Table of Contents

3.4 Final accounts...............................................................................................................................2

The purpose of accounts to different stakeholders........................................................................................2
Profit & loss account....................................................................................................................................3
Balance Sheets.............................................................................................................................................4
Different types of intangible assets...............................................................................................................5
Depreciation (HL).........................................................................................................................................6
3.5 Profitability and liquidity ratio analysis.........................................................................................7
Profitability ratios........................................................................................................................................7
Liquidity ratios.............................................................................................................................................8
3.6 Efficiency ratio analysis (HL)..........................................................................................................9
Efficiency ratios (HL).....................................................................................................................................9
3.7 Cash Flow...................................................................................................................................12
The difference between profit & cash flow.................................................................................................12
Working capital..........................................................................................................................................12
Liquidity position........................................................................................................................................13
Cash flow forecasts.....................................................................................................................................14
The Relationship between investment, profit and cash flow.......................................................................15
Strategies for dealing with cash flow problems...........................................................................................16
3.8 Investment Appraisal (HL only)...................................................................................................16
Payback period (PBP) and average rate of return (ARR)...............................................................................16
Net present value (NPV).............................................................................................................................16
3.9 Budgets (HL only)........................................................................................................................17
The difference between cost and profit centers..........................................................................................17
The roles of cost and profit centers.............................................................................................................17
Constructing a budget................................................................................................................................17
Variances...................................................................................................................................................17
The importance of budgets and variance in decision-making......................................................................17
3.4 Final accounts

The purpose of accounts to different stakeholders

Stakeholders: individual, organizations or group with a vested interest in the actions and
outcomes of a specific organization. All stakeholder groups are directly affected by the
performance of the business.
Final accounts: the published accounts of an organization, made available to and used by
different stakeholders, such as managers, employees, shareholders, sponsors, financiers,
and investors.
1. Profit and loss account (income statement)
2. Balance sheet (statement of financial position)
Internal stakeholders: managers, employees, and shareholders. They can use the final
accounts to measure the performance of business, in order to negotiate pay deals or to
judge the level of job security.
External stakeholders: banks, suppliers, customers and the government. External
stakeholder groups are interested in an organization’s final accounts in order to enable
them to make sensible and coherent decisions.

Different Stakeholders can also use final accounts to calculate profitability ratios and
liquidity ratios.

WHY STAKEHOLDERS ARE INTERESTED IN THE FINAL ACCOUNTS:

Managers
-measures the performance of the business against organizational targets (goals)
-review financial performance against planned/targeted performance
-help decision making
-set budget and targets
-assist strategic planning

Employees
-measure if their jobs are secure
-can be used for negotiation of salary

Shareholders
-measure if business is more or less profitable
-measure value of business
-calculate return of their investment
-dividend they receive
-see if business has prospects for growth and expansion
-compare financial performance with different businesses to make rational investment
decisions

Financiers (commercial banks or microfinance providers)

-Decide whether to lend money to business
-Creditworthiness of the business
-assess if the business can pay back

Suppliers
-Sufficient liquidity to pay its debt
-negotiate improved credit terms; extend the trade credit period or to demand
immediate cash payment.

Customers
-see if business if financially secure; if there is a long working capital cycle (a lengthy
delay between the customers paying and receiving the products).
-Security and reliability
-Future supplies

The government
-calculate tax
-if the business if able to expand and create jobs in the economy
-assess liquidity position of the business
-ensure business operate within the law

Competitors
-compare financial accounts in order to judge their own financial performance
-seek how they can improve

Profit & loss account

Profit and loss account: Also known as statement of profit or loss or income statement,
shows a firm’s profit (or loss) after all production costs have been subtracted from the
organization’s revenue, each year.

Sales revenue: money an organization earns from selling goods and services.
Cost of sales (COS): also known as cost of goods sold, direct costs of production, such as
the cost of raw materials, component parts, and direct labor. Formula: opening stock +
purchases – closing stock.
Gross profit: profit from a firm’s everyday trading activities. Sales revenue – Cost of sales
Expenses: firm’s indirect cost of production (management salaries, rent, utilities).
Profit before interest and tax: firm’s profit before deducting interest payment on loans
and taxed on corporate profits.
Profit for period: the actual value of profit earned by the business after all costs have
been accounted for (profit after interest and tax)
Tax: the compulsory deductions paid to the government as a proportion of a firm’s
profits.
Dividend: payments from a company’s profit (after interest and tax) paid to the
shareholders of the company.
Retained profits: any funds left over from profits that is not paid to shareholders is kept
within the business for its own use (internal source of finance).

