UNIVERSITY OF ELDORET

SCHOOL OF HUMAN RESOURCE DEVELOPMENT

DEPARTMENT OF QUANTITATIVE SKILLS AND DEVELOPMENT STUDIES
SHUM 122: QUANTITATIVE SKILLS II E-LEARNING MODULE
Prepared by CPA Dominic Abuga Omare (0725 779046)

Course Objective
By the end of the course unit the learners should be able to:-
Perform basic mathematics and calculations that are necessary for their various fields of study
Expected Learning Outcomes
By the end of the course unit learners should be able to:-
i. File records using basic record keeping techniques
ii. Draw simple business budgeting financial projections, simple investment analysis & cost of capital,
iii. Calculate working capital and expenditure decisions
COURSE OUTLINE
Week Topic Sub Topic

Week One TOPIC ONE:  Business records/types/importance

Record Keeping  Assets, liabilities and capital
 Accounting Cycle
 Source documents
 The Journal and its entries
 The ledger
 The trial balance statement
 Financial statements (Income
statement and Balance sheet)
 Post trial Balance Adjustments ie
stock, Accruals, Prepayments,
Bad debts, Depreciation etc
 Analysis of simple financial
statements and interpretation
Week Two-Three TOPIC TWO: Financial  Introduction
Mathematics  Series
 Types of series ie Arithmetic and
Geometric Progressive
 Types of interest ie Simple and
Compound interest
 Time value of money
 Compounding and Discounting
 Annuities
 Application of annuity formulae to:
 Hire Purchase

1
  Sinking fund
 Debt
Payment/Repayments
 Depreciation
 Present value of an annuity
 Loan Amortization
 Present Value of Perpetuity (
Perpetual annuity)
 Present Value of a Constant Value of
cash flow growing at a compound
Week Four-Five TOPIC THREE: Budgeting  Introduction
and Budgetary Control  Importance/limitation of budgeting
 Principles of Budgeting
 Objectives of budgetary control
 Budget control, Budget manual and
Budget Period
 The key factor or limiting
factor/Principle Budget factor
 Types of Budget/ Master Budget
 Sales Budget
 Purchase Budget
 Production
 Cash Budget
 Fixed and Flexible Budget
 Forecasting and Budgets
Week Six TOPIC FOUR: Index  Introduction
Numbers  Significance/ limitation of index
numbers
 Factors/problems in construction of
INDEX numbers
 Types of Index numbers
 Construction of Index numbers
(a) Unweighted index
numbers ie fixed &
chain base method
(b) Weighted index numbers
 Laspeyre’s
Method
 Paashes Method
 Kelly’s method
 Fishers’ Ideal

2
  Marshall Edge
worth etc
 Application of Index
numbers
Week Seven C.A.T  Continuous Assessment Tests

Week Eight-Nine TOPIC FIVE: Taxation  Basic concepts and Purpose

of taxation
 Principles of an optimal tax
system
 Classification or types of
taxes
 Value added Tax
 Employment Benefits
 Determination of taxable
Income.
Week Ten-Eleven TOPIC SIX: Stock Market  Basic concepts in stock exchange
 Company quotation to the Nairobi
stock exchange
 Role of stock exchange in economic
development.
Week Twelve TOPIC SEVEN:  Births and death rates
Demography  Morbidity
 HIV/Aids and its impacts
 Population trends and projection
Week Thirteen- EXAMS  Revision and Sitting the Final
Fourteen Examination

 Teaching / Learning Methodologies-Lectures and tutorials, Group discussion, Demonstration, Individual

assignments, Case studies of critical and scientific reading, writing and listening.

 Instructional Materials and Equipment-Text books, Lecture notes.

 Course Assessment-Examination - 70%; Continuous Assessment Test (CATS) - 20%; Assignments - 10%;
Total - 100%

References
Chandan J. S. (2003), Statistics For Business & Economics, New Delhi Tata McGraw Hill
Hughes, A. J. (1983). Applied mathematics for business economics and social sciences. Illinois: Richard D. Irwin
Beri I. (2008) Business Statistics New Delhi 2e PVT publishers
Barnett, R. A., Ziegler M. R., & Byleen K. E. (2000). Applied mathematics (7th ed.). New Jersey:SPrentice Hall.
Wood F. Business accounting, Pitman 10th Edition
Saleemi N.A.(2005) Taxation I Simplified, 4 th Edition

3
Kenya Revenue Authority Employer Guide to Pay As You Earn
Saleemi N. A.(2005) Business Financial Simplified
Lucey,T. (2004) Quantitative Techniques DP Publication
Central Bureau of Statistics, Population statistics (Demographics)
Gupta P. (2003) Statistical Methods, Education Publishers New Delhi

TOPIC 1: BOOK KEEPING/RECORD KEEPING

Definition of book keeping/business records
Book- keeping plays a dynamic role in success of any business enterprise. The purpose of any
business is to increase wealth by making business transactions. There are three main types of
business enterprise. These are;

i) Sole proprietor
ii) Partnership
iii) Limited Company.
A business is considered to be an entity on its own separate from the owners for accounting
purposes. The importance of Book keeping is outlined below.

Importance of Book-keeping
i) Ascertainment of Profit and Loss. The main purpose of any business enterprise is to make
profits and booking generates the basic data required to determine profit/and losses of
a business.
ii) Book-keeping records are required to determine the credit worth of business as a
requirement for borrowing funds.
iii) Book-keeping records must be kept as a requirement for determination of Tax payable to
Government.
iv) Book-keeping records help to determine the value of Assets and Liabilities and therefore
network of a business.
v) Book-keeping can be effectively used as a tool to exercise controls of expenses and
increase profitability.
Types of business records
(a) Balance sheet
(b) Ledger
(c) Income statement
The Balance Sheet: A Balance sheet is a financial statement of Assets and Liabilities of an
individual or business as at a given date.

The Balance Sheet Equation

The Balance sheet equation is expressed as: Assets = Capital + Liabilities, or
Capital = Assets – Liabilities, or Liabilities = Assets – Capital

The values of Assets, liabilities and capital may change from time to time due to transactions but

4
 the equation remains constant.
Assets: Assets can be classified as Fixed Assets and Current Assets. Current Assets are assets in
cash form or near cash form. Examples are cash in Hand, cash at Bank, debtors, stock and pre-paid
expenses. Fixed Assets are properties of the business which have a longer life in the business and
are not subject to regular changes. Examples are Land and Buildings, Motor vehicles, Plant and
Machinery, office equipment, furniture and fittings.
Liabilities: Liabilities can be classified as Current (Short term) Liabilities and Long-Term
liabilities. Current liabilities constitute short-term borrowings, Bank Overdrafts,
Creditors and outstanding expenses. Long Term Liabilities include long-Term
borrowings by the business. These include Loans and Mortgages that are repayable
over a long period of time at least exceeding 2 years.
Capital: Capital is the Owners Contribution to the business. It can be increased due to profits or
reduced due to losses or drawings. Drawings refer to the Owners withdraw of funds
invested by him/her in the business.
Example
From the following balances extracted from the books of Goldmine Enterprises, draw the Balance
sheet as at 31st December, 2014 and determine his net profit for the year.
Land and Buildings 3,000,000
Plant and Machinery 1,500,000
Furniture and fittings 750,000
Motor vehicles 1,250,000
Debtors 500,000
Creditors 600,000
ICDC Loan 2,000,000
Capital
Cash at Hand 5,000
Cash at Bank 25,000
Stock 200,000
Bank overdraft 250,000

GOLDMINE ENTERPRISES BALANCE SHEET AS AT 31ST DECEMBER, 2014

Shs Shs.

Capital 3,500,000 Fixed Assets

Net Profit 1,055,000 Plant and Building 3, 000,000
Long –Term Liabilities Furniture and Machinery 1,500,000
ICD Loan 2,000,000 Motor Vehicles 1,250,000
6, 5000,000

Current liabilities Current Assets

Creditors 600,000 Debtors 500,000

5
Bank Overdraft 250,000 Stock 200,000
Cash at Bank 208,000
Cash on Hand 5,000

- 905,000

7,405,000
7,405,000

6
 NB: When the Balance sheet is arranged starting with fixed assets to current assets, it is referred to
as order of permanency. If arranged starting with current assets to fixed assets, it is referred to as
order of liquidity.

The Ledger Accounts

The ledger is a book of Accounts. The following are classifications in the ledger.
i) Personal Accounts: These are accounts of individuals in the Ledger who have had
transactions with the business. They Range from debtors to Creditors.
ii) Impersonal Accounts: These are accounts of Transactions impersonal in nature. These
include Expenses, Assets, Liabilities and Capital etc.

THE LEDGER

IMPERSONAL ACCOUNTS PERSONAL ACCOUNTS

NOMINAL ACCOUNTS REAL ACCOUNTS

Real Accounts: Refer to Accounts of Tangible properties either movable or immovable

e.g. Land, Buildings, Moto vehicles etc.

iii) Nominal Accounts: These are intangible items e.g. Sales Purchases, rent, wages, water bills,
insurance, etc.

The Ledger and the principle of double entry

The Principle of double entry states that for every debit entry on an account there is a
corresponding credit entry in the respective account.

For All Asset accounts, a debit entry represents an addition to the asset and a credit entry a
reduction.

For All liability Accounts including capital, a debit entry represents a reduction and a credit entry
an addition.

