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Business, Accounting and Financial Studies (BAFS) Supplementary Notes

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(To be implemented in S4 in 2014/15; effective for 2017 HKDSE Examination and onwards) Appendices:

1. Formulae of Ratios

2. Accounting Terminology Compulsory Part

1(a) Business Environment

Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

Hong Kong Business Environment

(i) Describe the role and importance of business in the Hong Kong economy.

(ii) Analyse the recent developments and characteristics of the Hong Kong economy.

- Recent developments of Hong Kong economy:

1. Closer economic and business relationships with the Mainland (e.g. CEPA, trading partners, sources of capital)

2. Impacts of globalization on Hong Kong business ( e.g. keen competition, international flow of capital and information, global sourcing and outsourcing, technology transfer)

3. Increasing international trade cooperation (major international trade organisations include WTO and APEC)

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Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

- Characteristics of Hong Kong economy:

lack of primary industries, dependence on external trade, concentration on tertiary industry, free trade, simple taxation

(iii) Evaluate how economic, technological, cultural, physical, social, political and legal factors affect business decisions.

Forms of Business Ownership

(i) Distinguish between the major forms of business ownership: sole proprietorship, partnership, limited company, joint venture, franchise and public enterprise.

- Characteristics of general, limited and nominal partners are required

- Setup procedures of different forms of business ownership and related documents are not required

(ii) Evaluate the pros and cons of the different forms of business ownership.

(iii) Describe the characteristics of multinational corporations in Hong Kong.

Business Ethics and Social Responsibilities

(i) Explain why and how a business should be ethically responsible to various stakeholders.

(ii) Describe how business ethics and social responsibilities affect business decisions.

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Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

Management Functions

(i) Explain the importance of management.

(ii) Demonstrate a basic understanding of the following management functions for organisations: planning, organising, leading and controlling.

- Planning: importance, planning process and characteristics of SMART goals

- Organising: organisational structure – by level and by authority; departmentalisation – by function, by product, and by location

- Leading: leadership styles - Controlling: control process (iii) Apply the following principles of effective management: division

of work, unity of command, unity of direction, authority and responsibility, and management by objectives.

- Detailed process of MBO is not required

Key Business Functions

(i) Describe the role and importance of the following key business functions: human resources management, financial management, operations management, marketing management, information management and risk management.

(ii) Explain the interrelationship and integrated nature of different business functions in solving business problems.

Small and Medium Enterprises

(SMEs)

(i) Describe the characteristics of SMEs.

(ii) Explain the importance of SMEs to the Hong Kong economy.

(iii) Explain the importance of entrepreneurship in business development.

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1(c) Introduction to Accounting

Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

Purposes and Role of Accounting

(i) Explain the importance of accounting and its relevance to decision-making.

(ii) Describe the functions of accounting. - Functions: recording, classifying, summarising and communicating

(iii) Describe the flow of the accounting cycle. - Flow of an accounting cycle:

books of original entry, ledgers, trial balance, period-end adjustments, financial statements

The Accounting Cycle

• Double entry system

(i) Explain the accounting equation and demonstrate how transactions affect it.

- Accounting equation:

C = A – L – (R – E) (ii) Apply the principles of double entry to the recording of business

transactions in ledger.

• Trial balance (iii) Explain the functions and limitations of a trial balance.

(iv) Balance off the accounts and prepare a trial balance.

• Financial statements

(v) Prepare income statement and statement of financial position for sole proprietorships.

- Both horizontal and vertical form of financial statements are accepted

- Calculations and entries for period-end adjustments are not required

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Uses of Financial Statements

(i) Explain how information in financial statements can assist decision-making.

- Identify the users of financial statements and state their information needs

(ii) Explain the uses and limitations of financial statements.

Accounting Assumptions, Principles and Conventions

(i) Explain the meaning of the following: business entity, going concern, historical cost, consistency and accrual.

- Application to case scenario is required

Basic Ratio Analysis

(i) State the general functions of accounting ratios.

(ii) Calculate and interpret the following ratios: working

capital/current ratio, quick/liquid/acid test ratio, gross profit ratio, net profit ratio and return on capital employed.

