Association of Chartered Certified Accountants (ACCA) Financial Management (FM) Syllabus

Financial Management (FM) syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Financial Management (FM) in Association of Chartered Certified Accountants (ACCA), not a summary of it.

1. 1

   Financial Management Function and Environment

   3 topics

   • Nature and purpose of financial management
     • Financial objectives and shareholder wealth
     • Stakeholder conflicts and agency
   • Financial management environment
     • Economic policy and financial markets
     • Regulation and the role of financial intermediaries
   • Financial objectives and not-for-profit entities
     • Value for money in the public sector
     • Measuring financial performance
2. 2

   Working Capital Management

   4 topics

   • Working capital fundamentals
     • The cash operating cycle
     • Liquidity vs profitability trade-off
   • Management of receivables and payables
     • Credit policy and factoring
     • Early settlement discounts
   • Management of inventory and cash
     • Economic order quantity
     • Cash management models, Baumol and Miller-Orr
   • Working capital funding strategies
     • Aggressive, conservative and matching policies
3. 3

   Investment Appraisal

   4 topics

   • Discounted cash flow techniques
     • Net present value and internal rate of return
     • Relevant cash flows
   • Allowing for tax and inflation
     • Tax-allowable depreciation
     • Money vs real terms
   • Specific appraisal situations
     • Asset replacement and lease vs buy
     • Capital rationing
   • Risk and uncertainty in appraisal
     • Sensitivity analysis
     • Probability and expected values
4. 4

   Business Finance and Cost of Capital

   4 topics

   • Sources of finance
     • Equity, debt and Islamic finance
     • Sources for SMEs
   • Cost of capital
     • Cost of equity and CAPM
     • Cost of debt and WACC
   • Capital structure theories
     • Traditional and Modigliani-Miller views
     • Gearing and financial risk
   • Dividend policy
     • Dividend irrelevance vs relevance
5. 5

   Business Valuations and Risk Management

   4 topics

   • Business and security valuation
     • Asset-based and earnings-based methods
     • Dividend valuation model
   • Market efficiency
     • Forms of efficient market hypothesis
   • Foreign exchange risk management
     • Transaction, translation, economic risk
     • Forward contracts and money market hedges
   • Interest rate risk management
     • Forward rate agreements and swaps

Financial Management (FM) flashcards for Association of Chartered Certified Accountants (ACCA)

24 of 68 cards from the Financial Management (FM) deck — real questions with worked answers.

1. What are the three key decisions that define the scope of financial management?

   The investment decision (which projects/assets to invest in), the financing decision (how to raise the funds), and the dividend decision (how much profit to return to shareholders versus retain).

2. State the primary financial objective of a profit-seeking company and how it is commonly measured.

   The maximisation of shareholder wealth, measured by the maximisation of the market value of ordinary shares (and dividends paid).

3. What is the 'agency problem' in financial management?

   A conflict of interest where managers (agents) pursue their own goals rather than maximising the wealth of shareholders (principals), arising from the separation of ownership and control.

4. List three methods used to encourage goal congruence and reduce agency costs between managers and shareholders.

   Performance-related pay/bonuses, share option schemes, and managerial reward linked to share price; also regulatory requirements such as corporate governance codes.

5. How do the financial objectives of a not-for-profit (NFP) organisation differ from those of a company?

   NFP organisations aim to maximise value for money (the provision of services) rather than profit or shareholder wealth, focusing on the 3 Es: economy, efficiency and effectiveness.

6. Define the three Es used to assess value for money in not-for-profit entities.

   Economy (acquiring resources at lowest cost), Efficiency (maximising output per unit of input), and Effectiveness (achieving the organisation's objectives/outputs).

7. What are the four main roles/functions of financial intermediaries in the financial system?

   Aggregation (pooling small savings into large loans), maturity transformation (lending long while borrowing short), risk diversification/transformation, and providing a reduction in transaction/search costs.