Balance Sheets
Balance sheet: also known as statement of financial position, is an essential set of final
accounts that shows the value of an organization’s assets, liabilities, and the owners’
investment (equity) in the business at a particular point in time. Often referred to as a
“snapshot”
Assets: the possessions of a business that have a monetary value. Assets are owned by a
business. (e.g. Buildings, land, machinery, and cash)
Liabilities: the debts of a business (e.g. money owed to others, trade creditors,
government)
Non-current asset/fixed assets: the long-term assets or possessions, not intended for
resale within the next 12 months of the balance sheet date. Instead, non-current assets
are used over and over for firm’s operations.
Accumulated depreciation: the value of most non-current assets falls in value over time
due to depreciation.
Illiquid assets: the items, usually non-current assets, that cannot be sold quickly, are
difficult to sell, and cannot be sold easily without incurring a significant loss in value.
Current assets: possessions of an organization with a monetary value, but intended to be
liquidated (turn into cash) within 12 months.
-Cash: the money an organization has either “in hand” or “at bank”. Most liquid of
current asset, easily accessible to the business.
 -Debtor: individual/business customers that owe money to the organization
because they have bought goods or services on trade credit.
-Stocks (inventories): the goods that a business has available for sale. Intended to
be sold as quickly as possible, generating cash for business.
Total assets: the sum of non-current assets and current assets.
Current liabilities: short-term debt of business, need to be repaid within 12 months.
-Bank overdrafts: allow customers to temporarily take out more money than is
available in their bank account. Used for very short term (usually within few
months) because very high interest rate.
-Trade creditors: suppliers may give trade credit (30 to 60 days), which need to be
repaid at a future date.
-Short-term loans: loans from a financial lender, such as a commercial bank, need
to be repaid within 12 months.
Non-current liabilities: long-term debts, falling due after 12 months.
-long-term loans
-mortgages
Total liabilities: sum of current liabilities and non-current liabilities.
Net assets: overall value of an organization’s assets after all its liabilities are deducted.
Total assets - Total liabilities
Equity: value of the owners’ stake in the business.
-Share capital: refers to the value of equity in a business that is funded by
shareholders, either through an initial public offering or via a share issue.
-Retained earnings: value of equity in a business that is funded by the
accumulated profit after tax that has not been distributed as dividends to
shareholders. Instead, it is kept as an internal source of finance for the business to
use.
Different types of intangible assets
Intangible assets: a type of fixed asset except they are non-physical assets with a
monetary value to the business. Include 4: goodwill, patents, copyrights, and
trademarks.
Intellectual property rights: intangible assets are protected by intellectual property
rights. Give rights to the inventors or creators of that property.
Goodwill: the reputation and established networks of an organization, which adds
significance above the market value of the firm’s physical assets.
Patents: the official rights given to a business to exploit an invention or process for
commercial purpose. They give registered patent holder the exclusive right to use the
innovation for a limited time period. (protect inventions and new processes)
Copyrights: give the registered owner the legal rights to creative pieces of work.
Copyrights cover the work of authors, musicians, conductors, playwrights, and directors.
(protect works of authorship in a tangible form)
Trademarks: form of intellectual property, they give listed owner the legal and exclusive
commercial use of the registered brands.

Depreciation (HL)
Depreciation: the fall in the value of a non-current asset. As non-current asset is used
over and over, its value drops due to wear and tear. Obsolete assets: with newer and
better products become avaliable, these will reduce the demand for existing fixed assets.

Residual value/scrap value/Salvage value: the value of the non-current asset at the end
of its useful life, before it is replaced.

