Finance for Managers

RQF
Principal Examiner’s Report

Unit Title: Finance for Managers

Unit Code: 4UFM

RQF Level: 4

Session: December 2017

Comments on Learning Outcome and Assessment Criteria Performance

Learning Outcomes & Assessment Criteria Comments

1. Explain the purpose of financial and
management accounting
1.2 Apply accounting principles, processes, and
concepts to financial and management accounting
data
Learners demonstrated a limited understanding of
the role of auditor. It was evident that they did not
have experience of how an auditor worked with
business organisations in practice.

4. Demonstrate the use of costing and pricing
methods to contribute to business decision making
4.3 Assess the implications of using different
costing methods
Learners showed a limited understanding of the
FIFO and LIFO methods of inventory valuation.
However, the majority of learners were unable to
discuss the implications for a business organisation
of using these two methods.

2. Interpret financial statements to review the
performance of business organisations and report
to stakeholders
2.2 Calculate financial ratios to assess the financial
performance of a business organisation
Calculations of the ratios, which have been
regularly tested on the legacy paper saw limited
success. It is important that this topic is addressed
fully
and learners are well prepared for the examination
in
this area.
 1. Explain the purpose of financial and
management accounting
1.2 Apply accounting principles, processes, and
concepts to financial and management accounting
data
Learners demonstrated a limited understanding of
the definition of depreciation and how this is
applied in
general accounting practice. However, only the
most able learners understood that depreciation
was a book keeping entry and discussed the
various caused of depreciation.

4. Demonstrate the use of costing and pricing
methods to contribute to business decision making
4.1 Explain costing and pricing methods used to
make business decisions
This question was generally well attempted with
learners demonstrating some knowledge of
marginal and absorption costing. The most able
learners demonstrated a clear understanding of the
difference in calculations for the two costing
methods.

1. Explain the purpose of financial and
management accounting
1.1 Understand the roles of financial and
management accounting
Learners answered this question particularly well.
However, learners should be reminded of the
importance of giving explanations and details
rather than just identifying points and providing a
list. This was a common issue.

Question 1

Question wording

Explain the role and duties of an auditor in relation to the production of company accounts.

Learning Outcome 1

1. Mark scheme
Q Indicative Content Total
21 In order to ensure that a company’s financial statements show a ‘true and fair’ view of their
financial affairs, an external, independent auditor is appointed.
This increases confidence for stakeholders regarding the accounting records. The auditor
will ensure that the financial information is accurate.

Auditing duties include:

• Ensuring the management and employees understand the company, in particular,

company operations, fraud and financial reporting.
• Evaluating and understanding internal control systems.
• Observing a physical inventory stock take.
• Investigating differences or variances in account balances.
• Confirming balances of accounts receivable and accounts payable.

An auditor can offer objective advice on internal control and improving financial reporting.
They must ensure that they remain independent from the company. The auditor can only
offer an opinion on the businesses validity.

An auditor cannot:

1. Supervise the company’s employees Total

2. Maintain company assets 10
3. Sign tax returns marks
 4. Hire or terminate the employment of an employee
5. Authorise/complete any financial transactions on behalf of the company
6. Design/maintain internal controls or financial management systems
7. Approve invoices for payment
8. Report to the board of directors on behalf of the management.

A basic Pass would include:

• Some understanding of the role of an auditor.
• A clear identification of at least two duties of an auditor.
• Descriptions rather than analysis throughout.

A better answer would include:

• A good understanding of the role of an auditor.
• A detailed and well-structured explanation of the duties of an auditor.
• A detailed and well-structured analysis with practical examples where appropriate.

Other relevant material should be credited.

Mark Allocation Guidance
Up to 4 marks can be allocated for an explanation of the role of the auditor.
A further 6 marks can be allocated for the explanation of the duties that may be undertaken.

2. Comments on learners’ performance

The weakest answers failed to understand the role or duties of an auditor. In many cases, the description
failed to relate to the work completed by an auditor.

The best answers provided a clear explanation of both the role and duties of an auditor. These answers
were based on a clear understanding of what an auditor did in practice.

3. Recommendations

Learners need to ensure that they are focusing on the command verb in the question. In many cases, the
learners simply listed or described the role or duties of an auditor. Learners need to be reminded to read
the question carefully and complete all parts of the question.

Examiner’s tips
Ensure you read the question carefully
and include both parts, for example, role
and duties.
Question 2

Question wording

Discuss the usefulness of the FIFO (First in First Out) and LIFO (Last In First Out) methods of
inventory valuation.

