December 2020

DESIGNING YOUR PERSONAL CFA STUDY PROGRAM Create a Schedule An orderly, systematic approach to examination preparation is critical. You should dedicate a consistent block of time every week to reading and studying. Complete all assigned readings and the associated problems and solutions in each study session. Review the LOS both before and after you study each reading to ensure that you have mastered the applicable content and can demonstrate the knowledge, skills, and abilities described by the LOS and the assigned reading. Use the LOS self- check to track your progress and highlight areas of weakness for later review. Successful candidates report an average of more than 300 hours preparing for each examination. Your preparation time will vary based on your prior education and experience, and you will probably spend more time on some study sessions than on others. As the Level I curriculum includes 19 study sessions, a good plan is to devote 15−20 hours per week for 19 weeks to studying the material and use the final four to six weeks before the examination to review what you have learned and practice with practice questions and mock examinations. This recommendation, however, may underestimate the hours needed for appropriate examination preparation depending on your individual circumstances, relevant experience, and academic background. You will undoubtedly adjust your study time to conform to your own strengths and weaknesses and to your educational and professional background. You should allow ample time for both in- depth study of all topic areas and additional concentration on those topic areas for which you feel the least prepared. As part of the supplemental study tools that are included in your examination registration fee, you have access to a study planner to help you plan your study time. The study planner calculates your study progress and pace based on the time remaining until examination. For more information on the study planner and other supplemental study tools, please visit www.cfainstitute.org. As you prepare for your examination, CFA institute will e- mail you important examination updates, testing policies, and study tips. Be sure to read these carefully. CFA Institute Practice Questions Your examination registration fee includes digital access to hundreds of practice questions that are additional to the practice problems at the end of the readings. These practice questions are intended to help you assess your mastery of individual topic areas as you progress through your studies. After each practice question, you will be able to receive immediate feedback noting the correct responses and indicating the relevant assigned reading so you can identify areas of weakness for further study. For more information on the practice questions, please visit www.cfainstitute.org. CFA Institute Mock Examinations Your examination registration fee also includes digital access to three- hour mock examinations that simulate the morning and afternoon sessions of the actual CFA examination. These mock examinations are intended to be taken after you complete your study of the full curriculum and take practice questions so you can test your understanding of the curriculum and your readiness for the examination. You will receive feedback at the end of the mock examination, noting the correct responses and indicating the relevant assigned readings so you can assess areas of weakness for further study during your review period. We recommend that you take mock examinations during the final stages of your preparation for the actual CFA examination. For more information on the mock examinations, please visit www.cfainstitute.org.   2020-L1V5

DESIGNING YOUR PERSONAL CFA STUDY PROGRAM Create a Schedule An orderly, systematic approach to examination preparation is critical. You should dedicate a consistent block of time every week to reading and studying. Complete all assigned readings and the associated problems and solutions in each study session. Review the LOS both before and after you study each reading to ensure that you have mastered the applicable content and can demonstrate the knowledge, skills, and abilities described by the LOS and the assigned reading. Use the LOS self- check to track your progress and highlight areas of weakness for later review. Successful candidates report an average of more than 300 hours preparing for each examination. Your preparation time will vary based on your prior education and experience, and you will probably spend more time on some study sessions than on others. As the Level I curriculum includes 19 study sessions, a good plan is to devote 15−20 hours per week for 19 weeks to studying the material and use the final four to six weeks before the examination to review what you have learned and practice with practice questions and mock examinations. This recommendation, however, may underestimate the hours needed for appropriate examination preparation depending on your individual circumstances, relevant experience, and academic background. You will undoubtedly adjust your study time to conform to your own strengths and weaknesses and to your educational and professional background. You should allow ample time for both in- depth study of all topic areas and additional concentration on those topic areas for which you feel the least prepared. As part of the supplemental study tools that are included in your examination registration fee, you have access to a study planner to help you plan your study time. The study planner calculates your study progress and pace based on the time remaining until examination. For more information on the study planner and other supplemental study tools, please visit www.cfainstitute.org. As you prepare for your examination, CFA institute will e- mail you important examination updates, testing policies, and study tips. Be sure to read these carefully. CFA Institute Practice Questions Your examination registration fee includes digital access to hundreds of practice questions that are additional to the practice problems at the end of the readings. These practice questions are intended to help you assess your mastery of individual topic areas as you progress through your studies. After each practice question, you will be able to receive immediate feedback noting the correct responses and indicating the relevant assigned reading so you can identify areas of weakness for further study. For more information on the practice questions, please visit www.cfainstitute.org. CFA Institute Mock Examinations Your examination registration fee also includes digital access to three- hour mock examinations that simulate the morning and afternoon sessions of the actual CFA examination. These mock examinations are intended to be taken after you complete your study of the full curriculum and take practice questions so you can test your understanding of the curriculum and your readiness for the examination. You will receive feedback at the end of the mock examination, noting the correct responses and indicating the relevant assigned readings so you can assess areas of weakness for further study during your review period. We recommend that you take mock examinations during the final stages of your preparation for the actual CFA examination. For more information on the mock examinations, please visit www.cfainstitute.org.   2020-L1V4

