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Revised - BS > Finance Content > Flashcards

Finance Content Flashcards

1
Q

Define financial management

A

Financial Management is the planning and monitoring of a business’s financial resources to enable the business to achieve its financial objectives

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2
Q

Define financial resources

A

Financial Resources are those resources in a business that have a monetary or money value

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3
Q

Recall the objectives of financial management

A

The objectives of financial management:
- Profitability
- Growth
- Efficiency
- Liquidity
- Solvency

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4
Q

Define profitability

A

Profitability is the excess of revenue or income over expenses or costs

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5
Q

Define growth

A

Growth is the ability of the business to increase its size in the longer term

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6
Q

Define efficiency

A

Efficiency is the ability of a business to minimise its costs and manage its assets so that maximum profit is achieved with the lowest possible level of assets

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7
Q

Define liquidity

A

Liquidity is the extent to which a business can meet its financial commitments in the short term (less than 12 months)

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8
Q

Define solvency

A

Solvency is the extent to which the business can meet its financial commitments in the longer term (more than 12 months)

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9
Q

Define gearing

A

Gearing is the proportion of debt (external finance) and the proportion of equity (internal finance) that is used to finance the activities of a business. Gearing ratios determine the firm’s solvency

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10
Q

Explain the relationship between solvency and gearing

A

Gearing indicates the dependency of the business on external (debt) financing and hence, the ability of the business to pay off the debt

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11
Q

Explain why conflicts may arise between the short and long term financial objectives

A

Conflicts may arise as both short and long term objectives require resources, making them incompatible to a degree

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12
Q

Recall the internal sources of finance

A

The internal sources of finance are retained profits

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13
Q

Define owner’s equity

A

Owner’s Equity is the funds contributed by owners or partners to establish and build the business, e.g. partners, private investors, selling assets, and private shares

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14
Q

Define retained profits

A

Retained Profits (earnings) is kept in the business as a cheap and accessible source of finance for future activities. Most businesses keep some of their profit in the form of retained earnings

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15
Q

Define overdraft

A

Overdraft is when a bank allows a business or individual to overdraw their account up to an agreed limit and for a specified time, to help overcome a temporary cash shortfall
No regular repayment schedule

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16
Q

Define commercial bills

A

Commercial Bills are primarily short-term loans issued by financial institutions, for larger amounts (usually over $100 000) for a period of generally between 30 and 180 days
Flexible in interest and repayment period

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17
Q

Define factoring

A

Factoring is the selling of accounts receivable for a discounted price (typically 90% of the accounts’ value) to a finance or factoring company

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18
Q

Define mortgage

A

Mortgage is a loan secured by the property of the borrower (business)
Repaid with interest, usually through regular repayments, over an agreed period of time

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19
Q

Define debenture

A

Debenture is a promise issued by a company to repay a loan for a fixed rate of interest and for a fixed period of time

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20
Q

Define unsecured note

A

Unsecured Note is a loan from investors for a set period of time. Unsecured notes are not secured against the business’s assets
Higher interest rate than secured notes

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21
Q

Define leasing

A

Leasing is the payment of money for the use of equipment that is owned by another party
Usually, a long-term lease cannot be cancelled

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22
Q

Outline the benefits of leasing

A
  • Assists a business with their cash flow
  • The costs of establishing leases are low
  • If some assets are leased a business may be in a better position to borrow funds
  • Provides long-term financing without reducing control of ownership
  • Permits 100% financing of assets
  • Repayments of the lease are fixed for a period so cash flow can be monitored easily
  • Lease payments are a tax deduction
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23
Q

Define equity

A

Equity, as an external source of funds‚ refers to the finance raised by a company through inviting new owners

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24
Q

Define new issue

A

A new issue is a security that has been issued and sold for the first time on a public market

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25
Q

Define rights issue

A

A rights issue is an invitation to existing shareholders to purchase additional new shares in the same company. Existing shareholders are given securities - ‘rights’ - which give the right but not obligation to purchase shares at a set future date

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26
Q

Define placement

A

A placement involves creating new shares in return for capital and issuing them to selected investors at a discount to the market price of the company’s shares

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27
Q

Define share purchase plans

A

Share purchase plan is an offer to existing shareholders in a listed company to purchase newly issued shares in that company without brokerage fees

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28
Q

Define private equity

A

Private Equity is the money invested in a (private) company not listed on any stock market, such as the Australian Securities Exchange (ASX)

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29
Q

Unit funds are also known as ___

A

Unit funds are also known as mutual funds

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30
Q

Define unit funds

A

Unit funds are financial institutions that pools a large sum of money from investors and invests it, typically in minerals

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31
Q

Define the Australian Securities Exchange (ASX)

