Chapter 6 Flashcards
What is liquidity?
The level of ease with which assets can be turned into cash
Examples of liquid assets
- Cash
- Short-term investments (i.e stocks)
- Accounts Receivables
- Fixed-term deposits
Definition of liquid assets
current assets less inventories
The three motives for holding cash
- Operational - to conduct business
- Precautionary - to deal with unforeseen circumstances
- Opportunities - to capitalise on investment opportunities
Working Capital formula
current assets - current liabilities
Another name for working capital cycle
Cash operating cycle
Three objectives of cash management
- Profitability
- Liquidity
- Security
Return on shareholder’s funds formula
(profit after tax / total equity) x 100%
What are the two Liquidity ratios
- Current ratio: Current assets / current liabilities
- Acid test ratio: (current assets - inventory) / current liabilities
Over-trading definition
When a business uses its working capital up in the short-term but the returns do not turn into cash quick enough
Over-capitalisation definition
When a business has more capital/funds than it can effectively utilise and turn into profit.
When a business’ current assets are too large, causing issues. I.e. Having too large AR causing in lots of bad debts
The two main factors that cause stringent governance in a corporate company
- Government legislation
- Restrictions from being a stock-listed company
Fiduciary duty definition
A duty of care and trust which one person/entity owes to another
Who has a fiduciary duty to an entire company?
The directors. They must act according to the interests of the entire company and not just one biased side.
UK Nolan Committee on Standards in Public Life (1995)
states that holders of public office must subject themselves to whatever scrutiny their office post requires
The Public Accounts Committee
The public body which provides oversight to public spending
What is the purpose of Companies Act 2006
Legal framework that helps businesses to do things properly, fairly, and mainly to generate wealth for shareholders
What does Companies Act 2006 not give guidelines for?
Liquidity
Definition of money laundering
The process of disguising criminally obtained money into appearing like it was legitimately obtained
The proceeds of Crime Act 2002 - section 327
It is illegal to facilitate money criminal money to be hidden or moved overseas
The proceeds of Crime Act 2002 - section 328
It is illegal to allow other parties to access criminal property
The proceeds of Crime Act 2002 - section 329
It is an offence to acquire property which is suspected to be criminally obtained
The Money Laundering Regulation 2017
Requires organisation to adhere to regulations which help restrict systems in which money laundering can take place
What is the treasury function in a large organisation?
The board of individuals responsible for managing the company’s liquidity as well as investment matters
Measures to ensure cash security within an organisation
- physical safeguards
- checks (for valid banknotes)
- Reconciliations + record-keeping
- Banking procedures
- Recording procedures (not same person doing reconciliations and bank deposits
Government Monetary Policy purpose
Deals with supply of money, interest rates and availability of credit
One way BoE restricts bank lending
by offering attractive gilts to financial institutions that exchange cash for these gilts
Quantitative Easing
Government introducing more money into the system to stimulate economic activity