- Refer to Appendix 1 for the relevant formulae of ratios

(iii) Evaluate the liquidity and profitability of a business using accounting ratios.

- Proposal for remedial actions is not required

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1(d) Basics of Personal Financial Management

Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

Time Value of Money

(i) Explain the concepts of compounding, discounting, present value and future value.

(ii) Apply the concepts of present value and future value to compute net present value.

- Only simple calculation (with not more than 3 compounding periods) is required

- Students are not required to look up the annuity or discount factor table

(iii) Distinguish between nominal and effective rate of return.

Consumer Credit (i) Compare different types of consumer credit. - Common types of consumer credit: bank overdraft, credit card and personal loan

(ii) Explain the importance of maintaining a good personal credit record.

Personal Financial Planning and Investment

(i) Identify the basic characteristics and the relationship between risk and return of the following investments: savings/term deposits, bonds/debentures and stocks.

- Students are expected to be able to explain:

1. investors should expect higher risk of investments for higher return; and

2. higher risk of investments does not necessarily bring higher return

- Numerical concepts and application are not required (ii) Explain the importance of personal financial planning at different

life stages.

(iii) Describe the rights and responsibilities of employees and self- employed persons under Mandatory Provident Fund (MPF) scheme.

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(iv) Describe the rights and responsibilities of individual investors and consumers of financial services.

- Rights and responsibilities:

1. right to ask for rationale behind an investment recommendation made by a broker or bank 2. right to file a complaint

3. duty to understand the terms of a contract before signing it

4. duty to monitor activities on own account by checking account statements, transaction documents

Stock Trading as an Investment

(i) Explain the factors affecting share prices. - Major factors include: general economic condition, political factors, interest rate, industry prospects, company performance, dividend policy and speculation

(ii) Describe the platforms of stock trading in Hong Kong: Main Board and Growth Enterprise Market (GEM).

- Knowledge about the basic listing requirements for new applicants is required:

1. operating history and management

2. financial requirements: profit attributable to shareholders, market capitalisation, revenue and cash flow (exact figures of the above are not required)

[Website for reference: Hong Kong Exchangesand Clearing Limited (HKEx) http://www.hkex.com.hk/eng/listing/listreq_pro/listreq/equities.htm]

(iii) Describe the importance of Hang Seng Index (HSI).

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Elective Part -- Accounting Module 2(a) Financial Accounting

Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

Books of Original Entry and Types of Ledgers

(i) Explain the functions of books of original entry and ledgers. - Petty cash book is not required (ii) Record transactions in books of original entry and post to

ledger accounts.

(iii) Identify the major types of ledgers.

Period-end Adjustments Relating to the Preparation of Financial Statements

(i) Differentiate between cash accounting and accrual accounting.

(ii) Distinguish between bad debts and allowance for doubtful accounts.

- Allowance for discounts allowed on trade receivables is not required

- Students are expected to be able to interpret an ageing schedule

(iii) State the meaning and objectives of providing depreciation in accounting.

(iv) Distinguish between capital and revenue expenditures.

(v) Compare the commonly used methods of depreciation:

straight-line, reducing-balance and depreciation based on usage; and explain the effect of depreciation charge (including disposal) on profits.

- Students are expected to be able to record disposals of non- current assets including trade-in

- Calculation and reversal of impairment loss are not required

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(vi) Apply the following to determine the value of inventory:

1. lower of cost and net realisable value 2. sale or return

3. weighted average cost

- Distinction between the accounting treatment for normal and abnormal inventory loss is required

- Perpetual inventory system is not required

(vii) Prepare adjusting entries at the close of accounting period and show their effect on income statement and statement of financial position.

Financial Reporting for Different Forms of Business

Ownership

• Financial statements

(i) Prepare income statement and statement of financial position for sole proprietorship, partnership and limited company.

- Published accounts are not required

- Students are expected to be able to record income tax in the financial statements of limited companies but over or under- provision brought forward and tax payable outstanding at period end will not be included

• Accounting for partnership

(ii) Prepare appropriation account and current accounts for partnership.

(iii) Define goodwill and explain the factors affecting its valuation.