7
 Format of a Ledger Account

DR Name of the Account CR

Date Folio Particulars Amount Date Folio Particulars Amount

Opening of Ledger Accounts

Example 2
The following balances were extracted from the books of Masika Enterprises as at 31 st
December, 2014
Capital 2,500,000
Cash at Bank 5,000,000
Cash at Hand 20,000
Motor Vehicles 1,500,000
ICDC Loan 2,000,000
During the month of January, 2015 the following transactions took place.
January 1 Purchased goods on credit from Dan worth kshs.50,000.
January 2 Sold goods on credit to Otieno Kshs.150,000.
January 3 Received Kshs.100,000 a cheque from Wandera for payments of
goods supplied to him on credit earlier on.

8
January 4 Purchased Motor Vehicle on credit from AZ motors, worth
Kshs.1,000,000.
January 5 Paid Dan for his goods by cash Kshs.15,000.
January 6 Paid kshs.100,000 by cheque to AZ motors for Motor
vehicle Purchased on Credit.
January 15 Received cash kshs.30,000 from Mr. Otieno for sales on credit.
January 20 Masika enterprises made a drawing of Kshs.100,000 for private
use.
The first step is to open ledger accounts for the balances given.

Dr. Capital A/C Cr

January 20 Drawings 100,000 January 1 Balance b/f 2,500,000 Dr.
Bank A/C Cr.

January 1 Balance b/f 500,000

January 3 Wandera 100,000

January 1 Balance b/f 20,000 Cr.

January 6 Otieno

1,500,000

ICDC A/C
January 1 Balance b/f 2,000,000
January 4 AZ motors 1,000,000

Sales A/C

Dr.
January 1

Wanjan A/C

9
 Journals
A Journal is a book of original entry and is also referred to as Subsidiary book. Original entries
to the books of accounts are made in journals.

Types of Journal
There are two main types of journals namely:
(a) Specialized Journals: This are opened for specific purposes and the following are commonly
used.
i) Sales Journal
ii) Purchases Journal
iii) Sales Returns Journal
iv) Purchases Returns Journal
v) Cash Journals

(b) General Journals: This is a Journal that in nature. Examples are correction of
errors, sale of shares, transfer entries.

Example 3
Given the following transactions, make entries in the Sales Journal, Purchases Journal, Sales Returns
Journal and Purchases Return Journals.
January 1 Credit Purchases: Simiyu shs.25,000, Mathews shs.15,000,
Wanyoike shs.30,000.

January 5 Credit Sales: John Otieno shs.40,000, Musungu shs.28,000, Peter

Kobil shs.40,000, Roselyne Otiende shs.50,000.
January 7 Credit purchases: Mundia shs.19,000, Simiyu shs.30,000, Oku,u
Peter shs.45,000.
January 9 Good Returned by us to Simiyu shs.5,000, Mathews shs.3,000,
Mundia shs.7,000.
January 10 Goods Returned to us by John Otieno shs.3,500, Musungu
shs.7,000. Peter Kobil shs.4,000.
Answers
Sales Journal
Date Particulars Invoice No Folio Amount (Kshs)

January 5 John Otieno 001 PL 01 40,000

January 5 Musungu 002 PL 07 28,000
January 5 Peter Kobil 003 PL 15 40,000
January 5 Roselyne Otiende 007 PL 27 50,000
L. 19 158,000
=======

10
 Purchase Journal
Date Particulars Invoice No Folio Amount (Kshs)
January 1 Simiyu 017 22 25,000
January 1 Mathews 027 16 15,000
January 1 Wanyoike 030 21 30,000
January 7 Mandia 024 034 19,000
January 7 Simiyu 013 22 30,000
January 7 Okumu Peter 016 25 45,000
PL 27 164,000
=======

Sales Returns Journal

Date Particulars Invoice No Folio Amount (Kshs)
January 10 John Otieno 022 041 3,500
January 10 Musungu 024 042 7,000
January 10 Peter Kobil 025 044 4,000
PL 17 14,500
=======

Purchase Returns Journal

Date Particulars Invoice No Folio Amount (Kshs)
January 9 Simiyu 003 23 5,000
January 9 Mathews 007 27 3,000
January 9 Mandia 008 31 7,000
PL 24 15,000
=======

The general journal

All other transactions which cannot be recorded in the specific Journals are entered in the general
journal. The General Journal has a narration for each transaction.

Example: The following Transactions were undertaken during the month of March. March 5
Purchased a Motor vehicle on Credit from Toyatsa Corporation worth kshs.5, 000,000. March 10
Purchase office equipment from office Solutions on credit worth shs.1, 500.00. Prepare a general
journal
General Journal
DATE PARTICULARS FOLIO DR. CR.
March 5 Motor Vehicle Toyasta Corporation
Being Purchase of Motor Vehicle on 5,000,000 5,000,000
credit

11
Trial Balance
A trial Balance is a list of debit and credit balances extracted from the ledger as at a particular date.
The main objective of drawing a Trial Balance is to test the accuracy of double entry system in
accounting and help defect if there are errors in the books. The debit and credit balances are
extracted from the ledger after closing and balancing all accounts.

The following balances were extracted from the books of John Mwangi as at 31 st December 2014.

ITEM AMOUNT
Capital 250,000
Stock (1/12/2007) 25,000
Plant & Machinery (cost) 250,000
Motor Vehicle (cost) 80,000
Provision for depreciation of Plant & Machinery 20,000
Provision for depreciation of Motor Vehicles 6,000
Purchases 360,000
Sales 600,000
Sales Returns 40,000
Purchases Returns 20,000
Wages & Salaries 60,000
Rent& Rates 15,000
Water & Electricity 8,600
Postage & Telephone 7,500
Bad debts Written off 1,500
Provision for bad debts 1,000
Discount allowed 5,000
Discount received 4,000
Carriage inwards 2,500
Carriage Outwards 3,000
Debtors 5,500
Creditors 46,600
Cash at hand 6,600
Cash at bank 30,000
Additional Information
1. Closing stock on (31st Dec. 20070 22,500
2. Depreciation is to be charged at 10% of cost of plant & machinery and 20% of
cost of motor vehicle.
3. Accrued rent (not paid) 3,000

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 4. Pre-paid Rates 1,000
5. Outstanding electricity expense 600

Requirements
1. Using the balance extracted from the accounting records of John Mwangi as
on 31st December 2007 prepare a Trial Balance.
2. Using the additional information prepare John’s Trading Profit & Loss
Account.
3. Prepare a Balance Sheet as at the last day of the business.

Johns Trial Balance as at 31st December 2007

DETAILS Dr. Cr.
Capital 250,000
Opening Stock 25,000
Plant & Machinery (cost) 250,000
Motor Vehicle (cost) 80,000
Provision for depreciation of Plant & Machinery 20,000
Provision for depreciation of Motor Vehicles 16,000
Purchases 360,000
Sales 600,000
Sales Returns 40,000
Purchases Returns 20,000
Wages & Salaries 60,000
Discount allowed 5,000
Discount received 4,000
Carriage inwards 2,500
Carriage Outwards 3,000
Rent& Rates 15,000
Water & Electricity 8,600
Postage & Telephone 7,500
Bad debts Written off 1,500
Provision for bad debts 1,000
General Expenses 8,500
Debtors 55,000
Creditors 46,600
Cash at hand 6,000
Cash at bank 30,000
957,600 957,600

13
TRADING PROFIT AND LOSS ACCOUNT
Every business enterprise will require to determine its profitability. The first step is to prepare a
trading account where Gross Profit is determined. The second step is to prepare the profit and loss
account where Net Profit is determined.

Gross Profit =Net Sales - (opening stock + purchases – closing stock)

Adjustments are made for carriage inwards (cost of transport on purchases). Net Sales =
Total Sales - Sales Returns.
Net Profit/Loss is the difference between the Gross Profit and Total Expenses. Using the example
on Trial Balance on Page…. We can draw out Trading Profit and Loss Account for John Mwangi
for the year ended 31st December 2014.

Trading Profit & Loss Account for the year ended 31st December 2007
Shs Shs
Sales 600,000
Less Return Inwards 40,000 560,000
Opening Stock 25,000
Purchases 360,000
Less Return Outwards 20,000
340,000
Add Carriage inwards 2,500 342,500
367,500
Less Clossing Stock 22,500 345,000
Gross Profit 215,000
Discount Received 4,000

Less Expense
Wages 60,000
Discount allowed 5,000
Carriage outwards 3,000
Postage & Telephone 7,500

14
Water & Electricity Charges
Paid 8,600
Accrual 400 9,000
Bad debts 1,500
General expense 8,500

Rent & Rates

15,000
Paid
Accrual 3,000 18,000
Less paid rates 1,000
17,000
Depreciation
Plant & Machinery 25,000
Vehicles 16,000
Total 41,000
Net Profit 66,500
219,000 219,000

References
1. Deakin, B.E & Maher, W.M. (1987). Cost Accounting, 2nd ed. USA
2. Ferries, R. K. (1993). Financial Accounting and corporate Reporting, 3 rd ed., Irwin
3. Slater, R & Curwin, J. (2002). Quantitative Methods for Business decisions, 5 th ed., Thomson
4. Saleemi, S. A. (2003). Simplified Mathematics, Saleemi publications Ltd, Nairobi Kenya.

15
TOPIC 2: FINANCIAL MATHEMATICS
Simple interest
Interest is the money charged for the use of borrowed money for a specific period of time if a sum
of money is deposited in or borrowed from a financial institution for a period of time, it earns
interest. The sum of money borrowed or deposited is called the principal (p). The ratio of interest
earned in given period of time to the principal is called the rate (r) of interest. The rate of interest
is normally expressed as a percentage of the principal per annum (p.a).
When interest is calculated using only the initial principal at a given rate and time, it is called simple
interest. (1). The simple interest is calculated using the formula
I = Prn, where
n is the number of interest period which could be either months or years.

