MAC4865/501/0/2020

Tutorial Letter 501/0/2020

Financial Strategy

MAC4865

Year Module

Department of Management Accounting

IMPORTANT INFORMATION

Please register on myUnisa, activate your myLife email address and make
sure that you have regular access to the myUnisa module website for
MAC4865-20-Y1.

Note: This is a fully online module and therefore it is only available on myUnisa.
 CONTENTS

Page

INTRODUCTION ...................................................................................................................................... 3
CIMA verb hierarchy ................................................................................................................................. 3
PART 1 Financial Reporting (F1) ....................................................................................................... 5
1 Short-term finance and investments .............................................................................................. 5
2 Working capital management ........................................................................................................ 6
3 Working capital management – accounts receivable and payable ................................................ 7
4 Working capital management – inventory control .......................................................................... 8
5 Working capital management – cash control ................................................................................. 9
PART 2 Advanced Financial Reporting (F2) ................................................................................... 10
6 Long-term finance ....................................................................................................................... 10
7 Cost of capital ............................................................................................................................. 11
8 Analysis of financial statements .................................................................................................. 12
Conclusion ............................................................................................................................................ 13
References ............................................................................................................................................ 13

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 MAC4865/501

This tutorial letter will provide students with a high-level overview of the undergraduate
knowledge relating to this module that students should be familiar with. Students are
required to refer to their undergraduate study material and/or do research if required to
revise these topics. Students must ensure that they are adequately prepared and have a
solid foundation to ensure that the topics covered in the CIMA Financial Strategy (F3)
syllabus is mastered after the completion of this module.

Assignment 1 is based on students’ prior knowledge (undergraduate studies). Selected

topics that are included in CIMA’s Financial pillar relating to the Operational level (F1 –
Financial Reporting) and the Managerial level (F2 – Advanced Financial Reporting) that is
seen as prior knowledge as referred to above, is contained in this tutorial letter.

INTRODUCTION

Dear student

A sincere welcome as a registered student of the module FINANCIAL STRATEGY. We trust

that studying the tutorial matter will not only be interesting and stimulating, but will also provide
new knowledge and insights that will stand you in good stead in your career and future studies.

This module is based on the 2019 CIMA Professional Qualification Syllabus. CIMA did rigours
research on developing the new syllabus, they conducted face-to-face interviews, roundtables
and conducted a global survey including more than 5500 finance professionals from over 2000
organisation in over 150 countries. CIMA did this in order to acquire an understanding of the
management community’s needs in a digital world. “Re-inventing Finance for a Digital World”.
Go to the links below to read up more on this important topic, and the new syllabus.

https://www.cimaglobal.com/Documents/Future%20of%20Finance/future-re-inventing-finance-
for-a-digital-world.pdf

https://www.cimaglobal.com/Documents/Future%20of%20Finance/1807-
5335%20Future%20of%20Finance%20-%20Syllabus_WEB_R1_IT.pdf

CIMA verb hierarchy

CIMA place great importance on the definition of verbs in structuring questions and tests. It is
therefore crucial that students understand the verbs in order to appreciate the depth and
breadth of a topic and the level of skill required. These verbs, as included in Table 1 below, will
be used to guide students when answering assignment and examination questions.

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Table 1: CIMA verb hierarchy (Kaplan Publishing 2019c: P.14-P.15)

Levels Learning objective Verbs used Definition

5 Evaluation Advise Counsel, inform or notify
How you are expected to Assess Evaluate or estimate the nature, ability or
quality of
use your learning to
Evaluate Appraise or assess the value of
evaluate, make decisions Recommend Propose a course of action
or recommendations Review Assess and evaluate in order, to change if
necessary
4 Analysis Align Arrange in an orderly way
How you are expected to Analyse Examine in detail the structure of
Communicate Share or exchange information
analyse the detail of what
Compare and Show the similarities and/or differences
you have learned contrast between
Develop Grow and expand a concept
Discuss Examine in detail by argument
Examine Inspect thoroughly
Interpret Translate into intelligible or familiar terms
Monitor Observe and check the progress of
Prioritise Place in order of priority or sequence for
action
Produce Create or bring into existence
3 Application Apply Put to practical use
How you are expected to Calculate Ascertain or recon mathematically
Conduct Organise and carry out
apply your knowledge.
Demonstrate Prove with certainty or exhibit by practical
means
Prepare Make or get ready for use
Reconcile Make or prove consistent/compatible
2 Comprehension Describe Communicate the key features of
What you are expected to Distinguish Highlight the differences between
Explain Make clear or intelligible/state the meaning
understand
or purpose of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
1 Knowledge List Make a list of
What you are expected to State Express, fully or clearly, the details/facts of
Define Give the exact meaning of
know
Outline Give a summary of

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 MAC4865/501
Selected topics that are included in CIMA’s Financial pillar relating to the Operational level (F1 –
Financial Reporting) and the Managerial level (F2 – Advanced Financial Reporting) that is seen
as prior knowledge as referred to above, is dealt with below in Part 1 and Part 2 respectively.

