FOUNDATIONS IN ACCOUNTANCY PAPER MA2 [Managing Costs & Finances] Text Book Summary Please read through the text book. Do depend on this summary as errors & omissions may occur. Done By Tariq Suhail Al ShaibaniPart A: Chaptera Accurate Purpose of Management Information: Complete > Planning Cost-beneficial - Control User-targeted Relevant Authoritative Timely Easy touse ~ Decision-Making | | | | | | | J +Read page 12 about the role of the trainee accountant. Cost unit isa unit of product or service which has costs attached to it. Type of Codes: ~ Sequential (or progressive) ~ Block (group classification) - Mnemonic codes —LAX, CAI, SIN ~ Heretical codes — first digit represents a classification and then next represents a subset - Faceted codes Main Features of a report: Title - Date - Whois it intended for? - Subject - Whois the repot from? - Appendix Chapter2 Advantage of computers Stages of Data input: - Speed 2) Origination of Data + Accuracy 2) Transcription of Data = Volume and complexity 3) Data Input = Access to information Graphical User Interfaces ‘Automatic input devices: ~ Windows ~ Magnetic ink character recognition (MICR) ~ - Icons used in banking industy - Mouse ~ Optical mark reading ~ multiple choice answer - Pull-Down Menu sheets - Scanner ~ Barcodes - EFTPOS *A VDU is a monitor. Card Reading Devices are Magnetic Stripe card and Smart Card. Data can be stored on disks, tape storage, CD-ROM, DVD, Memory stick (Pen drive)‘A management information system is the hardware and software used to drive a database system which provides useful information for management. Chapter 3 Just Read Chapter 4 Cost behavior is the way in which costs are affected by changes in the volume of output Cost Behavior Patterns are Fixed, Stepped-fixed, variable & semi-variable/fixed/mixed. Other cost patterns are Maximum and minimum charge costs. Cost Behavior is essential in budgeting, decision making and control accounting. Total cost at highest activity level ~ total cost at lowest activity level Total units at highest activity level ~ total units at lowest activity level The high-low method = art B: Chapter 5 Purchase Requisition \ Identify Supplier (Quotation) \ Order Form y Dispatch Note \ Delivery Note \ Goods Received Note GRN Just-in-time inventory is to have the inventory just in time of production & have no left over afterit Buffer Inventory is to have the inventory stored before the production. This where inventory valuation arises (FIF, LIFO, Weight Average)The Effect of Value of Issues & Closing Inventory in Rising Prices (Inflation) Method Value of issues (Prod’ Cost) | Valve of closing inventory FIFO Lower than LIFO Higher than LIFO LIFO Higher than FIFO Lower than LIFO Cum. Weighted Average Lower than periodic average _| Higher than periodic average Periodic Weighted Average | Higher than weighted average | Lower than weighted average *LIFO is not used anymore according to the Accounting Standards. *Read Page 79 for inventory valuation Perpetual Inventory System is the use of bin cards & stores ledger to ensure that every issue & receipt of inventory as it occurs (control) Periodic Stocktaking: to count the stock annually, on a specific date Continuous Stocktaking: to always count and check the stock Inventory discrepancies: is when the physical amount of the inventory and the one shown in the records disagree. Inventory Costs: © Ordering Costs * Holding Costs © Stockout Costs Inventory control levels: Reorder level = maximum usage x maximum lead time Minimum level (Safety/Buffer) = reorder level - (average x usage average led time) Maximum level = reorder level + reorder quantity — (minimum usage x minimum lead time) Reorder quantity is the quantity which to be ordered when inventory reaches the reorder level ‘Average inventory = safety inventory + ¥ reorder quantity Economic order quantity (E0Q) is the order quantity which minimizes the inventory costs. Co = Cost of ordering a consignment from a supplier V2 ‘CoD y= Cost of holding one unit of inventory of one time period 0a = CH D_ = Demand during the time period Annual cost of holding inventory = [buffer inventory + (EOQ/2)] x Annual holding cost per ‘component Chapter 6 Incentives & bonuses: © Piece work © Time-saved bonus * Discretionary bonus — if the boss feels like it© Group bonus scheme + Profit-Sharing Scheme Replacements ‘Average number of employees in period Labor turnover rate 100% Labor Efficiency & Utilization: * Efficiency ratio = SH x 100% ion At * Capacity utilization ration = 57/x 100% SH ‘* Production volume ratio ==> x100% _ lle Hours = Total hours Idle Time ratio x 100% Chapter 7 Depreciation: ~The Straight line method - equal amount every year = Reducing balance method - calculate a percentage from the NBV - Machine hour method - depends on expected hours of usage ost of fixed asset ~ residual value ‘estimated total of production Depreciation per unit = x acutal production (Product Unit Cost) 4 +9? Marginal Costing ‘Absorption Costing Sales om -COGS (Variable Cost) = i De Contribution 7 £c____ +Prod” O/H Profit Factory cost uae o Total Cost ‘The