Business finance Flashcards
The IASB’s Conceptual Framework for Financial Reporting states that, to support the effective working of capital markets for the benefit of businesses, financial statements must have which two fundamental qualitative characteristics?
A Understandability B Relevance C Faithfulness of representation D Comparability E Timeliness F Verifiability
Relevance and Faithfulness
A consultant has made two statements about the primary focus of the users of financial statements of an entity.
Statement 1 The primary focus of suppliers is on the entity’s risk and return
Statement 2 The primary focus of shareholders is on the entity’s solvency Are these statements true or false?
Statement 1 Statement 2 A True False B False True C True True D False False
The primary focus of suppliers is not risk and return. Its LIQUIDITY.
Solvency is not the main concern of the entity’s shareholders. Its RISK & RETURN.
A consultant has made the following statements concerning each possible relationship between a bank and its customer.
Statement 1
In the fiduciary relationship the bank is expected to act with good faith towards the customer
Statement 2
In the mortgagor/mortgagee relationship the bank asks the customer to secure a loan with a charge over the customer’s liabilities
Statement
3 In the bailor/bailee relationship the bank accepts the customer’s property for storage and undertakes to take reasonable care to safeguard it against loss or damage
Identify which of the statements about these relationships are true.
Statements 1 and 3.
They describe the fiduciary relationship as well as the bailor/bailee relationship correctly.
Statements 2.
Is incorrect because in a mortgager/mortgagee relationship, the bank asks the customer to secure a loan with a charge over his/hers ASSETS as opposed to his/her liabilities.
Ken plc’s new building programme is likely to start within the next 90 days, but the precise start date and timing of the cash flows are still uncertain. The company has £150,000 available in cash in anticipation of the investment.
Which is the least appropriate use of the funds in the interim period?
A Investment in equities
B Treasury bills
C Bank deposits
D Local authority deposits
An investment in equities.
Short term cash surpluses will normally be invested in equities owing to the risks associated with achieving a return over a short period of time.
Nextron plc manufactures washing machines. It has a 20% share of the UK market.
The company wants to increase its revenues so has decided to add tumble dryers to its range of products. In terms of Ansoff’s matrix, this represents a growth strategy of
A market penetration
B market development
C product development
D diversification
Product development
The company is introducing a new product but clearly targets the same market as its existing markets products, hence growth by means of product development.
The marketing Director of Bristall plc is formulating weather one of the company’s products which is aimed at a small Niche market, should be different from its close competitors.
At this stage she is unsure how such differentiation would be achieved in practice.
The decision to differentiate or not is a decision concerning the companies:
A) Product market strategy
B) Competitive Strategy
C) Business Strategy
D) Functional strategy
Competitive Strategy
A competitive strategy is concerned with how the business will compete in terms of source of competitive advantage ( cost differentiation) and extent of the competitive scope (broad/narrow).
Functional strategy= Concerns the role of marketing itself.
Business Strategy= Concerned with how the marketing mix would be adjusted in due course if a competitive strategy of differentiation was decided upon.
Product/Market Strategy= Is concerned with how the business will grow (Ansoff Matrix)
List three the characteristics of a limited company
Perpetual Succession
Separate legal entity
Regulation under the companies act 2006
Perpetual succession
Is when a shareholders shares are transferrer to another person upon death. This does not affect the company.
Separate Legal Entity
A limited company is separate from its owners as in Solomon v Solomon.
Companies Act 2006 Regulations
Both private and public limited companies are subject to regulations under the company act 2006.
Alain is a manager with Glasgow PLC. He always looks for opportunities to praise his subordinates and takes great pleasure in promoting staff who perform well. As far as his subordinates are concerned, Alain’s action meets their:
A) Self actualisation needs
B) Status/ Ego needs
C) Social needs
D) Safety needs.
Define each
B) Status/ Ego needs
Status and Ego needs can be met by giving praise and promotion.
Self Actualisation
Is concerned with an individuals needs for realising their own potentiel for continued development and creativity in its broadest sense. It is a need for feeling accomplished and satisfied with ones self.
Social needs
Are the needs to belong to a group.
Safety and Security
Refers to the need for protection in all its senses.
Romos ltd and Remus Ltd have recently agreed to co-operate to exploit the possibilities that both companies have in particular overseas market. No separate company has been established for this purpose because the companies chief executive’s, who have known each other for many years have agreed to matters informally. This is an example of:
A) A group structure
B) A joint venture
C) Strategic Alliance
D) A licensing agreement
Strategic Alliance
A strategic alliance is an informal or weak contractual agreement between two or more parties/companies
GROUP STRUCTURE; Implies a company owning one or more subsidiaries.
A JOINT VENTURE; Implies that a third party business is set up and owned by joint venturers, Joint ventures nearly always involves the formation of a separate company with the investing companies taking financial stake as shareholders and with management being provided as agreed.
LICENSING AGREEMENT; involves formally giving permission to another company to manufacture/sell a product or use a brand name via a contractual agreement.
The financial statement of a listed company departs from the relevant accounting standards and the provisions of the companies act 2006. The company is likely to be referred to which regulatory body?