DESIGNING YOUR PERSONAL CFA STUDY PROGRAM Create a Schedule An orderly, systematic approach to examination preparation is critical. You should dedicate a consistent block of time every week to reading and studying. Complete all assigned readings and the associated problems and solutions in each study session. Review the LOS both before and after you study each reading to ensure that you have mastered the applicable content and can demonstrate the knowledge, skills, and abilities described by the LOS and the assigned reading. Use the LOS self- check to track your progress and highlight areas of weakness for later review. Successful candidates report an average of more than 300 hours preparing for each examination. Your preparation time will vary based on your prior education and experience, and you will probably spend more time on some study sessions than on others. As the Level I curriculum includes 19 study sessions, a good plan is to devote 15−20 hours per week for 19 weeks to studying the material and use the final four to six weeks before the examination to review what you have learned and practice with practice questions and mock examinations. This recommendation, however, may underestimate the hours needed for appropriate examination preparation depending on your individual circumstances, relevant experience, and academic background. You will undoubtedly adjust your study time to conform to your own strengths and weaknesses and to your educational and professional background. You should allow ample time for both in- depth study of all topic areas and additional concentration on those topic areas for which you feel the least prepared. As part of the supplemental study tools that are included in your examination registration fee, you have access to a study planner to help you plan your study time. The study planner calculates your study progress and pace based on the time remaining until examination. For more information on the study planner and other supplemental study tools, please visit www.cfainstitute.org. As you prepare for your examination, CFA institute will e- mail you important examination updates, testing policies, and study tips. Be sure to read these carefully. CFA Institute Practice Questions Your examination registration fee includes digital access to hundreds of practice questions that are additional to the practice problems at the end of the readings. These practice questions are intended to help you assess your mastery of individual topic areas as you progress through your studies. After each practice question, you will be able to receive immediate feedback noting the correct responses and indicating the relevant assigned reading so you can identify areas of weakness for further study. For more information on the practice questions, please visit www.cfainstitute.org. CFA Institute Mock Examinations Your examination registration fee also includes digital access to three- hour mock examinations that simulate the morning and afternoon sessions of the actual CFA examination. These mock examinations are intended to be taken after you complete your study of the full curriculum and take practice questions so you can test your understanding of the curriculum and your readiness for the examination. You will receive feedback at the end of the mock examination, noting the correct responses and indicating the relevant assigned readings so you can assess areas of weakness for further study during your review period. We recommend that you take mock examinations during the final stages of your preparation for the actual CFA examination. For more information on the mock examinations, please visit www.cfainstitute.org.   2020-L1V3

DESIGNING YOUR PERSONAL CFA STUDY PROGRAM Create a Schedule An orderly, systematic approach to examination preparation is critical. You should dedicate a consistent block of time every week to reading and studying. Complete all assigned readings and the associated problems and solutions in each study session. Review the LOS both before and after you study each reading to ensure that you have mastered the applicable content and can demonstrate the knowledge, skills, and abilities described by the LOS and the assigned reading. Use the LOS self- check to track your progress and highlight areas of weakness for later review. Successful candidates report an average of more than 300 hours preparing for each examination. Your preparation time will vary based on your prior education and experience, and you will probably spend more time on some study sessions than on others. As the Level I curriculum includes 19 study sessions, a good plan is to devote 15−20 hours per week for 19 weeks to studying the material and use the final four to six weeks before the examination to review what you have learned and practice with practice questions and mock examinations. This recommendation, however, may underestimate the hours needed for appropriate examination preparation depending on your individual circumstances, relevant experience, and academic background. You will undoubtedly adjust your study time to conform to your own strengths and weaknesses and to your educational and professional background. You should allow ample time for both in- depth study of all topic areas and additional concentration on those topic areas for which you feel the least prepared. As part of the supplemental study tools that are included in your examination registration fee, you have access to a study planner to help you plan your study time. The study planner calculates your study progress and pace based on the time remaining until examination. For more information on the study planner and other supplemental study tools, please visit www.cfainstitute.org. As you prepare for your examination, CFA institute will e- mail you important examination updates, testing policies, and study tips. Be sure to read these carefully. CFA Institute Practice Questions Your examination registration fee includes digital access to hundreds of practice questions that are additional to the practice problems at the end of the readings. These practice questions are intended to help you assess your mastery of individual topic areas as you progress through your studies. After each practice question, you will be able to receive immediate feedback noting the correct responses and indicating the relevant assigned reading so you can identify areas of weakness for further study. For more information on the practice questions, please visit www.cfainstitute.org. CFA Institute Mock Examinations Your examination registration fee also includes digital access to three- hour mock examinations that simulate the morning and afternoon sessions of the actual CFA examination. These mock examinations are intended to be taken after you complete your study of the full curriculum and take practice questions so you can test your understanding of the curriculum and your readiness for the examination. You will receive feedback at the end of the mock examination, noting the correct responses and indicating the relevant assigned readings so you can assess areas of weakness for further study during your review period. We recommend that you take mock examinations during the final stages of your preparation for the actual CFA examination. For more information on the mock examinations, please visit www.cfainstitute.org.   2020-L1V2