- Valuation of goodwill is not required

(iv) Prepare the necessary adjustments to capital and/or net assets arising from changes in profit-sharing ratio, admission and retirement of partner(s) at the beginning or end of a financial period.

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Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

(v) Prepare the necessary accounting entries required in dissolution.

- Students are expected to be able to record capital deficiency of insolvent partner(s) as instructed

- Piecemeal realisation and the Garner v Murray rule are not required

- Conversion or sale of a partnership to a limited company is not required

• Accounting for limited company

(vi) Explain the nature of share capital (preference shares and ordinary shares), loan capital (debentures), reserve and provision.

- Revaluation of non-current assets is not required

(vii) Prepare journal and ledger entries relating to the issue of ordinary shares and debentures fully paid on application.

- Only requires knowledge of issue of shares at no par and issue of debentures at par

- Oversubscription and the related refunds are required - Rights and bonus (capitalisation) issues of shares are not

required (viii)Prepare appropriation account and calculate the balance of

retained profits for limited company.

Control System

• Bank

reconciliation statement

(i) Explain the functions of a bank reconciliation statement.

(ii) Identify reasons for discrepancies between cash book and bank statement balances and prepare a bank reconciliation statement.

• Correction of errors

(iii) Identify the types of accounting errors and their effects on accounting records.

(iv) Prepare correcting entries and, where appropriate, a suspense account.

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Generally Accepted Accounting

Principles

(i) Explain the meaning, importance and shortcomings of the following principles and conventions: business entity, going concern, historical cost, consistency, accrual, matching, realisation, prudence, materiality, objectivity, timeliness and money measurement.

(ii) Apply the relevant accounting principles and conventions in accounting situations.

Financial Analysis (i) Calculate ratios and comment on a company’s profitability, liquidity, solvency, management efficiency and return on investment: mark-up, inventory turnover, average trade receivables collection period, average trade payables

repayment period, trade receivables turnover, trade payables turnover, earnings per share, total assets turnover, gearing ratio, dividend cover and price-earnings ratio.

- Refer to Appendix 1 for the relevant formulae of ratios - Paper 2A requires an in-depth application of the ratios

covered in the Compulsory Part, i.e. working

capital/current ratio, quick/liquid/acid test ratio, gross profit ratio, net profit ratio and return on capital employed

(ii) Explain the functions and limitations of accounting ratios in financial analysis.

Incomplete Records (i) Determine profits or losses from statement of affairs.

(ii) Calculate the cash and inventory value from incomplete record.

(iii) Prepare income statement and statement of financial position from incomplete records.

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2(b) Cost Accounting

Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

Cost Classification, Concepts and Terminology

(i) Explain the general nature of cost accounting and its importance for financial decision-making.

(ii) Distinguish between direct and indirect costs, fixed and variable costs, and factory and administrative overheads.

Marginal and Absorption Costing

(i) Prepare income statement under marginal and absorption costing.

- Students are only expected to apply weighted average cost for the costing of inventory

- Over and under-absorption of overheads is to be charged to cost of goods sold

(ii) Compare the advantages and disadvantages of adopting marginal and absorption costing.

Cost Accounting for Decision-making

(i) Identify the nature of various cost items and their relevance to decision-making: sunk costs, incremental costs and

opportunity costs.

(ii) Apply costing concepts and techniques in business decisions e.g. ‘hire, make or buy’, ‘accept or reject an order at a special price’, ‘retain or replace equipment’, ‘sell or process further’, and ‘eliminate or retain an unprofitable segment’.

- Joint product costing is not required

(iii) Conduct cost-volume-profit analysis to assess the effects of changes in costs, selling price and units sold on the breakeven point and target profit.

- Calculation of margin of safety is required - CVP analysis for multiple products is required - The involvement of limiting factors is required - Graphical presentation is not required

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Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

Financial Analysis (i) Explain the role of financial management in running an organisation.

(ii) Assess business performance from a range of accounting ratios in terms of profitability, liquidity, solvency and management efficiency.

