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CIMA > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Organisations are distinguished by many factors, including?

A
  • Who owns them
    -Objectives are
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2
Q

What is a sector? Example?

A

who they are owned by
1) Public Sector
2) Private Sector

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3
Q

What is an objective? Examples?

A

-There are two main categories of ‘objectives of organisations
1) Profit
2) Non Profit

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4
Q

What does the Public Sector refer to?

A

The public sector refers to organisations that are involved in provision of goods and sevices by and for the government at a national, regional or local level.

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5
Q

What are examples of common public sector areas?

A

Common areas where traditionally public sector services have operated include hospitals, schools, defence and police

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6
Q

Can ‘sectors’ and ‘categories’ overlap?

A

Yes, you may find both non profit and for profit enterprises in both the public and private sectors.

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7
Q

Which sector would publicly owned corporations fall into?

A

Publically owned corporations (State owned enterprises) would fall into the public sector/public organisations
e.g. BT used to be a State owned organisation that was taken into private ownership in the 1980’s (privitisation)

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8
Q

What is the principle goal of a public organisation?

A

To provide services which are deemed important by society

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9
Q

How are public organisations funded?

A

Through taxation revenues

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10
Q

Since public organisations are funded by the public through taxation revenues, it is important that……

A

1)Resources - demonstrate their efficiency in the allocation and use of their resources.
2) Services - maximising the quality and quantity of the services provied,
3) Finance - balancing the financial budget - financial stability

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11
Q

What are the recent developments within the public sector

A

-A shift to privatisation of previously State-run organisations
-Public-private partnerships

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12
Q

What is a public-private partnership?

A

-Where the government joins forces with the private sector

-Motive: share risks and rewards
-Rationale: by bringing in private sector expertise, the public services can be made to run more efficiently with better allocation of resources

-E.g.: Common with major construction projects

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13
Q

What are the two most common examples of organisations that benefit society but aren’t necessarily owned by gov or funded by public money (tax)?
Private non-profit

A

-Mutuals
-Co-operatives

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14
Q

What is a mutual?

A

-Raising funds from its members
-Used to provide common services to all members

-owned by and run for the benefit of its members
-no external shareholders to pay in the form of dividends.

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15
Q

What is an example of a mutual?

A

Nationwide Building Society is a well-known example.

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16
Q

What is a cooperative?

A

-a cooperative returns any margins or profits to members on the basis of usage.
-A member-owned business with membership open to those who use its services.

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17
Q

What is the difference between a mutual and a cooperative?

A

-The principal distinction lies in their basic operating principles.
Co-op = “to each according to use”
mutual = “ to each according to need”.

The goal of a mutual is to create a fund that all members can fall back on in times of need.

In contrast, members of a co-op want to use the services the co-op offers as often as possible in order to get the maximum benefit of being a co-op member.

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18
Q

What is a broad definition of both mutuals and cooperatives?

A
  • An independant association of individuals who have voluntarily come together in order to fulfil their common needs and aspirations
  • through co-ownership in a democratically run organisation
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19
Q

A non profit does not have WHAT as its primary objecticve?

A

Profit

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20
Q

What is the primary objective or a mutual?

A

try to make a surplus
used to meet the needs of their members.
This is commonly done by providing better rates of interest offered on borrowings and deposits.

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21
Q

What is the primary objective of a charity?

A

Charities goals are to provide a service to the whole of society or some specific target group within society

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22
Q

What is the primary objective of a members club?

A

-To provide the members within a facility an appropriate environment within which to enjoy their membership
e.g. a sports club

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23
Q

What is a QUANGO?

A

Non-departmental public bodies that perform a range of tasks/functions on behalf of the government.

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24
Q

What does QUANGO stand for?

A

Quasi Autonomous Non-Governmental Organisations

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25
Q

What is the general goal of a non-profit organisation?

A

To provide value for money. This is often measured by the 3 E’s.

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26
Q

What are the 3 Es?