DESIGNING YOUR PERSONAL CFA STUDY PROGRAM Create a Schedule An orderly, systematic approach to examination preparation is critical. You should dedicate a consistent block of time every week to reading and studying. Complete all assigned readings and the associated problems and solutions in each study session. Review the LOS both before and after you study each reading to ensure that you have mastered the applicable content and can demonstrate the knowledge, skills, and abilities described by the LOS and the assigned reading. Use the LOS self- check to track your progress and highlight areas of weakness for later review. Successful candidates report an average of more than 300 hours preparing for each examination. Your preparation time will vary based on your prior education and experience, and you will probably spend more time on some study sessions than on others. As the Level I curriculum includes 19 study sessions, a good plan is to devote 15−20 hours per week for 19 weeks to studying the material and use the final four to six weeks before the examination to review what you have learned and practice with practice questions and mock examinations. This recommendation, however, may underestimate the hours needed for appropriate examination preparation depending on your individual circumstances, relevant experience, and academic background. You will undoubtedly adjust your study time to conform to your own strengths and weaknesses and to your educational and professional background. You should allow ample time for both in- depth study of all topic areas and additional concentration on those topic areas for which you feel the least prepared. As part of the supplemental study tools that are included in your examination registration fee, you have access to a study planner to help you plan your study time. The study planner calculates your study progress and pace based on the time remaining until examination. For more information on the study planner and other supplemental study tools, please visit www.cfainstitute.org. As you prepare for your examination, CFA institute will e- mail you important examination updates, testing policies, and study tips. Be sure to read these carefully. CFA Institute Practice Questions Your examination registration fee includes digital access to hundreds of practice questions that are additional to the practice problems at the end of the readings. These practice questions are intended to help you assess your mastery of individual topic areas as you progress through your studies. After each practice question, you will be able to receive immediate feedback noting the correct responses and indicating the relevant assigned reading so you can identify areas of weakness for further study. For more information on the practice questions, please visit www.cfainstitute.org. CFA Institute Mock Examinations Your examination registration fee also includes digital access to three- hour mock examinations that simulate the morning and afternoon sessions of the actual CFA examination. These mock examinations are intended to be taken after you complete your study of the full curriculum and take practice questions so you can test your understanding of the curriculum and your readiness for the examination. You will receive feedback at the end of the mock examination, noting the correct responses and indicating the relevant assigned readings so you can assess areas of weakness for further study during your review period. We recommend that you take mock examinations during the final stages of your preparation for the actual CFA examination. For more information on the mock examinations, please visit www.cfainstitute.org.   2020-L1V1

Economic Growth This is the increase in the productivity of a country which can be seen in the continued increase in the national income over a period of years. It can be measured by taking the average percentage of increase in national income over a period of time (number of years) and be assumed to be the average rate of economic growth in the country   Economic Development This is the quantitative change or increase in a country’s national income over the years, accompanied by favorable changes in the structures within the country that leads to general improvement of the individual well being, as well as the entire nation A country may experience economic growth without experiencing economic development. This is because the increase in the national income may be as a result of people working for long hours without any time for rest, recreation and other development to occur in their body. This will make them not to have better living, despite the fact that the national income shall have increased. The expected structural changes to be realized in a case of economic development include; Shifting from depending on agricultural sector to manufacturing sector in the economy Reducing illiteracy levels Increase in skilled manpower in the economy Improvement in health facilities within the country Increase in technology and improvement of entrepreneurial ability Increase and improvement of institution that handles new methods of productive economic activities Outline the differences that exist between economic growth and economic development Economic Growth Economic Development ·         An increase in size of the country’s National income ·         An increase in the size and quality of the country’s National income ·         Number of people living in absolute poverty can increase despite the increase in national income ii) Number of people living in absolute poverty does not increase iii)Increase in national income could be due to increase in income of only few people ·         Increase in national income is attributed to general increase of incomes of majority of the people in the country ·         No tendency to bridge the gap between the rich and the poor iv)Tends to bridge the gap between the rich and the poor   Underdevelopment This refers to a situation whereby the economic growth is in the negative direction (decreasing) accompanied by uneven distribution of wealth and decrease in quality and quantity of the factors of production available   Characteristics of Underdevelopment High level of poverty. This is characterized by most of the people in the country depending on mainly subsistence, or lives below the poverty levels. Their per capita income is lower as compared to the developed countries High disparity in income distribution. The income in this countries are not evenly distributed with the few rich people earning so much while the poor majority earns so little Low levels of savings and investments. They have very little if at all exist to save and invest for their further development, making them to continue being poor. This is well illustrated in the vicious circle of poverty High population growth rates. This is due to some of them not being able to afford, ignorant about or simply refusing to use the modern birth control methods since they find consolation on their high number of children Dominance of subsistence sector. This is due to their inability to raise capital for indirect production Problem of unemployment. The high population growth rate leads to high supply of labour that the country’s economy cannot afford to absorb all, leading to unemployment Under utilization of natural resources. This may be due to lack of capital in this countries or in appropriate technology they use Dependence on the developed countries. This is due to their in ability to sustain themselves financially, which makes them keep on calling upon the developed partners for financial assistance Poor infrastructure. Their roads and communication networks are not properly maintained due to the in availability of adequate resources to improve them   Goals of Economic Development The following are the changes that economic development seeks to put in place, which in Kenya they have been joined together in what is referred to as the millennium development goals. They includes Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality and empower women Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria and other diseases Ensure environmental sustainability Develop a global partnership for development Some includes Reducing income disparity in distributions Reducing unemployment Provision of important basic needs such as food, shelter, etc   Factor which may hinder development in a country The rate of a country’s economic development may be influenced negatively by the following factors Low natural resource