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CIMA E1 - MM > Finance Function and Value Creation > Flashcards

Finance Function and Value Creation Flashcards

1
Q

What is the digital age characterized by?

A

Widespread use of computing technology integrated into all aspects of modern life

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2
Q

What are the five basic activities of the finance function known as?

A

The five As

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3
Q

List the five basic activities of the finance function.

A
  • Assembling information
  • Analyzing for insights
  • Advising to influence
  • Applying for impact
  • Acumen
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4
Q

What are the four stages that link the five As?

A
  • Information
  • Insight
  • Influence
  • Impact
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5
Q

Define the term ‘data’ in the context of finance.

A

Unprocessed raw facts

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6
Q

Define the term ‘information’ in the context of finance.

A

Processed and organized data

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7
Q

What is the purpose of analyzing information in the finance function?

A

To find patterns and trends for useful insights

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8
Q

What does the finance function do to influence decision-making?

A

Communicates insights to advise stakeholders

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9
Q

How does the finance function apply itself for impact?

A

By implementing decisions to guide organizational actions

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10
Q

What is the role of acumen in the finance function?

A

To help the organization make better future decisions

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11
Q

What is a business model?

A

An organization’s plan for achieving its objectives

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12
Q

What is Ryanair’s main objective as a business?

A

To achieve sizeable profit

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13
Q

Describe Ryanair’s business model.

A

Cutting costs to charge lower prices for high flight volumes

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14
Q

What is Apple’s business model focused on?

A

High quality, superb design, and leading-edge innovation

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15
Q

What are the four stages in CIMA’s business model approach?

A
  • Define value
  • Create value
  • Deliver value
  • Capture value
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16
Q

What does ‘define value’ entail?

A

Identifying what is being created and for whom

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17
Q

What is the focus of ‘create value’ in a business model?

A

How to deliver value to identified groups

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18
Q

What is involved in ‘deliver value’?

A

Operational processes to provide goods or services to customers

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19
Q

What happens in the ‘capture value’ stage?

A

Sharing surplus value between the organization and stakeholders

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20
Q

What is ‘utility’ in the context of value?

A

Satisfaction customers get from consuming goods or services

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21
Q

What is ‘shared value’?

A

Delivering long-term shareholder value while benefiting society

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22
Q

What are tangible value drivers?

A

Physical reasons or qualities that add value

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23
Q

What are intangible value drivers?

A

Non-physical factors that add value, such as a brand

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24
Q

How does the concept of value change over time?

A
  • Past value
  • Present value
  • Future value
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25
Q

Why are business models important?

A
  • Reporting to shareholders
  • Better long-term performance
  • Responding to industry disruption
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26
Q

True or False: Organizations with business models perform worse over the long term.

A

False

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27
Q

What can lead to industry disruption?

A

New technological innovations altering traditional business models

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28
Q

What is industry disruption?

A

Industry disruption is a change in industries and businesses often resulting from a new technological innovation that alters a traditional business model.

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29
Q

Give an example of industry disruption.

A

Uber disrupting the taxi industry through the use of apps and driver-owned vehicles.

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30
Q

Why must organizations adapt their business models?

A

To ensure their business model continues to be appropriate and drives the company’s success in the long term.

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31
Q

What is the difference between short-term and long-term value?

A

Short-term value focuses on immediate financial gains, while long-term value balances financial and non-financial objectives for sustainable success.

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32
Q

What quote emphasizes the importance of objectives in business?

A

“Failure comes only when we forget our ideals and objectives and principles.” - Jawaharlal Nehru

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33
Q

What defines an incorporated entity?

A

An incorporated entity is a separate legal entity from its owners, where owners are not liable for corporate debts.

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34
Q

What is an unincorporated entity?

A

An unincorporated entity has no legal distinction from its owners, making them liable for the business’s debts.

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35
Q

How does ownership affect objectives in incorporated vs. unincorporated entities?

A

Incorporated entities often have numerous owners leading to more disagreements in objectives compared to unincorporated entities with fewer owners.

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36
Q

What distinguishes quoted from unquoted entities?

A

Quoted entities can sell shares on the stock market, while unquoted entities cannot.

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37
Q

What challenges do quoted entities face?

A

Quoted entities must satisfy many investors and cope with scrutiny from the financial markets and regulators.

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38
Q

What are the three ‘E’s objectives of public sector organizations?

A
  • Effectiveness
  • Efficiency
  • Economy
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39
Q

What is the primary objective of for-profit entities?

A

To make money and maximize shareholder wealth.

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40
Q

What is the main objective of not-for-profit entities?

A

To provide a benefit to a certain group of people, not to make a profit.

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41
Q

What does value for money mean in not-for-profit entities?

A

Achieving economy, efficiency, and effectiveness in performance.

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42
Q

What are some typical financial objectives for businesses?