Straight line method: spreads depreciation evenly over the useful life of the non-current
asset.
Pros:
-ease of calculating depreciation
-easier to make historical comparison
Cons:
-some non-current assets depreciate in value the most during the initial stage of their
useful shelf life.
-many assets don’t depreciate constantly
-not useful if lifespan cannot be estimated

Units of production method: assigns an equivalent value of depreciation to a non-

current asset based on each physical unit of output. Based on the units of usage rather
than time.
Pros:
-more realistic/accurate to use this method
-more accurate for assets that depreciate directly due to wear and tear.
Cons:
-more complicated to calculate
-units of production -> estimation (subjectivity)
-many tax authorities do not allow the units of production depreciation method to be
used for tax purposes (primarily used for internal bookkeeping)

3.5 Profitability and liquidity ratio analysis

Profitability ratios
Ratio analysis: quantitative management planning and decision-making tool, used to
analyze and evaluate the financial performance of a business. Can be further categorized
as profitability, liquidity, and efficiency ratio analysis.
-Gross profit margin
-Net profit margin
-Return on capital employed (ROCE)
Gross profit margin (GPM): profitability ratio that measures and organization’s gross
profit expressed as a percentage of its sales revenue.
Gross profit: Sales revenue – COGS (cost of goods sold)

If GPM ratio is 45%, every $100 of sales revenue, the firm earns gross profit of $45, the
higher the GPM ratio, the more profitable the firm has been.
-Can improve GPM ratio by increasing revenue or reducing direct costs.
-Changing promotional strategy -> persuade more customers to buy
-launching new goods/services-> products that have greater difference between
their selling price and their associated direct costs.
-reducing prices of products in highly competitive markets to attract more
customers
Net profit margin (NPM): profitability ratio that measures a firm’s overall profit (after all
costs of production have been deducted) as a percentage of its sales revenue.

The higher the NPM figure, the better the organization’s control over its overhead and
hence the higher its profitability tends to be.
Net profit: the financial surplus after all costs, including expenses, have been paid.
-To improve NPM ratio, businesses need to find ways to reduce any type of excessive and
unnecessary expenses, some examples of expenses include:
-Insurance
-Mortgage payments
-Salaries
-Rent on commercial buildings/lands
The return on capital employed (ROCE): a profitability ratio that measures a firm’s
efficiency and profitability in relation to its size (as measured by the value of the
organization’s capital employed).
Capital employed: the value of all source of finance for a business, including internal and
external finance.

-Can improve its ROCE ratio by improving its NPBIT

-Increasing firm’s sales revenues by using strategies such as reduced prices to
attract more customers, or using new sales promotions.
-Reduce cost of production
-Selling obsolete assets

Liquidity ratios
Liquidity ratios: financial ratios that examine an organization’s ability to pay its short-
term liabilities and debts.
-Current ratio
-Acid test ratio/quick ratio
Liquidity: ease with which a business can convert its assets into cash without affecting its
market value. (measures firm’s ability to repay short-term liabilities without having to
use external sources of finance)
Liquidity crisis: when the organization is unable to pay its short-term debts.
Current ratio: short-term liquidity used to calculate the ability of an organization to meet
its short-term debts. Calculates the value of an organization’s liquid assets relative to its
short-term liabilities
-The minimum figure for current ratio should be 1.0 (1:1) -> means firm has just enough
liquid assets to pay off its short-term liabilities.
-To improve current ratio business needs to increase its current asset or reduce its
current liabilities.
 -Attract more customers
-encourage customers to pay by cash -> improve cash inflows
-Use available cash to pay off short-term debts, reducing the interest (debt)
burden on the business in long run.
-Negotiate with supplier for extended trade credit period (e.g. 30days to 40 days)
Acid test ratio (quick ratio): a short-term liquidity ratio used to measure an organization’s
ability to pay its short-term debt, without the need to sell any stock. Stocks are ignored
from the calculation of inventories are not highly liquid, such as work-in-progress or very
expensive finished goods sold in niche markets; makes the stock difficult to sell or
convert into cash in a short period of time.
-A good warning sign of liquidity problems for business that usually hold stocks.
-Significantly less than 1 is often bad news.
-Less relevant for business with high stock turnover
-Trend: significant deterioration in the ratio can indicate a liquidity problem

3.6 Efficiency ratio analysis (HL)

Efficiency ratios (HL)

Efficiency ratios: used by managers and other decision makers to measure how well the
resources of a business are used in order to generate income form the firm’s capital.
-Stock turnover ratio/inventory turnover ratio)
-Creditor days ratio
-Debtor days ratio
-Gearing ratio
Ratio analysis can improve business’s operational efficiency:
-Looking at ways to reduce the time it takes the business to collect cash payments
from its customers (debtors days ratio)
-improving inventory control (stock control ratio)
-improving relationships with suppliers and trade creditors
-managing its level of affordable debt