endowment. Absence or inadequacy of natural resources such as raw materials, fertile land for agriculture, etc may slow the pace of the country’s economic development Inadequate capital. This reduces the rate at which they exploit their natural resources, or produce in the economy Poor technology used. The traditional methods of production that they use cannot sustain their requirement any more Poor human resource endowment. Their inability to train adequate skilled manpower together with their inappropriate system of education leads to their slow development Unfavorable domestic environment. Their political, social and economic institutions within their countries are not structured to favour economic development. For example Their political system is characterized by corruption, authoritarian kind of leadership with lengthy procedures and bureaucratic controls that scares the investors Their social environment is still full of outdated or retrogressive cultural values and negative attitude towards work and investment, leading to slow development Their Economic institutions has allowed their markets to be influenced so much that that leads to interference in their smooth operations   Development Planning This is the process through which the country establishes their objectives to be achieved, identify the resources that will be required and put in place the strategies or methods of acquiring the resources and achieving their pre-determined objectives. In most cases their objectives or goals are the goals of economic development

A trade involving the exchange of goods and services between two or more countries. If the exchange is between two countries only, then it is referred to as bilateral trade, but if it is between more than two countries then it is referred to as multilateral trade. Advantages of International Trade It enable the country to get access to wider range/variety of goods and services from other countries It enable the country to get what it does not produce It helps in promoting peace among the trading countries It enable the country to specialize in it’s production activities where they feel they have an advantage It earns the country revenue through taxes and licenses fees paid by the importers and exporters in the country It enable the country to dispose of its surplus goods and services thereby avoiding wastage It creates employment opportunities to the citizens of that country either directly or indirectly It may lead to the development of the country through importation of capital goods in to the country It encourages easy movement of factors of production across the boarders of the countries involved It enable countries to earn foreign exchange which it can use to pay for its imports A country may be able to obtain goods and services cheaply than if they have been produced locally During hard times or calamities such as wars, the country is able to get assistance from the trading partners It brings about competition between the imported and locally produced goods, leading to improvement in their quality It gives the country an opportunity to exploit fully its natural resources, due to increased market   Disadvantages of International trade It may lead to collapse of the local industries, as people will tend to go for the imported goods. The collapse may also lead to loss of employment It may also lead to importation of harmful foods and services such as drugs and pornographic materials May lead to over depending on imported commodities especially the essential ones, making the country to be a slave of the other countries, interfering with their sovereignty It may make the country to suffered during emergencies if they mainly rely on the imported goods May make the country to suffer from import inflation May lead to acquisition of bad culture from other countries as a result of their interactions May lead to unfavorable balance of payment, if the import is higher than exports   Terms of Trade This refers to the rate at which the country’s export exchanges with those from other country. That is: Terms of trade =     It determine the value of export in relations to import so that a country can know whether it’s trade with the other country is favourable or unfavourable Favourable terms of trade will make the country spent little on import and gain a lot of foreign exchange from other countries For example; Then table below shows trade between Kenya and China in the year 2004 and 2005, with the Kenyan government exporting and importing to and from china, and China also importing and Exporting from and to Kenya. Year Average prices of export Kenya China 2004 1000 4000 2005 1200 6500   Calculate the Terms of trade for; Kenya China Solution;   Kenya Export price index (E.P.I) =              x  100   =      x100 = 120% Import price index (I.P.I) =                                                                     x 100 =           x 100 =  162.5% Terms of trade (T.O.T) =       x  100 =        x 100 = 73.8% This implies that Kenya is importing from China more than it is exporting, leading to unfavourable terms of trade i.e. when the percentage is less than 100%, it implies unfavourable terms of trade.   China                                (work out) The average prices is the various prices of the individual export or import items divide by their number   Factors that may lead to either favourable or unfavourable terms of trade The country is experiencing a favourable terms of trade if: The prices of imports decline and those of export remains the constant The prices of imports declines while those of exports increase The price of imports remains constant while those of exports increase The prices of import and export increases but the rate of increase in export is higher Both prices decrease but the decrease in import prices is higher     The country will experience unfavourable terms of trade if; Prices of import increases while those of exports decline Prices of import remains constant while those of export declines Prices of import increase as the export remains constant Both prices increase, but for imports increases at a higher rate than export Both prices decrease, but for export decreases at a higher rate than import   Reasons for differences in terms of trade between countries The terms of trade may differ due to: The nature of the commodity being exported. If a country exports raw materials, or unprocessed agricultural products, its terms of trade will be unfavourable, as compared to a country that exports manufactured goods Nature of the commodity being imported. A country that imports manufactured goods is likely to have unfavourable terms of trade as compared to that which imports raw materials or agricultural produce Change in demand for a country’s export. An increase in demand for the country’s export at the world market will make it have favourable terms of trade as compared to those with low demand at the world market Existing of world economic order favouring the products from more developed countries. This may make the developing countries to have deteriorating terms of trade Total quantity supplied. A country exporting what most countries are exporting will have their products trading at a lower price, experiencing unfavourable terms of trade as compared to a country that export what only few countries export Trade restrictions by trading partners. A country with no trading restrictions is likely to import more products, leading to unfavourable terms of trade, as compared to if it impose trade restrictions Balance of