A

-Economy (cheap acquisition of resources)(of appropriate quality)
-Efficiency (minimum wastage of resources)
-Effectiveness (operating in line with organisations objectives)

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27
Q

What is a surplus?

A

more income than expenditure

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28
Q

What is a Private sector organisation

A

Organisations that are not owned by the state

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29
Q

What are the main types of private organisations?

A

The green network pic here

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30
Q

What is the difference between private and public limited companies

A

Private (Ltd) shares are not sold on the stock market
Public (plc) are sold on the stock market

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31
Q

What are the key features of profit making organisations?

A

-They make up the largest proportion of organizations in the UK.
-They provide the most employment opportunities
-They generate significant tax revenues for the government

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32
Q

What is a sole trader?

A

Where one individual owns and runs the entire company.

Minimal admin and paperwork.
HOWEVER - owners have unlimited liability

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33
Q

What is unlimited liability?

A

When personal assets of a business owner could be seized in order to pay the debts of the business

Applicable for sole traders and partnerships

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34
Q

What is a partnership?

A

-a formal arrangement by two or more parties
-to manage and operate a business and share its profits

-Owners have unlimited liability
-Minimal admin/red tape/paperwork

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35
Q

What is a partnership agreement?

A

-sets out their relationship in a legally binding way
-Within a partnership, there are no shares issued.

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36
Q

What is a limited company?

A

A company that is a seperate legal entity from its owners

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37
Q

What is the difference between a private limited company and a public limited company?

A

A private limited company (Ltd) cannot offer shares/securities for sale to the public whereas a public limited company (plc) can.

38
Q

What is a quoted company?

A

If a plc has its shares listed and traded on a recognised stock exchange

39
Q

What is the acronymo for a private limited company?

A

Ltd

40
Q

What is the acronum for a public limited company?

A

plc

41
Q

What is a stakeholder?

A

interest in, or who influence an organisation

42
Q

What are 6 examples of a stakeholders

A

Customers
Suppliers
Employees
Managers and Directors
Government
Local residents

If the needs of the above groups are taken into account in business decisions, there is a greater chance of acheiving long run success

43
Q

What is the principle financial objective of a profit making organisation?

A

-Maximising profit
-This objective can be achieved and measured by an increasing share price, growth in the annual dividends and other financial measures such as ROCE
-In order to achieve long run profitability and growth a business must respect the needs of all of those parties who can influence its future (stakeholders)

44
Q

How can stakeholders be categorised?

A

Primary and Secondary
Primary
-Internal: Employees/Management
-Connected: shareholders, customers, suppliers, financial

Secondary
External: local community, government, pressure groups

45
Q

What other goals do profit-driven companies also include?

A

Managerial theories of revenue maximisation (Baumol)
Long term survival (enables continues profit generation)

Some management will often follow satisficing therories where they try to achieve enough to keep shareholders happy and themselves in a comfortable position (pay/benefits)

46
Q

What is revenue?

A

The basic revenue definition is the total amount of money brought in by a company’s operations, measured over a set amount of time. A business’s revenue is its gross income before subtracting any expenses. Profits and total earnings define revenue—it is the financial gain through sales and/or services rendered.

47
Q

What would a shareholder expect in return for investing in the shares of a limited company

A

1) Receive a return (dividends or growth in the value of shares owned)
2) Have a say on the way the company is run (since they will be an owner of the business). This is achieved by having a ‘vote’ in general meeting of shareholders

It is a fundamental concept that a busines with shareholders wants to maximise the wealth of its shareholders.

48
Q

What must the company offer to increase the wealth of shareholders?

A

A rate of return that is at least the same of higher than their required rate of return

49
Q

What is ‘required rate of return’ sometimes referred to as?

A

Cost of capital.

The cost of capital is taken as the minimum acceptable return on an investment made by an organisation

50
Q

What does ROCE stand for?

A

Return On Capital Employed

51
Q

What is ROCE?

A

ROCE is a widely used measure that linkes the profit before any finance costs to the captial (equity and debt) that has been employed to generate those profits.

It considers how efficiently the capital has been used to generate a return for the investors

52
Q

Equation for ROCE?

