Finance #4 Flashcards
cost centres
particular areas, departments or sections of a business to which costs can be directly attributed
- monitoring expenses through this allows for greater controls of total costs
expense minimisation
minimising expenses,
- profits are weakened if business expenses are overly high as they consume valuable resources
- savings can be substantial if people take a critical look at costs and eliminate waste and unnecessary spending
revenue controls
in determining an acceptable level of revenue with a view to maximising profits, a business must have clear ideas and policies
accounts receivable turnover ratio
sales/accounts receivable measures the effectiveness of a firm’s credit policy and therefore how efficiently it collects debt, high turnover ratios indicate the business has efficient debt collection, measured in days
return on equity ratio
net profit/total equity, shows how efective the funds contributed by the owners have been in generating profit and thus the return on investment, the higher the percentage the better the return for the owner although consider other comparative analysis
comparative ratio analysis
comparisons as a means of measuring the success/meaning of the financial ratios
types of comparative ratio analysis
time comparison, industry average comparison and benchmark against similar businesses
normalised earnings
earnings adjusted to take into account changes in the economic cycle or to remove on off or unusual items that will affect profitability.
- given to make an accurate depiction of the companies true earnings
capitalised expenses
accounting method where a business records an expense as an asset on the balance sheet rather than an expense on the income statement.
- this doesn’t accurately represent the true financial condition of the business - understates the expenses and overstates the profits
valuing assets
process of estimating the value of assets when recording them on a balance sheet.
- hard to measure
valuing assets - historical costs
assets are listed with the value when they were purchased.
- cost can be verified
- value may distort balance sheet due to inaccuracy
- depreciating assets demonstrate the negative effect of this feature
valuing assets - difficult to value
goodwill, trademarks etc, are harder to place a value on, therefore some are overvalued to present the business in the best way possible
timing issues
the time in which the financial report was recorded
timing issues - matching principle
expenses incurred by a business must be recorded on the income state for the accounting period. when revenue is recorded, expenses related to revenue should be recorded at the same time.
financial report limitations - debt repayments
financial reports can be limited because they do not have the capacity to disclose specific information about debt repayments, including
- how long the business has had or has been recovering from debt
- capacity of business or debtors to repay the amount owed
- adequacy of provisions and methods the business has for the recovery of debt
- provisions in place for doubtful debts
notes to the financial statement
reports the additional information and details of the main reporting documents, containing information that helps stakeholders analyse and contextualise them.
they show the way the procedures were calculated and the procedures to develop them.
- as its at the end, this information can be hidden from stakeholders
audit
an independent check of the accuracy of financial records and accounting procedures
internal audit
conducted internally by employees
management audits
conducted to review the firms strategic plan and to determine if changes should be made
external audits
requirement of the Corporations Act 2001 (Cwlth) where financial reports are investigated by independent and specialised audit accountants to guarantee their authenticity.
common ethical issue with financial reports
overestimating expenditures and understating revenues to all for unexpected and uncertain events.
- proving inaccurate of true financial performance
record keeping
recording all transactions using source documents
- ATO watches businesses not recording cash transactions for tax decreases
reporting practices
shareholders in a private company are legally entitled to receive financial reports annually, preventing any understating of profit.
cash flow strategies
penalties for late payments, discounts for early payment, factoring
distribution of payments
distributing the payments of things spread out throughout the period so that large expenses do not occur at the same time, and therefore cash shortfalls. this makes it so there are equal cash outflows each month
discounts for early payment
offering debtors a discount for early payments, most effective for those debtors who owe the largest amounts over the financial year.
debtors are able to save money and businesses improve their cash flow status.
factoring
selling of accounts receivable for a discounted price to improve debt collection
working capital (liquidity)
funds available for short-term financial commitments of a business
net working capital
the difference between current assets and current liabilities, representing the funds needed for day-to-day operations to produce profits and provide cash for short-term liquidity
current assets - current liabilities