Introduction Inflation refers to an economic situation where the demand for goods and services in the economy is continuously increasing without corresponding increase in supply which pushes the general prices up. The opposite of inflation is called deflation. Inflation is measured by considering the Consumer Price Index (C.P.I) which involves comparison of prices of certain goods and services for two different periods. In constructing the C.P.I; A basket of commodities is selected which includes selecting the generally consumed commodities by average consumers. Choosing the base period which should be a period when the prices were fairly stable. The price of commodities both in the current period (P1) and base period (P2) Consumer Price Index (C.P.I)= × 100 Types and causes of inflation Inflation is classified in relation to its causes. Demand pull inflation This is a type of inflation caused by excessive demand for goods and services without a corresponding increase in production resulting into rise in prices. Causes of demand pull inflation Increase in population.;Increased number of people in a family calls for increased demand of goods and services thus fueling demand-pull inflation. Increase in government expenditure;The government expenditure has the effect of making money available to people thus increasing the aggregate demand for goods and services. A fall in the level of savings; This increases the consumer expenditure on goods and services which brings pressure on the available goods and services thereby pulling up prices. Effects of credit creation by the commercial banks; When banks lend more money to the public, their purchasing power increases hence increasing demand which in turn leads to increase in the prices. Consumers’ expectation of future price increases; When consumers expect the prices of goods and services to increase in the future, they will buy more in the present thus increasing the demand thus fueling demand-pull inflation. General shortages of goods and services; Any shortage in goods caused by factors such as; adverse climatic conditions, hoarding, smuggling, withdrawal of firms from the industry and decline in level of technology calls for scramble for the available goods thus increasing their demand and prices.   \ Cost push inflation This is a type of inflation caused by increase in cost of factors of production which translates to increased prices of goods and services. Causes of cost push inflation. Increase in wages and salaries; An increase in the wages and salaries may increase the cost of labour. The increased cost of labour may be reflected in the increased prices of commodities which in turn would cause wage push inflation. Increase in cost of raw materials and other inputs; This increases the cost of production thus increased prices. Increase in indirect taxes; This increases the cost of production and this causes firms to raise the prices of their product. Increase in profit margin; If the business decides to raise its profit, it leads to an increase in the price of the commodities resulting to profit push inflation. Reduction in subsidies; removal of a subsidy implies that the producer would produce at a higher cost that was being met by the subsidy. This increase cost is finally reflected in increased prices.   Imported inflation This is a type of inflation which is caused by importation of high priced inputs of production such as; technology/machines, skilled human resources and crude oil. This in turn increases the prices of locally produced goods which may lead to inflation. Causes of imported inflation Importation of expensive technology especially highly skilled labour. Importation of expensive machines and equipment. Importation of high priced oil. The currency depreciating thus increasing the price of the country’s imports. LEVELS OF INFLATION Mild / Creeping/Moderate Inflation This a slow rise in price level of not more than 5 % per annum. It is associated with some beneficial effects on an economy especially to firms and debtors. Galloping /Rapid Inflation This is a very rapid accelerating inflation characterized by a situation whereby the general prices levels increase rapidly. Stagflation; This is an economic condition in which unemployment is high, the economy is stagnant, but prices are rising. Hyper /Runway Inflation; This is when prices are rising at double or triple digit rates of 20%, 100%, 200%. The price levels are extremely high and under this situation people may lose confidence in the money as a medium of exchange and as a store of value.   EFFECTS OF INFLATION IN AN ECONOMY positive effects of inflation Mild inflation motivates people to work hard as they try to cope with the effects of the inflation in order to maintain their standards of living. Mild inflation encourages proper utilization of resources with an attempt of avoiding wastage as much as possible. Mild inflation increases investment especially in trading activities since sellers buy goods when prices are low and sell later when prices are higher. It promotes creativity in an economy in terms of production in order to survive the effects of inflation. It benefits debtors since they obtain goods on credit and pay for them in future at the old low prices.   Negative effects It leads to reduction in profits as sales volumes reduce since inflation reduces the purchasing power of consumers resulting to low sales. It wastes time as a lot of time is wasted in shopping around for reasonable prices and also firms may waste a lot of time adjusting their price lists to reflect new prices. It leads to conflicts between employers and employees as firms are pressurized by employees and trade unions to raise wages and salaries to cope with inflation. It leads to loss by creditors as they lend money when the value of money is high but at the time of payment is low since the value of money will have been eroded by inflation. It leads to decline in standards of living as consumers’ purchasing power decrease and therefore one can not lead the lifestyle he/she used to live before. Leads to unemployment. Discourages savings and investment since during inflation people tend to

Public finance refers to the activities carried out by the government associated with raising of finances and the spending of the finances raised (it is the study of how government collects revenue and how it spends it) The components of public finance are; Public revenue Public expenditure Public debt Public revenue-refers to the revenues (income) and resources received by the government from different sources. Public expenditure-refers to the resources spent by the government. Public debt-refers to the money and resources borrowed by the government. Purpose of public finance Provision of essential goods and services. The government has a responsibility of providing its citizens with essential goods and services such as security,health,schools,drought control, law e.t.c such facilities and services may not be adequately covered by the private sector because of the high costs involved and risks. Encouraging consumption of certain commodities-The government may encourage consumption of certain commodities e.g. maize by subsidizing on their productions or lowering their taxes. Controlling consumption of certain commodities-The government may also encourage consumption of some commodities e.g. cigarettes and alcohol by imposing heavy taxes on them. Promotion of Balanced regional development-This may be done by initiating economic projects in areas that are under developed/lagging behind. Wealth Redistribution-This is done by heavily taxing the rich and using the money raised to provide goods and services that benefit the poor To promote economic stability-Economic instability may be caused by factors such as unemployment. Such problems can be solved through public expenditure in projects that generate employment such as ‘kazi kwa vijana’ Creation of a conducive Business Environment-Through public expenditure, the government may develop infrastructure such as roads, electricity, security e.t.c thereby creating a conducive environment for businesses to thrive in. To raise government revenue-Through public finance, the government raises revenue which it uses in provision of essential goods and services to the public. Improving balance of payment-This may be done by improving heavy taxes such as customs duty to discourage importation. Sources of public finance There are two major sources of public finance i.e. Public revenue Public debt (government borrowing) Public revenue-This is the income that the government gets from its citizens. The main sources of public revenue are; Tax; This is a compulsory payment levied by the government on individuals and firms without any direct benefit to the payer. Fines and penalties-These are the charges imposed on individuals, firms and corporations who break the laws of the country.