3.3 Processes of financial management

Question 1

Why is planning in financial management is important and what need to be plan and aware of?

Answer 1

• Planning ensure the business cash inflow is greater than cash out flow
• Need to work out financial need for business
• Budgets for expected cost in the future
• Make clear record system (cashflow & income statements, balance sheets)
• Avoid and plan for internal and external finnancial risks
• Use finnancial control to make daily changes

Question 2

What is debt finance and 2 advantages and disadvantages in planning?

Answer 2

• Borrow money from financial sources
• Adv: +Easily available to acquire
  + Not decrease ownership of business
• Disadv : + Debt can be expensive due to interests
  + Repayments begin immediately after borrowing.

Question 3

What is equity finance and 2 advantages and disadvantages in planning?

Answer 3

• Money from investor or retained profit
  -Adv : +Does not have interest charge
  + Does not add to business debt level
• Disadv: + Ownership is diluted
  + Profit is share among shareholders

Question 4

What is the meaning of matching term and source of finance to business purpose?

Answer 4

• Use short term finance for short term needs and long term finance for long term needs.

Question 5

What are 3 financial report of business and what it does?

Answer 5

• Cash flow statement (Show cash flow in and out of business)
• Income statement (Show profit from sale)
• Balance sheet (Show balance )

Question 6

What is equation for cash flow statement?

Answer 6

Opening balance + Inflow - outflow = closing balance (OB + I + O = CB)

Question 7

What is equation for Gross Profit?

Answer 7

GP = Sales - Cost of Good sold (Sales - COGS = GP)

*

Question 8

What is equation for

COGS ?

Answer 8

COGS = Opening stock +Purchase - Closing stock (COGS = OS + P - CS)

Question 9

What is equation for Net profit?

Answer 9

Net profit = Gross profit - Expenses (NP = GP - E)

Question 10

What is equation for balance sheet?

Answer 10

Current Asset + Non current asset = Current liabilities + Non current liabilities + Owner equity (CA + NCA = CL + NCL + OE)

Question 11

What do ratio in balance sheet use to measure and what is it?

Answer 11

• Measure liquidity and growing

- Current ratio and gearing (High gearing = high debt), debt to equity ratio

Question 12

What do ratio in the income statement measure and what ratio is it?

Answer 12

• Measure business’s profitability and efficiency
• Gross Profit Ratio , Net Profit Ratio, Return on Owner ‘s Equity, Expense ratio, Account receivable turn over ratio (How long take for account receivable to pay the cash)

Question 13

What is equation for debt to equity ratio?

Answer 13

{ (CL + NCL) / OE } x 100%

Question 14

What is current ratio equation?

Answer 14

CA / CL

Question 15

What is Gross profit ratio ?

Answer 15

GP/R x 100

Question 16

What is Net profit ratio?

Answer 16

NP/R x 100

Question 17

What is return on owner equity ratio?

Answer 17

NP / OE x100

Question 18

What is expense ratio?

Answer 18

(Expenses / Sales ) x 100

Question 19

What is Account receivable turnover ratio and how to change to days

Answer 19

Sales / Account Receivable

• To find days use 365 divide by the ratio found for ARTR

Question 20

Comparative ratio?

Answer 20

Use ratio of business to compare to standards bench marking or other competitors to identify position of business

Question 21

What are some limitations of financial reports and what it is?

Answer 21

• Normalise earning: earning is adjusted base on economic upsizing or downsizing, might be inaccurate and not reliable
• Capitalise expense: Payment include with a non current asset
• Valuing assets: Some asset lose value over time, intangible assets like goodwill are added to show good cash flow and increase asset
• Timing issues
• Debt payment
• Notes to the financial statement:provider deeper understanding of reports to investors and lenders

Question 22

How can financial report be ethical ?

Answer 22

Financial managers should:

• Value assets accurately
• Normalise business earning
• Avoid capitalising expenses
• State exactly business debt repayments
• Write accurate notes to the financial statements