ACCA Study E-books available
ACCA Exam Study Text
ACCA Paper F1 - Exam Study Text - Accountant in Business
ACCA Paper F2 - Exam Study Text - Management Accounting
ACCA Paper F5 - Exam Study Text - Performance Management
ACCA Paper F9 - Exam Study Text - Financial Management
ACCA Paper P3 - Exam Study Text - Business Analysis
ACCA Practice Questions and Answers
ACCA Paper F1 - Practice Questions and Answers - Accountant in Business
ACCA Paper F2 - Practice Questions and Answers - Management Accounting
ACCA Paper F3 - Practice Questions and Answers - Financial Accounting
ACCA Paper F5 - Practice Questions and Answers Diagnostic Tests - Performance Management
ACCA Paper F9 - Practice Questions and Answers Diagnostic Tests - Financial Management
ACCA Paper P3 - Practice Questions and Answers - Business Analysis
ACCA Revision Mnemonics and Charts
ACCA Paper F5 - Revision Mnemonics and Charts - Performance Management
ACCA Paper F8 - Revision Mnemonics and Charts - Audit and Assurance (International)
ACCA Paper F9 - Revision Mnemonics and Charts - Financial Management
ACCA Paper P3 - Revision Mnemonics and Charts - Business Analysis
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Can Financial Management be defined in terms of a Balance Sheet?
ACCA Paper F9 and ACCA Paper P3 cover financial management.
The answer to the question is Yes, it can.
By using GAAP (generally approved accountancy practice) a balance sheet is constructed to show four things: (i) non-current assets, (ii) current assets, (iii) long-term capital and (iii) current liabilities. Assets represent investments (assets are only obtained as the result of investing) and capital and liabilities represent the financing or funding of these investments (we need funds for the investments). We consider what is involved below.
Non-current assets
These are assets that have an expected ‘life’ that exceeds one year from the date of the balance sheet. Financial managers refer to these as capital assets. The acquisition of capital assets need to be carefully planned and subsequently managed and this involves capital budgeting and capital investment appraisal. Both areas are covered on the ACCA Paper F9 and ACCA Paper P4 syllabuses.
Current assets
These assets, such as inventory, debtors and cash, are of expected short life, with less than one year at date of the balance sheet, and are required so that the organisation can ‘work’. Financial managers refer to these assets as ‘working capital’. Working capital management is another important part of the syllabuses for both ACCA Paper F9 and ACCA Paper P3.
Current liabilities
Short-term liabilities, such as trade credit and accruals (unpaid bills) represent a significant part of the funding of a company. Because they are short-term they are low cost. For example, a trade creditor may not charge for an accepted delay in the payment of an invoice, employees are paid at the end of a month and the government does not charge interest if it allows a nine month period before corporate tax is paid.
Obviously, financial managers plan to take as much advantage as possible of short-term funding. Current liabilities are mainly used to finance working capital (i.e. current assets).
Long term capital
Long term capital is made up, in the main, of equity capital (shares, and funds belonging to shareholders) and long term debt. Long term debt is more expensive than current liabilities and must therefore be carefully planned and managed. The relationship between equity and long term debt is referred to as structure which brings with it gearing. The ‘mixture’ of equity and long term debt needs to be carefully balanced.
It can be seen from this short discussion that the major part of financial management is based on factors shown in the balance sheet. There are obviously other areas, such as risk management, foreign currency management, performance measurement and taxation management - but even these are to a great extent related to aspects which will be, or are, reflected in the company’s balance sheet.
Financial Managment is coverd in the ACCA F9 exam, and ACCA P3 exam. For more information on either of these ACCA subjects, see the TonySurridge ACCA study section on this website.
