CSS Accounting and Auditing Business Finance and Studies Syllabus

State the formula for the present value of a single future sum.

$$PV = \frac{FV}{(1 + r)^{n}}$$ where $FV$ is the future value, $r$ is the discount rate, and $n$ is the number of periods. The factor $\frac{1}{(1+r)^{n}}$ is the discount factor.

What is compounding and what is discounting?

Compounding finds the future value of a present sum by adding interest over time ($FV = PV(1+r)^{n}$). Discounting is the reverse: finding the present value of a future sum by removing interest ($PV = \frac{FV}{(1+r)^{n}}$).

What is an annuity, and give the present value formula for an ordinary annuity.

An annuity is a series of equal periodic cash flows. The present value of an ordinary annuity is $$PV = A \times \frac{1 - (1 + r)^{-n}}{r}$$ where $A$ is the periodic payment.

Define Net Present Value (NPV).

NPV is the difference between the present value of expected cash inflows and the present value of cash outflows (initial investment) of a project, discounted at the required rate of return.

State the NPV formula.

$$NPV = \sum_{t=1}^{n} \frac{C_{t}}{(1 + r)^{t}} - C_{0}$$ where $C_{t}$ is the net cash inflow in period $t$, $r$ is the discount rate, $n$ is the project life, and $C_{0}$ is the initial investment.

What is the NPV decision rule?

Accept a project if $NPV > 0$ (it adds value); reject it if $NPV < 0$. If $NPV = 0$, the project just meets the required return. Among mutually exclusive projects, choose the one with the highest positive NPV.

Define the Internal Rate of Return (IRR).

IRR is the discount rate at which the net present value of a project equals zero, i.e., the rate that equates the present value of cash inflows with the initial investment.

State the equation that defines IRR.

IRR is the rate $r$ that satisfies $$\sum_{t=1}^{n} \frac{C_{t}}{(1 + r)^{t}} - C_{0} = 0,\quad\text{i.e. } NPV = 0.$$

What is the IRR decision rule?

Accept a project if its $IRR$ exceeds the required rate of return (cost of capital $k$): accept when $IRR > k$, reject when $IRR < k$.

Give the interpolation formula used to approximate IRR.

$$IRR = L + \frac{NPV_{L}}{NPV_{L} - NPV_{H}} \times (H - L)$$ where $L$ and $H$ are the lower and higher discount rates, and $NPV_{L}$, $NPV_{H}$ are the NPVs at those rates.

Define the payback period.

The payback period is the length of time required for a project's cumulative net cash inflows to recover its initial investment.

State the payback period formula for even annual cash flows.

$$\text{Payback Period} = \frac{\text{Initial Investment}}{\text{Annual Cash Inflow}}$$ (used when annual cash inflows are equal).

What is the decision rule and the main limitation of the payback period method?

Rule: accept projects with a payback shorter than the maximum acceptable period; prefer the shortest payback. Main limitation: it ignores the time value of money and disregards all cash flows occurring after the payback point.

Define the Accounting Rate of Return (ARR).

ARR (or Average Rate of Return) is a profitability measure expressing average annual accounting profit as a percentage of the investment: $$ARR = \frac{\text{Average Annual Profit}}{\text{Average Investment}} \times 100$$

What is the key difference between the payback/ARR methods and the NPV/IRR methods?

Payback and ARR are non-discounting (traditional) methods that ignore the time value of money; NPV and IRR are discounted cash-flow techniques that explicitly account for the time value of money.

Define working capital.

Working capital is the capital available for day-to-day operations, measured as current assets minus current liabilities: $$\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$$

Distinguish gross working capital from net working capital.

Gross working capital is the total investment in current assets. Net working capital is current assets minus current liabilities, indicating the liquidity cushion financed by long-term funds.

What is the operating (working capital) cycle?

The operating cycle is the time taken to convert cash into inventory, inventory into receivables, and receivables back into cash. A longer cycle increases working capital requirements.

What is the objective of working capital management?

To maintain an optimal balance between liquidity and profitability — holding enough current assets to meet obligations and run operations smoothly, while avoiding excess idle funds that reduce profitability.

State the current ratio formula and its standard benchmark.

$$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$$ A standard rule-of-thumb benchmark is $2:1$.

State the quick (acid-test) ratio formula and its benchmark.

$$\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}$$ The standard benchmark is $1:1$.

What is the objective of cash management?

To maintain an optimal cash balance — enough to meet payment obligations and contingencies (transaction, precautionary, and speculative motives) while minimizing idle cash that earns no return.

Name the three motives for holding cash identified by Keynes.

The transaction motive (to meet routine payments), the precautionary motive (to cover unexpected needs), and the speculative motive (to exploit profitable opportunities).

What is the objective of inventory management and name a key technique.

To minimize the total cost of holding and ordering inventory while ensuring stock is available for production and sales. A key technique is the Economic Order Quantity (EOQ) model.

State the Economic Order Quantity (EOQ) formula.

$$EOQ = \sqrt{\frac{2DS}{H}}$$ where $D$ is annual demand (units), $S$ is the ordering cost per order, and $H$ is the holding (carrying) cost per unit per year.

Differentiate between the money market and the capital market.

The money market deals in short-term debt instruments (maturity up to 1 year) such as treasury bills and commercial paper, providing liquidity. The capital market deals in long-term securities (over 1 year) such as shares and bonds, providing long-term funds.

Name the main instruments traded in the money market.

Treasury bills (T-bills), commercial paper, certificates of deposit, call money, and bankers' acceptances.

Distinguish the primary market from the secondary market.

The primary market is where new securities are issued and sold for the first time (e.g., IPOs), raising fresh capital for the issuer. The secondary market (stock exchange) is where existing securities are traded among investors, providing liquidity; no new capital goes to the issuer.

What is a stock exchange and what are its key functions?

A stock exchange is an organized, regulated marketplace for buying and selling existing securities. Key functions: providing liquidity and marketability to securities, ensuring fair price discovery, mobilizing savings into investment, and protecting investors through regulation.

Compare a sole proprietorship with a partnership.

A sole proprietorship is owned and managed by one person with unlimited liability and no separate legal entity. A partnership is owned by 2 or more persons sharing profits, losses, and management, with unlimited joint-and-several liability and a partnership agreement; both lack perpetual succession.

What are the defining features of a joint stock company compared with a cooperative society?

A joint stock company is a profit-driven association of shareholders with capital divided into transferable shares, limited liability, separate legal entity, and perpetual succession; control follows shareholding (one share, one vote). A cooperative society is a voluntary, service-oriented association formed for members' mutual benefit, with limited liability, separate legal status, democratic control (one member, one vote regardless of shares), and limited returns on capital.