Stock turnover ratio: efficiency ratio that measures the number of days it takes a
business to sell its stock (inventory); how quickly the stock is sold and needs to be
replenished.
The higher the stock turnover ratio, the better it is; meaning that company sells that
product very quickly, and request also exists for that product. Good stock turnover ratio
is between 5 and 10

More days, slower they sale the stocks

Average stock

Ratio varies between businesses and industries. Ratio would be much higher for large
supermarkets than jewelry brands. Businesses that sell perishable goods will have
extremely high stock turnover rate, because unsold stocks cannot be stored so need to
be disposed.
Can be improved by:
-getting rid of outdated (obsolete) inventory in order to reduce stock level.
-Narrower range of products, thereby simplifying the number of stocks that the
firm needs to hold and control.
-implementing a just-in-time (JIT) stock control system, which means the firm does
not need to hold any stocks as these are ordered and delivered only when
needed.

Debtor days ratio: efficiency ratio that measures the average number of days an
organization takes to collect debts from its customers; the time it takes for the business
to collect money owed from its customers who have bought products on credit terms.

-Debtor days ratio analysis enables managers to gauge how a business has been in
managing the credit that it gives to customers. Effective credit control is important for a
business to control its cash flow and liquidity position.
-The lower the value of the debtor days ratio the better it is for the company. Low ratio
shows that the firm is efficient in getting debtors to pay on time. A good debtor days
ratio is under 45 (30-60days).
-By contrast, a high debtor days ratio means that customers are being given more credit
than the firm can afford, given that this delays cash inflow for the firm.
-To improve debtor days ratio
-incentives for customers to pay by cash rather than credit
-shortening the credit period given to customers.
-stricter criteria for those wanting to purchase products using trade credit. (e.g.
only to customers with a proven track record of having paid their invoices in a
timely manner.)

Creditor days ratio: measures the average number of days an organization take to repay
its creditors (suppliers who the business has bought products from using trade credit);
calculates the length of time a business takes to pay its suppliers.

Usually between 30-60 days, a high creditor days ratio can help improve companies cash
flow, but can influence the company in long term by high interest charges.
To improve creditor days ratio:
-negotiate an extended credit period with the supplier
-find different supplier who offer preferential trade credit agreements
-using cash to pay inventories (cost of sales) instead of trade credit.
Gearing ratio: measures the extent to which an organization is financed by external
sources of finance; loan capital expressed as a percentage of the firm’s total capital
employed.

-Non-current liabilities -> loan capital

-Capital employed-> sum of non-current liabilities and equity
-Gearing ratio indicates the degree of financial risk that a business can afford to take by
measuring the extent to which the firm’s capital employed is financed by external
borrowing.
-Firms with a high gearing ratio -> larger dependence on long term sources of borrowing
-To improve ratio
-Pay off some of long-term liabilities
-Enhancing working capital by improving stock control, giving incentives to
customers to pay earlier, reducing credit period for customers.
-Try to rely more on internal sources of finance; retained profits or share capital
3.7 Cash Flow
The difference between profit & cash flow
Cash flow: refers to the movement of an organization’s cash inflows (cash receives from
the sale of goods and services) and cash outflows (used to pay for the costs of running
the business).
-Usually used to measure financial health of a business – and is an indicator of the
financial health of the economy as a whole.
-Comparison of cash inflows and cash outflows enable managers to see whether
the business is able to pay its costs in order to maintain its operations.
Sales revenue: the value of goods and services sold to customers.

Profit: the value of sales revenue after all costs have been accounted for. Profit is the
money that the business earns.

-The cash accumulated by a business still needs to be used to pay for the costs of
production before any profit can be declared.
-Cash is not always received immediately; sometimes customers pay with trade credit.
-possible to have profit but negative cash flow OR financial loss but positive cash flow
-When business first establish, profit and cash flow are likely to diverge. (e.g. Amazon
and Netflix took about 7 years of operation before becoming profitable)
-Business must have sufficient cash flow to continue operating, whether it is profitable
or not.

Working capital
Working capital (net current assets or circulating capital): cash or other liquid assets
available to an organization for its daily operations, such as paying for raw materials,
utility bills and staff wages. (measure of firm’s liquidity, efficiency, and overall financial
health)

Current assets: short-term assets of an organization

-Cash
-Stocks (inventory)
-Debtors
Current liabilities: short-term debts of a business, which need to be repaid within twelve
months.
-Bank Overdrafts
 -Trade creditors
-Short-term loans
-Taxes
Working Capital Cycle: refers to the duration between the organization paying for the
production costs of good or service and it receiving the cash from customers purchasing
the product.