Financial Reporting Council
Kate is employed in the finance function of Graham PLC. Her duties are to ensure that the company always has enough money to meet its short term and long term financial requirements. Which section is she employed in.
A) Accounting Management
B) Financial Reporting
C) Treasury Management
4) Recording of Financial transaction
Treasury management
Anti-monopoly laws are based on the proposition that the best way to achieve efficiency and avoid excessive prices is through
A) Public ownership
B) Increased competition
C) Oligopoly
D) Regulation
Increased Competition
Tending towards a perfect market through increased competition should lead to allocative efficiency and lower prices
Which of the following would lead to demand pull inflation?
A) Rising import prices
B) Increase in wages
C Increases in indirect taxation
D High consumer expenditure such that aggregate demand exceeds aggregate supply
Briefly explain your answer:
Aggregate demand exceeding aggregate supply is an example of pull inflation.
The government has intervened to impose a limit on businesses’ carbon emissions. This is an example of regulation designed to address market failure caused by
A asymmetric information
B equity
C market imperfection
D externalities
Externalities
An externality is an adverse social consequence which the private producer has no incentive to minimise.
Which of the following is regarded by economist as a factor of production?
Supply
Demand
Enterprise
Innovation
Enterprise
Enterprise is one of the 4 factors of production including
Labour (Management)
Land
Capital
Under the requirements of the UK Corporate Governance Code, who is responsible for maintenance of sound risk management and internal control systems?
A Just the executive directors
B Just the non-executive directors
C The entire board of directors
D The audit committee
The entire board of director are responsible
Merton plc is a small listed company outside the FTSE 350. As a consequence, the company:
A) Must comply with all the requirements of the UK Corporate Governance Code
B is governed by other corporate governance regulations than the UK Corporate Governance Code
C can be flexible in how it applies the UK Corporate Governance Code
D is not affected by the requirements of the UK Corporate Governance Code
Can be flexible in how it applies the UK governance code
In seeking to address the problem of the separation of ownership and control, corporate governance attempts to align the interests of which two of the following stakeholders?
A Investors B Employees C Regulators D Managers E Auditors Briefly explain your answer:
Investors and Managers
The separation of ownership and control refers to the classic ‘agency problem’ in which investors (shareholders) who own the company delegate responsibility to the managers for running the business for their ultimate benefit.
Corporate governance is fundamentally concerned with ensuring that the manager acts as the owners would want them to.
The body responsible for promoting high standards of corporate standard in the UK is the
A) FRC
B) OECD
C) CCAB
D) Bank of England
FRC (Financial Reporting Council)
OECD (Organisation for Economic co operation and development)
Bank of England
&
CCAB (Consultive Committee of Accountancy Bodies)
Are not responsible for promoting high standards of corporate governance.
Under a unitary board structure, a company’s board of directors is responsible for both management of the business and reporting to:
A the non-executive directors
B the supervisory board
C the company’s employees
D the company’s shareholders
The Shareholders
Not other directors or employees
Under a unitary board structure there would be no supervisory board
In a market-based financial system, the financial system will be characterised by:
A comparatively more government regulation than a bank-based system
B comparatively less close relationships between banks and businesses than in a bank-based system
C comparatively more risk averse households than in a bank-based system
D households with less access to investment in physical assets than in a bank-based
comparatively less close relationships between banks and businesses than in a bank-based system
A, C & D are characteristics of bank based systems
Raymond & Co, a firm of chartered accountants, is the subject of the ICAEW disciplinary procedure. Its senior partner has been told by a colleague that if the Disciplinary Committee decides a penalty should be imposed on the firm, it has the power to:
1 fine the firm
2 exclude the firm from membership of ICAEW
3 offer an unpublicised caution
4 take away the firm’s practising certificate
Which of these penalties may in fact be imposed on Raymond & Co?
A 1, 2 and 3 only
B 2, 3 and 4 only
C 1, 2 and 4 only
D 1, 3 and 4 only
1, 2 & 4 Only
The offering of an unpublicised caution is a course of action open to the investigation committee at an earlier stage in the disciplinary process.
A company correctly records and analyses all its sales transactions.
At the end of each month, a report is produced for the sales director listing the details of every sales transaction: customer, products, quantities and prices.
Which of the following describes the quality of the reports data and information?
A) Poor quality of data, but good quality of information.
B) Good quality of both data and information
C) Poor quality of both dafa and information
D) Good quality of data but poor information
Good quality of data but poor information
Good quality of data is classified as accurate and complete. However it fails the accurate requirements
The marketing Director of Bristall plc is formulating weather one of the company’s products which is aimed at a small Niche market, should be different from its close competitors.
At this stage she is unsure how such differentiation would be achieved in practice.
The decision to differentiate or not is a decision concerning the companies:
A) Product market strategy
B) Competitive Strategy
C) Business Strategy
D) Functional strategy
Competitive Strategy
A competitive strategy is concerned with how the business will compete in terms of source of competitive advantage ( cost differentiation) and extent of the competitive scope (broad/narrow).
Functional strategy= Concerns the role of marketing itself.
Business Strategy= Concerned with how the marketing mix would be adjusted in due course if a competitive strategy of differentiation was decided upon.
Product/Market Strategy= Is concerned with how the business will grow (Ansoff Matrix)