A

Australian Securities Exchange (ASX) is the primary stock exchange group in Australia

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32
Q

Define primary market

A

Primary Market deals with the new issue of debt instruments by the borrower of funds

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33
Q

Define secondary market

A

Secondary Market deals with the purchase and sale of existing securities

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34
Q

Recall the company tax rate in Australia

A

In Australia, the company tax rate stands at 30% unless the company does not exceed the threshold (of $50mil AUD turnover) then it is 25%

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35
Q

Recall the factors on the availability of funds

A

The availability of funds is affected by:
- Risk
- Demand and supply
- Domestic economic conditions

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36
Q

Recall the types of financial information

A

Types of financial information include:
- Balance sheet
- Revenue Statement (Income statement
- Cash flow statement
- Sales and price forecast
- Budget
- Bank statement
- Break-even analysis
- Reports from financial ratio analysis and interpretation

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37
Q

Define record systems

A

Record Systems are the mechanisms employed by a business to ensure that data are recorded and the information provided is accurate, reliable, efficient and accessible

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38
Q

Recall the benefits of keeping financial records

A

Keeping financial records is beneficial as:
- It assists in decision-making as the business has a clear understanding of the finances
- It encourages investment as investors and financial institutions are unlikely to invest in businesses with unclear financial details
- Businesses are required by law to keep records of their financial transactions for at least five years for tax purposes

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39
Q

Define financial risk

A

Financial Risk is the possibility of an inability to cover its financial obligations, such as incurred debts

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40
Q

Recall the types of financial risk

A

Types of Financial Risk:
- Credit risk
- Market risk
- Liquidity risk
- Operational risk

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41
Q

Define credit risk

A

Credit Risk is the risk a business takes on when borrowing money and without sufficient funds to meet repayments, the business incurs penalties and interest

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42
Q

Define market risk

A

Market Risk is the risk arising from the changing conditions in the specific market in which a company competes in

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43
Q

Define liquidity risk

A

Liquidity Risk is the risk depending on the cash flow and whether the business has sufficient funds to meet their financial obligations

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44
Q

Define operational risk

A

Operational Risk is the risk associated with the day-to-day management of a business, such as legal problems, fraud risk, human resource issues, and business model risk. Operational risk largely arises from poor management

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45
Q

Define financial controls

A

Financial Controls are the procedures, policies and means by which a business monitors and controls the allocation and usage of its resources

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46
Q

Define debt finance

A

Debt Finance is the short-term and long-term borrowing from external sources by a business

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47
Q

Define equity finance

A

Equity Finance relates to the internal sources of finance in the business

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48
Q

True or False. Short-term assets and financial objectives should be achieved through the use of short-term finance and vice versa otherwise, it is not compatible

A

True

49
Q

Define cash flow statement

A

Cash Flow Statement is a financial statement that indicates the movement of cash receipts and cash payments resulting from transactions over a period of time

50
Q

Define income statement

A

Income Statement is a summary of the income earned and the expenses incurred over a period of trading. It helps users of information see exactly how much money has come into the business as revenue, how much has gone out as expenditure and how much has been derived as profit

51
Q

Income statements are also known as ___

A

Income statements are also known as revenue statements

52
Q

Define cost of goods sold

A

Cost of Goods Sold (COGS) is the cost of producing the stock that a business has sold to its customers

53
Q

Define gross profit

A

Gross Profit is a value derived from subtracting cost of goods sold from operating income/sales (Operating income/Sales − COGS)

54
Q

Define net profit

A

Net Profit is the difference between the gross profit and expenses (Retained/Net profit = Gross profit − Expenses)

55
Q

True or False. The gross profit is larger than the net profit

A

True.

56
Q

Define expenses

A

Expenses are the costs incurred in the process of acquiring or manufacturing a good or service to sell and the costs (direct and indirect) associated with managing all aspects of sales

57
Q

Define balance sheet

A

Balance Sheet is a summary of a business’s assets and liabilities at a particular point in time, expressed in money terms; represents the net worth of the business

58
Q

Recall which financial information can only be prepared at the end of a financial year

A

A balance sheet can only be prepared at the end of a financial year

59
Q

Define current items

A

Current Items are items that are expected to be resolved within a year

60
Q

Define non-current items

A

Non-current Items are items that are expected to be resolved for more than a year

61
Q

Define accounting equation

A

Accounting Equation is a equation that shows the relationship between assets, liabilities and owners’ equity, which forms the basis of the accounting process

Assets = Liabilities + Owners’ equity

62
Q

Define financial ratios

A

Financial Ratios alters financial information into significant and acceptable forms that are more meaningful and consumable