main reasons for using absorption costing are for inventory valuations and establishing the Profitability of different products ‘ Budgeted Output ‘The Predetermined Absorption Rate = ‘The procedures are Allocation, Apportionment, Reapportionment and Absorption Direct Method of reapportionment involves apportioning the costs of each service cost center to production cost centers only‘Step-down method of reapportionment recognizes the inter-service cost centers work. In this method, leach service cost centers costs are not only apportioned to production department but to some (but not all) of other service cost centers that makes use of the service provided ‘*The service centers which would be reapportioned to first, depends on which one would cause a higher Absorption rate. ‘Actual ~ Absorbed = Positive/Negative ‘+ Ifthe result is negative, there is over absorption ‘Ifthe result is positive, there is under absorption Chapterao They are two types of cost bookkeeping system: 2) Interlocking System: require separate ledgers to be kept for the cost accounting function and the financial accounting function, which means that the cost accounting profit and financial profit have to be reconciled 2) Integrated System: Combines the two functions in one set of ledger accounts *Modern cost accounting systems (computerized) are integrated systems. Costs are debited as normal into the appropriate expense accounts (the credit entry going to cash or creditors): Material Cast ‘Amounts are taken out x oie ‘of each cost account and From work in- progress, Finished goods are then cma [S put in to work in items will be transferred sold, forming the cost of progress accounts to finished goods sales Profit & Loss Work-in-progress Finished Goods ‘Account To Labour profit ashy x and loss Tow To From Creditors | x Material | finshed work | account e in —> TF abou | gooes progress | (cost of Sales Overheads sales) ‘Overheads Cash/ x To Creditors | WIP x‘Step-down method of reapportionment recognizes the inter-service cost centers work. In this method, each service cost center's costs are not only apportioned to production department but to some (but not al) of other service cost centers that makes use of the service provided “*The service centers which would be reapportioned to first, depends on which one would cause a higher Absorption rate. ‘Actual - Absorbed = Positive/Negative ‘+ Ifthe result is negative, there is over absorption ‘+ Ifthe result is positive, there is under absorption Chapter 20 ‘They are two types of cost bookkeeping system: 2) Interlocking System: require separate ledgers to be kept for the cost accounting function and the financial accounting function, which means that the cost accounting profit and financial profit have to be reconciled 2) Integrated System: Combines the two functions in one set of ledger accounts ‘*Modem cost accounting systems (computerized) are integrated systems. Costs are debited as normal into the appropriate expense accounts (the credit entry going to cash or creditors): Material Cosy ‘Amounts are taken out * aie of each cost account and From work in- progress, Finished goods are then creamer: (3c put in to work in items will be transferred sold, forming the cost of progress accounts to finished goods sales Profit & Loss Work-in-progress Finished Goods ‘Account To Labour profit Cash) x and loss Tow To From Gael Creditors. | x Material | finished work | account ae TT abou | gooas progress | (cost of a Overheads sales) Overheads Cash/ x To Creditors | WIP x‘Advantages and Limitations of interlocking & Integrated cost accounting systems Interlocking Integrated ‘Advantages | -Feature two ledgers each fulfill _| - Saving in administration time & different purposes costs = Ivisless likely that any conflict | - No need to reconcile the profits of needs will arise of the separate cost & financial accounts Limitations | - Profit of separate cost & ~ one set of accounts is expected financial accounts must be to fulfil two diferent purposes reconciled (Cost for Management & Financial for external reporting)s = requires more administration time -More costly torun Chapter aa ‘Ajob is a cost unit which consists of a single order or contract Cost plus pricing is when after you determine the cost, you add a percentage mark-up for profit. Abatchis a cost unit which consists of a separate, readily identifiable group of product units which maintain their separate identity throughout the production process. (Itis very similar to job costing but in batches) Chapter a2 Input Rawmaterals Process 1 Split-off point Joint product A, By-product ‘No common cost allocated cuz it doesn't havea significant sales valueThe problems in accounting for joint products: a) How common costs should be apportioned between products, in order to put a value to closing inventories and to the cost of sale (and profit) for each product b) Whether it is more profitable to sell a joint product at one stage of processing, or to process further and it at a later stage Abnormal loss is a cost/expense Dr Income Statement Abnormal gain is gain/revenue