BTEC Nationals – Unit 5 Workbook
St Augustine’s CE High School
Level 3
BTEC Nationals in Business
Unit 5
An Introduction to
Accounting
Student Handbook
http://stabusiness.pbworks.com
Edexcel Level 3 BTEC National Certificate in Business Studies
Mr R Gordon
1
BTEC Nationals – Unit 5 Workbook
Unit 5 – An Introduction to Accounting
Understanding how a business operates and what makes it successful requires knowledge
of the accounting process. This unit will introduce you to the purpose of accounting and its
role in the management of a business organisation.
Accounting involves the recording of business transactions, and this in turn, leads to the
generation of financial information, which can be used as the basis of good financial control
and planning. Inadequate record-keeping and a lack of effective planning ultimately lead to
poor financial results. It is vital that owners and managers of businesses are able to
recognise the indications of potential difficulties. Remedial action can then be taken. This
unit should give learners the skills and knowledge needed to understand and manage
finances.
The unit is divided into two distinct parts. The first is an understanding of the accounting
processes necessary to provide accurate and relevant financial information. The second part
is the practical aspect of carrying out those accounting activities.
You will be introduced to accounting terminology as you study the purpose and function of
accounting and consider the various categories of business income and expenditure. It is
important to know the sources of an organisation’s income and the nature of its expenditure
as this clarifies the basis of its profitability and enables more effective control of the
business. This control begins with the planning process and you will study the use of a cash
flow forecast which requires managers to set cash flow targets that can be monitored and
adjusted on a regular basis. You will consider the effective management of cash flow and the
implications of cash flow problems. The link between business failures and cash flow
problems will be highlighted.
The measurement of an organisation’s financial performance and position requires an
understanding of a basic profit and loss account and balance sheet. This understanding
permits the analysis of profitability, liquidity and efficiency of the organisation through the
application of ratio analysis. Analysis will always require comparison of current figures with
those from a previous accounting period or those of a similar business organisation. You will
discover the method of carrying out ratio analysis as well as the meaning and implication of
the figures.
Learning outcomes
On completion of this unit you should be able to:




Understand the purpose of accounting and the categorisation of business income
and expenditure
Be able to prepare a cash flow forecast
Understand profit and loss accounts and balance sheets
Be able to review business performance using simple ratio analysis.
Edexcel Level 3 BTEC National Certificate in Business Studies
Mr R Gordon
2
BTEC Nationals – Unit 5 Workbook

Edexcel Level 3 BTEC National Certificate in Business Studies
Mr R Gordon
3
BTEC Nationals – Unit 5 Workbook
Task 1 – The Purpose of Accounting (P1)
Please refer to the PowerPoint presentation entitled “An introduction to Finance & Accounts.ppt” at
http://stabusiness.pbworks.com Task 1.
Write a report titled “The Purpose of Accounting”. Your report should include the following
information:









A definition of the term "accounting"
An explanation of the difference between "management" and "financial" accounting
Three different examples of a financial accounting document. Provide print screens
of any relevant examples you have found.
An explanation of how each financial accounting document is used, and who uses it.
An explanation of the implications of not completing financial accounts correctly
Three different examples of a management accounting document. Provide print
screens of any relevant examples you have found.
An explanation of how each management accounting document is used, and who
uses it.
An explanation of the implications of not using management accounts correctly
Research at least one news story which highlights the importance of a
business keeping an accurate record of finances
Task 2 – The Difference between capital and revenue income and expenditure (P2)
Please refer to the PowerPoint presentation entitled “Revenue and Capital Spending.ppt” at
http://stabusiness.pbworks.com Task 2.
Complete the following tasks:
1. Explain the difference between revenue and capital income.
2. Imagine you run a mini-cab service from Kilburn High Road. Identify some potential
sources of revenue and capital income.
3. Explain the difference between revenue and capital expenditure
4. How can poor management of revenue and capital expenditure lead to cash flow
problems?
5. What are the implications of poor cash flow for a mini cab firm?
Edexcel Level 3 BTEC National Certificate in Business Studies
Mr R Gordon
4
BTEC Nationals – Unit 5 Workbook
Task 3 – Cash flow forecasts
P3 - Prepare a 12 month Cash flow forecast to enable an organisation to manage its cash.
M1 - Analyse the cash flow problems a business might experience
D1 - Recommend and justify actions a business might take when experiencing cash flow problems
Hamilton Construction Limited, a small house building and restoration company, forecast the
following cash flows over the next 12 months commencing in January.
Turnover of £16,000 per month from January to March inclusive and wages of £3,000 per month;
£28,000 per month from April to August inclusive and wages of £5,000 per month; and £14,000 per
month from September to December and wages of £2,500 per month. All work is undertaken strictly
on one month’s credit.
The company had a cash balance of £17,000 at the beginning of January. Materials which are paid
for on one month’s credit are estimated at £5,000 per month from February to May, £10,000 per
month from October to December. Current creditors total £25,000 for supplies bought in December,
where debtors are £12,000.
A £20,000 investment in new equipment is anticipated in May. Corporation Tax is estimated at
£2,000 per quarter. Miscellaneous expenses are estimated at £2,500 per month.
1. Prepare a professional looking 12-month cash flow forecast for the company using
Spreadsheet software such as Microsoft Excel
2. Comment on any trends or actions which the company may need to take to control its cash
flow.
3. Use your spreadsheet to consider the impact on the figures if...
 Wages and materials increased by 10%
 Sales improved by 20%
Edexcel Level 3 BTEC National Certificate in Business Studies
Mr R Gordon
5
BTEC Nationals – Unit 5 Workbook
Task 4 – Profit & Loss Account & Balance Sheet
P4 – Explain the component parts of a profit and loss account and balance sheet of a given
organisation
Profit & Loss Account for JD Sports Ltd
1. Copy and paste the above Profit & Loss account for JD Sports from
http://stabusiness.pbworks.com Task 4 into a Word document. Label and explain the
following component parts:







Revenue
Cost of Sales
Gross Profit
Operating profit
Profit before tax
Income tax expense
Profit for the period
Edexcel Level 3 BTEC National Certificate in Business Studies
Mr R Gordon
6
BTEC Nationals – Unit 5 Workbook

Basic earnings per ordinary share
Balance Sheet for JD Sports Ltd:
2. Copy and paste the above Balance Sheet for JD Sports into your Word document, and label
and explain the following key components:





Assets
Intangible assets
Non-current assets
Current assets
Liabilities




Current liabilities
Non-current liabilities
Capital and reserves
Total equity/Net Assets
Edexcel Level 3 BTEC National Certificate in Business Studies
Mr R Gordon
7
BTEC Nationals – Unit 5 Workbook
Task 5 – Ratio Analysis
P5 - Perform Ratio Analysis to measure profitability, liquidity and efficiency of a given organisation
M2 - Analyse the performance of a business using suitable ratios
D2 - Analyse the financial performance of a business using ratio analysis
Profitability Ratios
Ratio
Calculation
Comments
Indicators
(Gross profit/revenue) * 100
This ratio tells us something
about the business's ability
consistently to control its
production costs or to manage the
margins its makes on products its
buys and sells. Whilst sales value
and volumes may move up and
down significantly, the gross
profit margin is usually quite
stable (in percentage terms).
However, a small increase (or
decrease) in profit margin,
however caused can produce a
substantial change in overall
profits.
This depends on
the industry –
for a retailer, 2040% is good, 1020% satisfactory,
under 10% is
unsatisfactory.
Operating Profit
Margin (%)
(Operating profit/revenue)
* 100
Assuming a constant gross profit
margin, the operating profit
margin tells us something about a
company's ability to control its
other operating costs or
overheads.
ROCE (Return on
Capital Employed)
(Profit before tax/Total
assets) *100
ROCE tells us what returns
management has made on the
resources made available to them
before making any distribution of
those returns.
20% is very good
– the bigger the
better!
Calculation
Comments
Indicators
A simple measure that estimates
whether the business can pay
debts due within one year from
assets that it expects to turn into
cash within that year.
2 is very good,
less than 1 is a
serious cause for
concern
Gross profit margin
(%)
Liquidity Ratios
Ratio
Current Ratio
Acid test ratio
Current assets/current
liabilities
Cash and Cash
equivalents/current
liabilities
Not all assets can be turned into
cash quickly or easily. Some notably raw materials and other
stocks - must first be turned into
final product, then sold and the
cash collected from debtors. The
acid test therefore adjusts the
Current Ratio to eliminate all
assets that are not already in cash
(or "near-cash") form.
A ratio of less
than 1 is a cause
for concern
Edexcel Level 3 BTEC National Certificate in Business Studies
Mr R Gordon
8
BTEC Nationals – Unit 5 Workbook
Efficiency Ratios
Ratio
Asset turnover
Stock turnover
ratio
Calculation
Comments
Sales revenue/net assets
This measures the productivity of
the business (i.e. how many
pounds worth of sales revenue can
be generated from the assets
employed?). A figure of 1.6 will
mean that for every £1 of net
assets, the business generates
£1.60 of sales revenue.
Cost of sales/Inventories
(stock)
This measures the number of
times in a 12-month period that a
business sells its stock. A figure of
4 would mean that the business
would turn its stock over (i.e. sell
the lot and order some more) four
times per year, or every 91 days
on average.
Indicators
Clearly the higher the
answer, the better. It
is normal for service
industries (e.g.
supermarkets) to
have a much higher
asset turnover ratio
than manufacturing
industries, since
service industries
generate very high
sales in relation to
their net assets.
Care must be taken
when comparing the
stock turnover ratios
of different
businesses, since a
supermarket, for
example, is likely to
have a much higher
stock turnover
(especially for
vegetables, fruit and
other perishables)
than a retailer such
as 'Dixons' (for
televisions, washing
machines, etc).
Tasks:
1. Calculate each of the ratios in the table for JD Sports using the information in the profit and
loss account and balance sheet from task 4. Please use the Profitability/Liquidity/Efficiency
sub-headings. (P4)
2. For each ratio you have calculated, explain what the result indicates and what it means for
the business. i.e. will they have to reduce costs? Increase sales? Streamline operations? (M2)
3. With full reference to the ratios, explain how well you think JD Sports performed in 2008.
You will need to compare the ratios to previous year’s results and other businesses’
performance in the same market. (D2)
Edexcel Level 3 BTEC National Certificate in Business Studies
Mr R Gordon
9
BTEC Nationals – Unit 5 Workbook
Reading List
Brammer J, Cox D, Fardon M and Penning A — Active Accounting (Osborne Books,
2002) ISBN 1872962378
Cox D — Business Accounts (Osborne Books 1999) ISBN 1872962580
Dyson JR — Accounting for Non-Accounting Students (FT Prentice Hall, 2003)
ISBN 0273683853
Fardon M — Finance (Osborne Books, 1992) ISBN 1872962351
Journals
Accounting Technician (Centurion Publishing Group)
PQ Magazine (PQ Publishing)
Websites
www.accountingtechnician.co.uk - Association of Accounting Technicians Online
www.accountingweb.co.uk Accounting Web - for news and analysis
www.bized.ac.uk/learn/accounting/index.htm - Business education website including
learning materials and quizzes
www.tutor2u.net/business/accounts - Support for teachers and learners
Edexcel Level 3 BTEC National Certificate in Business Studies
Mr R Gordon
10