3.4 Financial Management

Question 1

Accounts Payable

Answer 1

Record of accounts of money payable to consultants and to other suppliers for expenses.

Question 2

Accounts Receivable

Answer 2

Record of professional fees and disbursements which have been invoiced

Question 3

Aging Reports

Answer 3

record of invoices due and past due. this can be for both accounts receivable and accounts payable.

Question 4

Average Collection Period

Answer 4

accounts receivable divided by gross revenue x 365. key factor in liquidity.

Question 5

What does the Average Collection Period measure?

Answer 5

average number of days it takes to receive payment from the invoice date. fewer the number of days. the better the company can convert collections into cash, strengthen financial position and liquidity.

Question 6

Bad Debt

Answer 6

recorded on income statement, amount of accounts receivable that will be not collected from clients.

Question 7

Balance Sheet

Answer 7

Record of all assets, bank funds, receivables, furniture, computer equipment, all liabilities, accounts payable and loans, retained earnings. financial position of the practice at a particular point in time.shows firms’ overall health.

Question 8

Cash Book

Answer 8

record of day-to-day cash position of the practice using the cash accounting method. All transactions are entered and a running balance is calculated.

Question 9

cash flow

Answer 9

cash and other liquid assets to meet current payroll, consultants fees, other overhead expenses.

Question 10

current assets

Answer 10

items from the balance sheet that are cash and cash equivalents, accounts receivable and short term investments- any line items that can be converted into cash within a year.

Question 11

current liabilities

Answer 11

liabilities that are due within a year, for example accounts payable, tax, wages, insurance

Question 12

current ratio

Answer 12

current assets divided by current liabilities. measures liquidity risk of business and its ability to generate cash to meet short term financial commitments such as payroll, subconsultant fees, line of credit etc. this ratio helps in understanding how cash (or cash equivalent) rich the company is. 1:1 ratio indicates for eery $1 in liabilities the business has $1 in assets to pay it. using balance sheet in table 2. ratio is 773,500/391,500=2.0.

Question 13

debt to equity ratio

Answer 13

total liabilities divided shareholders equity. measures whether the business is comfortable handling its debt obligations

Question 14

depreciation/amortization

Answer 14

rate by which capital assets may be depreciated according to government tax regulations. it is laos use by acountants to account for the loss in value of an asset as it ages. because most fixed assets have value longer than a year, depreciation is a way of expensing a portion of the fixed asset each year.

Question 15

direct personnel expense (direct labour cost)

Answer 15

salary of a staff person engaged on the project plus the cost of such mandatory and customary contributions and employee benefits as employment taxes and other statutory benefits, insurance, sick leave, hoildays. vacations, pensions and similar contributions and benefits.

Question 16

disbursement record

Answer 16

record of billable reimbursable expenses

Question 17

fiscal period

Answer 17

12 month period of which financial records start and end. (previously it was an advantage for a fiscal year to end early in the calendar year, legislation now requires most professionals to pay taxes based on a calendar year, which encourages fiscal year-end to correspond ot hte end of the calendar year).

Question 18

labour multiplier (net multiplier)

Answer 18

formula is net revenue divided by direct labour costs. actual net revenue generated by the firm expressed as a multiple of total direct labour costs. multiplier shows the return on the investment made in direct labour costs.

Question 18

general ledger

Answer 18

record of all accounts, including receivables, payables, income and expenses, payroll, tax payments and disbursement

Question 19

multiplier

Answer 19

percentage or figure by which direct personnel expense is multiplied to cover overhead expenses and profit. establish a charge-out/billing rate

Question 20

office overhead

Answer 20

expenses for rent utilities, office supplies, computer maintenance, prmotion and advertising, annual dues, leasing expenses. legal consultans accounting, marketing, are included in overhead expenses.

Question 21

overhead rate

Answer 21

total overhead including indirect labour divided by direct labour costs. measure of efficiency. lower hte overhead rate, the higher the profit margin

Question 22

payroll burden

Answer 22

required contributions by the employer, employment insurance canada pension plan, workers compensation, insurance, and bonuses

Question 23

payroll records

Answer 23

record of salaries, taxes due and paid, and payroll burden for each employee

Question 24

profit margin

Answer 24

formula is net profit divided by net revenue x 100. analyze the overall financial health of a firm. measures percentage terms how much profit is left over after all expenses are accounted for (including taxes, interst, and depreciation). higher the percentage, more profitable the firm is.

Question 25

profit

Answer 25

excess of revenue over expenses

Question 26

project cost control chart

Answer 26

financial record of each project, including professional fees, consultant fees, staff time expended, budgeted time, expanded payroll, profit and loss for each phase of the work

Question 27

staff utilization record

Answer 27

monthly and year-to-date hours spent by each staff person on direct labour for projects, as well as hours of vacation, holiday time, sick leave, and miscellaneous overhead duties. indicates percentage of direct billable to indirect non-billable time. these records are used to develop billing rates for individual staff members, as well as for short-and long term planning

Question 28

statement of income and expenses

Answer 28

a report (monthly) documenting all expenses and resulting profit or loss

Question 29

tax records

Answer 29

personal income taxes, corporate taxes, HST, GST

Question 30

work in progress

Answer 30

work underway or complete not yet invoiced.

Question 31

what is a profit required to do

Answer 31

build reserve for cyclical downturns, invest additional resources, payout retiring/dismissed staff, build successful financial history, invest in research and professional development, fund incentive programs, attract investors

Question 32

projected income

Answer 32

work-in progress, anticipated professional income based on prevoius years records, anticipated income. adjusted to account for current and projected economy

Question 33

projected expenses

Answer 33

estimated expenses, change in expenses which have occured or will occur, increased expenses

Question 34

internal accounting

Answer 34

in house management accounting, or by prof.accountant

Question 35

external accounting

Answer 35

independent accountant, preparation and examination of financial statements in order to express and opinion on the financial position of the practice. this can be in the form of an audit, a review or a compilation

Question 36

audit

Answer 36

independent objective examination of accounting records and other necessary documentation to express an opinion on the fairness of a balance sheet and other financial statements. gives reasonable assurance that financial statements are free of material misstatements and are in accordance with canadian generally accepted accounting principles.

Question 37

review

Answer 37

lower level of assurance compared to audit, banks typically require middle level of assurance, a review.

Question 38

compilation

Answer 38

lowest level of financial statements, not examined in detail

Question 39

systems of accounting to record transactions

Answer 39

1) cash basis system 2) accural basis system. canada revenue agency requires accural basis for accounting and tax returns

Question 39

accural system

Answer 39

record all income (work in progress and expenses). statement of income and expenses and balance sheet

Question 39

what are three things we could tell from the balance sheet?

Answer 39

1) who owns the business 2) how liquid is the business? 3) how lean or fat is the business

Question 39

3 things in income statement

Answer 39

income, expenses, profit. income-expense= profit / loss. measures firms performance

Question 39

cashflow statement / statement of changes in financial position

Answer 39

detailed explanation of change in cash on the balance sheet. bank account statement. how much cash is available at the beginning of the period and how much new cash was collected, how much cash was paid out, ending balance of cash.

Question 40

billing rate

Answer 40

applying multiplier to the calculated hourly direct personnel expense. add 25% to the hourly rate for payroll burden, double the total to include overhead and add 50% of hte overhead for profit. multiplier of 3.125 to the direct personnel expense

Question 40

utilization factor

Answer 40

percentage of billable hours compared to total hours of work in a year.

Question 40

what needs to be identified when determining fees for service?

Answer 40

each component of the services, cost of production for each component (direct and indirect costs), profit margin to be achieved