debt 70
10. 77
Islamic Financing
11. Small and Medium Enterprises (SME) 80
12. Working Capital Management 94
13. Inventory Management 99
Downloaded by kuchy kuchy ()
, lOMoARcPSD|53991452
Study Notes Financial Management - FM
Investment Appraisal
Decision making
Short term Long term
(Single period effect) (Having multi period effects)
Investment Appraisal:-
A detailed evaluation of projects/investments to assess the viability, its effects on shareholders wealth is called
investment appraisal,
What is Appraisal:-
Any expenditure in the expectation of future benefits. There are two types of investment:
Capital expenditure:
Capital expenditure is an expenditure which results in the acquisition of non-current assets or an improvement in
their earning capacity. It is not charged as an expense in the income statement; this expenditure appears as a non-
current asset in the balance sheet.
Revenue expenditure:
Charged to the income statement and is expenditure which is incurred.
(i) For the purpose of the trade of the business this includes expenditure classified as selling and distribution,
administration expenses and finance charges.
(ii) To maintain the existing earning capacity of non-current asset.
The capital budgeting process:
The process of identifying, analyzing and selecting investments projects whose returns are expected to extend
beyond one year.
These steps are being followed in capital budgeting process.
I. Creation of capital budgets
This steps involves assessing the time required by projects, when they are anticipated to start, how they
will be financed, how they would effect the current production budget, expected levels of production and
long term development of organization.
II. Investment Decision making process
It involves the following steps
Origination of Proposals Project screening Analysis Monitoring
and Acceptance and Review
1
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