Dr Process Account Cr income Statement *Page 220 and 223 Part D: Chapter a3 Cost-volume-profit (CVP) analysis is the study of the interrelationships between costs, volume and profit at various levels of activity ‘The CVP analysis is done to know these two main points: ©The breakeven point which is the activity level at which there is neither profit nor loss. ‘© Theamount by which actual sales can fall below anticipated sales, without a loss being incurred . Total fixed costs Contribution required to break even Breakeven point (BEP) aR STS Tro ee ema Contritbution per unit Contribution per unit = Number of units of sales required to break even, Reuired Contribution _ Fixed Costs Alternative way to calculate BEP = z SRatio ratio *Assume Contribution = Fixed Costs BUT only in BEP not in general because profits 0 at BEP. Conrtibution CS ratio= —————_ x 100% ‘Sales ‘The margin of safety is the difference in units between the expected sales volume and the breakeven sales volume and itis sometimes expressed as a percentage of the expected sales volume Atthe breakeven point, S = V + F Sales mi = ar Total variable costs = Total fixed costs Profit The target profitis achieved when S = V+ F+ P * 5 -V =F + Pso, total contribution required = F + P Subtracting V from each equations side will give you the total contribution = Fixed Costs *CHECK CHANGES IN SELLING PRICE Total profit is maximized when the total contribution at its maximumThey are two types of charts, + Breakeven chart = Profit/Volume Chart itations of CVP analaysis ~ _ Itcan only apply to a single product Time consuming - Assumes fixed costs are constant - Assumes variable costs are the same per unit at all levels of output - Assumes that sales price are constant at al levels of output ~ Assumes production and sales are the same (inventory levels are ignored) - I's uses estimates (budgets) *Check out the charts part advantage and limitations. Chapter 14 Relevant cost (incremental) isa cost that will occurin the future from the result of a decision made now, at present. Relevant costs are cash flows. So they do not reflect additional cash spending (Such as depreciation and notional costs) Past/Sunk Costs are costs that have been incurred in the past which are totally irrelevant to any decision that is being made now An opportunity cost is the valve of the benefit sacrificed when one course of action is chosen, in preference of alternative. Itis it the cost of the other alternative that have not been chosen. Unless stated otherwise, you should assume the following, * Variable costs will be relevant costs. + Fixed costs are irrelevant to a decision Non-Relevant variable costs are variable costs that may be irrelevant. For example, if you have raw material that is no longer been used and has no scrap value. However, they can be used in a special job which the company is trying to decide to undertake. Attributable fixed costs are those costs which, although fixed within a relevant range of activity are relevant to a decision for either of the following reasons: a) They could increase if extra activities were undertaken (STEPPED FIXED COSTS). For Example, ‘you will need to employ extra supervisors for ever y 20 units. b) They would decrease or be eliminated entirely if a decision were taken either to reduce the scales of operations or shut down entirely. ‘Absorbed overhead is a notional accounting cost and hence should be ignored in decision-making purposes, Its overhead incurred which may be relevant to a decision, limiting factor is a factor which limits the organization's activities. It could be sales if there are sufficient production resources to meet the sales demands, but any one of the organizations sources (labor, materials and so on) may be insufficient to meet the level of production demands. Ina limiting factor situation, contribution will be maximized by earning the biggest possible contribution per unit of limiting factor. In.amake/buy-in problem with no limiting factors, the relevant costs for the decision are the differential costs between the two options.Unit Variable cost of making (Unit variable cost of buying = Difference (Annual requirements (units) = Extra variable cost of buying (per annum) (0 Fixed Costs saved by buying = Extra total cost of buying *CHECK with the limiting factor part Chapters Long term decisions generally involve looking at the options available when a company (or an individual) puts money into an investment. Companies will need to consider the time value of money (how much $5 that | have now will be worth in 5 years’ time?) Interest is the amount of money which an investment earns over time ‘Simple interest is the interest which is earned in equal amounts every year assuming no change in the interest rate, and which is given proportion of the original investment (the principal) = the original sum of money R=the interest rate n= the number of periods (normally years) S= the sum invested after n periods, consisting of the original capital (P) plus interest earned (future value) S=P+nrP Compound interest is when the interest earned also