Chapter 6 - The Finance Function and Financial Information Flashcards
What are the tasks of the finance function? 4
The finance function involves 1. Recording Financial Transactions (legal requirement), 2. Management Accounting, 3. Financial Reporting, and 4. Treasury Management.
What does ‘Recording financial transactions’ involve?
Ensuring that the business has an accurate record of its revenue, expenses, assets, liabilities, and capital.
What is the purpose of Management Accounting? Examples of tasks
Providing information to assist managers and other internal users in decision-making, performance measurement, planning, and control activities. Management accounting: planning, budgets, forecasts, costings, management accounts, variance analysis, project appraisal.
What does Financial Reporting provide? Examples of tasks
Providing information about a business to external users. Financial accounting: preparation of financial statements, preparation of tax returns, reports to financial markets, working with external auditors
What does Treasury Management focus on? Examples of tasks
Managing business funds, including cash/working capital, long-term investments, debt, and equity finance. Treasury management: cash flow forecasting, cash management, foreign currency management, investment into liquid and long term assets, financial risk management, raising of finance through lenders or shareholders.
What is business partnering in the context of the finance function?
Business partnering involves the finance function working alongside other business functions to provide advice and support, helping maximize performance.
What are the roles of the finance function in business partnering?
Members of the finance function act as advisors, providing support in strategy formulation, decision-making, analysis, and facilitating productive discussions.
What are some key activities involved in business partnering?
Key activities include strategy formulation, implementation and communication, commercial decision-making, business analysis, and acting as a trusted advisor or facilitator.
Why do businesses and managers need financial information?
Businesses and managers need financial information for planning, controlling, recording transactions, performance measurement, and decision-making.
What are the purposes of planning information?
Planning information helps people involved in the planning process.Help us to meetobjectives, implementation, resources needed, timescales
What is the role of operational information?
Operational information helps people carry out their day-to-day activities, such as determining how many operatives are needed on one shift.
What does tactical information help with?
Tactical information helps people deal with short-term issues and opportunities, such as monthly variance reports for the factory. e.g. monthly.quarterly
What is the focus of strategic information?
Strategic information supports major long-term decision-making, for example, determining if resources can be made available to expand production.
What information do present and potential investors (shareholders) need?
They need information to make equity investment decisions, such as assessing the risk and return of investment and the ability of the company to pay dividends.
What do lenders and other payables assess using financial information?
They assess whether loans will be repaid and whether related interest will be paid when due.
What aspects do employees assess about their employer using financial information?
Employees assess their employer’s stability and profitability, as well as their ability to provide remuneration, employment opportunities, and retirement or other benefits.
Why do customers need financial information?
Customers assess whether the business will continue to exist, especially if they have long-term involvement or dependency on the business, such as being supply chain partners.
What do suppliers or business partners assess using financial information?
Suppliers or business partners assess the likelihood of being paid when due.
How do governments and agencies use financial information?
Governments and agencies use it to assess resource allocation, regulate activities, assess taxation income, provide national statistics, and direct policies on health, safety, and equal opportunities.
Why is financial information important to public and community representatives?
They use it to assess trends and developments in the business’s prosperity and its contributions to the local economy, such as employment and using local suppliers.
What are the fundamental qualitative characteristics of financial statements?
Fundamental characteristics include relevance and faithful representation.
What are the enhancing qualitative characteristics of financial statements?
Enhancing characteristics include understandability, comparability, verifiability, and timeliness.
What does relevance mean in the context of financial statements?
Relevance means the information has predictive or confirmatory value and is affected by the nature and materiality of items (size of error).
What is faithful representation in financial statements?
Faithful representation means the information is complete, neutral, and free from error.
What does understandability mean for financial statements?
Understandability means the information is clear and concise.
What is comparability in financial statements?
Comparability ensures measurement and display are consistent over time and across businesses.
How is verifiability achieved in financial statements?
Verifiability is achieved when knowledgeable and independent observers can reach consensus about the information.
Why is timeliness important in financial statements?
Timeliness ensures that information is available to decision-makers in time to influence their decisions.
What are some limitations of financial information in meeting users’ needs?
Limitations include conventional representation, being backward-looking, and omission of non-financial information.