Learning Outcome 4

1. Mark scheme
Q Indicative Content Total
22 FIFO (First In First Out)

The FIFO method of valuation assumes that inventory is used, or sold, in the order in which
it is purchased. So, inventories of goods that are bought first are used first.

Advantages
It is realistic because it is based on the assumption that issues from inventory are made in
the order in which the goods are received.
It is relatively easy to calculate.
The inventory values are based on the most recent prices paid.

Disadvantages
The prices at which inventory is issued to production are likely to be out of date, so the
selling price of the finished goods might not accurately reflect the most recent costs.
When the prices of inventory are rising, the FIFO method values the inventory at the
highest, i.e. latest prices.
The effect is to reduce the cost of sales and therefore to raise profit. Such a policy could
result in more tax being paid because profits are higher than they might otherwise have
been.

LIFO (Last in First Out)

The last in, first out, method of inventory valuation assumes that the most recent deliveries
of inventory are used first. So, new inventory is always issued before old inventory. The
value of unused inventories at the end of the trading year is therefore based on the cost of
earlier purchases.

Advantages
The system is based on the prices most recently paid for inventory, therefore selling prices
will reflect up to date costs.
It is relatively easy to calculate.

Disadvantages
There might be problems in issuing new inventory first, particularly if the inventory is
perishable or is likely to go out of date.
The closing inventory is valued at out of date prices, which might be lower than the current
prices.

A basic Pass would include:

• Some understanding of the FIFO and LIFO methods of inventory valuation.
• A clear identification of at least one advantage and one disadvantage of using FIFO or
LIFO.
 • An answer that is unbalanced in terms of advantages and disadvantages.
• Descriptions rather than analysis throughout.

A better answer would include:

• A good understanding of the FIFO and LIFO methods of inventory valuation.
• A detailed and well-structured explanation of a number of advantages and disadvantages
of using FIFO and LIFO.
• A detailed and well-structured analysis with practical examples where appropriate.

Other relevant material should be credited.

Mark Allocation Guidance
Up to 4 marks can be allocated for the understanding of the FIFO and LIFO methods of inventory
valuation.
A further 6 marks can be allocated for the analysis of the advantages and disadvantages,
highlighting the usefulness of the methods.

Total Maximum Marks for Q1 10 marks

2. Comments on learners’ performance

In general, there was a lack of understanding of the various inventory valuation methods. On a number of
occasions, learners discussed AVCO which was not included in the question.

The weakest answers simply reiterated the question and attempted to provide an example of when each
one would be used.

The most able learners provided a definition of each term and attempted to review the advantages and
disadvantages of each method.

3. Recommendations
Learners need to ensure all key terms have been learnt.
They should try to provide a balanced argument in their answer, considering both the advantages and
disadvantages of the methods being discussed.
Practical business examples would demonstrate learner understanding and allow the learners to consider
the usefulness of the methods.

Examiner’s tips
Learn all key terms.
Question 3

Question wording

Electrical Warehouse have provided the following financial information for the year ending 30 April 2017.
Task:
(a) Calculate the following ratios for Electrical Warehouse:

• Trade receivables turnover

• Trade payables turnover
(b) Assess the efficiency of the Electrical Warehouse.

Learning Outcome 2

1. Mark scheme
Q Indicative Content Total
23(a) Trade receivables turnover = trade receivables / credit sales × 365
Trade receivables turnover = 30 000 / 1 060 000 × 365 (1) = 10.33 days (to 2 decimal
places) (1)
Trade payables turnover = trade payables / credit purchases × 365
Trade payables turnover = 60 000 / 500 000 × 365 (1) = 43.80 days (to 2 decimal places)
(1)
4
Mark Allocation Guidance
Marks as allocated above.
23(b) The trade receivables turnover period is relatively short, with trade receivables settling
their accounts within 11 days. Usual credit terms are 30, 60, or 90 days.
The trade payables turnover period is in excess of the trade receivables turnover period.
This is beneficial as it allows Electrical Warehouse to pay its debts after receiving payment
from customers. To ensure loyalty with suppliers, Electrical Warehouse should consider
paying its debts within 30 days. 6
Mark Allocation Guidance Total 10 marks
1 mark can be allocated per point, up to 6 marks
Total Maximum Marks for Q1 10 marks

2. Comments on learners’ performance

The weakest answers, demonstrated little or no understanding of ratio analysis. It was clear that the
learners had not accurately learnt the ratio formulae which meant all calculations, if attempted, were
inaccurate.

The most able learners demonstrated considerable numerical dexterity in the answers. They showed all of
their workings and then clearly analysed the results calculated.