earns interested itself in later periods S =P(atr)” ‘The Nominal rate is the interest rate expressed a per annum (the rate may per annum but itis actually compounded over periods of less than one year) Adjusted Nominal rate = Equivalent annual rate Effective Annual Rate = equivalent annual rate (the rate per day or per month adjusted toa given an annual rate) Effective Annual rate = Annual Percentage Rate (APR) = Compound Annual Rate (CAR) Effective Interest Rate = [(a +r)""” -2] or[(a+n"*" -a) Present value means the cash equivalent now of a sum to be received or to be paid in the future. (the value of an investment today at time) The basic principle of discounting involves calculating the present value of an investment. It starts with a future value and converts a future value to a present value. ‘The Future value an investment plus accumulated interest (compounding formula) 10FV=PV(1+1)" FVis the future valve of the investment with interest PVis the initial or ‘present’ value of the investment. ris the compound rate of return per time period, expressed a proportion (interest) nthe number of time periods ed The discounting formu! 1 PV = S(or FV) x: an *Sis the sum to be received after n time periods. This equation is the rearrangement of the equation above. ‘An annuity is a constant sum of money received or paid each year for a given number of years Present value of an annuity = Annuity x annuity factor Perpetuity is an annuity which lasts forever annuity ‘The present value of a perpetuity = ares Net profit measure how much of the capital has increased over a period of time by applying the matching concept. Net cash flow measure the difference in the payments leaving an organization's bank account and the receipts that are paid into the bank account. Reasons why net profit and net cash flow differ are mainly due to timing differences 1. Purchase of non-current assets 2. Sale of non-current assets 3. Matching receipts from receivables and sales invoices raised 4 Matching payments to payable and cost of sales Discounting cash flow involves discounting future cash flows from a project in order to decide whether to the project will earn a satisfactory rate of return. ‘The Net Present Value (NPV) method calculates the present values of al times of income & expenditure related to an investment at a given rate of return, and then calculates a net total. itis positive, the investments considered to be acceptable. The cost of capital has two aspects tot a) Itis the cost of funds that a company raises and uses b) The minimum return that a company should makes from its own investments, to earn the cash flows out of which investors can be paid their return, *Page 272 question 6.3 and 6.4 ‘The Internal Rate of Return (IRR) method determines the rate of interest (internal rate of return) at which the NPVzo. The internal rate of return is therefore the rate of return on an investment. 1It can be calculated either by a graphical method or by a technique called as the interpolation method IRR= a%- [, x(a-b)|% | aisone interest rate { bisthe other interest rate *The negative sign shouldn't be shown. The answer should be | NPV,isthe NPV at rate a somewhere between the two rates. {NPVoisthe NPV rate at b The payback period is the time that is required for the cash inflows from a capital investment project to equal the cash outfiows. itis to measure of how long it will take to recover the initial cash spending onan investment. ‘The discounted payback period is the time it take before a project's cumulative NPV turns from being negative to being positive. Part E: Chapteraé For management purposes cash includes petty cash, bank account balances, marketable secuirties and the un-used portion of any overdraft facility. Cash flowis the movement of funds into and out of a business. A business which runs out of cash even if profitable, will fail. Working capital isthe net differences between current assets and current liabilities. The working capital «eydle measures the period of time between cash outflows for materials and cash inflow from customers. ‘Types of cash transactions: Capital - increase capital, non-current assets Revenue day-day operations, overdraft interest Exceptional - unusual such as closing down part of a business Unexceptional - Regular - at predictable intervals, salary, rent, etc x 4 5 6. Irregular —not at predictable intervals, such as buying new machine, disaster recover expense 12RAW MATERIALS hy J Payables Payments WORK IN PROGESS {or suppliers 4 3) 6) FINISHES GOODS Les > p-current assets PROFIT IN T CASH CYCLE OR Cash OPERATING CYCLE Dividends Interest Drawings Received for ‘goods sold r takeos RAW MATERIALS cial investments, feign currency for trading overseas Cashinflows » 2) 2 4 D) 6 Cash received from sales credit + cash Long-term grants from government institutions Equity share capital invested Long-term loans provided by banks, etc. Sale of non-current assets Liquidation (conversion into cash) of short-term investments Differences between trading profits and cash flows Cash may be obtained from a transaction