A

ROCE = Profit from operations/Capital employed (long term debt and equity) (total assets -current liabilities)

aka Profit before interest and tax (PBIT)/ (total assets -current liabilities)

or = operating earnings/capital employed

53
Q

What does EPS stand for?

A

Earnings per share

53
Q

What is EPS?

A

EPS is used widely in the stock marlet to monito short term performance of listed companies. Particular emphasis is place on showing an increasing EPS figure year on year.

53
Q

Equation for EPS?

A

EPS = Profit available for ordinary shareholders/Number of equity shares in issue

Profit available for ordinary shareholders = Profit after tax and preference dividends

54
Q

What are the 3 short term investor calculations

A

ROCE (Ro-key)
EPS
(above are measures that focus on historic performance, previous profits from past FY)
P/E ratio

55
Q

What is an issue with the ROCE/EPS measure ?

A

-They only report historic performance and many investors are more interested in likely future performance
-Because forward looking long run measures will give a better indication of value

55
Q

What is an issue with the ROCE/EPS measure ?

A

-They only report historic performance and many investors are more interested in likely future performance
-Because forward looking long run measures will give a better indication of value

56
Q

What does P/E ratio stand for>?

A

Price, earning ratio

57
Q

What is the P/E ration equation?

A

P/E ratio = Share Price / EPS
Not a value or percentage, just a number

58
Q

What does a P/E ratio give??

A

A P/E ratio gives a guide as to the markets’ perception of the future growth potential of the company

59
Q

If two businesses (A+B) with the same EPS but Share Price of A was twice that of B…. what would that infer?

A

The P/E ratio of A would be twice the size of B
This infers that investors believe that there is much better future potential in A than in B
It could also imply that B has greater risk

60
Q

As the P/E ration rises…..

A

.. so does investor confidence in the company’s ability to generate future profits

61
Q

What is agency theory?

A

Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents.

62
Q

What are other models that cite alternative views on the management within organisations?

A

-Baumol
-Williamson
-Cyert & March

63
Q

What is the Baumol model?

A

Baumol (sales maximisation) – managers concentrate on expanding sales since this results in increased prestige, bonuses and job security

64
Q

What is the Williamson model?

A

Williamson (management discretion) – managers will try to benefit themselves both financially and otherwise subject to achieving minimum profit acceptability

65
Q

What is the Williamson model?

A

Williamson (management discretion) – managers will try to benefit themselves both financially and otherwise subject to achieving minimum profit acceptability

66
Q

What is the Cyert & March model ?

A

Cyert & March (organisational coalition) – it is necessary for stakeholders to accept compromise positions to maintain a political balance

67
Q

Economies can be structure in a number of ways….

A

…in order to manage the allocation of resources

68
Q

Economies can be structure in a number of ways….

A

…in order to manage the allocation of resources

69
Q

What is the free market economy?

A

In a free economy, the interaction between the market forces of supply and demand determines what is made, in what quantity and who gets the output.

Patterns of economic activity are determined by the decisions made by individual consumers and producers(organisations).

There is very little government intervention in the economy

70
Q

What is the planned (command) economy

A

In a planned economy, the factors of production are owned and/or controlled by the state. Decisions regarding what to produce and the allocation of that production are made centrally. Individual
consumers have little or no control over what is made or its distribution

71
Q

What is the mixed economy ?

A

In a mixed economy, market forces and the state interact to determine what is produced, in what quantity and who receives the output. In a typical Western European economy up to half of all economic activity can be traced back to government spending.

72
Q

What are the three main structures of economy?

A

-Free market economy
-Planned (command) economy
-Mixed economy

73
Q

Methods of expansion within the market: What are the two ways in which firms (organisations functioning within the market) may expand?

A

-Organic growth
-Growth via mergers and acquisitions

74
Q

Economies can be structure in a number of ways….

A

…in order to manage the allocation of resources

75
Q

Methods of expansion within the market: What are the two ways in which firms (organisations functioning within the market) may expand?