Example 1
Calculate the simple interest and the amount on sh.16000 for 1½ years at 14% per annum.
Solution
14 3
I 16000
100 2
sh.3360
Amount = P + I
= sh.16000 + sh.3360
= sh.19360

Example 2
Calculate the rate of interest if sh.4500 earns sh.500 after 1½ years.
Solution
From the simple interest formula
100I
I = Prn, r
pn

16
 Since r is a percentage.
100 500
r 7.4%
1
4500 1
2

Example 3
Juma invested a certain amount of money in a bank which paid 12% p.a simple

17
 interest. After 5 years, his total savings were sh 5600. Determine the amount of money he invested
initially.

Solution
Let the amount invested be sh,P n = 5
years
r = 12% p.a.
But A = P + I
Therefore 5600
⎠
P 0.6P
1.6P

Compound Interest
In compound interest, the interest for each period is added to the principal before interest is
calculated for the next period. To see how compound interest is computed, we will consider the
following situation. Suppose sh.P is invested at r% per period compound interest. The accumulated
𝑟𝑝
amount after 3 interest period can be calculated as follows; Amount after 1st period = sh. (𝑝 + )
100
𝑟
= Sh. p(1 + )
100

2nd Period
𝑟 𝑟
Interest = sh. × 𝑝 (1 + )
100 100

𝑟 𝑟 𝑟
Amount = sh. p(1 + ) + 𝑠ℎ. × 𝑝 (1 + )
100 100 100

𝑟 𝑟 𝑟
Factoring out p(1 + ) 𝑤𝑒 ℎ𝑎𝑣𝑒 𝑝 (1 + ) (1 + )
100 100 100

𝑟 2
Therefore Amount = p(1 + )
10
3rd period
𝑟 𝑟 2
Interest = sh. × 𝑝 (1 + )
100 100

𝑟 2 𝑟 𝑟 2
Amount = p(1 + ) + × 𝑝 (1 + )
100 100 100

𝑟 2
Factoring out p(1 + ) 𝑊𝑒 𝑔𝑒𝑡
100

18
 𝑟 2 𝑟
Amount = p(1 + ) (1 + )
100 100

𝑟 3
=p(1 + )
100

We therefore notice that for n interest periods, the accumulated amount would be
𝑟 𝑛
A=p(1 + )
100

Example 1
Find the amount at the end of the fourth year if sh.30,000 is deposited at 15% p.a. compound interest.
Solution
From the formula
15 4
A=sh.30,000(1 + )
100
4
30, 000 1.15
sh. 52470
Example 2
A man wants to have sh.30,000 in 8 years. How much money must he invest now if the rate of interest
is 7.5% p.a. compound interest?
Solution
Using compound interest formula
A = sh.30,000
r = 7.5%
n = 8 interest periods.
7.5 8
Therefore 30,000 = p(1 + )
100

30,000 × 𝑝(1.075)8
𝑠ℎ.30,000
Therefore, p = (1.075)8
=Sh16821

Example 3
Find the rate per annum at which a certain amount of money doubles after being invested for a period of 5
years compounded annually.
Solution
Let the amount invested be sh.P and the interest rate per annum be r%
𝑟 5
Amount after 5 years = 5 years = sh.2P so, 2p(1 + )
100

𝑟 5
Therefore 2 =(1 + )
100
19
 𝑟 5
Taking 5th roots of both sides (1 + ) = 1.149 (logarithms or calculatos can be used to evaluate √2
100
𝑟
Therefore (1 + ) = 1.149
100
𝑟
= 0.149
100

R= 14.9%

Some accounts have their interests compounded semiannually, quarterly, monthly or daily. Unless specifically
stated otherwise, a stated interest rate is the rate per year, and is called the nominal annual rate. The interest
rate per compound period is the annual rate divided by the number of compound period per year e. annual rate
8
becomes % = 2% quarterly rate.
4

The interest rate should be number of years times the number of times, the interest is compounded per year.
In general, if P invested for t years at a nominal rate r, compounded m times per year, then the total number of
compounding period is
n = mt

20
 𝑟
The interest rate per compounding period is i= and the compound m times per year, then the total number of
𝑚
compounding period is
N=mt
𝑟
The interest rate per compounding period is i= and the compounded amount
𝑚

A=p(1 + 𝑖)𝑛

𝑟 𝑚𝑡
A=(1 + )
𝑚

Example
What would be the accumulated amount after 3 years if 15,000 is invested at 16%
p.a. compounded
a) Annually
b) Semiannually
c) Quarterly
d) Monthly
Solution
Note the nominal annual rate is 16%
a) Annually
16 3
A=15,000(1 + )
100

=15,000(1 + 0.16)3

15,0000.163
=sh.23413.40

b) Semiannually

16 1 3×4
A=15,000(1 + × )
100 2

A=15,000(1 + 0.04)12
A=15,000× 1.0412

Sh.24015.50

Exercise
1. Find the simple interest that would accrue when a welfare group lends to a member sh.15,000 at the
rate of 12% in one year.
2. The simple interest on a given sum of money borrowed for 4 years at 10% exceeds the simple
interest on the same sum borrowed for 2½ years at 12% p.a. by sh.12960. What was the sum of
21
money borrowed?
3. A butcher obtained a loan on which simple interest was changed at 14% p.a. He cleared his loan by
 paying sh.24805 at the end of 1½ years. Find the sum borrowed?

4. Find the compound interest in each of the following

a. Sh.8000 invested for 2 years at 13% p.a.
b. Sh.8500 invested for 2 years at 5% p.a. compounded
i. Semiannually
ii. Quarterly
5. A farmer invested sh.48000 for 5 years. Calculate the rate per annum of compounded interest if the
accumulated amount was sh.77304.50
6. A Juakali mechanics wants to accumulate sh.400,000 in 5 years. How much money must he invest
now at 10% p.a. compounded interest?
7. Kimani deposited sh.40000 in a savings account for 3 years at a simple interest rate of 12.5% p.a.
how much money would he have lost if he had deposited the same amount for 2 years in a fixed
deposit account where the money is compounded at 16% p.a.?
8. It is that the population of a country increased by 4% each year. If the population of the country was
25 million in 1st January 1996, find what it would be to the nearest thousands on 31 st December
2005.

Appreciation and Depreciation Definition

Appreciation means the increase or gain in value of fixed assets with time. This
means that the value of an asset next month or next year is more than it is today.

Definition
Depreciation is the loss in value of a fixed asset with time. In this case the value of the asset next
month or next year is less than it is today. This may be due to use, obsceneness or just passage of
time e.g. cars, computers, furniture etc.

Example
A house is valued at sh.800, 000 and is expected to appreciate in value by 15% each year. Find
its value after 3 years.
Solution
Value today = sh.800,000

15
Value next year =sh(800,000 + × 800,000)
100
=920,000
15 15
Value in two years’ time = sh(920,000 + × 920,000) 𝑜𝑟 𝑠ℎ 920,000 ×
100 100
=1,058,000

115
Value in three years = sh 1,058,000×
100

= 1,216,700

22because the rate of increase in value is constant

NB: We could use the compound interest formula
throughout the period.
Example
A car valued at £ 6,000 depreciates each year at 10% of its value in the beginning of the year. What will
be its value after 2 years?
Solution
Value today £ 6,000
10
Depreciation in year 1 6000 6000

100

23
 90
Value after year 1 × 6000 = 5400
100
90
Value after year 2 = × 5400 = 4860
100

NB We can use the compound interest formula with negative rate

10 2
i.e. £6,000 (1 − ) = £6000(0.90)2
100

=£4860
Example
The value of a building was sh 3 million at the end of 1997 appreciated by 20% in 1998, 10% in 1999 but
depreciated by 15% in 2000.
Solution
In this case, the appreciation and depreciation is not constant and therefore we cannot use the formula. This
example involved both appreciation and depreciation.

Value 1997 = sh.3, 000, 000

Value 1998 = (1 + 0.2) sh.3, 000, 000
= 3.6m=sh.3, 600, 000
Value 1999 = (1 + 0.1)sh.3.6m
Sh.3, 960, 000
Value 2000 = (1 – 0.15) sh.3, 960,0 00
= sh.3, 366, 000

Exercise
1. A machine was bought 3 years ago at Ksh.1.5m it depreciated at 20% every year. What is its
value today?
2. A house bought at £ 25,000 appreciation by 10% in the first year and subsequently 2 more
years at 12%.
a) Find its value after 3 years
b) Supposing that the rate of appreciation was constant throughout the 3 year period,
what rate could produce the same effect?
3. The population of a city was 10,000 3 years ago. It increased by 20 per 1000 in the 1 st year, 25
per 1000 in the next and 30 per 1000 in the third year. Find the population at the end of the 3
years to the nearest 1000.
[5 marks]
References
1. Chandan J. S. (2003), Statistics For Business & Economics, New Delhi Tata McGraw Hill
2. Hughes, A. J. (1983). Applied mathematics for business economics and social sciences. Illinois:
Richard D. Irwin
3. Beri I. (2008) Business Statistics New Delhi 2e PVT publishers
4. Barnett, R. A., Ziegler M. R., & Byleen K. E. (2000). Applied mathematics (7th ed.). New
Jersey:SPrentice Hall.
5. Wood F. Business accounting, Pitman 10th Edition
6.

24
 TOPIC 3: BUDGETING AND BUDGETARY CONTROL

A budget is a quantitative expression of a plan of action prepared in advance of the period to which it relates.
Budgets set out costs and revenues that are expected to be earned or incurred in future periods. Most
organizations prepare budgets for the business as a whole.