which has nothing to do with profit or loss Ex. issue of shares Cash may be paid for the purchase of non-current assets, When a non-current asset is sold there is a profit/oss from the NBV only Profit is sales minus COGS. The cash may not be received or paid yet due to the matching concept. Ex Payables & Receivables Operational Cash flow = Cashin - Cash out Cashin = sales + opening receivables ~ closing receivables Cash out = Purchases + opening payables — closing payables Causes of Negative Cash flows Spend cash on non-current assets High inflation rates may cause the business to increase its funding Dividends may exceed cash surpluses for the year. ¢happensin recession to encourage investors Debt Repayment Negative cash flows from operations would be an indicator of financial distress, unless the company is. ina period of rapid (and profitable) growth and is having to invest heavily in additional working capital 13Cash budgets are not prepared according to the accruals concepts, which tries to ensure income and expenditure are matched. Instead they are prepared on a cash (receipts and payments) basis. Read Page 294 ‘The accruals concept basis of accounting is a way of letting investors knows how much profit has made by the matching Income and expenses. It has no relevance whatsoever to day to day cash management. ‘Advantages of cash flow = Business ability torepay = Helps management on which decisions should be taken - Can provide a satisfactory basis for stewardship accounting ‘Cash flow management or liquidity management includes the management of inventory levels, receivables and payables, to ensure that the working capital cycle does not become too long. Chapter 27 ‘Treasury management is the corporate handing ofall financial matters, the generation of external and intemal funds for business, the management of currencies and cash flows, and the complex strategies, policies and procedures of corporate finance. ‘The role of the teasurer 1) Corporate financial objectives 2), Liquidity management 3) Funding Management 4) Currency management 5) Corporate finance 6) Related subjects Cash handling procedures relating to receipts include: = Proper post-opening arrangements - Prompt recording = Prompt banking - Reconciliation of records of cash received and banked, Cash han 1g procedures over payments include: ~ Restriction of access to cash and cheques = Procedures for preparation and authorization of payments Major factors in the financial enviorement are the level of interest rates and the relative ease or difficulty in borrowing or raising capital. Chapter 18 Cash flow forecasts provide an early warning of liquidity problems, by estimating: - How much is required = Whenitis required - How long its required for 14- Whether it will be available from anticipated sources Acash budget is a detailed forecast of cash receipts, payments and balances over a planning period. Its formally adopted as part of the business plan or master budget for the period. Cash flow based forecasts (receipts and payments) are forecasts of the amount and timing of. cash receipts and payments, net cash flow and changes in cash balances, for each time period covered by the forecast. Cash flow based forecasts include cash budgets up to a year or so ahead and short-term forecasts of just a few days. Arolling forecast is a forecast that is continually updates Cash flow problems can arise in various ways: a) Making losses b) Inflation ¢) Growth 4d) Seasonal business €) One-off items of expenditure Controlling the working capital cycle: short-term deficiencies a) Short-term borrowing b) Sale of short-term investment ©) Raising share capital 4d) Thenature and timing of discretionary flows might alter €) Different sources of finance f) Leading and lagging - Effectively means shortening the working the cycle by obt money from customers as soon as possible, and taking as much credit as possible. When a company isin need for cash, those steps are taken: 3) Postponing capital expenditure 2) Accelerating cash inflows which would otherwise be expected in a later period 3) Reversing past investment decision by selling assets previously acquired 4) Negotiating a reduction in cash outflows, so as to postpone or even reduce payments ‘An index is a measure over a period of time of the average changes in prices of items or a group of items A quantity index is measures the change in the non-monetary val a group of time. A price index is the same but in monetary value. 