Cambridge International AS & A‑Level Business (9609) – Finance & Accounting
Clickable Index
- 1. Overview of the Finance & Accounting Unit
- 2. AS‑Level Topics (1 – 5)
- 2.1 Business & Its Environment (AS 1.1‑1.5)
- 2.2 Human Resource Management (AS 2.1‑2.6)
- 2.3 Marketing (AS 3.1‑3.6)
- 2.4 Operations Management (AS 4.1‑4.6)
- 2.5 Finance & Accounting (AS 5.1‑5.5)
- 3. A‑Level Topics (6 – 10.4)
- 3.1 External Influences & Business Strategy (6.1‑6.6)
- 3.2 Organisational Structure & Leadership (7.1‑7.5)
- 3.3 Marketing Strategy (8.1‑8.6)
- 3.4 Operations Strategy (9.1‑9.6)
- 3.5 Finance & Accounting Strategy – Ratio Analysis (10.4)
1. Overview of the Finance & Accounting Unit
This unit develops learners’ ability to:
- Interpret and analyse the three primary financial statements (income statement, balance sheet, cash‑flow statement).
- Calculate and evaluate the full range of ratios required by the syllabus – liquidity, profitability, efficiency, gearing and investment appraisal.
- Explain how financing choices (debt vs. equity) affect each ratio and the strategic position of the business.
- Integrate financial analysis with the other functional areas of business (marketing, operations, HR, strategy).
- Appraise the limitations of ratio analysis and make reasoned recommendations.
2. AS‑Level Topics (1 – 5)
2.1 Business & Its Environment (AS 1.1‑1.5)
Key Vocabulary
| Term | Definition (concise) |
|---|
| Enterprise | The initiative to organise resources to produce goods or services for profit. |
| Factors of Production | Land, labour, capital and entrepreneurship. |
| Stakeholder | Anyone who can affect or is affected by the business (shareholders, employees, customers, community, government). |
| CSR | Corporate Social Responsibility – the ethical, social and environmental obligations of a business. |
| SMART Objective | Specific, Measurable, Achievable, Relevant, Time‑bound. |
Concepts & Key Points (AS 1.1‑1.5)
| Concept | Key Points |
|---|
| Enterprise & Business Plans | Idea → market research → feasibility → business plan (objectives, financing, marketing, operations). |
| Business Size & Structure | Micro, small, medium, large; sole trader, partnership, private limited, public limited – impact on sources of finance and liability. |
| Business Objectives | Profit maximisation, growth, survival, market share, CSR; must be SMART. |
| Stakeholders & Their Interests | Shareholders (returns), employees (wages, job security), customers (quality, price), suppliers (stable orders), community (environment), government (taxes, regulation). |
| External Influences – PESTLE | Political, Economic, Social, Technological, Legal, Environmental – each can affect demand, costs, financing options. |
| CSR & Ethical Considerations | Triple‑bottom‑line – people, planet, profit; can influence brand image and access to finance. |
Illustrative Case (Start‑up vs. Multinational)
Start‑up: A tech start‑up creates a mobile app, raises seed capital from founders (equity) and a bank overdraft (debt). Objectives are rapid market entry and user acquisition. Stakeholders are founders, early employees, angel investors.
Multinational: A global consumer‑goods firm expands into a new market, uses a mix of retained earnings (equity) and a 10‑year term loan (debt). Objectives include market share growth, CSR initiatives, and compliance with local regulations. Stakeholders now include shareholders, multinational employees, NGOs and host‑government.
2.2 Human Resource Management (AS 2.1‑2.6)
Key Vocabulary
| Term | Definition |
|---|
| Workforce Planning | Estimating the number and type of employees required to meet organisational goals. |
| Turnover Rate | (Number leaving ÷ Average number of employees) × 100%. |
| Motivation Theory | Maslow’s hierarchy, Herzberg’s two‑factor, McGregor’s Theory X/Y, etc. |
| Redundancy | Job loss caused by organisational change rather than employee performance. |
| Trade Union | Organisation representing workers in collective bargaining. |
HRM Process Flow‑Chart (AS 2.1‑2.6)
- Workforce Planning – Analyse future skill needs.
- Recruitment – Advertise, source candidates.
- Selection – Application screening, interviews, tests.
- Induction & Training – On‑the‑job, off‑the‑job programmes.
- Performance Management – Appraisals, feedback, rewards.
- Motivation & Morale – Incentives, job design, communication.
- Redundancy & Dismissal – Legal procedures, severance.