What does ‘conventional representation’ mean as a limitation of financial information?
‘Conventional representation’ means financial information is often standardized and highly aggregated, which can limit its usefulness.
Why is financial information considered ‘backward-looking’?
Financial information is considered backward-looking because financial statements cover a period that has already ended.
What is omitted from financial information that limits its usefulness?
Non-financial information, such as narrative descriptions of major operations, discussions of business risks, and narrative analysis of performance and prospects, is omitted.
What are the key attributes of effective information processing (CATIVA)?
The key attributes are Completeness, Accuracy, Timeliness, Inalterability, Verifiability, and Accessibility.
* Completeness – Everything that needs to be processed should be processed - looking at date and time stamps
* Accuracy – Data remains true to its sources and contains no errors
* Timeliness – Processing should occur when data is available and provide real time access
* Inalterability – The process should be open to neither unauthorised intervention whilst in action nor alteration once completed - audit trails, logs, checksums and blockchain - test integrity of transcations.
* Verifiability – The sources of the data and the trail through processing
* Accessibility – The effectiveness of the processing should be open to scrutiny e.g. internal audit can check for controls, reconcliations, analysis of nominal ledger accounts
What does information processing involve?
Information processing involves converting collected data into information for broader communication within the business.
What is a system in the context of information management?
A system is a set of interacting components that work together to achieve a purpose.
What is a business system?
A business system is a collection of people, machines, and methods organized to accomplish a set of specific functions.
What are information systems (IS)?
Information systems include all systems and procedures involved in the collection, storage, production, and distribution of information.
What is the role of information technology (IT) in information systems?
The equipment used to capture, store, transmit or present information. IT provides a large part of the information systems infrastructure.
What is information management?
Information management is a business’s approach to managing its information, including planning IS/IT developments, the organizational environment of IS, control, and technology.
What are the three main components of a system? Example
A system has three component parts: inputs, processes and outputs. Other key characteristics of a system are the environment and the system boundary. Example Input a purchase invoice, processing match up the PO with the invoice and output 1. payment is made 2. entry + visibility in the management accounts.
What is a system boundary?
A system boundary separates the information system from its environment, defining what belongs to the system and what is external.
What is a transaction processing system (TPS)?
A TPS performs, records, and processes routine transactions, supporting most business functions.EPOS (electronic point of sale system) e.g. cash register.
What is a management information system (MIS)?
An MIS converts data from internal sources into information that enables managers to make timely and effective decisions.
What are some risks to data in an organization? 5
Risks include human error, entering incorrect transactions, technical errors, natural disasters, and deliberate actions such as fraud, malicious damage, or commercial espionage.
What are the aspects of security for information systems? 6
The aspects of security are prevention, detection, deterrence, recovery, correction, and avoidance.
What does ACIANA stand for in the context of a secure information system? 6
ACIANA stands for Availability, Confidentiality, Integrity, Authenticity, Non-repudiation, and Authorisation.Relates to the qualities of a secure information system.
What measures can be taken for physical access control in information security?
Measures include manning premises with receptionists and security guards, installing door locks, installing intruder alarms, and securing computer devices.
How can we ensure integrity controls in the system 5
Integrity controls in the system
Data verification involves ensuring data entered matches source documents
Data validation involves ensuring that data entered is not incomplete or unreasonable.
Back up and archive strategy
Personnel selection
Segregation of duties
What is data verification in the context of information systems?
Data verification ensures that the data entered matches source documents.
What is data validation in the context of information systems?
Data validation ensures that data entered is not incomplete or unreasonable.
What are some examples of data validation checks? 5
Examples of data validation checks include Check Digits, Control Totals, Hash Totals, Range Checks, and Limit Checks.
What is the purpose of a backup and archive strategy in information systems?
A backup and archive strategy helps prevent data loss by ensuring data is securely stored and can be retrieved when necessary.
Why is personnel selection important in information security?
Personnel selection ensures that only trustworthy and qualified individuals have access to sensitive information systems.
What is the significance of segregation of duties in information systems?
Segregation of duties prevents unauthorized actions and reduces the risk of errors or fraud by dividing responsibilities among different individuals.
What are qualitative performance measures?