(offenders) Fees; These are the payments charged by the government for the direct services it renders to its people e.g. road licence fee, marriage certificate fee and import licence fee. Rent and rates; Charged on use of government properties e.g. game parks, forests e.t.c Eschiats; Income obtained from properties of persons who die without legal heirs or proper wills. Such people’s properties are taken over by the state. Dividends and profits; These are the income received from the government direct investments e.g. income/surplus from public corporations. Interest from loans-This is the interest on loans advanced by the government to firms and individuals through its agencies such as ICDc, AFC e.t.c Proceeds from scale of government property. Public debt (Government borrowing)-This is the money that the government borrows when public revenue is insufficient to meet all its financial obligations. Government borrowing is also referred to as national debt. It includes all outstanding borrowing by the central government, local authorities and government corporations. These are two majorly two sources of public debts; Internal borrowing External borrowing Internal borrowing This refers to borrowing by government from firms and individuals within the country. This may be done through; Open market operation; the government sells its securities such as treasury bonds and treasury bills. This however has a disadvantage of causing ‘crowding out effect’ where the government leaves the private investors with little to borrow from. External borrowing This refers to government borrowing from external sources. It may either be on a bilateral or multilateral basis. Bilateral borrowing is where the government borrows directly from another country. Multilateral borrowing is where the government borrows from international financial institutions such as international monetary fund (IMF), World Bank, African Development bank e.t.c.such bodies get finances from various sources which they lend to their member countries who are in need of such funds. Generally, external borrowing has strings attached. The borrowing country is expected to meet some set conditions, sometimes adversely affecting some sectors of the economy.  The total internal borrowing (internal debt) added to the total external borrowing (external debt) constitutes the national debt. Classes of public (National debt) These are two classes of national debt; Reproductive debt Dead-weight debt. (i) Reproductive debt This is borrowed money used to finance project(s) that can generate revenue. Such projects, once started may become self sustaining and may contribute towards servicing/repaying the debt. E.g. money used to finance irrigation schemes, electricity production e.t.c. dead-weight debt     This is borrowed money that is used to finance activities that do not generate any revenue. Examples are money used to finance recurrent expenditure e.g. payment of salaries or for famine relief e.t.c Dead-weight debt is a burden to members of the public since they are the ones who are expected to contribute towards its repayment. Factors to consider before the government decides whether to borrow internally or externally This refers to how the government spends the finances it has raised on behalf of its citizens. Categories of government expenditure Recurrent expenditure Development expenditure Transfer payments. Recurrent expenditure This refers to government spending that takes place regularly e.g. payments of salaries to civil servants, fuelling of government vehicles e.g. Every financial year, the government must allocate funds to meet such expenditure. Recurrent expenditure is also known as consumption expenditure. Development expenditure This is also referred to as capital expenditure .It is government spending on projects that facilitate economic development. Such projects includes construction of railway lines, roads, airports, rural electrification e.t.c Once completed expenditure on such projects ceases and may only require maintenance. Transfer payments This is expenditure on things/people who do

Barter trade This is a form of trade where goods and services are exchanged for other goods and services.   Benefits Satisfaction of wants: And individual is able to get what he or she needs. Surplus disposal: an individual or country is able to dispose off its surpluses. Social relations: it promotes social links since the communities trade together. Specialization: some communities shall specialize in a particular commodity. Improved living standards: this is enhanced by receiving what one is unable to produce. Limitations of Barter trade Lack of double coincidence of wants: – it is difficult to find two people with the need for each other’s product at the same time. Lack of store of value/ perishability of some commodities: – some goods are perishable thus their value cannot be stored for a long time for future purposes e.g. one cannot store vegetables for exchange purposes in future. Indivisibility of some commodities: -it is difficult to divide some products like livestock into smaller units to be exchanged with other commodities. Lack of standard measure of value: – It is not easy to determine how much one commodity can be exchanged for a given quantity of another commodity. Transportation problem: It is difficult to transport bulky goods especially when there is no faster means of transport. Lack of a standard deferred payment: – The exchange of goods cannot be postponed since by the time the payment is made, there could be fluctuation in value, demand for a commodity may not exist and the nature and quality of a good may not be guaranteed. It may be therefore difficult what to decide what to accept for future payment. Lack of specialization: – Everyone strives to produce all the goods he or she needs due to the problem of double coincidence of wants. Lacks unit of account- it is difficult to assess the value of commodities and keep their record.     