Chapter 6 - The finance function and financial information Flashcards
What is the finance function?
Recording financial transaction
What are the three types of way to record financial transactions
- Financial reporting (external)
- Management accounting (internal)
- Treasury management (internal)
What is the task of finance function for recording financial transaction
- Books of prime entry
- Ledgers
- Reconciliations
What is the task of finance function for management accounts
- Costing
- Budgeting
- Pricing decisions
- Investment appraisal
- Performance measurement
What is the task of finance function for financial reporting
- Financial statements
- Tax
- Regulatory information
What is the task of finance function for Treasury management
- Cash, working capital and foreign exchange management
- Managing financial risks
- Raising short, medium and long-term finance
What is business partnering?
Sees members of the finance function partnering within functional areas of the business in a value adding capacity.
What other business functions
- Marketing: Understanding revenue drivers, analysing sales volumes and mix and advising on pricing decision
- IT: KPI monitoring such as system downtime, service desk response times and internal customer satisfaction
- Procurement: Assessing supplier performance against service level agreement, deliveries on time and monitoring prices across the market.
- Operations: Production efficiency, levels of waste and rejected units, machine downtime and traditional variance analysis.
Who are the users of financial information?
Managers, production supervisors, material buyers, machinists (internal)
shareholders, financiers, customers, supplier government (external)
What purpose does the financial information serve to what people
- Planning
- Production manager: future production level
- Buyer: sourcing material
- HR: labour requirement
- Shareholder: increase shareholding? - Controlling
- Managing director - actual market share
- Distribution manager - actual costs versus standards
- Government: how much tax should entity be paying? - Recording transaction?
- Accountant: ledger accounting
- Sales ledger clerk - customer balances - Performance measurement
- Board of directors - how is division performing vs expectation?
- Shareholders? - performance vs share price? - Decision making
- Buyer: sources from supplier A or B
- Project team - invest in machine X or Y?
- Customer: do we want to commit to business for foreseeable future
What are the three levels organisations are split into
- Strategic
- Tactical
- Operational
What is effective information processing?
CATIVA mnemonic can be used to remember the issues related to effective processing of data into information.
CATIVA is an effective way to process information, what does it mean
- Completeness: all relevant data is processed
- Accurate: all processing ensures data remains true to source and error free
- Timeliness: processing matches data availability
- Inalterability: Data cannot be tampered with by unauthorised persons
- Verifiability: clear ‘audit trail’ from data source to information
- Assessability: information produces can be challenged, ensuring quality of systems.
What are transaction processing system?
Transaction processing systems (TPS) are systems which perform and record routine transaction
What are examples of transactions processing systems
- Finance/accounting systems: sale and purchase ledgers, budgets, nominal ledger, management account
- HR systems: payroll, personnel files, training records
- Manufacturing/production systems: Purchasing, orders, production schedules, stock control, quality records
- Sales/marketing systems: marketing research, pricing records, sales, management records
What are management information systems (MIS)
Systems to produce information allowing managers to make effective decisions
What is ACIANA for data security?
- Availability: information can be readily accessed at all time
- Confidentiality: information only accessed by those with a right to access
- Integrity: data remains unadulterated
- Authenticity: data/information comes from bona fide sources
- Non-repudiation: users trust the information produced and the system producing it
- Authorisation: systems changes only made by staff who are accountable for those changes.
What are controls?
Procedures - need to be in place for a business to protect its information systems
What are physical access controls?
Door locks, alarm systems, PIN numbers
What are input controls?
- Control totals e.g. batch invoices
- Range checks e.g. number of hours on timesheet
- Authorisation of source documents/data e.g. timesheet
- Password controls over input of data e.g. restricted access to payroll
What are output controls?
- Control totals e.g. batch of invoices vs batch total
- Follow up for error/expectation reports e.g. large overtime payment
What is backup and archiving?
disaster recovery plans, regular back-up data
What is personnel controls?
careful recruitment, selection, and training of staff operating IS
What are segregation of duties?
Different people are responsible for
- Generation of data
- Processing of data
- Recording of data
- Physical asset custody e.g. inventory, cash, etc.
What are the two types of performance measures
- Qualitative measures: subjective, judgemental, and cannot be expressed in numerical terms
- Quantitative measures: Are objective and must be based on reliable data. These are numerical and can be split into financial measures and non financial measures
What does financial measures mean?
- Based on sales, profit
What does non financial measures
based on production/activity levels
What are common performance measures
Profitability - comparisons of income generation and associated costs. Key measures include gross and net margins, return on capital employed, required return to investors
Activity:
- physical units, number of customers, time taken etc
- Monetary values
Productivity
- Efficient use of resources
e.g. output per employee, number of customers served in one hour
What are the 3 E good measures of productivity?
- Economy - control over input costs
- Effectiveness - output measure (against objectives)
- Efficiency - achieving objectives at minimum cost (combination of effectiveness) and economy
What are critical success factors?
these product features that are particularly valued by a group of customers and, therefore where the organisation must excel to outperform the competition
How can business identify and measure against CSFs?
Key performance indicators (KPI)
What does bench marking mean?
Establishment of targets and comparatives by which relative performance can be established. By adopting best practices, performance should improve
What are the limitations of financial performance indicators?
- Historical: information is not necessarily useful when predicting future
- Financial information mostly report internal performance and does not always consider external factors
- Can encourage short-term decision-making at the expense of long-term objectives
- Can be easily manipulated with the use of accounting policies etc
- Does not consider the whole picture. Financial results are only part of the business’s performance.
What is a balance scorecard
Ensures a mixture of financial and non-financial perspectives and considered when selecting performance indicators.
What are Kaplan and Norton’s suggestion for performance indicators should consider four perspectives.
- Financial perspective
- Internal business perspective
- Innovation and learning perspective
- Customer perspective
How can we measure sustainability?
Social (people) e.g. negative impact on society, low paid worker, lack of diversity
Environment (Plant) e.g. pollution, use of sustainable resources, climate change
Economic (Profit) e.g. economic stability, impact on local economy, provision of jobs
What does the Task Force on Climate-related Financial disclosure (TCFD)
- Risks
- Policy and legal - changes in regulations
- Technology - new lower emission option
- Market - costs
- Reputation - the need to be sustainable
- Acute and Chronic - changing weather event - Opportunities
- Resources efficiency - efficiency and recycling
- Energy sources - solar, wind power etc
- Products and services - low emission
- New markets - access - Disclosure
- Governance - disclosure
- Strategy - impact of risk and opportunities
- Risk management - management of risks
- Metrics and targets - how to measure and assess
What is the Global reporting initiative (GRI)
- Universal standards - apply to all organisation that choose to apply them
- Sector standards - help to identify sector specific impacts
- Topic standards - help to identify specific topics
What is the climate disclosure standards board (CDSB)
The CDSB publishes the CDSB framework for reporting environmental and climate change information. Sets out to assist organisations prepare and present environmental and social information in reports to help investors to see the relationship between the organisation strategy, performance and prospects and specific environmental and social issues.
What does the international sustainability standard board (ISSB)
- deliver comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’
What are internal controls?
Provide reasonable assurance regarding the achievement of objectives relating to operation
What is the control environment
Control environment
- Culture
- Management philosophy
- Authority
- Segregation of duties
- Business ethics
What is the risk assessment process for control processes
Risk assessment processes
- Identify/respond to risk e.g. how the business copes with growth/technology
What is the control activities
Control activities
- Specific controls manual, physical
- Information systems