3. Recommendations

Learners need to ensure they have learnt the ratio formulae. These should be included in their answers, so
it is easy to see which numbers the learner is attempting to include in their answer.
The learners should use a calculator and state whether their answer has been rounded.
Any analysis should be based on the calculations the learner has completed.
 Examiner’s tips
Learn the ratio formulae.

Question 4
Question wording

Discuss the reasons why companies need to depreciate the cost of their non-current (fixed) assets.

Learning Outcome 1

1. Mark scheme
Q Indicative content Total
24 • Depreciation is the cost of assets consumed over their useful life.
• The purpose of accounting for depreciation is to spread the cost of a non-current
(fixed) asset over its expected useful life.
• Depreciation is an application of the prudence and matching concepts. It matches
costs against the related revenues.
• Depreciation needs to be calculated to find out the correct profit of the year and to find
out the actual position of the business through the statement of financial position
(balance sheet). Unless the depreciation value is calculated and considered like other
expenses, the true profit or loss of the business cannot be ascertained.

Causes of depreciation
• Wear and tear / Rust, Rot and Decay / Erosion. Any non-current (fixed) asset will
gradually break down over a certain period of time. Eventually, the asset can no
longer be repaired, and must be disposed of.
• Obsolescence (Out of Date). Some assets have an extremely short life span. This
condition is most applicable to inventory, rather than non-current (fixed) assets.
• Time factor. A non-current (fixed) asset may actually be a right to use something
(such as software or a database) for a certain period of time. If so, its life span
terminates when the usage rights expire, so depreciation must be completed by the
end of the usage period.
• Depletion. If an asset is natural resources, such as an oil reservoir, the depletion of
the resource causes depreciation (in this case, it is called depletion, rather than
depreciation). The pace of depletion may change if a company subsequently alters its
estimate of reserves remaining.
• Inadequacy. Some equipment will be rendered obsolete by more efficient equipment,
which reduces the usability of the original equipment.
25
 Level Mark Descriptor
0 No rewardable material
1 1-9 • Demonstrates isolated knowledge and understanding of the theory of depreciation;
there may be major gaps or omissions.
• Provides little evidence of application and links between factors and issues.
• Analysis likely to consist of basic description of information.
• Meaning may be conveyed but in a non-specialist way; response lacks clarity and fails
to provide an adequate answer to the question.
2 10-14 • Demonstrates some knowledge and understanding of the theory of depreciation; there
may be minor gaps or omissions.
• Provides partially evidence of application and links between factors and issues.
• Analysis likely to consist of basic description of information.
• Meaning may be conveyed but in a non-specialist way; response lacks clarity and fails
to provide an adequate answer to the question.
3 15-18 • Demonstrates coherent knowledge and understanding of the theory of depreciation
with a few omissions.
• Evidence of application demonstrating relevant linkages and interrelationships
between factors leading to an analysis being presented.
• Demonstrates mostly the use of logical reasoning, clarity, and appropriate specialist
technical language.
4 19-25 • Demonstrates accurate and thorough knowledge and understanding of the theory of
depreciation; any gaps or omissions are minor.
• Evidences developed application leading to a balanced analysis containing linkages
and interrelationships between factors.
• Logical reasoning evidenced throughout response which is clear and uses specialist
technical language consistently.

2. Comments on learners’ performance

The least able learners failed to show any understanding of the term ‘depreciation’. It was evident that
these learners thought that depreciation was a financial transaction and that money would be available for
the purchase of replacement assets. Causes of depreciation were not discussed in these answers.

The most able learners provided a structured answer that demonstrated an excellent understanding of
depreciation. They explained that depreciation was a book keeping entry and that it was a cost consumed
over the life of a non-current asset. The learners analysed the causes of depreciation and provided
practical business examples throughout.

3. Recommendations

Learners need to ensure that they focus on the question set rather than providing a theoretical answer. For
example, the learners need to consider ‘why a business organisation’ needs to depreciate its non-current
assets.

Examiner’s tips
Justify any conclusions drawn.
Question 5

Question wording

Differentiate between marginal costing and absorption costing.

Learning Outcome 4

1. Mark scheme

Q Indicative content Total

25 Marginal Costing

• Marginal cost is defined as the cost of raising output by one more unit.
• Marginal cost is the same as the variable cost of production. It only includes those
costs that vary with the level of output. Marginal costing is a costing and decision-
making technique that is used by managers in business organisations. It is an
alternative to Absorption Costing and can be known as variable costing or direct
costing.
• Unlike absorption costing, which ensures that all costs are charged to a cost unit,
marginal costing charges only the variable cost of production. Fixed costs are
ignored.

