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E1 > 1.Role of the Finance Function > Flashcards

1.Role of the Finance Function Flashcards

1
Q

Define Organisation

A
  • Social Arrangement which pursues collective goals
  • Controls its own performance
  • Has either physical or social boundaries that separate it from its environment
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2
Q

What are the two sectors a developed country can be divided into

A
  1. Public: owned by state
  2. Private: businesses owned by individuals or institutions
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3
Q

What are the two types of private organisations

A
  • Profit Seeking: seek to increase shareholder wealth
    -Not for profit: other objectives
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4
Q

What are the two types of public organisations?

A
  • Those that provide public services eg. hospitals
  • State-owned industries
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5
Q

What are the two types of profit-seeking organisations

A
  • Sole trader/Partnerships
  • Companies/Incorporations
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6
Q

What are the implications of sole trader or partnership organisations

A

The owner’s private assets and liabilities are not distinguished from the enterprise

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7
Q

What are the implications of Companies/Incorporations as profit-seeking organisations

A

The law distinguishes business’ liabilities and profits from the owner

Business capital is provided through the purchase of shares

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8
Q

What are the two types of companies

A
  • Private: shares can only be traded in private
  • Public: shares can be sold publically on stock markets
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9
Q

What is meant by multinational corporations

A

Companies large enough to produce in multiple countries by owning or controlling foreign subsidiary

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10
Q

What is meant by not-for-profit organisations

A

The main objective is not to profit

EG. Charities, Clubs, Unions, Government services

Organisations still need to be profitable to continue operating

The surplus from business is used to further their objectives

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11
Q

What is meant by mutual organisations?

A

A special type of not-for-profit organisation
- Commercial operations owned by members/customers
-Customers benefit from services provided and the surplus
- They can pursue other purposes than maximising trading surplus such as quality of service

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12
Q

What are the objectives of public organisations

A

Value for money
E: Economy
E: Efficiency
E: Effectiveness

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13
Q

What are the restrictions of public organisations

A
  • Purpose is determined by law: objectives are not to do with profit-seeking but to provide efficient public service
  • Funding determined by the government: politics, current state of finance and country etc
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14
Q

Define Non-Governmental Organisations (NGOs)

A

Private organisations that operate in the public sector eg. providing services to the community/protecting the environment

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15
Q

What are the two key features of NGOs

A
  1. Generating a profit is not the primary goal and is not focused on financial objectives
  2. Not directly linked to government
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16
Q

What are the main types of NGOs

A
  1. Campaigning NGOs- seek to influence government policy through lobbying and generating public favour
  2. Operational NGOs- attempt to make a positive impact directly in interested areas
  3. Quasi- Autonomous non-governmental organisation (QUANGO) - Private organisations that the government has devolved authority for running public services
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17
Q

How does organisation type affect finance function

A
  • Differences in owners and key stakeholders
  • Sources of funding for the organisation
  • Overall goals of the organisation
  • How performance is measured
  • Use and investment in technology
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18
Q

How are the purposes of different organisations broken down

A

Vision
Mission
Objectives

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19
Q

What is meant by vision

A

The desire future state of the organisation - high level and timeless
- Contained in vision statement

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20
Q

What is meant by mission

A

An expression of overall purpose in line with values and expectations of stakeholders
-Set out in mission statement

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21
Q

What is meant by objectives

A

Specific targets which are set and control the overall functioning and progress of organisation
- Translate a mission into specific targets

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22
Q

What are characteristics of mission statements

A
  • States purpose
  • States areas of operation
  • provides general statement on culture
  • act as a guide to develop organisation’s strategy and objectives
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23
Q

SMART

What features should objectives have

A

S: specific
M: measurable
A: achievable
R: relevant
T: Time-related

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24
Q

PRIME

What functions do objectives have

A
  1. Planning: define and set out milestones
  2. Responsibility: define responsibilities of managers
  3. Integration: support other objectives and be consistent
  4. Motivation: motivate manaagers for areas of performance
  5. Evaluation: provide benchmark for performance and control
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25
Q

What are the different organisational levels of objectives

A

Strategic/ Corporate objectives: set overall long term

Tactical objectives: to plan and control individual functions

Operational objectives: day to day performance targets

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26
Q

What is meant by critical success factors

A

How objectives can be broken down into smaller, more specific goals

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27
Q

How are CSFs measured

A

By using Key Performance Indicators(KPIs)
- Can be financial or non financial
- Specific, measurable, used as control

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28
Q

What is meant by the digital world and the business environment

A

Digital world: increasing digitisation of everyday lives

Business environment: everything that surrounds business both physically and socially- split into Macro and Micro levels

