Chapter 23- accounting and finance objectives and strategy

Question 1

What does having financial objectives and the reports from the income statement and balance sheet allow the business to see?

Answer 1

Where the main problems may be and therefore enables the business to prioritise its strategies to improve the situation

Question 2

Financial objectives

Answer 2

• used by various stakeholders to measure the performance of the business
• can help management to judge the progress of the business in terms of meeting its targets within a given period of time
• having them also allows those within the business to judge its performance when compared to others within the same market (benchmarket)
• potential investors will want to see how the business is performing prior to investing
• potential creditors will want to judge where the business is performing sufficiently well in order to pay back any borrowing
• these objectives can be used to compare the performance of the business over time
• comparing financial results can allow management to alter its financial strategy in order to put the business on a better course

Question 3

However care needs to be taken when making financial comparisons

Answer 3

• are financial comparisons being made in the same way to avoid bias or any form of misrepresentation
• are assets of the business valued in the same manner
• have allowances been made for either depreciation or appreciation
• financial results are just figures and don’t offer an indication on why the figures are as stated
• no indication as to the state of the economy

Question 4

When setting financial objectives what is important to note?

Answer 4

• legal state and size of the business
• other objectives of the business
• budget of business
• state of economy (growing economy will make it easier to achieve financial objectives)
• level of competition within market (highly competitive market may mean prices have to be lower in order to compete and consequently profit margins may be lower which will affect the ability of a business to achieve a higher financial target)
• government
• work of the monetary policy (they set interest rates so this will affect a business in terms of borrowing money
• legislation

Question 5

From the financial objectives and data, a stakeholder can ascertain a wealth of information which is useful for many reasons

Answer 5

• members of the board of directors or managers of the business will use the financial information to make important decisions and consequently plan for the future by setting objectives for the business
• prospective shareholders/ investors will look at the financial information contained in the accounts of the business to decide whether to invest in the business
• banks will look at the accounts of a business to check if the business is able to afford repayments if money is borrowed
• potential or existing suppliers may use the financial information and financial objectives of a business in order to assess whether it is ‘safe’ to trade with in terms of judging its ability to pay for any supplies provided
• directors or managers will use the accounts as measure of success or failure in terms of how profitable the business is
• financial information can be used to look at the amount of cash flowing in and out of the business in order to rectify any financial cash flow problem
• financial information is often looked at by competitors in an attempt to assess how a particular business is performing in comparison to itself

Question 6

Setting clear financial objectives allows the business or stakeholders to

Answer 6

• have targets to aim for
• assess/monitor the progress of the business in meeting these objectives
• have access to information that sets out the financial situation of the business
• ensure the departments within the business understand the financial constraints it may face
• provide the employees and trade unions with the financial objectives and therefore they will have a better understanding of what the business is trying to achieve

Question 7

Window dressing may occur to

Answer 7

• encourage shareholders to continue to hold or purchase more shares
• encourage potential shareholders to buy its shares and thus enhancing the value of the shares and therefore the value of the business
• suggest the business is able to borrow money
• indicate that the business is able to repay any potential loans
• deter or attract takeover bids