- Students are expected to be able to discuss the limitations of financial analysis

- The ratios required are: gross profit ratio, net profit ratio, working capital/current ratio, quick/liquid/acid test ratio and return on capital employed, trade receivables

turnover, inventory turnover, trade payables turnover, total assets turnover and gearing ratio

- Refer to Appendix 1 for the relevant formulae of ratios

Budgeting (i) Explain the purposes of budgeting.

(ii) Describe the usefulness and limitations of budgetary control.

(iii) Identify the causes of budgeting variance and propose remedial action.

- Calculation of variances is not required

Sources of Financing (i) Compare different sources of financing: debt and equity financing, short-term and long-term financing, and internal and external financing.

- Details of the features of financing instruments are not required

(ii) Apply the basic principles for selecting financing methods.

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Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

Capital Investment Appraisal

(i) Evaluate financial and non-financial factors affecting capital investment decisions.

(ii) Apply the basic capital investment appraisal methods to evaluate capital projects: payback period, net present value (NPV), internal rate of return (IRR) and accounting rate of return (ARR).

- Calculation of IRR and ARR is not required

(iii) Compare the usefulness and limitations of different capital investment appraisal methods.

Working Capital Management

(i) Explain the importance of working capital management. - Students are expected to be able to describe the operating cycle and cash conversion cycle

(ii) Describe the basic principles of cash management and the relevance of cash budgeting.

- Preparation of cash budget is not required

(iii) Analyse the factors affecting the formulation of accounts receivable and accounts payable policies.

- Students are expected to be able to describe the elements of a credit policy, including credit terms, credit standard (5Cs:

capital, capacity, collateral, condition and character) and collection policy

(iv) Explain the objectives of inventory management and apply simple inventory control techniques: Economic Order Quantity (EOQ) and re-order level methods.

- Calculation of EOQ is required

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Risk Management (i) Identify different types of risks faced by business firms and analyse their impact on business activities.

- Types of risks: insurable vs non-insurable; pure vs speculative

(ii) Demonstrate an understanding of various types of insurance protection available to business.

- Types of insurance: comprehensive insurance, motor insurance, fidelity insurance, liability insurance, public liability insurance, employees’ compensation insurance

(iii) Explain the following risk management strategies: risk avoidance, risk assumption, risk reduction and risk transfer.

- Students are expected to be able to apply appropriate risk management strategies to given scenarios

3(b) Human Resources Management

Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

Functions of Human Resources

Management

• Manpower planning

(i) Explain the importance of manpower planning for an organisation.

(ii) Describe the manpower planning process. - Approaches and process of job analysis are not required

• Staffing (iii) Describe the recruitment process.

(iv) Compare different methods of recruitment.

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Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

• Performance apprasial

(v) Describe the objectives of performance apprasial.

(vi) Describe the basic steps in the performance appraisal.

• Reward management

(vii) Describe the characteristics and advantages of monetary and non-monetary rewards.

(viii)Compare different forms of compensation. - Forms: time-based pay (hourly, daily, monthly) Vs performance-based pay

(ix) Explain the purposes of benefits.

• Training and development

(x) Explain the objectives of training and development.

(xi) Evaluate the effectiveness of different modes of training. - Students are expected to be able to suggest various on-the- job and off-the-job training methods

Development of a Quality Workforce

(i) Apply the following motivation theories to enhance staff efficiency and reduce absenteeism:

1. Maslow’s Hierarchy of Needs Theory 2. Herzberg’s Dual-factor Theory 3. McGregor’s Theory X and Theory Y

(ii) Suggest appropriate internal communication programmes to enhance employee relations.

3(c) Marketing Management

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Role of Marketing (i) Explain the marketing concept.

(ii) Discuss the importance of marketing as a business function.

(iii) Describe the planning, organising, implementing and controlling of marketing activities.

(iv) Discuss the objectives, strategies and resources of the marketing process.

Marketing Research (i) Explain the importance and major objectives of marketing research.

(ii) Apply basic principles for designing marketing research:

data collection methods and sampling techniques.

- Sampling techniques: random sampling, convenience sampling, stratified random sampling

Customer Behaviour (i) Describe the customer decision-making process. - Students are expected to be able to describe the process with respect to both individual and business customers

(ii) Analyse the factors which affect customer decisions.