-Some working capital cycle is very short (quick) as they receive cash immediately from
their sales. (e.g. hair salons and taxis; commonly use cash)
-For other businesses, the working capital cycle is much longer (slow) due to the long
production process and high price of their products. (e.g. Sports cars -> likelyl to use
credit terms)
-Positive working capital -> business is able to pay off its short-term liabilities very
quickly
-Negative working capital -> unable to pay off short-term liabilities.
-The longer the working capital cycle, the more likely the business is to face a cash flow
crisis.
-Insolvency occurs when individuals or business entities are unable to settle their debts
due to lack of funds or cash in their bank accounts.
-Bankruptcy: the formal and legal declaration of an individual’s or organization’s inability
to settle its debts, even if all their assets are sold.

Liquidity position
Liquidity: the extent to which an organization is able to convert its assets (items of
monetary value owned by the business) into cash.

Liquid assets:
-Cash (including deposits at a commercial bank)
-Debtors
-Stock (inventory)
Illiquid assets:
-Property
-Plant (production facilities)
-Equipment

Liquidity position: indicates the extent to which it has sufficient liquidity to continue its
business activities.
-Good liquidity position -> business can avoid bankruptcy (business closure) as the
organization has sufficient liquidity to continue operating.
-Poor liquidity position -> may struggle to cover its current liabilities. If the
business is not able to improve its liquidity position, this can eventually lead to
bankruptcy.
Liquidity ratios: financial ratios that examines an organization’s ability to pay its short-
term liabilities and debts.
-Current ratio
-Acid test ratio (quick ratio)

Cash flow forecasts

Cash flow: the movement of money in and out of an organization.
Cash flow forecasting: quantitative technique used by business managers to predict how
cash if likely to flow into and out of the organization for a particular period of time, such
as for the next twelve months.
Cash inflows: the money going into a business from earning and other sources of
finance.

Cash outflows: the money going out of a business to pay for its spending.
Net cash flow (NCF): the numerical difference between an organization’s total cash
inflows and its total cash outflows, per time period.

-Positive net cash flow -> if total cash inflows are greater than the total cash
outflows for a given period of time.
-Negative net cash flow -> if the total outflows exceed the total inflows for
particular time period.
Liquidity problem: when there is a lack of cash in the organization because its cash
inflow is less than its cash outflow (e.g. experiences negative net cash flow)
Opening balance: a cash flow forecast refers to the value of cash held by a business at
the start of a trading period (usually the beginning of the month).
Closing balance: a cash flow forecast refers to the value of cash held by a business at the
end of trading period (usually the final day of the month), which therefore becomes the
opening balance for the next time period.

The Relationship between investment, profit and cash flow

Capital expenditure: Also referred as Investment (outflow) is the purchase of fixed assets
(such as equipment and machinery), with the intention of creating a financial return
(profit) in the future.
-Investment often requires a large initial amount of cash (for purchasing fixed
assets), so this can have a negative impact on the organization’s net cash flow.
However, in the long run, the business intends for the investment expenditure to
generate a profit for the organization, and improve its net cash flow.
 -The lack of investment can negatively affect business as they fail to adapt to
changing needs and wants in the marketplace.
Profit: the financial return from the trading activities of a business.

Cash flow: not the same as profit because a profitable business can still face liquidity
problems.
-Profit is declared if sales revenues exceed total costs of production, whereas cash
flow refers to the actual movement of money in and out of the organization.
-The timing of these cash flows depends of the product’s working capital cycle, so
whilst it might be profitable, the firm can still experience cash flow issues.

Strategies for dealing with cash flow problems

3.8 Investment Appraisal

Investment: capital expenditure of a business (e.g. the purchase of fixed assets) with the
intention of a financial return on the investment in the future.

Payback period (PBP) and average rate of return (ARR)

INVESTMENT APPRAISAL
Investment appraisal: formal process of quantifying the financial risks of an investment
decision. It helps to determine if a capital investment project is worthwhile, by
examining the costs of the investment and the expected return on investment.
Payback period (PBP): the time it takes for the initial amount of money invested to be
repaid using the gains from the original investment.
Average rate of return (ARR): the average annual profit of an investment project
expressed as a percentage of the initial amount of money invested in the project.