- Industrial Relations – Trade‑union negotiations, collective agreements.
Key HRM Topics (AS 2.1‑2.6)
- Purpose of HRM – Secure skilled labour, improve productivity, maintain morale.
- Workforce Planning – Forecasting demand & supply of labour; use of labour‑turnover calculations.
- Recruitment & Selection – Internal vs. external sources; selection methods and their reliability.
- Training & Development – Investment appraisal (payback period, ARR) for training programmes.
- Motivation Theories – How they influence pay, promotion, job enrichment.
- Management‑Workforce Relations – Leadership styles, communication, trade‑union impact.
- Redundancy & Dismissal – Legal requirements, cost implications.
Case Study – High Turnover in a Retail Chain
A national retailer records 2,400 departures in a year. Average staff headcount = 12,000.
Turnover rate = (2,400 ÷ 12,000) × 100% = 20%**. The high rate is linked to low wages and limited career progression. Recommendations: introduce a performance‑related bonus (motivational), improve induction, and develop a clear career pathway – each can be appraised using a simple payback period.
2.3 Marketing (AS 3.1‑3.6)
Key Vocabulary
| Term | Definition |
|---|
| Segmentation | Dividing a market into distinct groups with similar needs or characteristics. |
| Targeting | Selecting one or more segments to serve. |
| Positioning | Creating a distinct image of the product in the consumer’s mind. |
| 4 Ps (Marketing Mix) | Product, Price, Promotion, Place. |
| Product Life‑Cycle (PLC) | Introduction → Growth → Maturity → Decline. |
| CRM | Customer Relationship Management – strategies to retain and grow customers. |
Marketing Topics (AS 3.1‑3.6)
- Market Research & Segmentation – Primary vs. secondary data; demographic, psychographic, behavioural criteria.
- Target Market Selection – Undifferentiated, differentiated, concentrated, micromarketing.
- Positioning Strategies – Value‑based, benefit‑based, competitor‑based.
- Product Decisions – Core, actual, augmented product; PLC management.
- Pricing Methods – Cost‑plus, target profit, competition‑oriented, psychological pricing.
- Promotion Mix – Advertising, sales promotion, public relations, personal selling, direct marketing.
- Distribution (Place) – Channels, logistics, e‑commerce, exclusive vs. intensive distribution.
- Marketing Budgets & ROI – % of sales, objective‑and‑task, contribution‑margin approach.
Example – Pricing Decision Using Target Profit Method
Product X costs £40 per unit (variable). Fixed costs = £120,000. Desired profit = £80,000. Expected sales = 10,000 units.
Required price = (Fixed + Desired Profit + (Variable × Units)) ÷ Units
= (120,000 + 80,000 + 40 × 10,000) ÷ 10,000
= (200,000 + 400,000) ÷ 10,000 = **£60** per unit.
2.4 Operations Management (AS 4.1‑4.6)
- Cost‑Volume‑Profit (CVP) analysis – break‑even point, contribution margin, margin of safety.
- Economies of scale & scope – impact on unit cost and profitability.
- Inventory management – EOQ model, safety stock, inventory turnover ratio.
- Quality management – TQM, ISO standards, cost of quality.
- Location decisions – transport costs, labour availability, market proximity.
- Technology & automation – effect on productivity and capital structure.
Efficiency Ratio Highlight
Inventory Turnover = Cost of Sales ÷ Average Inventory. A higher turnover indicates efficient stock management, which can improve the current ratio by reducing inventory (a current asset).
2.5 Finance & Accounting (AS 5.1‑5.5)
- Fundamental accounting concepts – double‑entry, accruals, matching principle, going‑concern.
- Preparation of a simple profit & loss account and classified balance sheet.
- Introduction to basic ratios: current ratio, quick ratio, gross profit margin, net profit margin.
- Understanding of cash‑flow statement – operating, investing, financing activities.
3. A‑Level Topics (6 – 10.4)
3.1 External Influences & Business Strategy (6.1‑6.6)
Analyse how macro‑ and micro‑environmental factors shape strategic choices, including the selection of a financing strategy (debt vs. equity). Use tools such as PESTLE, Porter’s Five Forces and SWOT to link external pressures to capital‑structure decisions.
3.2 Organisational Structure & Leadership (7.1‑7.5)
Explore how organisational design (functional, divisional, matrix) influences control, risk‑taking, and the willingness to adopt debt or equity financing. Discuss leadership styles (autocratic, democratic, laissez‑faire) and their impact on financial decision‑making.