29
Q

PESTEL Model

What is meant by the macro environment

A

Factors influecing all organisations indirectly
PESTAL model:
- Political nature of government
- Economic health eg. inflation or interest rates
- Social, cultural and other trends
- Technological developments in industry
- Ecological and environmental impact eg. pollution
-Legal requirements and changes

30
Q

Porter’s five forces

What is meant by micro environment

A
  • Factors which have direct impact on organisation
  • Porter’s Five Forces:
    1. Bargaining power of suppliers
    2. Bargaining power of customers
    3. Threat of new entrants
    4. Threat of substitute products or services
    5. Rivavlry between Industry Competitors
31
Q

Define technological connectedness

A
  • How data is created, stored, retrieved and synchronised
  • Caused rules of business to change and become dynamics
32
Q

What are the 3 consequences of technological connectedness

A
  • Increasing levels of competition: infomred consumers expect same levels
  • Communication is faster and easier: reduction in product development and adaptability by others
  • Changes to competitors and stakeholders: international environments
33
Q

Explain the concept of value

A

Concept depends on the type of organisation
eg. profit making: value is measured by increasing shareholder wealth

for not for profit: value might be measured by achievement of objectives

34
Q

How is value for money measured

A
  1. Economy: performing activity for minimum cost
  2. Efficiency: performing activity by consuming minimum resources of input
  3. Effectiveness: achieving maximum output given the resources of input
35
Q

What are the four basic finance activities which are interconnected according to Fara

A
  1. Assembling information: collecting, cleaning data
  2. Analysing Insights: draw patterns
  3. Advising to influence: communicating insights to form objectives
  4. Applying for Impact: guiding actions to improve
36
Q

According to the white paper what is on Y axis of the finance function value matrix

A

What finace functions do:
- Sourcing and analysing information
- Communicating and using information

37
Q

According to the white paper what is on X axis of the finance function value matrix

A

Why finance fuctions performs activities
- To Create value
- To preserve value

38
Q

What are the 4 areas of the finance fuction value matrix

A
  1. Data Integrity: Sourcing and analysis of data to preserve value
  2. Stewardship: Communication and use of information to preserve value
  3. Value Analysis: sourcing and analysis of data to create value
  4. Value Enabling: Communication and use of information to create value
39
Q

Define data integrity

A

Finance functions acts as a trusted source of managment information

40
Q

Define Value Analysis

A

The finance function provides insights into the drivers of organisational value

41
Q

Define Stewardship

A

The finance function is the subject matter expert and contributes to strategic decision making and developing business model

42
Q

Define Value Enabling

A

The finance function partners with other business functions to use insights and address performance issues and create solutions to create value

43
Q

What are the 5 areas of value that white paper says accountants can bring

A
  • Reporting accuracy
  • Partnering and decision support
  • Controllership and risk
  • Enterprise-wide cost management
  • Analysis and insight for high quality data
44
Q

What are the key activites of financial function that enable, shape and narrate value

A

Enable/Create: planning, forecasting, resource allocation

Shape: performance management, control

Narrate: financial reporting

45
Q

Define corporate governance

A

System by which companies are directed and controlled

How directors are held accountable to shareholders

46
Q

What is the principal and the agent in an organisation

A

Principal: shareholders/owners

Agents: Company directors

47
Q

What are examples of poor corporate governance

A
  • Domination by individual or group
  • Lack of involvement of board
  • Lack of adequate control function eg. internal committee
  • Lack of supervision eg.loss through incompetence, negligence or fraud
  • Lack of independent scrutiny of external shareholders
  • Lack of contact with shareholders
  • Emphasis on short-term profitability
  • Misleading accounts and information
48
Q

What are the ultimate risks of poor corporate governance

A
  • Risk of large losses which becomes insolvent and business has to cease trading
49
Q

What are the six principles of corporate governance as defines by the OECD

A

Principle 1: promote transparent and fair markets and efficient allowcation of reosurces and be consistent with rule of law

Principle 2 : protect and facilitate the exercise of all shareholder rights equally

Principle 3: provide incentives throughout investment chain and stock market functions

Principle 4: recognise the rights of stakeholders

Principle 5: timely and accurate disclosure on material matters regarding finance, performance, ownership and governance

Principle 6: Strategic guidance of company and management by board

50
Q

What are the areas of the UK Corporate governance code

A
  1. Board Leadership and company purpose
  2. Division of repsonsbility of chairman and CEO
  3. Good evaluation and composition
  4. Audit, risk and internal control
  5. Remuneration
51
Q