Marginal costing and break-even analysis have a number of applications:

1. Make or buy – business organisations may choose to make or manufacture products

that they can sell on to their consumers. This could be because their product is
unique, there is a secret recipe / design, or they can make the product cheaper than
an outside organisation. Depending on whether the costs of purchase exceed the
costs of production will make the decision as to whether the business should make
the product or buy it in from a suppler.
Firms may manufacture their own products for various reasons such as:
- The product is unique, is not produced by anybody else, and there is a
demand for it.
- The firm wants to supply its own brand of a particular product.
- The firm does not want to be dependent upon outside suppliers who may be
unreliable regarding delivery and price.
- The firm believes it can manufacture its products more cheaply than it can buy
them from outside.
2. Special order decisions – business organisations may be asked to produce a one – off
order for another company. The business needs to decide whether this special order
is financially worth the costs of production. Considerations such as whether other
production needs to cease to allow for this product to be made or whether other
customers may demand the same terms as the one-off order need to be considered
prior to acceptance of the special order.
Circumstances may sometimes justify selling goods below the normal selling price:
- To combat competitors who are selling similar goods at a lower price.
- Acceptance of an order to produce and sell goods at a special price if this will
increase profit or help to cover overheads.
- To maintain production in temporarily difficult trading conditions so that a
skilled workforce may be retained.
- To dispose of obsolescent or perishable goods. 25
 - To promote a new product.
3. Acceptance of additional work – as with a make or buy decision, businesses need to
decide whether they have sufficient capacity in order to take on the additional work.
4. Discontinuing a product or service – this decision will be made based on the
contribution of the product or service. A business will make the decision to discontinue
a product if its unit contribution is less than other products or if the product has a
negative contribution. Before making the decision, the business must ensure that the
decision will not affect the sales of any products.
5. Price setting – a business organisation will use break-even analysis to work out the
best-selling price to charge for a product or service. It is possible to increase a
business’s profit by increasing the selling price of a product or service without
increasing the number of sales made.
6. Scarce resources – a scarce resource is something that limited a business’s ability to
operate at their full capacity. They may include a shortage of skilled labour, raw
materials, factory materials, factory space, machine availability or finance availability.
Once a scarce resource has been identified, a business will quantify the scarce
resource and then allocate its best used based on the contribution earned by each
product being made.
7. ‘What if’ scenarios – this will evaluate the expected return or value of a proposed
change in business activities. A business organisation will create various scenarios
that may occur in their organisation. They will then review the potential outcomes
each scenario prior to making a final decision.

Absorption Costing

Absorption costing values inventory at the full production cost of a product. Absorption
costing values will vary to those of marginal costing. As the inventory values are different,
this will affect the profits reported in the income statement for the period.

The benefits of absorption costing include:

1. Absorption costing includes an element of fixed overheads in its inventory value in

accordance with accounting legislation.
2. For small business organisations, absorbing overheads into product costs is the most
effective way of estimating job costs and profits.
3. The analysis of under / over absorption of overheads using absorption costs is useful
in controlling costs of a business organisation.
Level Mark Descriptor
0 No rewardable material
1 1-9 • Demonstrates isolated knowledge and understanding marginal costing and absorption
costing; there may be major gaps or omissions.
• Provides little evidence of application and links between factors and issues.
• Analysis likely to consist of basic description of information.
• Meaning may be conveyed but in a non-specialist way; response lacks clarity and fails
to provide an adequate answer to the question.
2 10-14 • Demonstrates limited knowledge and understanding of marginal costing and
absorption costing; there may be minor gaps or omissions.
• Provides little evidence of application and links between factors and issues.
• Analysis likely to consist of basic description of information.
• Meaning may be conveyed but in a non-specialist way; response lacks clarity and fails
to provide an adequate answer to the question.
 3 15-18 • Demonstrates coherent knowledge and understanding of marginal costing and
absorption costing with a few omissions.
• Evidence of application demonstrating some linkages and interrelationships between
factors leading to an analysis being presented.
• Demonstrates the use of logical reasoning, clarity, and appropriate specialist technical
language.
4 19-25 • Demonstrates accurate and thorough knowledge and understanding of marginal
costing and absorption costing; any gaps or omissions are minor.
• Evidences thorough application leading to a balanced analysis containing linkages and
interrelationships between factors.
• Logical reasoning evidenced throughout response which is clear and uses specialist
technical language consistently.

2. Comments on learners’ performance

This question was the least popular of the questions in this section. The learners that attempted the
question were generally able to define the two terms. However, there were only a limited number of
learners that were able to discuss the uses of both marginal and absorption costing.