BUDGETRY CONTROLS

It is a technique adopted for planning purpose so that the activities of the organization can be adequately
controlled. It is the use of budgeting technique to control the various activities of the organization by which
the standards of performance are measured i.e the actual results attained will be compared with the set or
budgeted

Purpose of budgeting/Role of budgetary control

1. Evaluation-A budget acts as a standard of performance against which actual performance can be
measured
2. Controlling cost-by comparing the plan of the budget with the actual results and investigation
significant differences (variance)between the two
3. Co-ordination –budgeting involves different activities different activities of the business. Therefore
it is a co-coordinating tool because all persons involved in budgeting preparation. It also ensures
that managers are working towards the same common goal.
4. Communication-Budgets communicate the targets of the organization to individual manager.
5. Motivation-Budget can motivate managers by encouraging them to beat targets or budgets set at
the beginning of budget period.
6. Authorization-Budgets act as a form of authorization of expenditure.
7. Budgets create the necessary conditions to introduce a standard costing technique. This helps to
create cost consciousness, hence leading to elimination of inefficiency caused by wastage.
Disadvantages of Budgetary controls
1. It’s a costly exercise
2. Budgets creates a risk of high expectations from budget proposed
3. Budgets are prepared at the beginning of the period, therefore thy are based on estimates which
may result in setting unattainable targets
4. Budget creates a danger of rigidity where thy are not revised i.e budgets may not take into
consideration changes in both internal and external factors
5. When imposed by supervisors subordinates may frustrate their achievement.
6. Budgeting is a time-consuming exercise
7. It may create a conflict within the various departments in an organizations

25
STAGES IN BUDGET PREPARATION

Before any budget can be prepared, the long term objectives of the organization must be defined so that the
budgets prepared are working towards the goals of the business. Once this is done the following steps can
be followed;

Step 1- a budgeting committee is formed note: a typical budgeting committee is made up of a chief
executive, budget officer (management accountant) and departmental or functional heads
e.g sales manager, purchasing manager e.t.c. The budget committee is responsible for communicating
policy guidance to the people who prepare the budgets and for setting and approving budgets.

Step 2- a budget manual is produced an organization’s budget manual sets out instructions relating to the
preparation and use budgets. It gives details of responsibilities of those involved in the budgeting process
including an organization chart and a list of budget holders.

Step 3-limiting factor is identified in budgeting the limiting factor is known as the principal budget factor.
Generally there will be one factor that limits the activities of an organization in a given period. It is usually
sales that limits the performance of an organization, but it could be anything else e.g. material or special
labor skills.

NB: if sales is the principal budget factor that the sales budget must be prepared first.

Step 4-initial functional budgets are prepared. Budget managers may sometimes try to build elements of
budget slack. This is a deliberate of a estimation of cost or underestimation of revenue which can make it
easier for managers to achieve their targets.

Step 5-initial budgets are reviewed and integrated into the complete budget system.

Step 6-after any necessary adjustments are made to initial budgets they are accepted and the master budget
is prepared .the master budget is then shown to the top management for final approval.

Step 7- Budgets are reviewed regularly and variances arising between budgets and actual results are
investigated.

Types of budgets. Budgets can be divided into 2;

i. Master budget
ii. Functional budget

Master budget

This is the overall budget of the activities of the organization. It combines the various budgets prepared by
the organization. It is a summary if all functional budget.

Functional budgets

These are budgets prepared for various activities undertaken in the organization.

26
Functional budgets include

i. Cash budget
ii. Production budget
iii. Material purchases budget
iv. Material usage budget
v. Sales budget
vi. Direct labour cost budget
vii. Selling and distribution cost budget

Cash budget

A cash budget is the most important component of the financial budget. Good management will keep cash
endangers liquidity of the company and too much cash tends to reduce profitability.

A cash budget is a budget representing cash balances for each month of the budget period. It shows the
various sources of cash received and how that cash generated has been utilized.

Objectives of cash budget

1. It ensures that sufficient cash is available when required.

2. It reveals any expected shortage of cash so that action may be taken e.g. arranging for a cash
overdraft or a loan.
3. It reveals any expected surplus of cash which can be used in the most profitable venture.

Preparation of a cash budget

A cash budget is prepared for a period e.g. annually, semi-annually or quarterly. The basic information
required include:- the period of the budget expected cash inflow, expect cash outflow, the expected non-
cash expense which do not involve movement of cash and they should not be included.

Problems in preparing cash budget

i. Tuning cash flow i.e. there is a time gap between the activity and when the actual cash flow
occurs.
ii. Treatment of non-cash items e.g. depression, accruals and prepayments provision etc They should
not be included in a cash budget.
iii. Estimating expected cash payment and proceeds where incomplete records are involved may be
difficult.

CASH BUDGET FORMAT

PERIOD JAN FEB MAR APR

Opening cash balance b/f xxx xxx xxx xxx

Add receipts

Cash sales xx xx xx xx

Sale of fixed asset xx xx 27 xx xx

Loan

Issue of shares xx xx xx Xx

Total cash inflow (A) xxx xxx xxx Xxx

Outflows

Payments of creditors xx xx xx xx

Cash purchases xx xx xx xx

Salaries & wages xx xx xx xx

Loan repayment - xx - xx

Taxation - - - xx

Rent xx xx xx xx

Electricity xx xx xx xx

Total payment (B) xxx xxx xxx xxx

Closing balance (A-B) xx xx xx xx

May surplus or deficit

EXAMPLE

The following information was extracted from the books of PK limited company which started trending one
year ago.

Month 2013 Sales (shs) Purchases (shs)

April 150,000 100,000

May 160,000 110,000

June 160,000 90,000

July 170,000 90,000

August 200,000 80,000

September 200,000 130,000

October 180,000 140,000

November 180,000 60,000

December 200,000 60,000 28

The following additional information is available;

a. Cash in hand at the end of May 2013 was 180,000

b. 60% of sales proceeds are received in the current month, 30% in the following month and the
balance is received 2 months after sale.
c. Suppliers are paid one month after delivery of goods
d. Corporation tax for (2012) amounting to shs 20,000 will be paid on 30th September 2013.
e. Contractor retention monies amounting to shs50,000 will be paid on 30 th June 2013.
f. The shareholders at their last extra ordinary (general meeting) increased the share capital by
70,000 and the first call of shs 40,000 will be received in October 2013.
g. In October 2003 the company is due to receive 20,000 as compensation for a civil suit.
h. The monthly administration expenses amounting to shs 33,000 includes factory depreciation
charge and preliminary expenses of shs 3,000
i. Office equipment worth shs 13,000 will be paid for in November.
Required;
Prepare a cash budget for the period 1 st June to 31st Dec 2013.

Sales Budget

It is a budget of planned sales in terms of quality and value analyzed by products. It forecasts what the
company can reasonably expect to sell to its customers during the budget period.

The following factors must be considered in preparing this budget.

a) Production capacity i.e. whether the sales are within the production capacity.
b) Past sales: They show the trend in sales levels
c) Company conditions any change in policy or methods of the company that have effect on sales
must be incorporated.
d) Business conditions; Any change in economic condition that is related to business activities and
will affect sales must be considered e.g. competition.
e) Expected developments and new innovations occurring
f) Reports by salesmen, salesmen are in close touch importance

FORMAT OF SALES BUDGET XYZ

CO. LTD
SALES BUDGET FOR 2019

PRODUCTS UNITS SOLD SELLING PRICE SALES

X XX X XXX

Y XX X XXX

Z XX X 29
XXX

TOTAL SALES XXX

PRODUCTION BUDGET

I t is an estimate of the production for the period. It is prepared to determine the unit cost of a product to be
produced in a given period. The total needs i.e. units to be sold and units to be held as stock must be
considered. The following considerations are involved.

a. Sales budgeted i.e. the management policy on stocks to be maintained at any particular time to
meet the customer’s requirements.

b. Production capacity – Units budgeted must be within capacity of each department.

c. Management policy on production, hence affecting the production budget.
d. Availability of resources such as materials, machine, time, labour etc.

FORMAT OF PRODUCTION BUDGET

XYZ CO. LTD
PRODUCTION BUDGET FOR 2019

PRODUCTS

X Y Z

Budgeted sales Xx xx xx

Add budgeted closing stock xx Xx xx

Total needs Xxx xxx xxx

Less opening stock (xx) (xx) (xx)

Production unit Xxx xxx xxx

MATERIAL USAGE BUDGET

It is forecast of material requirement during production for the period. It is an estimate of expected usage
of material.

The following are considered;

a) Production in units of each product

b) Types of material used during production.

30
 c) Material requirement per unit production
d) The material purchases for the period.

FORMAT OF MATERIAL USAGE BUDGET

XYZ CO. LTD MATERIAL

USAGE BUDGET FOR 2019
MATERIAL

Product Unit M1 M2 M3

X X XX XX XX

Y X XX XX XX

Usage XX XX XX

N/B The material used during production determines the cost of raw material consumed i.e. material cost
budget. This is so because the material usage (consumption), if multiplied by the unit cost of each material
gives cost of raw material consumed during the period.

MATERIAL PURCAHSES BUDGET

It is prepared to determine material to be purchased during the period.

It provides details of the purchases which are planned to be made during the period, to meet the need
of the business. The quantity of each type of raw material and the estimated cost of material purchases
will be shown. Factors to be considered include:

a) Stock to be maintained
b) Financial resources available i.e. capital available for purchases
c) Material requirement during production
d) Management policy regarding components to be manufactured or purchased from outside.
e) Expected changes in stock levels during the period
f) Availability of raw material.

FORMAT OF MATERIAL PURCHASES BUDGET

XYZ LTD CO.