3.3 Marketing Strategy (8.1‑8.6)
Link market‑orientation, product‑life‑cycle stage and growth ambitions to the need for capital. Evaluate how a firm’s marketing mix decisions (e.g., heavy promotion for a new product) may require external funding and affect the choice between debt and equity.
3.4 Operations Strategy (9.1‑9.6)
Consider capacity expansion, technology adoption, supply‑chain financing and outsourcing. Discuss how these operational choices influence the firm’s capital structure and the related ratio implications.
3.5 Finance & Accounting Strategy – Ratio Analysis (10.4)
10.4.1 Objective
To understand how a business’s financing decision (debt versus equity) influences key accounting ratios and to evaluate the strategic implications of those changes.
10.4.2 The Financial Statements – Quick Refresher
| Statement | Main Components | Relevance to Ratio Analysis |
|---|
| Income Statement (Profit & Loss) |
Revenue, Cost of Sales, Operating Expenses, Interest, Tax, Net Profit |
Provides EBIT, interest expense and profit figures used in profitability, gearing and coverage ratios. |
| Balance Sheet |
Current Assets, Non‑current Assets, Current Liabilities, Long‑term Debt, Equity |
Supplies numerators and denominators for liquidity, efficiency, gearing and return ratios. |
| Cash‑flow Statement |
Operating, Investing, Financing cash flows |
Shows actual cash available to service debt, pay dividends and fund new projects. |
10.4.3 Full Set of Ratios Required by the Syllabus
| Category | Ratio | Formula | Interpretation |
| Liquidity | Current Ratio | (Current Assets) ÷ (Current Liabilities) | Short‑term solvency; >1 generally acceptable. |
| Quick (Acid‑Test) Ratio | (Cash + Receivables + Marketable Securities) ÷ Current Liabilities | Liquidity without relying on inventory. |
| Cash Ratio | (Cash + Cash Equivalents) ÷ Current Liabilities | Most conservative liquidity measure. |
| Gearing / Solvency | Debt‑to‑Equity (D/E) | Total Debt ÷ Total Equity | Proportion of financing that is borrowed; higher = greater financial risk. |
| Debt Ratio | Total Debt ÷ Total Assets | Overall reliance on debt. |
| Interest Cover (Times‑Interest‑Earned) | EBIT ÷ Interest Expense | Ability to meet interest payments; >3 often a lender’s minimum. |
| Fixed‑Charge Coverage | (EBIT + Fixed Charges) ÷ (Interest + Fixed Charges) | Broader view of cash‑flow adequacy. |
| Profitability | Return on Equity (ROE) | Net Profit ÷ Average Equity | Profit generated per £ of shareholders’ funds. |
| Return on Assets (ROA) | Net Profit ÷ Average Total Assets | Overall efficiency of asset utilisation. |
| Gross Profit Margin | Gross Profit ÷ Revenue × 100% | Effectiveness of production/purchasing. |
| Net Profit Margin | Net Profit ÷ Revenue × 100% | Overall profitability after all expenses. |
| Earnings Per Share (EPS) | (Net Profit – Preference Dividends) ÷ Weighted Average Shares Outstanding | Key measure for shareholders. |
| Efficiency (Activity) | Inventory Turnover | Cost of Sales ÷ Average Inventory | How many times inventory is sold and replaced in a period. |
| Receivables Turnover | Credit Sales ÷ Average Trade Receivables | Speed of collecting credit sales. |
| Asset Turnover | Revenue ÷ Average Total Assets | Overall use of assets to generate sales. |
| Investment‑Appraisal (optional) | Payback Period | Years required to recover the initial outlay | Simple liquidity measure for projects. |
| Accounting Rate of Return (ARR) | Average Accounting Profit ÷ Average Investment × 100% | Profitability of an investment expressed as a percentage. |
10.4.4 How Financing Decisions Alter the Ratios
10.4.4.1 Adding Debt (Borrowing)
- Typical journal entries (simplified)
- Dr Cash Cr Loan Payable (long‑term liability)
- Each period: Dr Interest Expense Cr Cash
- Balance‑sheet impact
- Assets ↑ (cash or bank)
- Liabilities ↑ (long‑term debt; a portion may be re‑classified as current when repayment falls due within 12 months).
- Ratio consequences
- Liquidity – Current and quick ratios may fall if the loan is classified as current or if accrued interest adds to current liabilities.
- Gearing – Debt‑to‑Equity and Debt Ratio rise directly.
- Interest Cover – Falls because interest expense increases.
