Finance #5

Question 1

working capital management

Answer 1

determining the best mix of current assets and current liabilities needed to achieve business objectives

Question 2

control of current assets

Answer 2

cash, accounts receivable, inventories

Question 3

cash

Answer 3

ensures businesses can pay their debts, repay loans and pay accounts in the short-term because of the easy access

Question 4

accounts receivable

Answer 4

businesses must monitor them and ensure that their timing allows a business to maintain adequate cash resources, the better the debtors pay the better the firms cash position

• ## credit policies are used to ensure payments are done by a specific time

Question 5

credit policies

Answer 5

ensures payments are done by a specific time

tight policies may push business elsewhere and to loose of a policy will hurt the cash flow of the business and the ability to get liquid cash to pay off short-term debt.

Question 6

inventories

Answer 6

make up a significant amount of current assets, it is a cost to the business if it remains unsold, and the holding of too much stock means unnecessary expenses. there needs to be a high rate of inventory turnover for the business means they are more sufficient at generating cash

Question 7

control of current liabilities

Answer 7

accounts payable, loans, overdrafts

Question 8

accounts payable

Answer 8

money owed by the business to other businesses from whom it has purchased goods and services,
- taking advantage of discounts
- consignment financing, goods are supplied for a particular period of time and payment is generally not required until goods are sold

Question 9

working capital strategies

Answer 9

leasing, sale and lease back

Question 10

leasing

Answer 10

payment of money for the use of equipment that spreads cash outflows over several years, allows cheaper prices compared to outright expenses, is considered operating expenses and therefore tax deductible, allows flexibility, reduces the risk of unpredictable costs, helps cash flow forecasting and budgeting as the payments are fixed for a period of time.

Question 11

sale and lease back

Answer 11

the process of selling an owned asset to a lessor and then leasing the asset back through fixed payments for a specified period of time

• advantage is that it helps improve liquidity since it enables the business to receive a large cash injection from the assets sale,
  business still benefits from the use of the asset

Question 12

foreign exchange rate

Answer 12

ratio of one currency to another

Question 13

effects of currency fluctuations

Answer 13

currency appreciations raises value of the australian dollar as a foreign currency, making exports more expensive on international markets but import prices cheaper

currency depreciation makes exports cheaper and import prices more expensive
this affects profitability depending on the business situation

Question 14

interest rates

Answer 14

borrowing money changes with the interest rates of the country, with exchange rate movements the interest rates differ to the country that is business is being conducted in, therefore affecting profitability

Question 15

methods of international payment

Answer 15

payment in advance, letter of credit, clean payment, bills of exchange,

Question 16

payment in advance

Answer 16

exporter receives payment and then arranges for the goods to be sent, leaving the exporter with virtually no risk and is used when there is a high trust or if the buyer’s creditworthiness is uncertain

Question 17

letter of credit

Answer 17

a document that a buyer can request from their bank that guarantees the payment of goods will be transferred to the seller, issued by the importers bank to the exporter promising pay once a certain amount of conditions have been met,

only payment in advance offers less risk and is therefore highly popular with exporters, cannot be withdrawn, and if buyer cannot make purchase, the bank makes the purchase

Question 18

clean payment

Answer 18

exporter ships the goods directly to the importer before payment is received, importer doesnt send payment until after they receive the goods, invoice requesting payment at a certain time called the credit term, this is one of the riskiest for exporters

Question 19

bills of exchange

Answer 19

document (bill) against payment, document (bill) against acceptance

bill of exchange is a document drawn up by the exporter demanding payment from the importer at a specified time

Question 20

document (bill) against payment

Answer 20

importer collects the goods only after paying for them,

Question 21

document (bill) against acceptance

Answer 21

the importer may collect the goods before paying for them, exposes exporter to greater risk than documents against payment, there is a risk the importer may delay payment or not pay at all

Question 22

hedging

Answer 22

the process of minimising the risk of currency fluctuations

Question 23

spot exchange rate

Answer 23

value of one currency in another currency on a particular day

Question 24

natural hedging

Answer 24

eliminating or minimising the risk of foreign exchange exposure provided by the business itself

Question 25

natural hedging

Answer 25

eliminating or minimising the risk of foreign exchange exposure provided by the business itself

Question 26

derivatives

Answer 26

simple, financial instruments that may be used to lessen the exporting risks associated with currency fluctuations

Question 27

forward exchange contract

Answer 27

contract to exchange one currency for another at an agreed exchange rate on a future date, bank guarantees the exporter a fixed rate, dodging the risk of more expensive or the benefits of cheaper costs

Question 28

options contract

Answer 28

gives the buyer the right, not the obligation, to buy or sell foreign currency at some time in the future, protecting them from unfavourable exchange rate fluctuations

Question 29

leverage

Answer 29

total liabilities / total liabilities + total equity

D/D+E = Debt/ Debt+Equity

the proportion of debt from the total sources of finance, discovers gearing used to measure solvency/paying off debts in the long term