MATERIAL PURCHASES BUDGET FOR 2019

MATERIAL
MI M2 M3

Expected usage xx xx xx

Budgeted closing stock xx xx xx

Total needs xx xx Xx

31
Less opening stock (xx) (xx) (xx)

Purchases (units) xx xx xx

Purchase price xx xx xx

Cost of purchases xx xx xx

4. DIRECT LABOUR COST BUDGET

It represents a forecast labour requirement to meet the demand of the company during the budget period.

It is linked with production budget as labour will be required for the purpose of production.

It helps to estimate the labour cost of production and the labour requirement in terms of labour hours so that
the personnel department may plan for recruitment and for payment of wages.

The following factors are considered;

a. The availability of labour

b. Labour requirement during production
c. The rates of payment of each category of labour.
d. The types of labour required.

LABOUR COST BUDGET FORMAT

XYZ CO. LTD

LABOUR COST BUDGET FOR 2019

CATEGORIES
L1 L2 L3
PRODUCTS UNITS

X XX XX XX XX

Y XX XX XX XX

Labour hours xx xx xx
Rates xx xx xx
Labour cost xx
xx xx

32
 Example

Afro Cross ltd manufacturers P1, P2 & P3. The following data has been assembled for the company’s
budget preparation for July 2001.

SALES FORECAST
PRODUCTS

P1 p2 p3

Sales in quantities (units) 4,000 3,000 2,000

Sales price per unit (shs) 250 300 350

STANDARD MATERIAL COST

MATERIAL

M1 M2 M3

Units (kg) cost 8 10 12

STANDARD MATERIAL REQUIREMENT (KG)

Products P1 5 3 2

P2 3 2 4

P3 4 3 2

Expected closing and opening stocks for finished goods and raw material for the month.

PRODUCTS

P1(UNITS) P2(UNITS) P3(UNITS)

1st July 500 1000 1500

31st July 1000 1500 2000

MATERIAL

M1 (KGS) M2(KGS) M3(KGS)

1ST JULY 25,000 20,000 15,000

31st july 35,000 30,000 25,000

33
Required

a) Sales forecast for the month in value (shs)

b) Production forecast in units
c) Material quantity usage forecast.
d) Material purchase forecast in units (kg) and in value (shs)

FLEXIBLE BUDGET

Fixed budget is a budget designed to remain uncharged irrespective of the volume of activity or output and
turnover attained.

It does not recognize changes that occur during the period in consideration.

It is a static budget and therefore for purposes of compassion between actual results and budgeted results,
a fixed budget is not appropriate because of different units of measure i.e. where budgeted output, this
budget is not appropriate to be used for comparison.

Flexible budget

A flexible budget is a budget designed to adjust the cost and turnover according to the level of activity or
output attained. It is useful for comparison purposes because a budget for the actual level can be prepared.
In this budget costs are divided into fixed and variable components and therefore their behavior should be
considered when preparing a flexible budget.

Variable costs will change with change in output and fixed cost be compared with the flexed budget of the
actual level of output attained in a budget period to determine the variance.

Example

From the following information prepare 2 budgetary control statement i.e.

i. Fixed budget based on 10,000 units and

ii. Flexible budget for the actual level of products for the month of June 2008.

Direct material

(Shs 15 per unit) 150,000 153,000

Direct wages

(Shs 8 per unit) 80,000 63,000

Variable overheads

(Shs 2 per unit) 20,000 22,500

34
Fixed overheads 30,000 30,000
 280,000 268,500

Solution

BUDGETARY CONTROL STATEMENT

FIXED BUDGET COMPARED WITH ACTUAL RESULTS
Expense Fixed budget Actual results Budget variance
Direct material 150,000 153,000 (3,000) address
Direct wages 80,000 63,000 17,000 favourable
Variable overhead 20,000 22,500 (2,500) address
Fixed overhead 30,000 30,000 -
280,000 268,000 11,500

N/B The actual cost are less than the budgeted cost hence has a favorable variance however, the production
level is 1000 units below the budgeted production.

BUDGETARY CONTROL STATEMENT

FLEXED BUDGET COMPARED WITH ACTUAL RESULTS

Expense flexed budget for 9,000 units actual results for 9,000 units budget
variance

D. material (15x9000) 135,000 153,000 (18,000)

D.Wages (8X9000) 72,000 63,000 9,000F

Variable O/H (2X9000) 18,000 22,500 (4,500)A

Fixed O/H 30,000 30,000 -

255,000 268,500 13,500

The statement shows that total cost of producing 9,000 units should be 255,000. However the actual cost
incurred was 268,500. Therefore the adverse variance of 13,500 should be investigated.

35
EXAMPLE 2

Wye Ltd manufacturers one product and when operating at 100% capacity can produce 5,000 units per period, but
for the last few periods has been operating below capacity.

Below is the flexible budget prepared at the start of last period, for three levels of capacity at below capacity.

LEVEL OF ACTIVITY

70% 80% 90%

$ $ $

Direct materials 7,000 8,000 9,000

Direct labour 28,000 32,000 36,000

Production overheads 34,000 36,000 38,000

Administration selling and distribution overheads 15,000 15,000 15,000

Total cost 84,000 91,000 98,000

In the event, the last period turned out to be even worse than expected with production of only 2,500 units. The
following costs were incurred.

Direct materials 4,500

Direct labour 22,500

Production overheads 28,000

Administration, selling & distribution O/H 16,500

Total cost 71,000

Required

Use the information given above to prepare the following

a) A flexed budget for 2,500 units

b) A budgetary control statement
References
1. Deakin, B.E & Maher, W.M. (1987). Cost Accounting, 2nd ed. USA
2. Ferries, R. K. (1993). Financial Accounting and corporate Reporting, 3 rd ed., Irwin
3. Slater, R & Curwin, J. (2002). Quantitative Methods for Business decisions, 5 th ed., Thomson
4. Saleemi, S. A. (2003). Simplified Mathematics, Saleemi publications Ltd, Nairobi Kenya.
5. Internet and e-journals

36
UNIVERSITY OF ELDORET
SHUM 122: QUANTITATIVE SKILLS II
CAT
Instructions to candidates; Answer ALL questions
a) Sisibo borrowed a loan of ksh.1, 200,000 from Pendo commercial bank at an interest rate of 12% per
annum. The loan is repayable in 5 years. Prepare a loan amortization schedule
(5Marks)
b) From the following data prepare a cash budget of Kerstin Engineering company Ltd for the six months
ending 31st December 2016, on an assumption that cash balance in hand on 1st July 2016 will be
Kshs.96,000.
2016 Sales Distribution Raw Wages Production Administration
cost materials overhead overhead
May 95,000 3,600 35,000 9,000 6,000 2,500
June 84,000 3,400 36,000 9,200 6,100 2,400
88,000 3,500 40,000 9,800 6,300 2,400
July
August 84,000 3,200 45,000 10,500 7,000 2,300
September 95,000 14,000 55,000 13,000 8,600 2,400
October 120,000 15,000 40,000 10,400 8,100 3,000
November 125,000 16,000 30,000 9,000 5,900 2,600
December 118,000 7,000 28,000 7,000 4,900 2,500
Additional information;
i. Provide for payments of Kshs.10, 800 in July 2016 and Kshs.86, 000 in December in respect of
capital expenditure detailed in the budget.
ii. It is anticipated that a dividend of Kshs.23, 000 (NET) will be paid in August.
iii. 5% Kshs.10, 000 debentures are to be redeemed at Kshs.10, 400 on 1 st July 2016.
iv. Debtors are allowed 2 months credit and creditors are also allowed two months Arrears or
advance payments for wages are to be ignored. (10Marks)

c)

David a sole trader has prepared the following balance as at 31 March 2016. Sh.
Sales 378,500.00
Discount Received 2,400.00
Rent Received 7,500.00
Returns outwards 7,700.00
Creditors 18,700.00
Bank Overdraft 30,000.00
Capital 287,500.00
Purchases 261,700.00
37
Salaries and Wages 45,700.00
 Office expenses 8,400.00
Insurance premiums 3,100.00
Electricity 1,600.00
Advertising 8,400.00
Telephone 2,100.00
Business Rates 7,500.00
Discounts allowed 600.00
Returns Inwards 4,100.00
Stocks as at 1 April 2016 120,600.00
Warehouse, shop and office 210,000.00
Fixtures and fittings 12,800.00
Debtors 13,000.00
Cash in till 500.00
Drawings 26,000.00
The following further information was obtained:

1. Closing stock was Sh.102,500.00

2. Electricity charges accrued Sh.700.00
3. Advertising expenses accrued Sh.500.00
4. Insurance premiums paid in advance Sh.900.00
5. Business rates prepaid Sh.1,500.00
Required:

i. Prepare the Statement of Comprehensive Income for the year ended 31 March 2017 (7Marks)
ii. Prepare the Statement of Financial Position as at 31st March 2017. (8Marks)

38
 TOPIC 4: INDEX NUMBERS
Introduction
An index number is a weighted average that measures relative changes from time to time or from place to
place. Average for two different sets of data is computed and compared. For example:
i. Comparison of the price levels in 1990 and 1960.
ii. Comparison of the standard of living in Bombay and Nairobi.
iii. Intelligence of students in different years.
The index number will therefore be a ration of two quantities of the same variable with reference to two
timings, places or situation.
These rations are expressed as percentages.
In most cases however, index numbers are given with reference to an earlier time period (rather than place).
This period is known as the reference period or the base period.
It is the period against which everything is compared.
Data on a given variable during the base period is then compared with data on the same variable for the
current period i.e. the current period is expressed as percentage of the base period. If that percentage is
say 105% we know there has been an increase of 5%.

