Chapter 14 Financial Mng Flashcards
What does Capital budgeting refer to?
All aspects around long term investment
What does Capital Structure refer to?
All aspects of ways in which long term financing is obtained
Includes debt and equity
What is Working Capital Management?
Relates to current assets such as inventory, current liabilities .
What 2 possible actions can a firm take to improve their Gross Profit Margin?
1) Increase sales. Relax credit standards for credit sales.
2) reduce costs by finding cheaper supplier.
Also reconsider having less slow turnover items
What possible 2 actions can a company take to increase their Net Profit Margin?
1) increase sales. Relax credit standards to increase credit sales.
2) reduce operating expenses
Name 2 possible actions a company can take to increase their Return on assets?
1) increase sales / relax cr standards for more cr sales
2) review assets and outsource if need be / improve productivity
How is income calculated?
Income = Units sold x Price per unit
Income can also come from other sources like interest received.
What is Fixed Costs?
It is that portion of the total cost that remain unchanged no matter what else change.
Eg rent
What is the purpose of the Statement of Financial Performance?
Determine profit / loss
and how it has been distributed.
The longterm objective is to increase the value of the business. Name 2 ways in which this can be accomplished.
Investing in assets that will add value
Keeping cost of capital as low as possible
What is the risk-return principle?
The greater the risk the greater the return
What is meant with the break-even analysis?
It is the point where no profit or loss is realised.
The point where total costs equal total income.
N = F
———-
(SP - V)
What is the financial function in financial management concerned with?
The flow of funds
What is Financial Management responsible for?
The efficient management of all facets of the financial function
Capital can be described as?
The accrued power of disposal over the products + services used by a business to generate a monetary return or profit.
What does the liquidity of a business mean?
Refers to a business’ ability to satisfy its short-term obligations as they become due.
Ie. Ability to pay trade creditors by due dates.
Financial management is based on 3 principals. Name them.
1) Risk-return principle
2) Cost-benefit principle
3) Time value of money principle
A change in which 3 components will result in a change in the profit made by a business?
- Unit selling price of its product
- volume of production + sales
- costs (fixed and variable)
The term SP - V is referred to as?
The marginal income
or
Variable profit
What is the purpose of the Breakeven analysis?
- contribute in prep of budgets
- setting targets
- forms basis of strategic decisions
The greater a business’ fixed costs are …
the greater its exposure will be to negative effects of a decline in sales.
What is the key concept to remember with regard to the time value of money?
The value of money changes because of interest rates.
The future value of an initial investment is determined by?
Means of compounding
What would the formula be to calculate the future value of an original investment?
n
FVn = PV (1 + i)
PV - original investment / present value
FVn - the future value of investment after n periods.
i is the interest rate per period expresses as a decimal number
n is the number of discrete periods over which investment extends
What is meant with the “discounting process” in terms of present value?
It is the reverse of the compounding process.
What is the factor known as?
1
------------
n
(1 + i )The present value factor
or
discounting factor for a future single amount
What are the 3 most important implications of tome value of money?
1) Inflow must be accelerated (debtors to pay sooner)
2) Outflow should be delayed (pay cr as late as possible)
3) Manage inventory as optimally as possible - it represents capital that does not earn a return before it is sold.
What are the 4 aids to the Financial Management’s disposal to help with its financial analysis?
Statement of Financial Performance
Statement of Financial Position
Cash Flow Statement
Financial Ratios
What are the 2 approaches to drawing up a funds-flow statement?
1) according to changes in net working capital
2) according to changes in cash position, including current bank account
Which are the 4 interested parties that use financial ratios of the business?
MANAGEMENT
control, planning, decision-making
SUPPLIERS OF BORROWED CAPITAL
ability of buss to repay debts
INVESTMENT ANALYSTS
to evaluate buss as investment opp
LABOUR UNIONS
with view on salary negotiations
An integrated budgeting system for a manufacturing business consists of 2 main types of budgets. What are they?
Operating budgets
Financial budgets
Operating budgets include 3 responsibility centres. Name them.
COST BUDGETS - (measure efficiency)
manufacturing-cost budgets
discretionary-cost budgets
INCOME BUDGETS - (measure marketing + sales effectiveness)
PROFIT PLAN / PROFIT BUDGET (measure income and expenses for managers’ units)
Which budget is the most critical part of a profit budget?
Income budget
What are financial budgets used for?
Used by Financial Management for execution of planning, task control, financing and balance sheet budgets.
What are the 3 major purposes of the Financial Budgets?
1) verify viability of operational planning
2) reveal financial action
3) indicate how operating plans will affect furure.
What do the financial budgets consist of?
Capital expenditure
Cash budgets
Financing budgets
Balance sheet budgets
The financial budgets are prepared from information contained in the ….
Operating budgets
The capital expenditure budget indicates…
the expected budgeted future capital investment in physical facilities.
The cash budgets indicate :
Sources of expected cash inflows
Expected cash outflows
Expected availability of cash in comparison with expected need for it