PART 1 Financial Reporting (F1)

1 Short-term finance and investments

Students should be able to:

• describe sources of short term funding

• describe alternatives for investment of short term cash surpluses

• identify appropriate methods of finance for trading internationally

• illustrate numerically the financial impact of short term funding and investment methods

The diagram below depicts various short-term finance and investments that is covered in under-
graduate studies and the CIMA operational level subject Financial Reporting (F1).

Trade
Trade Short term Financing exports
receivables
payables borrowing • Documentary credits
• Factors
• Benefits • Overdrafts • Bills of exchange
• Invoice
• Problems • Loans • Export factoring
discounting

Finance

Short term investments

Investments

Interest bearing Negotiable instruments Other

bank accounts • Bank notes investments
Short-dated
• Bank deposit • Bearer bonds • Corporate
government
accounts • Certificates of deposit bonds
bonds
• Money market • Bills of exchange • Commercial
deposits • Treasury bills paper

Figure 1.1: Short-term finance and investments summary (adapted) (Kaplan Publishing
2019a: 306)
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2 Working capital management

Students should be able to:

• calculate and interpret working capital ratios

• discuss policies for the overall management of the total level of investment in working
capital

• evaluate the impact and risks of overtrading

• evaluate the impact of using different working capital

The diagram below depicts working capital management that is covered in under-graduate
studies and the CIMA operational level subject Financial Reporting (F1).

Working capital
management
Management of
Working capital working capital
Elements of working capital investment levels levels
• Current assets less current liabilities Work back from ratios
• Inventory + Receivables + Cash – to find balances
Payables - Overdrafts

Traditional Modern
approach approach
Management objectives Working capital
Correct balance between: ratios
• Liquidity versus Profitability Ratio formulas
• Cash versus Profits Raw materials
Operating cycle
holding period

Cash operating WIP holding

cycle period

Elements Receivables
Length
• Raw materials period
Affected by:
• WIP
• Profitability versus liquidity
• Finished goods
• Management efficiency Finished goods
• Receivables
• Type of business period
• Payables

Payables period
Calculations
Use
RM holding – Payables period
Measure of overall Working capital
+ WIP holding + FG holding +
cash requirements turnover
Receivables period

Figure 2.1: Working capital management and ratio summary (adapted) (Kaplan Publishing
2019a: 334-335)

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 MAC4865/501
3 Working capital management – accounts receivable and payable

Students should be able to:

• discuss policies for the management of trade receivables and trade payables balances

• evaluate the impact of different trade receivable and payable policies

The diagram below depicts accounts receivable and accounts payable that forms part of
working capital management that is covered in under-graduate studies and the CIMA
operational level subject Financial Reporting (F1).

Accounts receivable and

accounts payable

Accounts Accounts
receivable payable

Factoring and Liquidity vs profitability

Credit policy invoice Delay payment vs Taking discounts
discounting payment on demand

Liquidity vs profitability
Collect now vs allow credit
Factoring Benefits & problems
Cost of financing
Finance cost =
receivables balance X Calculations of Benefits
interest rate cost • Factor takes over debts
collection
• Gives admin savings
Giving discounts
Service charge
Less: Admin savings Problems
Assessing creditworthiness • Customers may be lost
All new customers and Less: Savings in
existing customers periodically finance costs

Setting imits
Finance cost =
receivables balance X Invoice
Benefits & problems
interest rate discounting

Collecting overdue debts Calculations of Benefits

Letter; call; withhold supplies; cost • Customer is unaware
collectors; legal action
Problems
Monitoring the system • Don t save on admin
Service fee
• Ratios Add: finance costs
• Age analysis
• Stats

Figure 3.1: Working capital management - accounts receivable and payable - summary
(adapted) (Kaplan Publishing 2019a: 369-370)

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4 Working capital management – inventory control

Students should be able to:

• discuss the objectives and costs of inventory management

• evaluate the impacts of alternative policies for inventory

The diagram below depicts inventory control that forms part of working capital management that
is covered in under-graduate studies and the CIMA operational level subject Financial Reporting
(F1).

Inventory control

Calculating reorder
levels (ROLs)
Objectives – the
balancing act

Inventory management
systems
Keep low • Bin systems
Reduce capital employed • Periodic review
Costs: systems The
• Stockout • Slow moving inventory Economic Order
• Re-ordering Quantity (EOQ)
• No bulk discounts

JIT
Keep high
• Eliminate all waste
Avoid running out
• Production on demand Dealing with
Costs:
• Carry no inventory discounts
• Purchases
• High reliance on
• Holding
suppliers

Figure 4.1: Working capital management – inventory control - summary (adapted) (Kaplan
Publishing 2019a: 396)

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 MAC4865/501
5 Working capital management – cash control

Students should be able to:

• prepare and analyse short term cash flow forecasts

• identify measures to improve a cash forecast situation

• compare and contrast the use and limitations of cash management models and identify
when each model is most appropriate

The diagram below depicts cash control that forms part of working capital management that is
covered in under-graduate studies and the CIMA operational level subject Financial Reporting
(F1).