3. Recommendations

Learners need to practice highlighting the keywords within the examination questions.

Examiner’s tips
Ensure you provide a balanced argument.
Question 6

Question wording

Compare and contrast financial and management accounting.

Learning Outcome 1

1. Mark scheme

Q Indicative content Total

26 Financial Accounting
To disclose period-end results
Objectives
and the financial health of a
business organisation.
Provide financial statements in
accordance with current
legislation.
Management Accounting
To provide information that can be
used by business management to
plan for the future, set goals and
objectives and evaluate the
achievement of these.

Financial accounting information Management accounting information

Intended
audience is produced for release to both is produced for internal use only.
internal and external This information is used by
stakeholders of a business managers and employees.
organisation.
These may include:
shareholders, lenders, tax
authorities, the
Government and customers.
For incorporated businesses
Legal Management accounting information
requirement and others where legislation is not a legal requirement.
dictates, there is a legal
requirement to prepare and
distribute financial accounting
statements.
Financial accounting statements
Required Management accounting information
segments are produced for a whole will relate to individual departments
business organisation or in the or sections within a business
case of consolidated accounts organisation.
for a group of business
organisations.

Financial accounting focuses on

Focus
historical data and reports on
information from the previous
trading period.
Depending on the type of
Format
business organisation, set
formats may be used depending
on the applicable legislation. For
example, in the UK public limited
companies (PLCs) use formats
as defined by the Companies
Act. International Accounting
Management accounting focuses on
the present and produces budgets
and forecasts for the future.
Management accounting data is
presented informally and adapted to
meet the needs of individual
departments.
25
 Standards provide companies
around the world with guidance
on final accounts.
A number of financial accounting Management accounting reports are
Rules and
regulations standards are prescribed. only for internal use. Therefore,
International Accounting there are no rules or regulations that
Standards (IAS) provide apply.
guidance to companies around
the world.

These standards could include:

IAS 7 – Statement of cash flows

IAS 10 – Events after the
reporting period
IAS 16 – Property, plant and
equipment
IAS 18 – Revenue
IAS 23 – Borrowing costs
IAS 36 – Impairment of assets
IAS 37 – Provisions, contingent
liabilities and contingent assets
Financial Accounting Management Accounting Statements
Reporting
Statements are are prepared as required. The usual
frequency
produced/published at pre- frequencies are daily, weekly or
defined times. The reports are monthly.
usually published on an annual
basis.
Financial Accounting Information Management Accounting Information
Information
is usually verifiable and could be quantitative and / or
quantifiable information based qualitative. This information is
on monetary data. usually based on monetary data,
based on the businesses goals and
objectives.
‘These reports typically show the
amount of available cash, sales
revenue generated, amount of
orders in hand, state of accounts
payable and accounts receivable,
outstanding debts, raw material and
inventory, and may also include
trend charts, variance analysis, and
other statistics.’
Level Mark Descriptor
0 No rewardable material
1 1-9 • Demonstrates isolated knowledge and understanding of financial and management
accounting; there may be major gaps or omissions.
• Provides little evidence of application and links between factors and issues.
• Analysis likely to consist of basic description of information.
• Meaning may be conveyed but in a non-specialist way; response lacks clarity and fails
to provide an adequate answer to the question.
2 10-14 • Demonstrates limited knowledge and understanding of financial and management
accounting; there may be minor gaps or omissions.
• Provides little evidence of application and links between factors and issues.
• Analysis likely to consist of basic description of information.
• Meaning may be conveyed but in a non-specialist way; response lacks clarity and fails
to provide an adequate answer to the question.
 3 15-18 • Demonstrates coherent knowledge and understanding of financial and management
accounting with a few omissions.
• Evidence of application demonstrating some linkages and interrelationships between
factors leading to an analysis being presented.
• Demonstrates the use of logical reasoning, clarity, and appropriate specialist technical
language.
4 19-25 • Demonstrates accurate and thorough knowledge and understanding of financial and
management accounting; any gaps or omissions are minor.
• Evidences thorough application leading to a balanced analysis containing linkages and
interrelationships between factors.
• Logical reasoning evidenced throughout response which is clear and uses specialist
technical language consistently.

2. Comments on learners’ performance

Generally, well answered. The majority of learners were able to describe the features of financial and
management accounting. Learners should be reminded to write in extended prose rather than bullet
pointed lists. This would ensure that they focus on the command verbs in the questions. For example,
compare and contrast, rather than identification of key points.

3. Recommendations
Ensure learners focus on the command verbs in the question.

Examiner’s tips
Focus on the command verbs in the
question.