MONEY SYSTEM Money is anything that is generally accepted and used as a medium of exchange for goods and services. Features/ characteristics of Money For anything to serve as money, it must have the following characteristics: Acceptability: The item must be acceptable to everyone. Durability: The material used to make money must be able to last long without getting torn, defaced or losing its shape or texture. Divisibility: Money should be easily divisible into smaller units (denominations) but still maintains it value. Cognizability: The material used to make money should be easily recognized. This helps reduce chances of forgery. It also helps people to differentiate between various denominations. Homogeneity: Money should be made using a similar material so as to appear identical. This eliminates any risk of confusion and forgeries. Portability: – Money should be easy to carry regardless of its value. Stability in value: The value of money should remain fairly stable over a given time period. Liquidity: – it should be easily convertible to other forms of wealth (assets). Scarcity: – It should be limited in supply. If it is abundantly available its value will reduce. Malleability- the material used to make money should be easy to cast into various shapes. Not easy to forge- money should not be easy to imitate. Functions of Money Medium of exchange: It is generally acceptable by everyone in exchange of goods and services. It thus eliminates the need for double coincidence of wants. Store of value: It is used to keep value of assets e.g. surplus goods can be sold and then money kept for future transactions. Measure of value: Value of goods and services are expressed in money form. Performance of businesses is measured in terms of money. Unit of account: It is a unit by which the value of goods and services are calculated and records kept. Standard of deferred payment: it is used to settle credit transactions. Transfer of immovable items (assets): Money is used to transfer assets such as land from one person to another.   DEMAND FOR MONEY This is the tendency or desire by an individual or general public to hold onto money instead of spending it. It also refers to as liquidity preference. Money is held by people in various forms: Notes and coins Securities and bonds Demand deposits such bank current account balances. Time deposits such as fixed account balances   REASONS (MOTIVES) FOR HOLDING MONEY   Transaction Motive: Money is held with a motive of meeting daily expenses for both the firms and individuals. The demand for money for transaction purpose by individuals depends on the following factors: Size/level of individual’s income: The higher the income of and individual, the more the number of transactions thus high demand for transactions. Interval between pay days/ receipt of money: if the interval is long, then high amount of money will be held for transaction reasons. Price of commodities: if the prices are high, the value of transactions will also increase thus more money balances required. Individuals spending habits-people who spend a lot of money on luxuries will hold more money than those who only spend money on basics. Availability of credit-people who have easy access to credit facilities hold little amount of money for daily transactions than those who do not have easy access to credit. The transaction motive can further be divided to; Income motive i.e. holding money to spend on personal/ family needs. Business motive i.e. holding money to meet business recurring needs such as paying wages, postage, raw materials. Etc Precautionary Motive: Money is held in order to be used during emergencies such as sicknesses. The amount of money held for this motive will depend on the factors such as: Level of income- the higher the income the higher the amount of money held for precautionary motive. Family status- high class families tend to hold more money for precautionary motive than low class families. Age of the individual- the aged tend to hold more money for precautionary motive than the young since they have more uncertainties than the young. Number of

These are prepared at the end of a given trading period to determine the profit and losses of the business, and also to show the financial position of the business at a given time. They includes; trading account, profit and loss account, trading profit and loss account and the balance sheet. They are also referred to as the final statements. The trading period is the duration through which the trading activities are carried out in the business before it decides to determines it performances in terms of profit or loss. It may be one week, month, six months or even a year depending on what the owner wants. Most of the business use one year as their trading period. It is also referred to as the accounting period. At the end of the accounting period, the following takes place; All the accounts are balanced off A trial balance is extracted Profit or loss is determined The balance sheet is prepared   Determining the profit or loss of a business When a business sells its stock above the buying price/cost of acquiring the stock, it makes a profit, while if it sells below it makes a loss. The profit realized when the business sell it stock beyond the cost is what is referred to as the gross profit, while if it is a loss then it is referred to as a gross loss. It is referred to as the gross profit /loss because it has not been used to cater for the expenses that may have been incurred in selling that stock, such as the salary of the salesman, rent for the premises, water bills, etc. it therefore implies that the businessman cannot take the whole gross profit for its personal use but must first deduct the total cost of all other expenses that may have been incurred. The profit realized after the cost of all the expenses incurred has been deducted is what becomes the real profit for the owner of the business, and is referred to as Net profit. The net profit can be determined through calculation or preparation of profit and loss account. In calculating the gross profit, the following adjustments are put in place Return inwards/Sales return: – these are goods that had been sold to the customers, but they have returned them to the business for one reason or the other. It therefore reduces the value of sales, and is therefore subtracted from sales to obtain the net sales Therefore Net sales = Sales – Return inwards Return outwards/purchases return: – these are goods that had been bought from the suppliers to the business and have been returned to them for one reason or the other. It reduces the purchases and is therefore subtracted from the purchases to obtain the net purchases. Drawings: – this refers to goods that the owner of the business has taken from the business for his own use. It reduces the value of purchases, and is therefore subtracted from purchases when determining the net purchases. It is different from the other drawing in that it is purely goods and not money Carriage inwards/Carriage on purchases: – this is the cost incurred by the suppliers in transporting the goods from his premises to the customers business. It is treated as part of the purchases, and therefore increases the value of purchases. It is added to purchases to determine the actual value of purchases/Net purchases.   Therefore Net Purchases = Purchases + Carriage inwards – Return Outwards – Drawings   Carriage outwards/Carriage on sales: – this is the cost that the business has incurred in transporting goods from its premises to the customers premises. The cost reduces the business profit that would have been realized as a result of the sale, and is therefore treated as an expense and is subtracted from the gross profit, before determining the net profit. Opening stock is the stock of goods at the beginning of the trading period, while the closing stock is the stock of the goods at the end of the trading period Gross profit is therefore calculated as follows; Gross Profit = Sales – Return inwards – (Opening stock + Purchases + carriage inwards – Return outwards – Closing stock)       Or       Gross profit = Net sales – Cost of Goods Sold (COGS)         COGS = Opening Stock + Net Purchases – Closing stock   Net Profit = Gross profit – Total expenses       Trading Account This is prepared by the business to determine the gross profit/loss during that trading period It takes the following format; Name of the business Trading Account Dr                                                   For the period (date)                                            Cr                                        