What are features of board leadership as part of UK coporate governance

A
  1. Effective board with chairman, deputy chairman, CEO, senior board members and chair of board committees recognised in annual reports
  2. Board shoudl establish company’s purpose and values
  3. Board should ensure resources are in place for company to meet its purpose
  4. Board should meet responsibilities with shareholders
52
Q

What is meant by division of repsonibilities in the UK Corporate governance

A
  • Splitting of CEO and Chairman of board
  • CEO should run day to day running of company
  • Chairman: runs board
  • Mix of executive and non executive directors (independant)
53
Q

What are requirements of Non executive directors

A
  • not have been an employee in the last five years
  • no material interes in company for last three years
  • not have company share options or performance related compensation
  • not have close family senior employees
  • cannot service longer than 9 years
  • hold cross-directorships
54
Q

What is meant by composition, succesion and evaluation in UK Corporate governance

A
  • Board should be chosen fairly and transparently based on merit and criteria
  • Nomination committee: should consist of 50% NED
  • Annual evaluations of the composition of the board of diversity and effectiveness
  • 50% of board must be NEDs
55
Q

What is meant by audit, risk and internal control in UK Corporate governance

A
  • Formal and transparent policies for internal and external audit functions
  • policies to manage risk
  • Audit committee: Consisting of only NEDs to monitor financial control and integrity
56
Q

What is meant by remuneration in UK corporate governance

A
  • Directors should not be responsible in deciding their own remuneration
  • Remuneration committee: establish and consist of at least 3 NDE
  • Helps to prevent agency problem although can be costly
57
Q

What are the two general disclosures listed companies are required to make under UK Coporate governance

A
  • Narrative statement: providing explanations for shareholders to assess principles are applied
  • Compliance statement: whether accounting policies were met and if not, why not
58
Q

What reuirements does US Sarbanes-Oxley act corporate governance have

A
  1. Auditor independence: cannot offer financial services apart from taxation, rotation of audit partner every 5 years
  2. US Stock exchange regulations
  3. Audit committee
  4. Internal control report annual
  5. Increased Financial disclosures
59
Q

What are advantages and disadvantages of rules based approac

A

Advantages:
- Consistent application
- Easy to identify breaches
- Rules for specific outcomes

Disadvantages
- Cannot learn every rule
- removes memebr discretion
- long and lengthy
- loopholes

60
Q

What are the advantages and disadvantages of principle/framework approach

A

Advantages
- Proactive actions and individuality
- Flexibility in complex situations
- Hard to find loopholes

Disadvantages
- Interpretations are subjective
- Potential for inconsistency
- Ambiguity
- Guidelines eventually become rules

61
Q

What are the difference approaches to making ethical decisions

A
  1. Egoistic: look after their own need
  2. Pluralistic: consider whether other staekholders are comprimised
  3. Absolutist: concerned whether course of action is fundamentally incorrect
  4. Consequentialistic: determine course of action by its consequences
  5. Utilitarian: maximise overall benefit to society
62
Q

What are CIMA principles of ethics

A

Integrity: honest and straightforward
Objectivity: avoid bias and prejudice
Confidentiality: not revela information unless legal need
Professional competence and due care : up to date with training and don’t do tasks you are not trained to do
Professional behaviour: comply with laws and regulations

63
Q

Define coporate social responsibility

A

Set of actions which an organisation is not obliged to take but takes anyway for the wellbeing of stakeholders and public

64
Q

What are the 4 Corporate social responsibility strategies according to Carroll and Bucholtz

A
  1. Economic responsibilities: providing return to shareholders, remuneration to staff and value for money to customers
  2. Legal responsibilities: expected to follow legislation
  3. Ethical responsibilities: to act in a fair and just way
  4. Philantrhopic responsibilities: to improve society
65
Q

What are the general corporate social responsibility strategies

A
  1. Proactive: organisation is prepared to take full responsibility for action
  2. Reactive: organisation allows situation to continue until public or government finds out
  3. Defence: minimising or attempting to avoid additional obligations arising from problem
  4. Accommodation: organisation takes responsibility when there is encouragement from special interest groups or perception that a failure to act will result in government intervention
66
Q

What are arguments against corporate social responsibility

A
  • business do not have responsibilities
  • businesses do not need to have charity as aim
  • if managers spend money elsewhere then shareholders money is being used for unauthorised
67
Q

What is corporate digital responsibility

A

actions organisations do although they do not have to, to protect data and digital devices

68
Q

What are the principles of corporate digital responsibility

A
  1. Digital stewardship: data collected should be used responsibiliy and securely
  2. Customer expectations and transparency: open and honest about data collected and shared
  3. Digital empowerment: use data to help them to make better decisions
  4. Greater digital equity: value of data
  5. Digital Inclusion: multiply impact of digital assets for good of society

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