(Last Updated On: May 12, 2018)
Download ACCA F9 Short Notes 2018 – 2019
Dear students, you can download the Download ACCA F9 Short Notes 2018 – 2019 by clicking the download link given below. These notes are created by Mr. Tommy Leung. He also gave online tuition for F9 (Financial Management) to the students, you can contact him via contact details given in the notes. He has well explained all the topics in the short notes and provided the important points to remember.
ALSO CHECK THIS: ACCA F7 SHORT NOTES 2018
We hope that ACCA F9 Short Notes 2018 – 2019 will help you in your studies. You can leave your query in the comments section or you can drop one email at [email protected] in this post I have shared one topic from his notes.
I have posted some part of his notes in this article.
CAPITAL INVESTMENT APPRAISAL
Capital investment is a key element in financial management and a thorough understanding of the
techniques of investment appraisal is very important. Textbooks compare Non discounted cash flow
methods (namely payback and ARR) with the discounted cash flow methods (namely NPV and IRR),
concluding that NPV is the best!
Non-Discounted Cash Flows (DCF) methods
(a) Accounting Rate of Return (ARR)
Accounting rate of return (also called the return on investment -ROI) is calculated as:
but whether profit is before or after interest charges and whether the investment is the initial outlay or averaged over the life of the project is unclear, a weakness of definition of profit and capital!
However, this ratio is normally calculated using the company’s published accounts, so one would expect ARR be calculated base on the accounting standards definition of profit and capital, and is normally:
- Profit / Average (written down) Investment
OR, if we were to measure management’s performance, the ratio would be:
- Profit before interest and tax / average (total) capital employed
OR, measuring the return to shareholders the ratio would be:
- Profit after interest and tax / shareholders funds (equity)
In the exam, pay attention to the definition of the ratio given in the question!!
Weaknesses of ARR
- It ignores the cost of capital tied up in the project by not discounting the cash flows.
- The use of profit in decision making may include a lot of irrelevant costs such as depreciation and generally fixed cost but ignore opportunity cost
- Profit is always subject to accounting manipulation
Though there may be many weaknesses associated with this method, it is still one of the most the commonly used method due to its utilization of the balance sheet and P/L account magnitudes familiar to managers, namely profit and capital employed. It is not surprising that some managers may be happiest in expressing project attractiveness in the same terms in which their performance will be reported to shareholders, and according to which they will be evaluated and rewarded. Afterall, most companies bonus payment is based on ROCE achieved.
ALSO, CHECK THE LINKS BELOW;
- ACCA F8 SHORT NOTES
- ACCA F2 SHORT NOTES