Shs                 Shs Opening stock                                    xxxxxx add Purchases              xxxxx add Carriage inwards      xxx less Return Outwards      xxx less Drawings                   xx            xxxxx Goods available for sale                    xxxxxx Less Closing Stock                                 xxx Cost Of Goods Sold (COGS)             xxxxxx Gross profit c/d                                    xxxx xxxxxx                                      Shs                    Shs Sales                             xxxxxx Less Return inwards          xxx Net sales                                          xxxxxx             xxxxxx Gross profit b/d                           xxxx   The trading account is completed by the time the gross profit b/d is determined For example The following balances were obtained from the books of Ramera Traders for the year ending may 31st 2010 Sales                                                    670 000 Purchases                                            380 000 Return inwards                                                  40 000 Carriage outwards                                18 000 Return outwards                                                 20 000 Carriage inwards                                                 10 000 Additional information; During the year the owner took goods worth sh 5 000 for his family use The stock as at 1st June 2009 was shs 60 000, while the stock as at 31st May 2011 was shs 70 000 Required; Prepare Ramera Traders trading account for the period ending 31st May 2010 Ramera Traders Trading Account Dr                                                               For the period ending 31/5/2010                                      cr                                        Shs                 Shs Opening stock                                     60 000 add Purchases              380 000 add Carriage inwards     10 000 less Return Outwards     20 000 less Drawings                   5 000        365 000 Goods available for sale             

These are documents containing the information that makes basis of making entries in the books of accounts. They act as evidence that the transaction actually took place. They includes Cash sale receipt: – a document that shows that cash as been received or paid out of the business either in form of cash or cheque. It is a source document that is mainly used in making records in the cash journals cash book, cash accounts or bank accounts. If the receipt is received, it means payments has been made and therefore will be credited in the above accounts, or taken to cash disbursement/payment journals, while when issued, it means cash/cheque has been received and therefore will be debited in the above accounts or taken to cash receipt journals   Invoice: – a document issued when the transaction was done on credit to demand for their payment. If the invoice is an incoming invoice/invoice received, then it implies that the purchases were made on credit, and if it is an outgoing/invoice issued then it implies that sales were made on credit. The incoming invoice will be used to record the information in the purchases journals/diary, while an outgoing invoice will be used to record information in sales journals/diaries   Credit note: – a document issued when goods are returned to the business by the customer or the business return goods to the supplier and to correct any overcharge that may have taken place. If it is received, then it means part of the purchases has been returned and therefore the information will be used to record information in the purchases return journals, while if issued then it means the part of sales has been returned by the customers and therefore used to record the information in the sales return journals/diaries   Debit note: – a document used to correct an undercharge that may have taken place to inform the debtor to pay more. It therefore acts as an additional invoice   Payment voucher: – a document used where it is not possible to get a receipt for the cash/cheque that has been received or issued. The person being paid must sign on it to make it authentic. It is therefore used to record information just as receipts   Books of original entries/Journals/Diaries/day’s books/Subsidiary books These are books where the transactions are listed when they first occur, with their entries being made on a daily basis before they are posted to their respective ledger accounts. The information in the source documents are used to make entries in these books. The books of original entries include: Sales journals Sales return journals/Return inwards journals Purchases journals/creditors journals/bought journals Purchases return journals/return outwards journal Cash receipt journals Cash payment/cash disbursement journals Three column cash book The petty cash book Analysis cash book General journals/journal proper   Sales journals This is used to record credit sales of goods before they can be recorded in their various ledgers. The information obtained in the outgoing invoice/invoice issued is used to record the information in this journal as the source document The overall total in the sales journal is therefore posted in the sales account in the general ledger on credit side and debtors account in the sales ledger as a debit entry Sales journal Date Particulars/details Invoice no Ledger folio amount             Example: The following information relates to Tirop traders for the month of June 2010 June   1: Sold goods to wafula on credit of ksh 200, invoice no 0114 2: Sold to the following debtors on credit; Wanjiru ksh 400, Musyoka ksh 300,    Wafula ksh 300 5: sold goods on credit to Wanjiru of ksh 300 10: Sold goods to the following on credit Kanini ksh 100, Wafula ksh 500, Wanjiru ksh 600 12: Sold goods on credit to musyoka of ksh 350 Required: Prepare the relevant day book for the above transactions; hence post the various amounts to their respective individual accounts Sales journal Date Particulars/details Invoice no Ledger folio amount June 2010: 1 2 2 2 5 10 10 10 12 15   Wafula Wanjiru Musyoka Wafula Wanjiru Wanjiru Wafula Kanini Musyoka Totals posted to the sales account (Cr)   0114                       SL SL SL SL SL SL SL SL SL   GL   200 400 300 300 300 600 500 100 350   3050   (Post the rest to their individual debtors account)   Sales Return Journals/Return inwards journals This is for recording the goods that the customers/debtors have returned to the business. It uses the information in the credit note issued as a source document to prepare it. The information is therefore recorded to the return inwards account in the general ledger, while the individual’s entries are reflected (credited) also in their respective debtors account for double entry to be completed. It takes the following format Sales return journal Date Particulars/details Credit note no Ledger folio amount             For example; Record the following transaction for the 2007 in their relevant diaries, hence post them to their respective ledger accounts; May 1: goods that had been sold to M Okondo of shs 2600 on credit was returned to the business “   2: G. Otuya returned good worth shs 1320 that was sold to him on credit to the business “    8: the following returned goods that had been sent to them on credit to the business H Wati shs 3500, Muya shs 4700 M Okondo shs 2900 “    12: G Otuya returned goods worth shs 5400 that were sold on credit to the business “  30: Goods worth sh 8900 that had been sold on credit to G Otuya were returned to the business Sales Return journal Date Particulars/details Credit note no Ledger folio amount May 2007: 1 2 8 8 8 12 30   M Okondo G Otuya H Wati Muya M Okondo G Otuya G Otuya Totals posted to Return Inwards