(iii) Identify the major business customers: producers, resellers, governments and institutions.

(iv) Distinguish between business and consumer markets.

Marketing Strategies (i) Explain different types of market segmentation methods.

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Learning Elements Specified in C&A Guide

Supplementary Teaching Notes

Topics Explanatory Notes

for Goods and Services

• Target markets

(ii) Explain the factors affecting the determination of target market: market niche and positioning.

• Marketing mix (iii) Explain the concept of marketing mix.

(iv) Illustrate different pricing, promotion, product and place strategies for goods.

(v) Apply various marketing mix strategies to different stages of the product life cycle.

(vi) Explain the characteristics of services and their effect on marketing mix design.

(vii) Compare the differences between traditional marketing strategies and e-marketing strategies.

• Customer relationship management (CRM)

(viii) Explain the importance of CRM to the marketing process.

(ix) Evaluate the factors affecting customer loyalty and develop marketing strategies to enhance customer loyalty.

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mark-up = cost of goods sold x 100%

gross profit ratio/margin = gross profit

sales x 100%

net profit ratio/margin = net profit before tax

sales x 100%

return on capital employed = profit before interest and tax

average capital employed x 100%

Capital employed =

1. Sole proprietorships: capital balance

2. Partnerships: capital account balances + current account balances (if any)

3. Limited companies: non-current liabilities + shareholders’ fund

working capital / current ratio = current assets current liabilities ∶ 1

quick / liquid / acid test ratio = current assets − inventories current liabilities ∶ 1 inventory turnover (times) = cost of goods sold

average inventory average trade receivables collection

period = average trade receivables

credit sales x 365 days/12 months average trade payables repayment

period = average trade payables

credit purchases x 365 days/12 months trade receivables turnover (times) = credit sales

average trade receivables trade payables turnover (times) = credit purchases

average trade payables

earnings per share = net profit after tax − preference dividend number of ordinary shares issued total assets turnover (times) = sales

total assets

gearing ratio = non­current liabilities + preference share capital

non­current liabilities + shareholdersfund x 100%

dividend cover for ordinary

shares (times) = net profit after tax − preference dividend ordinary dividend paid

price-earnings ratio = current price per ordinary share earnings per share

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Appendix 2 : Accounting Terminology

Except for term(s) specifically identified in the question or stated in the requirement, the following alternative accounting terminology will be accepted for marking purposes in the HKDSE Business, Accounting and Financial Studies examination.

Accounting Terminology Acceptable for the HKDSE BAFS Examination

English Chinese

Statement of financial position / Balance sheet 財務狀況表 / 資產負債表 Year end / Balance sheet date / End of reporting period 年終 / 期末

Income statement / Trading and profit and loss account 損益表 / 購銷及損益帳

Net book value / Carrying amount 帳面淨值

Reducing balance method / Diminishing balance method 餘額遞減法

Depreciation based on usage / Units of production method 按使用量計算折舊

Sales / Turnover / Revenue 銷售 / 銷貨 / 收益

Cost of goods sold / Cost of sales 銷貨成本 / 銷售成本

Selling and distribution expenses / Distribution costs 銷售及運送費用 Allowance for doubtful debts / Provision for bad and doubtful

debts 呆帳準備

Net profit / profit (or Net loss / loss) for the year / period 年度淨利 / 淨虧損

Retained profits / Retained earnings 留存利潤 / 保存利潤

Accounts receivables / Trade and other debtors 應收帳款 Accounts payables / Trade and other creditors 應付帳款

Trade receivables / Trade debtors 應收貨款

Trade payables / Trade creditors 應付貨款

Other receivables / Other debtors 其他應收帳款

Other payables / Other creditors 其他應付帳款

Inventories / Stocks 存貨

Short term investments / Current investments 短期投資

Equity / Capital and reserves 股東權益 / 資本及儲備

Total equity and liabilities / Total capital and liabilities /

Shareholders’ Fund and liabilities 股東權益及負債總額 / 資本及負

債總額 Short term loans / Short term borrowings / Current portion of

long-term borrowings 短期貸款

Deposits 訂金 / 定金 / 存款

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