Computing the index Number

According to the definition above an index number is a weighted average. As already discussed, there are
five possible averages: Mean, median, mode, geometric mean(GM), harmonic mean. For purposes of
computing index numbers, the GM is preferred because:
i. Index numbers usually deal with ratios and relative changes.
ii. The GM is not affected much by extreme values.
iii. Often we have to reverse the process in computing index numbers e.g. changing figures from
base to current period and the GM is better placed to deal with such charges.
Sometimes however, the arithmetic mean itself is used.

Weights
Weights are used to attach greater importance to some observations and less importance to others. For
example, if we wanted to compare the cost of living in 1980 and 1990 we would need to construct an
average cost of living index for 1980 and 1990.
In calculation this average, we would need to take into account prices of:
i.Food
ii.Clothing.
iii.Housing
iv.Petrol
v.Electricity
vi.Telephones etc.

But electricity and telephone charges are not as important as food and clothing because:
Not everyone uses these items one can do without them so in taking the average expenditure on this
„basket‟ of goods we should give a greater weight to food than telephone services.
Usually we use the quantities consumed, quantities produced or quantities distributed as weights to prices.
When current year weights are used we have Paasche‟s Index numbers whereas if base year weights are
used we have Laspeyre‟s
39
Base period
The base period selected should be a period that is considered as normal and as desirable as possible.
Thus for a Consumer price Index the year when inflation was lowest or averagely comfortable would
be the most ideal base period.

Types of Index Numbers

Price Relatives
The simplest example of an index number is a price relative. This is the ration of the price of a single
commodity in a given period to its price in another (base period).
If po = price of base period

pn = price of given period

pn
Price Relative =
po
Qn
Similarly a quantity relative =
Qo

Other Index Numbers

i. Average base index numbers
This index number uses average values for 2 periods or more. Thus for a price index number, the weight
used is obtained as
Qo
Q1 = and is used to weight both periods‟ prices
Q1

40
 1
pq
Ip= 1
1
p0q
On the other hand a Quantity Index number would be weighted by use of an average price P 1
po p2
P1= 2

1
qp
Io 1
1
q0 p

Chain base index number

These index numbers use a rotating base period as follows:

pt Qt
Ic
pt Qt
Chain base index numbers are useful because they are flexible allowing new products to be included and
old ones to be dropped where necessary.

Value index Numbers

Instead of measuring changes in prices only or quantities only we may be interested in values i.e. price x
Quantity.
The value for year 1 is compared with value for year 2.
1
pQ
Iv = 1
p0Q0

41
 This is useful in measuring movements such as changes in terms of trade from one year to another.

Fisher‟s Ideal index Number

Neither Paasche‟s nor Laspeyre‟s index numbers meet all the requirements of a good index
number. Fisher‟s index number is the geometric average of these two.
Fisher price index = Lp x pp Fishers
Quantity Index = Lq X Pq
Fisher‟s index number is said to be the most ideal combining the best qualities of both Paasche‟s and
Laspeyre‟s numbers.
Test for a good index number
Geometric mean of Laspeyre‟s and Paasche‟s index numbers is known as Fisher‟s ideal index
number. It is called ideal because it satisfies the time reversal and factor reversal test.

pon

pnqo pnqn
P 100
on
pq pq
o o on
Time reversal test
This states that if two periods are interchanged and the index numbers computed with one period as the
base of the other, the product of the two numbers should be 1.
Let Late base be 0 (1978)
Current be n (1980)
Then Ion is an index for 1980 with 1978 as base period. And
Ino is an index for 1978 with 1980 as base period. Time
Reversal Test: Ion x Ino=1.
Neither Paasche‟s nor Laspeyre‟s index numbers satisfy this condition but fisher does.

Factor Reversal Test

This states that the product of a quantity index and a price index number should be the value index
number.
i.e. Iq x Ip = Iv
Neither Paasche‟s nor Laspeyre‟s numbers satisfy this condition but Fisher‟s index does.

Weighted Index Numbers

When all commodities are not of equal importance. We assign weight to each commodity relative to its importance and
index number computed from these weights is called weighted index numbers.
Laspeyre‟s Index Number:
In this index number the base year quantities are used as weights, so it also called base year weighted index.
p qo
Pon 100 42
po qo
 Paasche‟s Index Number:
In this index number, the current (given) year quantities are used as weights, so it is also called current year weighted
index.
pnqn
Pon 100
po qn

43
 Marshal-Edge worth Index Number:
In this index number, the average of the base year and current year quantities are used as weights. This index
number is proposed by two English economists Marshal and Edge worth.

pnqo pnqn
p 100
on
p q p q
o o o n
pn (qo qn )
p 100

on
p (q q )
o 0 n

Weighted index numbers are classified into two broad groups:

 Weighted Aggregative Index Numbers: The weights are assigned to various items and the
weighted aggregate of the prices are obtained. Weights are assigned in various ways and the
weighted aggregates are obtained in different ways for the construction of the index numbers.
 Laspeyre‟s Price Index: This method is based on fixed weights of the base year. Base year‟s
quantities are used as weights. , where q0 = quantity used in the base year
 Paasche‟s Method: It is based on current year‟s quantities. Current year‟s quantities are used as
weights. , where q0 = quantity used in the current year
 Dorbish and Bowley‟s Method: This method takes into account both the base year as well as the
current year weights.
 Fisher‟s Ideal Index Method: Fisher‟s index number is the geometric mean of the Laspeyre‟s
and Paasche‟s index numbers.
 Marshall-Edgeworth Index Number: In this method, both the base years as well as current year‟s
prices are considered for calculating index number.
 Walsch‟s Index Number Method: Walsch suggested the geometrically crossed weighted
aggregates for calculating index number.
 Kelly‟s Method: Kelly believes that a ratio of aggregates with selected weights (not necessarily
of base year or current year) gives the base index number.
Thus Weighted Average of Price Relatives: The price relatives for the current year are calculated on
the basis of the base year prices. These price relatives are multiplied by the respective weights of the
items. These products are added up and are divided by the sum of the weights.

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 Exercise
Compute the weighted aggregative price index numbers for 1981 with 1980 as base year using
(1) Laspeyre‟s Index Number (2) Paasche‟s Index Number (3) Fisher‟s Ideal Index Number (4)
Marshal Edgeworth Index Number.

Commodity Prices Quantities

1980 1981 1980 1981

A 10 12 20 22

B 8 8 16 18

C 5 6 10 11

D 4 4 7 8

Laspeyre‟s Index Number

Paashe‟s Index Number

Fisher‟s Ideal Index Number

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Marshal Edgeworth Index Number

Uses of index Numbers

1. Allow us to express a change in price or quantity as a percent
2. Makes it easier to asses the trend in data
3. Enables government trade unions and private employer’s to know whether living
standards are rising or falling
4. Changes in terms of trade of a country can be effected as a result of comparing indexes
of export and import prices
5. Rates of interest in financial institution can be pegged on index numbers

Limitations of Index Numbers

6. Different methods of calculations yield different results
7. Data used for index number calculation may itself be inaccurate and so give
inaccurate results
8. Sampling and non-sampling errors may occur in the process of selecting the
representative group of items and so resultant figures may be inaccurate
9. Index numbers for groups of items are averages and hence more compromises between
conflicting changes.

References
i. Probability and Statistics by R.S Pilaai.
ii. Schaum's Outlines Probability-3rd edition.
iii. Quantitative Techniques Simplified by N.A Saleemi.
iv. Quantitative Techniques T.Lucey

46
 TOPIC 6: TAXATION
Definition and types of taxes
Tax is a compulsory contribution imposed on individual to meet the expenses which are incurred
for a common course. This means that a tax has two main characteristics. Firstly it is a compulsory
contribution whereby everybody must pay and secondly there is no direct service against the
payment of tax. This means that despite compulsorily paying the tax, an individual has no right to
demand for services directed to him or her.

From this definition, it follows that all the tax income collected is pooled together before
expenditures are done based on the guiding principles discussed earlier under public expenditure.
It should be noted that tax revenue constitutes the highest towards public revenue in the country.
This is because of its compulsory nature and the different forms that tax is manifested. The
following are some of the types of taxes:
1. income tax- this is tax imposed on income of individuals salaries and other
allowances
2. corporate tax - this is tax imposed on profits of public limited companies
3. sales tax- this is tax imposed on sale of commodities and its imposed on
businessmen
4. excise duty tax - this is tax imposed on production of commodities mainly by production
industries
5. Customs duty- this is tax imposed on imports or exports of commodities.
Explain other types of taxes in Kenya.

Principles of taxation
The concept of taxation and especially the guiding principles have evolved over the years.
Specifically, the first four principles were by an economist Adam Smith while the others were
developed after Adam Smith and basically expounds on this first four. We now explain each of
these principles.
Equality: This state that the subjects of every state ought to contribute towards the support of the
government in proportion to their respective abilities. This means that individuals must contribute
based on their respective abilities. Thus, the more you have the more you ought to contribute.
Certainty: This states that the tax which each individual is bound to pay ought to be certain and not
arbitrarily. This means that a proper system should be in place such that individual know their tax
obligation.
Convenience: This states that the tax an individual is supposed to pay should be imposed such that
the time and method of payment is convenient to the payer as much as possible. In fact most taxes
are imposed at source such that the payer does not feel it much. For instance income tax is paid
regularly as the income is paid to the person and is usually done by the employer and remitted to
the government. Also, the price of a commodity is inclusive of the relevant taxes.

