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04502026 syllabus

BUSINESS STUDIES · CHAPTER 5

Financial information

Use finance, cash-flow forecasts, accounts and ratios to support business decisions.

Full syllabus4 connected sectionsSyllabus-aligned guide

LEARNING OBJECTIVES

What you will be able to do

  • select suitable internal and external finance
  • construct and interpret cash-flow forecasts
  • interpret income statements and statements of financial position
  • calculate and evaluate profitability and liquidity ratios

AT A GLANCE

Syllabus0450Coverage2026Sections4LevelFull syllabus

INTRODUCTION · THE BIG IDEA

Use finance, cash-flow forecasts, accounts and ratios to support business decisions.

Finance allows a business to start, operate and expand. The amount, timing, purpose and risk of the need determine which source is suitable.

Accounts summarise performance and position, but figures become useful only when compared over time, with competitors or against objectives—and when their limitations are recognised.

01

SECTION 01

Finance needs and sources

Core concept

Start-up capital purchases initial assets and inventory; working capital supports daily activity; expansion may require long-term investment. Internal sources include retained profit, asset sales and owner's savings. External sources include share capital, loans, overdrafts, trade credit, leasing, hire purchase, grants and crowdfunding.

Short-term needs usually suit flexible short-term sources, while long-lived assets suit longer finance. Evaluate cost, repayment, security, control, availability and cash-flow effect.

Matching source to need
NeedPossible sourceReason
temporary cash gapoverdraftflexible short-term borrowing
delivery vehicleleasing or long-term loancost spread across asset life
company expansionretained profit or share issuelong-term finance without short repayment
02

SECTION 02

Cash-flow forecasting

Core concept

Cash inflow and outflow timing determines the closing balance. A forecast anticipates shortages and supports planning, but sales and cost assumptions can be wrong. A negative balance may be addressed by delaying spending, speeding receipts, reducing inventory, arranging finance or renegotiating credit.

Profit includes revenue earned and expenses incurred, while cash flow records money actually received and paid. Credit sales may create profit before cash arrives.

RULE 1
net cash flow = total inflows − total outflows
RULE 2
closing balance = opening balance + net cash flow
Original worked example

Monthly closing balance

  1. Opening balance is $1800.
  2. Inflows total $7600 and outflows total $9200.
  3. Net cash flow = −$1600; closing balance = 1800 − 1600.

Answer: Closing balance = $200.

03

SECTION 03

Income statement and financial position

Core concept

An income statement measures performance over a period: revenue minus cost of sales gives gross profit; subtract expenses to obtain profit. A statement of financial position shows assets, liabilities and equity at one date.

Non-current assets support long-term operations. Current assets are expected to become cash within a year; current liabilities are due within a year. Owner's equity is financed by share capital and retained profit.

RULE 1
gross profit = revenue − cost of sales
RULE 2
profit = gross profit − expenses
RULE 3
assets = liabilities + owner's equity
RULE 4
capital employed = owner's equity + non-current liabilities
04

SECTION 04

Ratio analysis and users

Core concept

Profitability ratios compare profit with sales or capital. Liquidity ratios estimate ability to meet short-term debts. A high current ratio may still hide slow inventory, while a low ratio may be acceptable for a cash retailer with fast turnover.

Managers, owners, employees, lenders, suppliers, government and potential investors use accounts for different decisions. Ratios are historical, depend on accounting choices and need meaningful comparisons; one number cannot prove success.

RULE 1
gross profit margin = gross profit ÷ revenue × 100%
RULE 2
profit margin = profit ÷ revenue × 100%
RULE 3
ROCE = profit ÷ capital employed × 100%
RULE 4
current ratio = current assets ÷ current liabilities
RULE 5
acid-test ratio = (current assets − inventory) ÷ current liabilities
Original worked example

Interpreting liquidity

  1. Current assets are $90 000, including $30 000 inventory.
  2. Current liabilities are $45 000.
  3. Current ratio = 2.0; acid-test ratio = 60 000 ÷ 45 000.

Answer: Current ratio = 2.0 and acid-test ratio = 1.33; immediate liquidity is positive, but trends and inventory quality still matter.

QUICK CHAPTER SUMMARY

The ideas to carry forward

  • Match finance duration and risk to the purpose.
  • Cash and profit measure different things.
  • Income statements measure performance; statements of financial position show position.
  • Ratios require comparison and contextual judgement.

QUICK REVISION CHECKLIST

Can you do each of these without your notes?

  • select suitable internal and external finance
  • construct and interpret cash-flow forecasts
  • interpret income statements and statements of financial position
  • calculate and evaluate profitability and liquidity ratios
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