5 of a group of items over Index numbers can be used for: - Topredict future cash inflows - Estimated future price index ~ Need for increased borrowing limits Atime series is simply a record of figures that have occurred over a past period of time. Amoving average is an average value that is revised as new information is received. (Middle of three numbers). Its often used to compute forecasts as it represent the most recent available. Seasonal variations * Trend — general long-term movement 15‘* Cyclical variation — long-term variation due to general economic conditions ‘© Seasonal variation * Random variation - variation in the figures due to unexplained or random events The additive model is A=T + S Actual figure = trend figure i = Seasonal variation | The multiplicative model is A = TxS. So seasonal variation may be calculated by either S=A-T or 5 =4 isadvantages of using time series for forecasting ~The less historic data available the less reliable the results will be = The further into the future we forecast the less reliable the results will be There is an assumption that the trend and seasonal variation from the past will continue in the future - Cyclical and random variation have been ignored Chapter29 Acash deficit is a shortage of available funds to satisfy current obligations. it may arise for the following reasons... current funding arrangements, seasonal factors, companies who are reliant on one or two large customers (if they fail to pay in time). Acash surplus is the value of cash over and above what is required to satisfy current obligations. The choice of investing cash surplus is determined by considerations of profitability, liquidity and safety. Cash must be kept as safety buffer to cover unforeseen expenses. Many business do not hold on cash surplus as an asset, they invest init. 2) Transaction motive - the need for a business to meet it’s regular commitment of covering it’s expenses, taxes, dividends, etc. 2) Precautionary motive - to keep cash to cover unforeseen contingencies, safety! 3) Speculative motive - Cash is not kept as a an asset in hope for interest rates will rise. Interest bearing accounts are accounts for a fixed period of time. Withdrawals may not be permitted and the principal dos not decline in monetary value. n ‘Compound Annual Rate of interest (CAR) = [a +4)- | x100 Money-market deposit account (MMDA) is a deposit account offered by a bank which invests in stocks ‘and bonds. The money is deposited fora fix period or a notice period. The interest rate is paid based on current interest rates in the money markets. ‘The risks and returns is that the business can retain their money in a few business days. Minimum deposits are as high as 50K, deposit rates are variable (you won't know how much will you be getting in 16return), over the long time, inflation can eat away at returns. A certificate of deposit (CD) is a certificate indicating that a sum of money have been deposited with a bank and willbe repaid at a later date with interest. They can be bought and sold, so they are liquid type of investment. CD's have one major advantage over a money-market fixed deposit which is namely is liquidity. They an be easily converted to cash by buying & selling them. Gilts (gilt-edged) are securities issued by the UK government which are basically stocks. Although, they have a small face value (usually $100) they dominate the fixed interest market. *Government stocks are about as safe as an investment you can get. However, returns are relatively low. Local authority stocks may be issued by any size of authority. They are not considered as safe asthe central government stocks. However, they are usually tend to be obtained by few institutions. *The return on local authority stocks tend to be rather higher than on glits Yearlings: bonds issues by local authorities which are redeemable in a year or two. Investments are rated according their retum and risk. Diversification across a range of separate investments can reduce risk for the investor. Chapter 20 ‘Companies often rely on bank finance. They are three aspects to the maintenance of liquidity: a). The firm needs enough money to function operationally b)_ The firm also needs to minimize the risk ©The firm also need to provide against the contingency of any sudden movements in cash (safety) Bank borrowing can be obtained in the following ways © Overdraft - repayable on demand Term oan: customer borrows a fixed amount & pays it back with interest over a period or at the end of it ‘© Committed facility: the bank undertake to make a stipulated amount available to a borrower, ‘on demand ‘© Arevolving facility: is a facility that is renewed after a set period. You can renew (re-borrow) ‘only after you have paid the full amount. © Uncommitted facility: the banks will give you ifit feels ike it, by the condition that all paperwork is done upfront. Ithas no obligation to give you this loan. © Banker's acceptance facilities: The bank agrees to make payments on your bills. It wll have @ legal agreement to do so; they'll also charge interest on it. Ex. Bank Mandate ‘THEBANKCUSTOMER RELATIONSHIP ~ Debtor/creditor when you open a bank account. = Mortgagor/mortgage when you secure a loan over an asset such as property 7~ Fiduciary The law ‘superior party’ (which is the bank) to act in good faith ‘The bank’s rights = Charges and commissions ~ Overdrawn balances ‘The bank's duties - Honor customer's cheques + Confidentiality ~ Receipt of customer's funds - Advice of forgery = Comply with customer's instructions ~ Care and skill = Provide a statement = Closure of accounts Borrower's duties ~ Duty of care ~ Advice of forgery CAMPARI~ Lending Criteria Character of