Financial Information and Decision-Making
Sources of finance
Candidates must distinguish internal sources (retained profit, sale of assets, working capital) from external sources (bank loans, overdrafts, trade credit, leasing, hire purchase, share issue, debentures, government grants). Match each source to purpose (short, medium or long term) and to the stage and size of the business. A start-up rarely issues shares; a public company can.
Accounts and ratios
Know the purpose of the income statement (revenue, cost of sales, gross profit, expenses, net profit) and the statement of financial position (assets, liabilities, capital). Learn key ratios:
- Gross profit margin = gross profit ÷ revenue × 100.
- Net profit margin = net profit ÷ revenue × 100.
- Return on capital employed = net profit ÷ capital employed × 100.
- Current ratio = current assets ÷ current liabilities.
- Break-even output = fixed costs ÷ (selling price − variable cost per unit).
Use ratios to compare years or firms and to comment on performance; a ratio alone is not an answer - interpret it.
Traps to watch
- Confusing gross profit with net profit.
- Forgetting to multiply margins by 100 to express them as percentages.
- Treating an overdraft as long-term finance.
- Calculating break-even in currency units rather than units.
Worked example / rule of thumb
Revenue P200,000; cost of sales P120,000; expenses P50,000. Gross profit = P80,000; net profit = P30,000; net margin = 15%. Break-even with fixed costs P30,000 and contribution P50 per unit = 600 units. Rule of thumb: always show the formula, the substitution and the units.