A
  • Earnings growth
  • Dividend growth
  • Increasing the share price
  • Maintaining gearing levels
  • Liquidity and cash flow management
  • Operating within budgetary limits
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43
Q

What can happen when a CEO focuses only on short-term financial goals?

A

Short-term decisions can undermine long-term business performance.

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44
Q

What is the financial objective of Jubbly Jobs?

A

To achieve financial balance during the year.

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45
Q

What is the non-financial objective of Jubbly Jobs?

A

To provide a high-quality jobs service.

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46
Q

What is the risk associated with management in an organization?

A

Managers may act in their own interests at the expense of maximizing returns for shareholders.

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47
Q

Who are considered internal stakeholders?

A
  • Employees
  • Management/directors
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48
Q

What do external stakeholders typically seek from businesses?

A

Economic growth, healthy competition, and employment.

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49
Q

What are connected stakeholders?

A
  • Shareholders
  • Fund lenders
  • Customers
  • Suppliers
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50
Q

True or False: Not-for-profit organizations do not have any financial objectives.

A

False. They have a secondary objective of maximizing funds raised.

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51
Q

Fill in the blank: The elements of value for money are _______.

A

[Effectiveness, Efficiency, Economy]

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52
Q

What are the key indicators related to shareholder wealth?

A

Earnings growth and dividend growth

Both objectives relate to profit, and typically, more profit results in increased dividends.

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53
Q

How is dividend growth measured?

A

Calculated as: Increase in dividend value / Original dividend x 100%

For example, a dividend increase from 10p to 10.5p represents a 5% growth rate.

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54
Q

What is the significance of profits in relation to dividends?

A

Without profits, there cannot be dividends

Dividend growth is crucial for business valuation based on growth rates.

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55
Q

What is gearing?

A

A measure of an entity’s financial leverage, calculated via the gearing ratio: total debt / total equity

Appropriate gearing levels are necessary for all entities, regardless of profit status.

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56
Q

What are non-financial objectives?

A

Objectives that focus on stakeholder needs rather than profit

Examples include healthcare objectives for not-for-profit entities and ethical labor practices.

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57
Q

What are typical areas for non-financial objectives?

A
  • Human
  • Intellectual
  • Natural
  • Social
  • Relationship

Each area addresses different stakeholder interactions and responsibilities.

58
Q

What is an example of a company balancing financial and non-financial objectives?

A

American Apparel, which avoids cheaper exported labor due to moral concerns

This approach enhances customer loyalty and company reputation.

59
Q

What are value drivers?

A

Features of a service or product that add to its perceived value

They can be tangible (physical changes) or intangible (brand value).

60
Q

What distinguishes tangible value drivers from intangible value drivers?

A

Tangible value drivers involve physical changes to a product, while intangible value drivers involve brand perception or other non-physical attributes

Example: Waterproofing a bag vs. adding a logo.

61
Q

How can organizations measure tangible value drivers?

A

By checking the value of an asset or the cost associated with added value

For example, measuring the cost of waterproofing a product.

62
Q

What is a challenge in measuring intangible value drivers?

A

Lack of physical substance makes measurement difficult

Customer satisfaction is an example of an intangible driver that can be monitored through feedback systems.

63
Q

What are critical success factors (CSFs)?

A

Key areas in which an organization must excel to remain competitive and profitable

CSFs should align with the organization’s strategy.

64
Q

What are key performance indicators (KPIs)?

A

Metrics used to measure the performance against critical success factors

Examples include employee satisfaction and customer satisfaction before and after acquisitions.

65
Q

What is corporate governance?

A

The way organizations are directed, administered, and controlled to ensure stakeholder interests are met

It includes managing the needs of shareholders and other stakeholders.

66
Q

What is the agency problem?

A

A conflict of interest between shareholders (principals) and directors (agents)

Directors may prioritize personal interests over those of shareholders.

67
Q

How does information asymmetry relate to the agency problem?

A

Directors often have more information than shareholders, which can hinder accountability

This allows directors to manipulate information presented to shareholders.

68
Q

What prompted changes in corporate governance regulations?

A

High-profile corporate scandals, such as Enron and WorldCom

These led to the Sarbanes-Oxley Act in 2002 to enforce stricter governance standards.

69
Q

What significant corporate governance report was produced in the UK in 1992?

A

The Cadbury Report

The report was produced after financial collapses like BCCI, the Mirror Group, and Polly Peck.

70
Q

What act was passed in the US in response to corporate scandals including Enron and WorldCom?

A

The Sarbanes-Oxley Act of 2002

This act imposed strict governance standards on US companies.

71
Q

What are the two main approaches to corporate governance?

A
  • Rules-based approach
  • Principles-based approach
72
Q

What is a key characteristic of a rules-based approach to governance?

A

It is legislated and sets out detailed requirements that must be followed.