8. Distinguish between fiscal policy and monetary policy as part of the financial management environment.

   Fiscal policy uses government spending and taxation to influence the economy; monetary policy uses control of interest rates and money supply (usually by the central bank) to influence the economy.

9. Define working capital and give its formula.

   Working capital is the capital available for day-to-day operations. $$\text{Working capital} = \text{Current assets} - \text{Current liabilities}$$

10. State the formula for the cash operating cycle (working capital cycle) for a manufacturing company.

    $$\text{Cycle} = \text{Inventory days} + \text{Receivables days} - \text{Payables days}$$ where inventory days may be split into raw material, WIP and finished goods periods.

11. What is the difference between an aggressive and a conservative working capital investment policy?

    An aggressive policy holds low levels of current assets (higher profitability, higher risk of liquidity problems); a conservative policy holds high levels of current assets (lower risk, lower return).

12. Distinguish between overtrading (undercapitalisation) and overcapitalisation.

    Overtrading is operating with insufficient working capital relative to sales volume, risking liquidity failure; overcapitalisation is holding excessive working capital, tying up funds and reducing profitability/return on capital.

13. State the current ratio and quick (acid test) ratio formulas.

    $$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$$ $$\text{Quick ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$

14. State the formula used to evaluate the cost of an early settlement (cash) discount as an annualised percentage.

    $$\left(1 + \frac{d}{100 - d}\right)^{\frac{365}{t}} - 1$$ where $d$ is the discount percentage and $t$ is the reduction in the payment period in days.

15. What factors should be assessed before granting credit to a new customer (the 5 Cs of credit)?

    Character, Capacity, Capital, Collateral and Conditions — assessed using trade references, bank references, credit agency reports and published accounts.

16. What is factoring and what are its two main services?

    Factoring is the use of a third party to manage receivables. The main services are administration/collection of the sales ledger and finance (advance of up to ~80% of invoice value); it may be with recourse or non-recourse (credit protection).

17. State the Economic Order Quantity (EOQ) formula and what each symbol represents.

    $$EOQ = \sqrt{\frac{2 C_o D}{C_h}}$$ where $C_o$ = cost per order, $D$ = annual demand, $C_h$ = holding cost per unit per year.

18. In inventory management, what does the EOQ minimise?

    It minimises the total of annual ordering costs plus annual holding costs (the point at which these two costs are equal).

19. State the Baumol cash management model formula for optimal cash transfer size.

    $$Q = \sqrt{\frac{2 C_o D}{C_h}}$$ where $C_o$ = cost per transaction (sale of securities), $D$ = annual cash demand, $C_h$ = interest cost of holding cash (the holding cost).

20. In the Miller-Orr cash management model, state the formula for the spread between upper and lower cash limits.

    $$\text{Spread} = 3\left(\frac{3}{4} \times \frac{\text{transaction cost} \times \text{variance of cash flows}}{\text{interest rate}}\right)^{\frac{1}{3}}$$ and the return point = lower limit + (spread/3).

21. Distinguish permanent and fluctuating current assets in working capital funding strategy.

    Permanent current assets are the minimum level of current assets needed at all times; fluctuating (temporary) current assets vary with seasonal/cyclical demand above that minimum.

22. Under the matching (maturity-matching) approach to funding working capital, how are assets financed?

    Permanent current assets and non-current assets are financed with long-term funds, while fluctuating current assets are financed with short-term funds.

23. Define net present value (NPV) and the decision rule for a single project.

    NPV is the sum of discounted future net cash flows less the initial outlay. Decision rule: accept the project if NPV is positive (it increases shareholder wealth).

24. Define the internal rate of return (IRR) and give the linear interpolation formula.

    IRR is the discount rate at which NPV = 0. $$IRR \approx a + \frac{NPV_a}{NPV_a - NPV_b}(b - a)$$ where $a, b$ are two discount rates giving NPVs of $NPV_a$ (positive) and $NPV_b$ (negative).

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