- ROE – May rise (financial leverage) if the borrowed funds generate a return greater than the cost of debt; may fall if the cost exceeds the incremental profit.
- ROA – Usually unchanged unless the asset base is significantly altered.
10.4.4.2 Adding Equity (Share Issue)
- Typical journal entry (simplified)
- Dr Cash Cr Share Capital (or Share Premium)
- Balance‑sheet impact
- Assets ↑ (cash)
- Equity ↑ (share capital + share premium + retained earnings if any).
- Ratio consequences
- Liquidity – Improves because assets increase while current liabilities stay the same.
- Gearing – Debt‑to‑Equity and Debt Ratio fall.
- Interest Cover – Unchanged (no extra interest).
- ROE – Usually falls because the equity denominator is larger, unless the new equity enables a proportionally larger profit.
- Control – Share dilution may affect voting power and dividend expectations.
10.4.5 Numerical Illustration – Debt vs. Equity
All figures are in £ ‘000 unless stated otherwise.
| Item | Before Financing |
|---|
| Cash | 200 |
| Inventory | 300 |
| Fixed Assets | 500 |
| Current Liabilities | 250 |
| Long‑term Debt | 400 |
| Equity (share capital + reserves) | 350 |
| EBIT | 120 |
| Interest Expense | 30 |
| Net Profit | 70 |
Baseline Ratios (rounded)
- Current Ratio = (200 + 300) ÷ 250 = 2.0
- Quick Ratio = (200 + 0 + 0) ÷ 250 = 0.8
- Debt‑to‑Equity = 400 ÷ 350 = 1.14
- Interest Cover = 120 ÷ 30 = 4.0
- ROE = 70 ÷ 350 = 20 %
- ROA = 70 ÷ (200 + 300 + 500) = 70 ÷ 1 000 = 7 %
Scenario A – Issue a £150 k Loan (10‑year term, 5 % interest)
- New cash = 200 + 150 = 350
- Long‑term debt = 400 + 150 = 550
- Interest expense rises by £7.5 k (150 × 5 %). New interest = 37.5 k.
Re‑calculated ratios
- Current Ratio = (350 + 300) ÷ 250 = 2.60 (improved cash, but still high current liabilities).
- Quick Ratio = 350 ÷ 250 = 1.40 (better liquidity).
- Debt‑to‑Equity = 550 ÷ 350 = 1.57 (higher financial risk).
- Interest Cover = 120 ÷ 37.5 = 3.2 (still acceptable but lower).
- ROE (assuming EBIT unchanged and interest now 37.5 k) → Net profit ≈ 62.5 k → ROE = 62.5 ÷ 350 = 17.9 % (falls).
Scenario B – Issue 10 000 New Ordinary Shares at £15 each (total £150 k)
- New cash = 200 + 150 = 350
- Equity = 350 + 150 = 500
- No change to interest expense.
Re‑calculated ratios
- Current Ratio = (350 + 300) ÷ 250 = 2.60 (same as Scenario A).
- Quick Ratio = 350 ÷ 250 = 1.40.
- Debt‑to‑Equity = 400 ÷ 500 = 0.80 (significant reduction in gearing).
- Interest Cover = 120 ÷ 30 = 4.0 (unchanged).
- ROE = 70 ÷ 500 = 14 % (falls because equity base is larger).
Strategic Interpretation
- Debt financing improves liquidity (more cash) but raises gearing and reduces interest cover; ROE falls unless the borrowed funds generate a higher return than the cost of debt.
- Equity financing also improves liquidity but dilutes existing shareholders and reduces financial risk; ROE typically falls unless the extra capital leads to proportionally higher profits.
- Decision‑makers must weigh the trade‑off between risk (gearing), control (share dilution) and the potential for higher returns.
10.4.6 Limitations of Ratio Analysis (A‑Level Insight)
- Historical data – ratios are based on past performance and may not predict future conditions.
- Different accounting policies – e.g., inventory valuation (FIFO vs. LIFO) can distort profitability and efficiency ratios.
- Industry variation – what is a “good” ratio in one sector may be poor in another.
- Quantitative focus – ratios ignore qualitative factors such as brand reputation, management quality, and market trends.
- Window dressing – management may manipulate timing of transactions to improve short‑term ratios.
10.4.7 Quick Checklist for Exam Answers
- State the financing option (debt or equity).
- Show the journal entry and balance‑sheet impact.
- Identify which ratios are affected and explain the direction of change.
- Interpret the strategic significance (risk, control, profitability).
- Mention any limitations or external factors that could alter the analysis.