In unit 3, students examine finance and accounts through both quantitative and qualitative methods. They learn how businesses represent themselves numerically through accounts; they also learn how to construct basic balance sheets and profit and loss accounts themselves.

By the end of the unit, they will be able to explain the meaning of these accounts by calculating ratios (for example, gross profit margin, net profit margin and return on capital employed (ROCE)) and interpreting the results.

HL students explore aspects of finance and accounts in more depth through the study of further efficiency ratios, investment appraisals and budgets.
Finance transcends mere numbers and connects to the six concepts underpinning the course. The profitability and financial health of an organization may significantly influence its strategy, ethics, and need
and willingness to change—and vice versa.

The challenge of accounting is for an organization to represent
itself through the common language of financial statements, which raises many TOK considerations, for example in relation to the “truth” that may or may not be found in numbers.

TopicSL/HL Contents
Sources of Finance>> Role of finance for businesses;
>> Internal sources of finance;
>> external sources of finance;
>> Short, medium and long-term finance;
>> The appropriateness, advantages and disadvantages of sources of finance for a given situation.
Costs & Revenues>> Total Cost
>> Total revenue
Break Even Analysis>> Total contribution versus contribution per unit;
>> break-even chart;
>> The effects of changes in price or cost on the break-even quantity, profit and margin of safety, using graphical and quantitative methods;
>> The benefits and limitations of break-even analysis
Final Accounts
(HL)		>> The purpose of accounts to different stakeholders;
>> The principles and ethics of accounting practice;
>> Final accounts;
>> Different types of intangible assets
>> Depreciation.
Profitability & Liquidity ratio analysis>> Profitability and efficiency ratios;
>> liquidity ratios;
>> strategies to improve ratios.

Efficiency ratio analysis
(HL only)		>> efficiency ratios (inventory, debtor days, creditor days, gearing ratio);
>> strategies to improve ratios.
Cash Flow>> The difference between profit and
cash flow;
>>The working capital cycle;
>> Cash flow forecasts;
>> The relationship between investment, profit and cash flow;
>> strategies for dealing with cash flow problems.
Investment Appraisal
(HL only)		>> Investment opportunities using payback period and average rate of return.
Budgets
(HL only)		>> The importance of budgets for organizations;
>> The difference between cost and profit centres;
>> The roles of cost and profit centres;
>> Variances;
>> The role of budgets and variances in strategic planning.

Theory of knowledge—suggested links
• Do financial statements reflect the “truth” about a business?
• Many businesses are introducing metrics about their environmental, social or ethical performance on the side of financial information. Can well-being, or other social variables, be measured?
• How certain is the information we get from financial statements? For example, could we know in advance if an investment will be successful?
• What is the role of interpretation in accounting? For example, could we compare businesses by just looking at their financial statements?
• Often, financial information is presented to the wider audience in a graphical or summary form. Do such simplifying presentations limit our knowledge of accounts?
• Does the accounting process allow for imagination?
• Accounting practices vary from country to country. Is this necessary, or is it possible to have the same accounting practices everywhere?

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