47
Economy: This states that since every tax has cost of collection, this cost should be as minimum as
possible. This means that the tax income should always be more than its cost of collection so as to
generate revenue for the government.
Productivity: This principle states that the tax system should be able to yield enough revenue for
the treasury to avoid deficit financing. This means that the tax revenue should always provide
sufficient funds for the government so as mitigate any deficits in its revenue.
Buoyancy: This states that there should be an increase in tax revenue even if there is no change in
tax base. This means that the tax system should have an inherent tendency to increase with national
income even if the tax rates and coverage are not revised.
Flexibility: This states that authorities should be able to revise the tax structure (coverage and rates)
to suite the changing requirements of the economy.
Simplicity: This principle states that the tax policies should be simple for people to understand and
easy for the government to administer.
Diversity: This principle postulates that there must be different types of taxes so that the tax burden
is on different groups of the society. This is intended to ensure that every person contributes towards
government revenue through payment of tax.

A good tax system is that which fulfills the maximum possible number of these principles of
taxation. Thus an ideal tax system should meet the majority of this principle.

However, the percentage proportion of tax revenue in relation to the Gross Domestic Product in
less developed countries such as Kenya is lower than those in developed countries. This is primarily
because of high tax rates that are intended to raise more funds for the government. This means that
citizens in these countries are taxed heavily and as a result tend to resort to way to evade paying
their tax liabilities by capitalizing on certain loopholes in the tax system.
Tax Evasion
This is a situation where an individual uses an illegal means in order to avoid meeting his or her
tax liability as required. i.e failing to declare correct income in tax returns, failing to file tax returns
or hiding taxable assets. These actions are against the law and the offenders can be charged in court.
This is possible by capitalizing on existing short falls in the tax system as discussed below.

Information gap in all levels: There are inappropriate records that are maintained by businesses
that have tendency to conceal factual evidences in the name of small businesses. Such people
pretend to be running small businesses in order to pay less tax yet they are running larger businesses.

Complicated tax laws: There have been changing provisions in terms of tax rebates (tax discounts
or waivers) which have been restructured in the form of Value Added Tax through rationalization.
It is thus difficult to tell who to give the tax discount or waiver which at times is given on friendly
basis. Also the inclusion of VAT in the price of certain commodities is not clearly understood to an
extent that the consumers rarely know which commodities attract VAT in their cost hence the

48
charge tax is not remitted to the government.

Concealment of true ownership: This creates a loop hole whereby one invests the property in
another person’s name say a relative. This makes it difficult for one to trace the source of funds for
such investments.

Imperfect tax administration: Tax officials are not efficient and like any other human being there
are amenable to temptations leading to corruption. The tax laws are also complicated for people to
understand.

Donation political parties: Any receipts to political parties and other Non-Governmental
Organizations (NGO) are not taxed yet it is an income. Their accounts and those of high profile
personalities are not audited. Also if you pledge loyalty to the ruling party as a business man you
are awarded by not paying tax.

Remedial measures to tax evasion: In order to increase tax revenue, the government needs to
check on the loopholes discussed above. The following are some measures that can be taken to
reduce tax evasion.
6. There is need to have appropriate conceptual definitions of income and put appropriate tax
laws.
7. There is need to reduce incentives for tax evasion and put obstacles to evasion.
This can be achieved by
a. Lowering tax rates so that people earn more hence taxed more.
b. Supplementing income tax with other forms of taxes such as tax on expenditure,
annual income tax etc.
8. There is need to have comprehensive returns on personal accounts.
9. Compulsory auditing of accounts of high income tax payers and assigning code numbers
for each.
10. Donation to political parties to be taxed and all accounts for political parties and other
NGOs to be audited.
11. Penalty for tax evasion should be related to the tax saved rather than the income concealed.
It should also be increased to make it more punitive.
12. Adequate attention to be paid to bracket creeping i.e when there is inflation the government
increases salaries of employees to make them get high salary hence pay more tax.
13. Also tax brackets should be frequently adjusted to take into account the price raise factor.

Tax avoidance
This is a legal usage of the tax regime in a single territory to one’s own advantage to reduce the
amount of tax that is payable by means that are within the law. This is the use of existing law and
its loopholes to avoid paying tax.

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Income Tax
This is a tax levied on every person who earns an income from salaries, wages, commissions,
interest on bonds and savings, dividends on share etc. Some basic terms used under income tax
include:

Gross income: this is the total income earned by an individual in a month or year. It consists of
the basic income basic salary and all the allowances due to the individual.

Relief: this is a tax rebate, discount or waiver given to an individual. It takes the form of personal
or family
Taxable pay: Is the gross income less contribution to registered schemes like pensions or
insurance provided that the scheme is registered with the commissioner of income tax.

Tax liability: this is the actual amount of tax paid by an individual. It is obtained by taking the
tax payable less the relief.

Net income: this is the final amount received by an individual after all deductions have been
made. It is also referred to as the take home package and is calculated as
Net income = Gross income-(tax paid +contribution to registered schemes + any other
deduction).

Example1
An employee drew the following benefits in the month of October 2014: Basic salary Kshs. 40,000,
House allowance Kshs. 30,000, Medical allowance Kshs.16,000, Car allowance Kshs. 17,000,
Entertainment allowance Kshs. 11,000 and responsibility allowance of Kshs. 14,400. During the
month the employer made the following payments: Kshs.860 to NHIF, 10% of basic salary to a
registered pension scheme, 6 % the basic salary to the cooperative for shares and Kshs. 24,000 to a
medical chemist for the drags he had taken. In addition an employee received a tax relief Kshs.
2,112. Using the tax schedule below calculate the employee’s
a) Gross income
b) Taxable pay
c) Tax charged
d) The net income.

Tax schedule
Income (Ksh.) p.m Tax rate (%)
1--10,800 10%
10,801--21,600 15%
21,601--32,400 20%
32,401--43,200 25%
43,201 and above 30%

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Solution
a) Gross income = basic salary + all the allowances received
Basic salary Kshs. 40,000.00
House allowance Kshs. 30,000.00
Medical allowance Kshs. 16,000.00
Car allowance Kshs. 17,000.00
Entertainment allowance Kshs. 11,000.00
Responsibility allowance Kshs. 14,400.00
Gross income Kshs. 128,400.00
b) Taxable pay = Gross income - contribution to registered schemes(pension
scheme)
Gross income Kshs. 128,400.00
Less pension scheme (10% of 40,000.00) Kshs. 4,000.00

Taxable pay Kshs. 124,400.00

c) Tax charged

We use the tax schedule to tax the amount for taxable pay. This is because the deductions towards
registered schemes shall be taxed at the time of payment.
10
1st 10,800= x10,800 = 1,080.00
100
15 = 1,620.00
2nd 10,800=
100

20
3rd 10,800= ,800
= 2,160.00
100
4th 10,800= 25
= 2,700.00
100

5th (124,400 – 43,200) = 81,200 × 30% = 24,360

Total tax = 31,920

Less Relief = 2,112.00
Tax charged =29,808.00

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 d) Net income = Gross income-(tax charged +pension + all other deductions) Gross
income Kshs. 128,400.00
Less pension scheme (10 % of 40, 000.00) =Kshs. 4,000.00
Tax charged =Kshs. 29,808.00
NHIF =Kshs. 860.00
Medical Chemist =Kshs. 24,000.00
Shares (6% of 40,000.00) =Kshs. 2,400.00 total Kshs. 61068.00
Net income Kshs. 67332.00

Example 2
An employee draws the following benefits in a month: Basic salary Kshs. 37,650.00, House
allowance Kshs. 36,600.00, subsistence allowance Kshs.2,900, car allowance
Kshs. 4,400.00, responsibility allowance Kshs. 800.00 and a non-contributory medical scheme. In
a month the employ contributes 10% of basic salary to a registered pension scheme, Ksh. 320 to
NHIF, 15% of basic salary to cooperative society and 400 to the union for all employees. The
employee is however entitled to a personal relief of Kshs. 1,080 per month. Using the tax
schedule provided above, calculate the employees:
a) Gross income per year.
b) Yearly taxable income
c) Monthly tax charged
d) Net monthly income received
Solution
a) Gross income = basic salary + all the allowances received
Basic salary Kshs. 37,650.00
House allowance Kshs. 36,600.00
Subsistance allowance Kshs. 2,900.00 Car
allowance Kshs. 4,400.00
Responsibility allowance Kshs. 800.00
Gross income Kshs. 82,350.00pm
Gross income per year = Kshs. 82,350.00 ×12 months = Kshs. 988,200.00

b) Taxable pay = Gross income - contribution to registered schemes(pension

scheme)
Gross income Kshs. 82,350.00
Less pension scheme (10% of 37, 650.00) Kshs. 3,765.00
Taxable pay p.m Kshs. 78,585.00
Yearly taxable income = Kshs. 78,585.00 × 12 months = Kshs. 943,020.00

c) Tax charged pm
10
1st 10800= x10,800 = 1,080.00
100

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 15
2nd 10,800= = 1,620.00
100

20
3rd 10,800= ,800
= 2,160.00
100
4th 10,800= 25
= 2,700.00
100

30
5th

100

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Total tax =18,175.50
Less Relief = 1,080.00
Tax charged = 17,095.50

d) Net income = Gross income-(tax charged +pension + all other deductions)

Gross income Kshs. 82,350.00
Less pension scheme (5%of20, 000.00) =Kshs. 3,765.00
Tax charged = Kshs. 17,095.50
NHIF = Kshs. 320.00
Union dues = Kshs. 400.00
Shares (15% of 37,650.00) = Kshs. 5,647.50 Kshs. 27,228.00
Net income Kshs. 55,122.00

Exercise
Mrs. Olive is a personnel manager with a certain company. She has a basic salary of 26,000 per
month, House allowance 20,000; Substance allowance 2,500; Responsibility 4,000; Car allowance
8,000 and Medical allowance 5,000. She contributes 10% of basic salary to a registered pension,
320 to NHIF; 200 to NSSF and 500 for service charge. In addition she pays 1000 to her cooperative
society every month and she has a personal relief 1,056 per month.