73
Q

What is the focus of a principles-based approach to governance?

A

It presents general principles around which businesses are expected to operate.

74
Q

What is one argument in favor of a rules-based governance approach?

A

Clarity – Clear and specific rules leave no room for misinterpretation.

75
Q

What is one argument against a rules-based governance approach?

A

Lack of flexibility – A rigid set of rules may not suit all entities.

76
Q

What is the first key principle of corporate governance?

A

Ensuring the basis for an effective corporate governance framework.

77
Q

What does the corporate governance framework promote according to the key principles?

A

Transparent and efficient markets.

78
Q

What is meant by the rights of shareholders in corporate governance?

A

Organisations should respect the rights of shareholders and help them exercise those rights.

79
Q

What is the significance of equitable treatment of shareholders?

A

All shareholders, including minority and foreign shareholders, should be treated fairly.

80
Q

What is the role of stakeholders in corporate governance?

A

Organisations must recognize obligations to all stakeholders, including employees and customers.

81
Q

What is a critical aspect of disclosure and transparency in corporate governance?

A

Timely and accurate disclosure on all material matters regarding the corporation.

82
Q

What responsibilities does the board have in corporate governance?

A
  • Strategic guidance of the company
  • Effective monitoring of management
  • Accountability on behalf of shareholders
83
Q

What should the board ensure regarding its composition and succession?

A

Board appointments should be formal, rigorous, and promote diversity.

84
Q

What is the purpose of the UK Corporate Governance Code?

A

To provide principles of good corporate governance for companies listed on the London Stock Exchange.

85
Q

What does the term ‘comply or explain’ refer to in corporate governance?

A

Companies must disclose how they comply with the UK Corporate Governance Code and explain any deviations.

86
Q

What is one key principle from the 2018 UK Corporate Governance Code related to board leadership?

A

Effective Board – A successful company is led by an effective and entrepreneurial board.

87
Q

What should the board establish according to the principle of risk and control?

A

A framework of prudent and effective controls to manage risk.

88
Q

Fill in the blank: The corporate governance framework should ensure timely and accurate _______ on all material matters.

A

disclosure

89
Q

True or False: The Sarbanes-Oxley Act is a principles-based approach to corporate governance.

A

False

90
Q

What is one of the responsibilities of non-executive directors?

A

To provide constructive challenge and strategic guidance.

91
Q

What should remuneration policies be aligned with according to good governance principles?

A

Company purpose and values.

92
Q

What is one method to ensure accountability in executive remuneration?

A

No director should be involved in deciding their own remuneration outcome.

93
Q

What is a common benefit often provided to directors in terms of remuneration?

A

Health insurance.

94
Q

What should the board do to ensure effective engagement with shareholders?

A

Encourage participation from shareholders.

95
Q

What is the purpose of a share options scheme?

A

To provide incentives for directors based on performance

Share options are often linked to company performance and can motivate directors to increase shareholder value.

96
Q

Why is health insurance considered a standard item for directors?

A

It ensures prompt treatment for directors, benefiting the company by reducing downtime

Healthy directors can return to work sooner, positively impacting company performance.

97
Q

What is a common benefit for directors that may be considered unnecessary?

A

Company jet

Given the nature of the business, a company jet is often seen as excessive and not providing good shareholder returns.

98
Q

What are the three major board committees mentioned?

A
  • Audit Committee
  • Remuneration Committee
  • Nomination Committee

These committees are essential for governance and oversight in a company.

99
Q

What is the main responsibility of the audit committee?

A

Monitoring the integrity of financial statements and reviewing internal controls

The audit committee plays a crucial role in ensuring transparency and accountability in financial reporting.

100
Q

What should remuneration packages for directors achieve?

A

Attract, retain, and motivate high-quality directors

Remuneration should be fair and linked to performance, avoiding excessive pay.

101
Q

What is the role of the nomination committee?

A

To ensure a fair and transparent process for appointing new directors

This helps mitigate risks of nepotism and ensures qualified candidates are selected.

102
Q

List the benefits of non-executive directors (NEDs).

A
  • Independent review of risk and reporting
  • Independence in dealing with auditors
  • Fair pay for directors
  • Fair appointment of new directors

NEDs provide an independent perspective that supports governance.

103
Q

True or False: Ethical conflicts should be disclosed to avoid accusations.

A

True

Transparency is essential in handling potential conflicts of interest.

104
Q

What should a professional accountant do if they encounter a conflict of interest?

A

Disclose and discuss it with the appropriate authority

Addressing conflicts is crucial to maintain integrity and ethical standards.

105
Q

What are the common threats to compliance with ethical principles identified by IFAC?

A
  • Self-interest threats
  • Self-review threats
  • Familiarity threats
  • Intimidation threats
  • Advocacy threats

Each threat can compromise ethical behavior and decision-making.

106
Q

What is the CIMA ethical code designed to ensure?