the customer Ability to borrow and repay Margin of profit Purpose of the borrowing ‘Amount of borrowing Repayment terms Insurance against the possibility of non-payment Discretionary rates: the bank will decide on the return (interest return) which it requires from the lending. This will apply on a risky venture such as a new business, The bank would give a loan to a borrower that s willing to pay a certain ‘up front’ amount. For example, a bank may be willing to lend $2 million to help a company to buy new premises, but only if the customer will contribute $3 milion of its own money. Banks have to take securities when lending, those securities should have the following characteristics: a) Easy totake b) Easy tovalue ©) Easy to realise (to be converted to cash) Overdraft considerations: a) Amount b) Margin interest is charged on an amount overdrawn, usually as a margin over base rate. ©) Purpose 4) Repayment -On demand €) Security ~may be required f) Benefits flexible ‘When a business customer has an overdraft facility, and the account is always in overdraft, then it has solid core (or hard core) instead of swing. If this continues, the bank may ask the customer to change the ‘overdraft loan to a long-term loan.‘An overdraft facility for day-today should be to either increase total current assets or to reduce other current liabilities Loan repayment profiles = Bullet: you do not pay the principal until at end of the period - _ Baloon: Some of the loan principals repaid during the term of the loan. At maturity, however, there is still a substantial proportion of loan outstanding, which is then repaid, - _Amortising or straight repayment loan: the loan principal is repaid gradually over the term of the loan. At the final loan payment, the outstanding loan will be zero. Ex. Mortgage Loan interest may be fixed or variable (depending on money markets) Covenants are the obligations for the borrower: 4) Positive covenants require the borrower to do something b) Negative or restrictive covenants are promises by a borrower not to do something (Ex. Borrow more money) ©) Quantitative covenants set limitation on the borrower's financial position. Ex. Loan does not ‘exceed 100% of shareholders’ funds. Advantages Overdraft ~ Only pays interest when overdrawn - Flexibility for the bank to review the loan conditions ~ Can do the same job as medium-term loan Chapter 22422 Advantages ~ Easy tolearn & use ~ Can make calculation & manipulation of data ‘easier and quicker ~ They enable the analysis, reporting and sharing of financial information ~ They enable ‘what-if Analysis very quickly Medium-term loan Both bank & borrower know what amount, how much interest and when will the loan be repaid Borrower does not have to worry about the bank to reduce the facility ‘They normally carry a facility letter setting out the precise terms of agreement. Disadvantages is only as its original design, garbage in = garbage out ~ formulae are hidden from sight spreadsheet presentation may make reports ‘appear infallible Research says that high proportion of large models contain critical errors Database is more suitable for large volumes of data Can easily get corrupted & difficult to find errors in large models Numbers can be formatted into several ways. Ex. Commas, percentages, currency, etc Cell contents may be text, values, and formulae. Error Value Explanation 19‘#DIVie! Dividing @ number by zero ‘#VALUE! Due to one of the cells contain text. tis a data type error. SUM ignore texts. #NULL ‘A formula is not separated correctly ‘#REF Invalid cell reference. The cell may have been deleted. Relative cell references (B3) change when you copy formulae to other locations or move data from place to another. Absolute cell references (sBs3) stay the same. IF Statement follow the following structure (or syntax). =IF(logical_test,value_if_true,value_if false) Bar Charts a char which data is shown in a form of a bar. Itis used to show the magnitude of the corresponding data item Component Bar Chart(stacked bar chart) is a bar that shows component information in each bar on a percentage basis. Line Graphs are often used in commercial contexts. They are useful for demonstrating trends. Xis the dependent variable. Y is the independent variable. Pie Charts it isin the shape ofa pie. To show percentage figures. One of the main disadvantages without showing figures on it, itis difficult to compare. ‘Scatter Diagram are graphs that exhibit data, rather than equations in order to compare the way in which to variables very with each other. The points may not follow a trend. However, if trend is noticed in ascatter diagram, a trend line is drawn Freezing titles is to always keep the titles visible to the user even when scrolling down. It can be done by the excel menu WindowsFreeze Panes (you have to select the column or rows you want to freeze first) Referring to a different spreadsheet file = SUM(‘C:\Sales\Annual.xls}an"!SCS10:SCS25) iPhone= Eye Phone= Illuminati Phone. Siri spelled backwards is Iris, that’s a part of the Eye. Apple is Illuminati. They are Watching You. 20