Required: Calculate
a) Gross income per month and for the whole year.
b) Her monthly and yearly taxable income.
c) Her monthly tax liability.
d) Her monthly tax liability.
e) Her take home package per month.

References
1. Saleemi N.A.(2005) Taxation I Simplified, 4 th Edition
2. Kenya Revenue Authority Employer Guide to Pay As You Earn
3. Ferries, R. K. (1993). Financial Accounting and corporate Reporting, 3 rd ed., Irwin
4. Slater, R & Curwin, J. (2002). Quantitative Methods for Business decisions, 5 th ed., Thomson
5. Saleemi, S. A. (2003). Simplified Mathematics, Saleemi publications Ltd, Nairobi Kenya.
6. Internet and e-journals

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TOPIC 7: STOCK MARKETS
This is a market which deals with the exchange of shares of a public quoted companies,
government securities and stocks of municipal authorities i.e it is a market where investors can buy
and/ or sell shares and other securities. Thus the securities traded at the stock market includes
government stocks or bonds, Ordinary shares whose owners are ordinary shareholders with voting
rights and preference shares whose owners are preference shareholders, provide funds that posses
fixed rate of interest and have no voting rights.

Share
A share is a unit of owner’s capital in a business while Stock refers to a bundle (say a minimum
of 100 shares) of company’s fully paid-up shares put together. It is therefore imperative that every
country must have a stock market since it plays the following functions:
1. Provides a ready market for those whose who wish to buy and sell shares.
2. Spreads risks since investors may avoid investing in one company which may go into
liquidation.
3. The stock exchange index serves as a barometer used to measure the country’s economic
progress.
4. Protects the country against fraud because accounts of quoted companies must be
published.
5. Provides useful statistical data that assists the government to evaluate economic
performance of the country.

Stock exchange index: this indicates the level of investment in stock securities. These
indices are constructed to measure the general price movement in the listed shares of a stock
exchange. Moreover, stock index is a geometric mean of 20 companies at the close of
business each day. Therefore, to compute this index the following is required:
 Closing share prices which are multiplied to form the numerator
 Previous days prices that are multiplied in a similar manner
 Divide the results in No.1 by the result in No. 2
 Take the 20th root of the above results (3).
 Multiply the results by the previous days index to get today’s index

Quoted Companies:
These are companies whose shares are dealt with in the stock exchange market. Such companies
are usually public Limited Companies although private Companies may also be quoted provided
they go public. Indeed, many companies strive to get quotation to the stock market because of the
following reasons:
 A Company may raise more capital by floating more shares in the stock
exchange market.
 A Company may use information from stock exchange to improve its
performance.

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  Helps to attract competent personnel into the company.
 The Company will know the value of its shares in the market.
 It’s attractive to investors since its shares are easily transferable.
 Helps promote the image of the Company because quoted Companies are firms
that perform well only.

However, quoted companies have the following disadvantages:

1. A company can be deregistered if it has a poor performance record.
2. It’s expensive to obtain quotation because of paying such fees as audit, brokerage fees
and legal fees.
3. A Company can’t maintain secrets as it’s required to publish its accounts.
4. If creditors lose confidence in the company then it may lead to liquidation.
5. A Company has no control over the incoming shareholders who may use their vote to
influence the company’s policies.

Having discussed the stock market, there is need to highlight the factors that are considered when
buying and or selling shares. The following are some of these factors;
1. Nature of product – consider whether to invest in an agricultural, industrial, finance and
banking or alternative investment companies.
2. Performances of the company-consider if the shares of the company are easily transferable
because some poor performance companies do not command high demand and hence are
difficult to convert to cash.
3. Diversification – buy shares in different companies to spread risks and have a wide product
mix.
4. The company growth rate- invests in a company whose growth rate is favorable. This is
seen when a company declares more dividends.
5. Security-invest in guaranteed securities such as those of the government.

Suppose you have participated in ‘Shangwe Mtaani’ program and won yourself two million Kenya
money and you intend to invest in shares with either Mumias sugar company, Barclays bank of
Kenya, Kenya power and company or the safaricom company. Discuss with justification where you
will invest your money.
Members of the stock exchange
Stock jobbers
These are members who buy and sell securities in their own names. They sell securities at a profit
called a ‘turn’
They buy shares in wholesale and hold them for speculative purposes
Stock brokers
These are middle men between the investing public and the stock exchange. They are agents who
earn a commission from the buyers and sellers.
Members of the stock exchange must pass through them for technical advice.

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Similarities between Jobbers and Brokers
They both operate in the stock market
Both don’t hold shares for investment purposes
Activities of both are regulated by the rules of stock market.
Types of jobbers
Bull- this is a speculator in the stock exchange who buys shares in expectations of a rise in their prices.
Bear- speculator in the stock exchange who sells shares in the anticipation of a fall in their prices.
Stag- a speculator in the stock market who purchases large block of new issues of shares in anticipation in the rise of market
price. They buy their shares directly from the companies selling them.
Functions of Stock Exchange
 Provides a ready market for stock, shares, bonds, debentures etc.
 Facilitates the flow of new capital into the industry
 Facilitates savings (encourages savings by individuals)
 Protects investors by reasons of the rules of the stock exchange.
 Companies seeking capital are advised and guided by all stages.
 Shows the trend of business in the stock exchange provides an important barometer for business throughout the
country.
 Investors are able to obtain capital from the public.
 It enhances the inflow of foreign capital.
 The title to any quoted security is transferred speedily and cheaply.
 Disciplines the company’s management by ensuring that the companies fulfill certain requirements and follow
certain rule before securities are listed in the stock exchange.
Quotations in the Stock Exchange
Quotation is consent by the stock exchange for companies’ securities to be dealt with in the stock market i.e. to be bought
and sold in the stock market.
Requirements of quotation
 A company must be a public limited company
 It must be registered with the registrar of companies and must submit a certification of registration.
 The company must provide details of the current directors, company lawyers, company secretary, company auditors,
financial year end and subsidiaries (branches) of the company.
 Such a company must inform the stock exchange the current distribution of the shares.
 Such a company must be willing to offer the public a minimum number of shares.
 Such a company must pay a clearing fee.
 Such a company must issue a prospectus to the stock exchange.
 Such a company must issue a statement of dividends and bonds issued in the previous 5 years.
Advantages of Quotations
i. A quoted company is able to raise finances quickly and easily.
ii. A quoted company is considered to be financially stable.
iii. A quoted company can easily obtain a loan.
iv. A quoted company can compare itself with other companies.
v. There is prestige associated with quoted companies.
vi. Quoted companies are forced to operate within certain guidelines
Disadvantages

57
 a. Loss of secrecy- means the company losses its secrecy through the publication of the company’s shares. The secrecy
is also lost by inspection of the books of accounts by the shareholders or by the public.
b. In case the company’s profits decline this will be revealed to the public and will lower the share prices of such a
company.
c. There is loss of control to incoming shareholders.
d. It is expensive because of the fee payable to the stock market.
e. The formalities of quotation are tedious and tiresome.
f. Immediately after quotation the prices are likely to be low.
g. A quoted company can easily be taken over by people buying shares in the stock exchange.
Terms Use in the Stock Exchange
1. Par value: it is the value of shares printed on the face of the share certificate.
2. Dividends: it is the profit that is distributed to the shareholders
3. Market value: it is the price that is quoted at the stock exchange i.e. the price at which the company’s shares are
traded at the stock exchange.
4. Speculation: it is the expectation about the future changes I the share prices.
5. Blue chips- they are shares with a good dividend history e.g. shares of KPLC, Barclays bank.
6. Rights issued- it is an opportunity given to an existing shareholder to purchase additional shares from the company
usually at a lower price before they are issued to members of the public.
7. Bonus issued: it is where the existing shareholder is issued with free shares out of the retained earnings.
8. Ex-dividends: It is where the person buying shares doesn’t receive the right to buy additional shares from the
company at a lower price if such an opportunity is made available.
9. Cum-dividends: It implies the shares that have been sold to the buyer give the buyer rights to receive dividends if
they are declared.
10. Ex-rights: Means the person buying shares doesn’t receive the right to buy additional shares from the company at a
lower price if such an opportunity is made available.
11. Cum-rights: Situation where the person buying shares receives

The Central Depository System (CDS)

The Central Depository & Settlement Corporation Limited (CDSC) is a limited liability Company approved by the Capital
Markets Authority under Section 5 of the Central Depositories
Act, 2000 to establish and operate a central depository system and provides central clearing, settlement and depository
services for securities initially in Kenya in respect to securities listed on the Nairobi Stock Exchange. The central
depository system provides a centralized system for the transfer and registration of securities in electronic format without
the necessity of physical certificates
The Central Depository & Settlement Corporation Limited (CDSC) was incorporated on 23rd March 1999 under the
Companies Act, 2000. It commenced its operations as a central depository on 10th November 2004.
Advantages of CDS
a. It shortens the registration process in the stock exchange
b. It improves the liquidity of stock exchange than increase the turnover of the equity shares in the market
c. It lowers the clearing and settlement cost
d. It’s faster and less risky settlement of securities which make the market more attractive to investors.
e. It will lead to an efficient and transparent securities market to adhere to international standards for the benefit of
all stakeholders

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References
1. Saleemi N. A.(2005) Business Finance Simplified
2. Lucey,T. (2004) Quantitative Techniques DP Publication

59