A

That accountants act according to established ethical standards

The code emphasizes integrity, transparency, and accountability in financial reporting.

107
Q

What is the legal minimum standard of behavior in society?

A

Law

Laws are created to protect society and regulate behavior, setting the baseline for conduct.

108
Q

How does ethical behavior differ from legal compliance?

A

Ethical behavior goes beyond laws and regulations

It involves adhering to moral principles and promoting transparency and integrity.

109
Q

What should be included in the preparation of financial statements?

A

Fair and honest preparation in accordance with relevant professional standards

This ensures that the financial information is clear and reliable for stakeholders.

110
Q

Fill in the blank: Directors’ pay should be structured to link rewards to _______.

A

[corporate and individual performance]

Emphasizing long-term performance is critical for sustainable success.

111
Q

What should a professional accountant do if they become aware of misleading information?

A

Take steps to disassociate from that information

Professional accountants must maintain integrity and transparency in their work.

112
Q

What is the role of ethical conduct programs in organizations?

A

To provide guidance on ethical issues

These programs help employees navigate ethical dilemmas and reinforce organizational values.

113
Q

What is a key area of concern regarding the treatment of workers in business ethics?

A

Not subjecting them to unreasonable working hours, pay, conditions or demands.

This includes ensuring fair labor practices and a safe working environment.

114
Q

What does avoiding bribery in business ethics entail?

A

A manufacturer pays a politician to vote their way, for example.

This relates to maintaining integrity in business dealings and avoiding corrupt practices.

115
Q

What is meant by good professional conduct and honesty in business ethics?

A

Avoiding misleading advertising or sales practices, respecting refunds and so on.

This includes transparency and accountability in business transactions.

116
Q

How should businesses respect people’s personal data?

A

Don’t sell it on for profit if you promise not to, or without consent; respect people’s privacy and keep personal details safe from hackers and cyber criminals.

This is critical in maintaining trust and complying with data protection regulations.

117
Q

What constitutes appropriate and fair advertising in business ethics?

A

Should you market sugary drinks directly to children, for example?

This raises questions about target audiences and the ethical implications of marketing strategies.

118
Q

What is the primary reason why ethics is important in business?

A

Reputation

An organization trades on its reputation, which influences its ability to do business.

119
Q

What are two perspectives from which ethics can be viewed in business?

A
  • Risk
  • Competitive advantage
120
Q

What is a potential consequence of unethical practices in business?

A

Legal action

Unethical practices can lead to legal challenges for misleading customers.

121
Q

How can ethical practices affect employee morale?

A

Generates good feeling among staff

122
Q

What competitive advantage did The Body Shop use in its marketing?

A

Ethical treatment of animals

123
Q

In the context of ethics, what does ‘cognitive dissonance’ refer to?

A

The conflict between personal moral codes and workplace practices

124
Q

What was Tesco’s ethical stance during the chicken price war in 2007?

A

They chose to uphold ethical sourcing over competing on price.

125
Q

What are the three key approaches to ensuring ethical decisions in an organization?

A
  • Personal ethics
  • Organisational culture
  • Ethical code
126
Q

What does personal ethics refer to?

A

The moral principles held by individuals

127
Q

What is meant by ‘organisational culture’?

A

The combination of beliefs, values, and standards of behaviour in an organization

128
Q

What is an ethical code?

A

A set of ethical rules and guidelines communicated to all staff

129
Q

What are CIMA’s five fundamental ethical principles?

A
  • Integrity
  • Objectivity
  • Professional competence and due care
  • Confidentiality
  • Professional behaviour
130
Q

What does the principle of integrity require?

A

Being straightforward, honest, and truthful in all professional relationships

131
Q

What does the principle of objectivity emphasize?

A

Not allowing bias or conflicts of interest to override professional judgment

132
Q

What is required under the principle of professional competence and due care?

A

An ongoing commitment to maintain professional knowledge and skill

133
Q

What must accountants do under the principle of confidentiality?

A

Respect the confidential nature of information acquired

134
Q

What does professional behaviour entail?

A

Compliance with relevant laws and regulations

135
Q

Fill in the blank: An ethical organization tends to go above and beyond legal _______.

A

minimums

136
Q

True or False: Unethical practices can enhance a company’s reputation.

A

False

137
Q

What happened to Paschal in the example regarding his ethical breaches?

A

He risks being fined and potentially expelled from CIMA.

138
Q

What did Paschal fail to uphold in terms of integrity?

A

He lied about knowing how to do a Corporation Tax Return.

139
Q

What was the consequence of Paschal’s actions regarding professional competence?

A

He should not have completed a tax return without the necessary knowledge.

140
Q

What risk did Paschal’s actions pose to Un-EthiCal Ltd?

A

Violation of tax laws and damage to reputation

CIMA E1 - MM (11 decks)

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