Cash control

Reasons for holdings Using spreadsheets Improving the situation

cash Management • Quicker • Arrange financing
• Transactions • Easier • Sell assets
• Precautionary • Facilitates sensitivity • Manage discretionary
• Investment analysis expenditure
• Manage working capital
better
Cash budget

Preparation Interpretation
• Use a pro-forma • Consider peaks and troughs
• Provide workings for • Plan timing of investments
receipts and payments • Consider delaying
discretionary expenditure

Figure 5.1: Working capital management – cash control – summary (adapted) (Kaplan
Publishing 2019a: 420)

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PART 2 Advanced Financial Reporting (F2)

6 Long-term finance

Students should be able to:

• discuss the characteristics of different types of long-term debt and equity finance

• discuss the markets for and methods of raising long-term finance

The diagram below depicts long term finance that is covered in under-graduate studies and the
CIMA managerial level subject Advanced Financial Reporting (F2).

Long-term finance

Other
Equity finance Debt finance

Other sources of finance

Sources of equity finance Sources of debt finance • Government grants
• Capital/stock markets • Banks • Retained earnings/cash
• Current shareholders • Other companies reserves
• Venture capital

Preference shares Bank finance

Ordinary • Cumulative preference shares • Loans Capital markets
shares • Non-cumulative preference • Money market borrowings • Bonds
shares • Revolving credit facilities
• Participating preference shares
• Convertible preference shares

Figure 6.1: Long-term finance - summary (own compilation)

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 MAC4865/501
7 Cost of capital

Students should be able to:

• calculate the cost of equity for an incorporated entity using the dividend valuation model
with and without growth in dividends

• calculate the post-tax cost of debt for an incorporated entity including post-tax cost of bank
borrowings, post-tax cost of bond and post-tax cost of convertible bonds up to and
including conversion

• calculate the weighted average cost of capital (WACC) for an incorporated entity and
understand its use and limitations

• calculate the yield to maturity on bonds

The diagram below depicts cost of capital that is covered in under-graduate studies and the
CIMA managerial level subject Advanced Financial Reporting (F2).

The weighted average cost

of capital

WACC = Ke VE + Kd VD _
VE + VD VE + VD

Cost of equity
Ke

Dividend Valuation Dividend Valuation Model (DVM)

Model (DVM): with dividend growth model:
Ke = D _ Ke = Do (1 + g) + g Cost of debt
Po Po Kd

Irredeemable Redeemable Bank loan

Kd = IRR of
Kd = interest rate x (1 – T)
Kd = i(1 – T) + g • Market value
Po • Net interest
• Redemption
amount

Figure 7.1: Cost of capital - summary (adapted) (Kaplan Publishing 2019b: 43)

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8 Analysis of financial statements

Students should be able to:

• evaluate the financial performance, position and financial adaptability of an entity based on
information within the financial statements

• calculate ratios for profitability, performance, efficiency, liquidity and investor analysis

• advise on action that could be taken to improve an entity’s financial performance and
financial position

• discuss the limitations of financial analysis

The diagram below depicts analysis of financial statements that is covered in under-graduate
studies and the CIMA managerial level subject Advanced Financial Reporting (F2).

Analysis of financial
statements

Financial statements

Calculate ratios

Efficiency/activity
ratios Interpret ratios / Analyse
• Working capital financial statements
ratios
• Asset turnover Capital structure
ratios ratios
• Gearing
• Interest cover
Limitations of ratio
Additional information
analysis

Figure 8.1: Analysis of financial statements - summary (adapted) (Kaplan Publishing

2019b: 464)

NOTE: Students are expected to be able to perform all the required calculations where
questions may require students to advise, assess, evaluate, recommend and review etc.
information.
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 MAC4865/501

Conclusion

Being a postgrad student requires you to not only study your prescribed book, but to also keep
up-to-date with what is happening in South Africa and globally. You need to read business
related articles. Please check the announcements on myUnisa for video tutorials and links to
articles that are important (which will be in addition to what you source yourself).

In Tutorial Letter 502, we will start discussing the MAC4865 syllabus content. We will look at the
first section of the F3 Financial Strategy syllabus, content area A, Financial policy decisions,
covering Chapters 1, 2 and 3 in the F3 study text. Please do not wait for Tutorial Letter 502 to
be loaded on myUnisa, as you can already start studying, as everything is to be studied in the
prescribed textbook, where nothing will be left out.

All the best with your studies in 2020.

Kind regards

Mr Dawid Scott

References

Kaplan Publishing. 2019a. CIMA Financial Reporting (F1) Study Text. 1st ed. Berkshire: Kaplan
Publishing UK.

Kaplan Publishing. 2019b. CIMA Advanced Financial Reporting (F2) Study Text. 1st ed.
Berkshire: Kaplan Publishing UK.

Kaplan Publishing. 2019c. CIMA Financial Strategy (F3) Study Text. 1st ed. Berkshire: Kaplan
Publishing UK.

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