A

-Organic growth
-Growth via mergers and acquisitions

76
Q

What is organic growth?

A

Organic growth – internal growth arising from developing products, acquiring extra resources (labour, machinery etc.). This allows a business to expand at its own pace and keep in control
but can be a slower means of growth.

77
Q

What is growth via mergers and acquisations?

A

Growth via mergers and acquisitions – whereby two or more firms are combined into one business entity. A merger is strictly the coming together of two firms where there is a balance of control between the two management boards of directors (very rare in practice). Acquisitions
occur where one business takes control of another

78
Q

Why might a share have a higher EPS

A

-Better future potential
-Safer, lower risk

79
Q

P/E ratio meaning

A

gives guidance on how the market perceives
the future potential of a company
higher = higher percieved growth potential

80
Q

P/E ratio meaning

A

gives guidance on how the market perceives
the future potential of a company
higher = higher percieved growth potential

81
Q

What is corporate governance?

A

Corporate governance refers to the way in which an organisation is managed and controlled and there has been much debate in recent years as to what constitutes good corporate governance.

The reason we have these in place is to reduce to impact surrounding the agency theory.

82
Q

Explain principal-agent relationship

A

In this sense the shareholders are acting as the principals who appoint the directors to act as their agents in the running of the business. The theory of the principal-agent relationship is concerned with how the agents (directors) can be incentivised/motivated to act in accordance with the principals’
(shareholders’) objectives.

83
Q

What is the most common issue arising with regards to agency in profit-seeking organizations?

A

The most common issues arising with regards to agency in profit-seeking organisations is differing objectives of the shareholders and directors.

–The shareholders’ primary goal is to get wealth maximization (evidenced by long-term growth in the share price and dividends).

–The directors/senior managers may be more concerned with salary, status, job security from a
personal perspective.

Directors may seek to make pricing decisions that guarantee steady growth without taking undue risks whereas the shareholders may have preferred a more aggressive pricing policy and more adventurous
investment project decisions that maximise profit.

84
Q

What is the answer to the agency problem in for-profit companies

A

An answer is to devise reward schemes for directors that align their goals with those of the shareholders. Some tried over the years have included schemes such as profit-related pay and share option schemes. Regulations on Corporate Governance reporting (e.g. the UK Corporate Governance
Code) have also helped to make decisions made by directors more transparent.

Shareholders ultimately are the owners of the business and appoint the board of directors and auditors, however they rely on the board of directors to manage the business

85
Q

How does the principle/agent issue arise in non-profit making organisations?

A

THE P/A issues arises due to the multiple objectives that these organisations often have.

Without the major profit driver motive a non-profit making organisation will frequently have a number of different objectives that are competing for funds. Many different stakeholder groups may
be interested.

Here it is likely that there will not be enough funds available to satisfy the needs of all the stakeholders all the time and difficult decisions may have to be made as to where those funds are directed.

86
Q

How can the principle/agent issues in non-profit organisations be adressed?

A

Prioritisation needs to be performed carefully (possibly using techniques such as stakeholder mapping (discussed above)). Different stakeholder groups may be able to appoint people to represent them within a non-profit-making organisations structure (e.g. patient representatives within hospitals and so
on).

87
Q

What is a market?

A

A “market” exists when potential buyers of a good or service are brought together with potential sellers of that good or service.
Markets can also exist for factors of production, such as the labour market which dictates the market
wage for a particular group of employees.

88
Q

What is the price mechanism

A

The “price mechanism” is the means by which the decisions of consumers and retailers interact to determine the allocation of scarce resources between different goods and services. Changes in the
demand or supply send the market price of a good up or down.

The price change acts as a signal to consumers and producers to change the quantity bought and sold. A price change subsequently changes consumers and retailers’ behaviour on the quantity they each
buy and sell

The process by which buyers and sellers interact such that an agreed price for a particular good or service is arrived at.

The price mechanism is the means by which decisions of consumers and businesses interact to determine the allocation of resources.

89
Q

What is the circular flow of income?

A

CIMA (11 decks)

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