THE PAYBACK PERIOD (PBP)

Payback period (PBP): a method of investment appraisal that considers the time it takes
for the initial amount of money invested to be repaid using the gains from the original
investment. (how long it will take a business to pay back its investment; the original
investment is known as the capital outlay or principal)
 -Shorter PBP is preferred -> minimizes the risks of an investment project and earns
profit for the business at an earlier date. Larger the contribution (net cash flow)
per month, the shorter the payback period.
Pros:
-Easiest and fastest method to calculate investment appraisal.
-Result -> easy to understand.
-useful for business that suffer from cash flow problems, such as small sole
traders, or those trying to survive a recession.
-suitable for fast-changing industries, product trends can become outdated quite
quickly
-aids decision making, as mangers will tend to choose the investments with a
short PBP in order to reduce risks.
Cons:
-doesn’t take into account the timing of cash flows and contributions to profit- the
reality is that money received in the future is worth less than money received
today.
-PBP method of investment is not usually suitable for determining long-term
projects with a long PBP, as the increasing the risks of an investment project.
-There is not consideration of the potential net benefits after the PBP. For
example, the useful life of the investment project is not considered by the PBP.
-For most businesses, profit is the main goal. The PBP does not reveal the
profitability of an investment, but focuses instead on the length of time needed to
recoup the costs of the project. Hence, the PBP a potentially highly profitable
investment project could be overlooked as it has a longer payback period.

THE AVERAGE RATE OF RETURN (ARR)

Average rate of return (ARR): a method of investment appraisal that calculates the
average annual profit of an investment project expressed as a percentage of the initial
amount of money invested in the project.
-Measures the forecasted annual profit from a particular investment project,
expressed as percentage of the initial amount of money spent on the investment.
-ARR is compared to the firm’s predetermined acceptable rate of return -> help
managers to decide whether to accept or reject the proposal investment project.
 -The higher the value of the ARR, the greater the expected return on investment
as a percentage of the amount of money invested in the project; high ARR means
the proposed investment project is more financially attractive.
Pros:
-Relatively straightforward to calculate -> easy to understand
-Unlike the PBP (payback period), the ARR focuses on the profits of a particular
project, rather than length of time it takes for a project to pay for itself.
-ARR can be used by managers and decision-makers to judge or evaluate the firm’s
financial performance.
-methods can be useful to help managers, shareholders and other decision
makers to compare the relative attractiveness of different investment projects
that cost different amounts of money
Cons:
-ARR ignores the timings of future net cash flows, so money received in the future
is worth less than it would be if received today; meaning ARR may overestimate
the real or true value of the financial returns on an investment.
-ARR focuses on profits (not entirely received until the distant future), rather than
on cash flow. Irrespective of the forecast ARR.
-Figure used to calculate ARR are only estimates, so the results or forecasts need
to be treated with some caution. The longer the investment project under
consideration, the less accurate the forecasts will be.

Net present value (NPV)

Net present value (NPV): method of investment appraisal that calculates the real value
(rather than the absolute value) of an investment project by discounting (adjusting) the
actual value of money received in the future.
-NPV is the numerical difference between the total values of future net cash flows
expressed in today’s (the present) value and the cost of the investment project or
decision. NPV is found by adding up the discounted values of all future net cash
flows and then deducting the cost of the investment project.
Discount rate: a figure used to reduce the future value of money. It is used to establish
the present value of cash that is yet to be received by the business. Refer to the table
below for various discount factors.

So, for example, if the interest rate is 5% per annum, then the present value of receiving
$100 in one year’s time is $95.24. This is because investing $95.24 today and earning an
annual return of 5% would make the investment valued at $100 in one year’s time. The
table above shows that discount rate is 0.9524.
Limitation of Average rate of return (ARR)
- it does not consider the future value of net cash flow – money received in five
years’ time is not worth the same as the money receive today. Hence, the
projected future cash flows calcualted using ARR method do not accurately reflect
the true value of the investment decision.
Advantages of net present value (NPV)
-The NPV method accounts for the future movements of cash flows an investment
value, it helps managers to make more infolrmed decisions.
Disadvantage of net present value (NPV)
NPV>0 the investment would add value to the firm
NPV<0 the investment would subtract value form the firm
NPV=0 the investment would neither gain not lose value for the firm

3.9 Budgets (HL only)

The difference between cost and profit centers
The roles of cost and profit centers
Constructing a budget
Variances
The importance of budgets and variance in decision-making