63
Q

Recall the types of analysis

A

The types of analysis are:
- Vertical
- Horizontal
- Trend analysis

64
Q

Define vertical analysis

A

Vertical Analysis compares figures within one financial year

65
Q

Define horizontal analysis

A

Horizontal Analysis compares figures from different financial years

66
Q

Define trend analysis

A

Trend Analysis compares figures for periods of three to five years

67
Q

Define current ratio

A

Current Ratio is a measure of a business’s ability to pay back its current liabilities with its current assets. The higher the current ratio, the more capable the business is of meeting its short-term obligations

Current asset / current liability

68
Q

Define debt to equity ratio

A

Debt to Equity Ratio shows the extent to which the firm is relying on debt or outside sources to finance the business

total liabilities / equity

69
Q

Define gross profit ratio

A

Gross Profit Ratio provides the percentage of sales revenue that results in gross profit, indicating the effectiveness of planning policies concerning pricing, discounts, valuation of stock etc

gross profit / sales

70
Q

Define net profit ratio

A

Net Profit Ratio shows the amount of sales revenue that results in net profit and illustrates the amount of sales revenue that results in net profit

net profit / sales

71
Q

Define return on equity ratio

A

Return on Equity Ratio shows how effective the funds contributed by the owners have been in generating profit, and hence a return on their investment

net profit / total equity

72
Q

Define expense ratio

A

Expense Ratio compares total expenses with sales and indicates the amount of sales that are allocated to individual expenses, such as selling, administration, cost of goods sold and financial expenses
Indicates the day-to-day efficiency of the business

total expenses / sales

73
Q

Define accounts receivable turnover ratio

A

Accounts Receivable Turnover Ratio is a measure of the effectiveness of a firm’s credit policy and how efficiently it collects its debts (how quickly debits pay their accounts)

sales / accounts receivable

74
Q

Recall how a business can determine the average length of time it takes to convert the balance into cash

A

A business can determine the average length of time it takes to convert the balance into cash in days by dividing 365 by the accounts receivable turnover ratio

75
Q

Recall what comparative ratio analysis can be compared against

A

Comparative ratio analysis can compare against:
- Time periods
- Standards and benchmarks
- Competitors and industry standards

76
Q

Define normalised earnings

A

Normalised Earnings are earnings that have been adjusted to take into account changes in the economic cycle or to remove one-off or unusual items that will affect profitability, providing a more accurate depiction of the true earnings of a company

77
Q

Define capitalising expenses

A

Capitalising Expenses refers to how a cost is treated on a business’s financial statement

78
Q

Define valuing assets

A

Valuing Assets is the process of estimating the value of assets when recording them on a balance sheet and can be difficult for non-current assets

79
Q

Recall the issues with valuing assets

A

Issues with valuing assets:
- Most assets are recorded as the historical cost and wild fluctuations in value, especially for non-current assets, cannot be properly valued
- Intangible assets hold subjective value and cannot be valued properly

80
Q

Define matching principle

A

Matching Principle is a means of ensuring the revenue earned and costs incurred match up. It involves recording expenses incurred by a business on the income statement for the accounting period in which the revenue to which those expenses relate is earned –> Limitation of debt repayment

81
Q

Recall the purpose of notes to the financial statements

A

Notes to the financial statement are similar to footnotes, in that, they provide clarity and necessary information to potential investors

82
Q

Recall what the notes to the financial statements may include

A

Notes to the financial statement may include:
- Accounting methodology
- Calculations of figures
- Procedures

83
Q

Under the Corporations Act 2001 (Cth), when a company becomes a large proprietorship, what must occur?

A

Under the Corporations Act 2001 (Cth), when a company becomes a large proprietorship, an External Audit must be conducted

84
Q

Recall the criteria for the Australian Securities and Investments Commission (ASIC) to defines a company as being ‘large’

A

The Australian Securities and Investments Commission (ASIC) defines a company as being ‘large’ if, at the end of the financial year, the company meets two of the following three criteria:
- A consolidated revenue of $50 million or more
- Consolidated gross assets of $25 million or more
- 100 or more employees

85
Q

Define cash flow

A

Cash Flow is the movement of cash in and out of a business over a period of time

86
Q

Define inflow

A

Inflows consist of sales, cash payments for accounts receivable, interest received, and dividends

87
Q

Define outflow

A

Outflows consist of payments to suppliers, interest on loans, operating expenses, drawings, and the purchase of assets

88
Q

Define cash flow statement

A

Cash Flow Statement is a financial statement that indicates the movement of cash receipts and cash payments resulting from financial transactions over a period of time

89
Q

Define distribution of payments

A

Distribution of Payments occurs when businesses or individuals spread out their payments across each month to ensure large expenses do not occur at the same time and cash shortfalls do not occur

90
Q

Provide an example of discounts for early payments and explain why the business provides such inventices