Qualitative measures are subjective and judgmental, not expressed in numerical terms.
What are quantitative performance measures?
Quantitative measures are objective, based on reliable data, expressed in numerical terms, and can be financial or non-financial.
What are the three main points of reference for measuring performance in a business?
The three main points are profitability, activity, and productivity.
What is included in profitability as a performance measure?
Profitability includes cost and revenue as its components.
What are examples of activity measures in a business?
Examples include the number of orders received from customers (effectiveness of marketing) and the number of machine breakdowns attended to by the repairs and maintenance department.
How is productivity defined in performance measurement?
Productivity is the quantity of service or product produced in relation to the resources put in, such as items processed per hour or per employee.
How can profitability be measured?
Profitability can be measured in absolute terms (profit amount) and relative terms (profit margin).
What are the types of resources a business uses to achieve its objectives? 5
Resources include physical assets (buildings, machinery), competences, intangible assets (customer goodwill, brands), business structure, and knowledge.
What is the difference between economy, effectiveness, and efficiency in resource use?
Economy focuses on cost reduction, effectiveness measures achievement, and efficiency involves achieving effectiveness at minimum cost without losing operational effectiveness..
What are critical success factors (CSFs)?
CSFs are factors critical to a business’s success, varying by area (e.g., price, quality, delivery) and dependent on both resources and the competitive environment.
What are key performance indicators (KPIs)?
KPIs are measurable indicators of performance linked to achieving CSFs, enabling businesses to outperform rivals.
How can businesses set effective KPIs?
Businesses can set effective KPIs using benchmarking to determine acceptable levels of performance.
What are some limitations of financial measures related to information? 2
Base information may be out of date, and historical cost data may not be appropriate.
What are comparison problems in financial measures due to price changes?
Price changes make comparisons difficult, and changing accounting policies can affect reported results.
What are comparison problems in financial measures related to industry norms?
Norms based on industry averages may not be useful, and differing sizes of firms can impact comparisons.
What is the balanced scorecard?
The balanced scorecard is an integrated set of performance measures linked to the achievement of strategic objectives.
Who developed the balanced scorecard?
The balanced scorecard was developed by Robert Kaplan and David Norton.
What are the four perspectives of the balanced scorecard?
The four perspectives are customer, internal business processes, innovation and learning, and financial.
What are examples of measures under the customer perspective of the balanced scorecard?
Examples include satisfaction ratings, retention rates, and return rates. The key question is ‘How do customers see us?’
What are examples of measures under the internal business processes perspective?
Examples include product quality and failure rates. The key question is ‘What must we excel at?’
What are examples of measures under the innovation and learning perspective?
Examples include employee retention rates and time to market for new products. The key question is ‘How can we continue to improve and create value?’
What are examples of measures under the financial perspective?
Examples include gross margin, net margin, return on capital employed, gearing, and interest cover. The key question is ‘How do we look to our shareholders?’
What is the purpose of financial control processes?
Financial control processes aim to safeguard an organization’s financial assets and reduce the risk of mismanagement.
What is financial control?
Financial control is a form of internal control.
What is internal control?
Internal control is a process, effected by an entity’s board of directors, management, and personnel, designed to provide reasonable assurance regarding operations, reporting, and compliance.
What are the characteristics of internal controls?
Internal controls are geared towards achieving organizational objectives, involve tasks and activities, are effected by people, provide reasonable (but not absolute) assurance, and are adaptable to an organization’s structure.
What are the categories of activities involved in internal controls? PARIS V
Internal control activities include approval, authorization, verification, reconciliation, business performance reviews, and segregation of duties.PARIS V
What are the five components of effective internal control according to COSO? CRIME
The five components are control environment, risk management, control activities, information and communication, and monitoring activities.
What is the FRC definition of risk management and internal control systems?
The FRC defines risk management and internal control systems as a system encompassing the policies, culture, organization, behaviors, processes, systems, and other aspects of a company.
What are the key objectives of risk management and internal control as defined by the FRC? 4
Objectives include
assessing and responding to risks, safeguarding assets,
reducing poor decision-making and excessive risk-taking,
ensuring quality of reporting,
ensuring compliance with laws and internal policies.