A

An example of discounts for early payments is tuition centres and the incentives include:
- Acquire funds quicker
- Accelerate the rate of inflows
- Reduce the risk of non-payment or late payment
- Anticipate demand

91
Q

Define working capital

A

Working Capital are the funds available for the short-term financial commitments of a business

92
Q

Define net working capital

A

Net Working Capital is the difference between current assets and current liabilities

93
Q

Define receivables

A

Receivables are sums of money owed to a business from customers to whom it has supplied

94
Q

Define payables

A

Payables are sums of money owed by a business to other businesses from who it has purchased goods and services

95
Q

Differentiate between a fixed and variable cost

A

A fixed cost is a regular cost that occurs regardless of business activity. On the other hand, a variable cost is an erratic cost that is dependent on the level of business activity

96
Q

Define expense minimisation

A

Expense Minimisation is a financial strategy that aims to achieve the most cost-effective way of delivering goods and services to the required level of quality

97
Q

Explain the effect of net appreciation of a currency on international trade

A

A net appreciation makes:
- exports more expensive
- imports cheaper

98
Q

Explain the effect of net depreciation of a currency on international trade

A

A net depreciation makes:
- exports cheaper
- imports more expensive

99
Q

List the methods of international payment ordered in increasing risk to the exporter

A

The methods of international payment ordered in increasing risk to the exporter are:
- Payment in advance
- Letter of credit
- Bill of exchange
- Clean payment

100
Q

Define payment in advance

A

Payment in Advance is a method that allows an exporter to receive payment first then arrange for the goods to be sent

101
Q

Define letter of credit

A

Letter of Credit is a document that a buyer can request from their bank that guarantees the payment of goods will be transferred to the seller

102
Q

Define bill of exchange

A

Bill of Exchange is a document draw up by the exporter demanding a payment from the importer at a specified time period

103
Q

Define clean payment

A

Clean Payment is an open account method that involves the exporter shipping the goods directly to the importer before the payment is received

104
Q

Define hedging

A

Hedging is the process of minimising the risk of currency fluctuations

105
Q

Recall types of natural hedging

A

Natural hedges:
- Established offshore subsidiaries
- Arranging for import payments and receipts denominated in the same foreign currency
- Implementing marketing strategies that aim to reduce price sensitivity of exports
- Insisting on import and export contracts in local currency (AUD)

106
Q

Define derivatives

A

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

107
Q

Define forward exchange contract

A

Forward Exchange Contract is a contract to exchange a currency for another currency at an agreed exchange rate on a future date usually 30, 90, or 180 days

108
Q

Define options contract

A

Options Contract gives the buyer (options holder) the right but not the obligation to buy or sell foreign currency at some time in the future

109
Q

Define swap contract

A

Swap Contract is an agreement to exchange currency in the spot market with an agreement to reverse the transaction in the future

110
Q

Recall the derivatives

A

The derivatives are:
- Forward exchange contract
- Options contract
- Swap contract

111
Q

Recall the aspects of the financial planning cycle in sequence

A

The aspects of the financial planning cycle are:
- (determining) financial needs
- (developing) budgets
- (maintaining) record systems
- (identifying) financial risks
- (establishing) financial controls

112
Q

Provide an allegory of sale and lease back

A

Sale and lease back occurs in football when a team sells a talented youngster to a larger club but has the player loaned back

113
Q

Recall the advantages and disadvantages of debt finance

A

Advantages:
- Funds are readily available
- Fuels growth
- Repayments are tax deductible
- Flexibility
- Does not dilute ownership

Disadvantage:
- Regular repayments
- Increases financial risk

114
Q

Recall the advantages and disadvantages of equity finance

A

Advantages:
- Does not have to be repaid unless the owner leaves the business
- No interest
- Low gearing –> low risk

Disadvantages:
- Lower profits and returns
- Dilution of ownership
- Drawn out process to obtain finance

115
Q

Recall the role of the Australian Securities and Investments Commission (ASIC)

A

The Australian Securities and Investments Commission (ASIC) is an independent statutory commission accountable to the Commonwealth parliament that enforces and administers the Corporations Act 2001 (Cth)

116
Q

Define collateral

A

The security for a loan

117
Q

Compare and contrast leasing and a mortgage

A

Leasing:
- No ownership
- Payments cover insurance and other benefits
- Payments are tax deductible
- No significant outlay
- Lease could be terminated depending on terms

Mortgage:
- Ownership
- Payments are tax deductible
- Financial risk - may forcefully lose the building for a lower value
- Interest on repayments

118
Q

Identify what financial ratios are represented as percentages

A

Ratios:
- Net profit ratio
- Gross profit ratio
- Return on Equity ratio
- Expense ratio

Revised - BS (12 decks)

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