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
2
Q
What are the five basic activities of the finance function known as?
A
The five As
3
Q
List the five basic activities of the finance function.
A
- Assembling information
- Analyzing for insights
- Advising to influence
- Applying for impact
- Acumen
4
Q
What are the four stages that link the five As?
A
- Information
- Insight
- Influence
- Impact
5
Q
Define the term ‘data’ in the context of finance.
A
Unprocessed raw facts
6
Q
Define the term ‘information’ in the context of finance.
A
Processed and organized data
7
Q
What is the purpose of analyzing information in the finance function?
A
To find patterns and trends for useful insights
8
Q
What does the finance function do to influence decision-making?
A
Communicates insights to advise stakeholders
9
Q
How does the finance function apply itself for impact?
A
By implementing decisions to guide organizational actions
10
Q
What is the role of acumen in the finance function?
A
To help the organization make better future decisions
11
Q
What is a business model?
A
An organization’s plan for achieving its objectives
12
Q
What is Ryanair’s main objective as a business?
A
To achieve sizeable profit
13
Q
Describe Ryanair’s business model.
A
Cutting costs to charge lower prices for high flight volumes
14
Q
What is Apple’s business model focused on?
A
High quality, superb design, and leading-edge innovation
15
Q
What are the four stages in CIMA’s business model approach?
A
- Define value
- Create value
- Deliver value
- Capture value
16
Q
What does ‘define value’ entail?
A
Identifying what is being created and for whom
17
Q
What is the focus of ‘create value’ in a business model?
A
How to deliver value to identified groups
18
Q
What is involved in ‘deliver value’?
A
Operational processes to provide goods or services to customers
19
Q
What happens in the ‘capture value’ stage?
A
Sharing surplus value between the organization and stakeholders
20
Q
What is ‘utility’ in the context of value?
A
Satisfaction customers get from consuming goods or services
21
Q
What is ‘shared value’?
A
Delivering long-term shareholder value while benefiting society
22
Q
What are tangible value drivers?
A
Physical reasons or qualities that add value
23
Q
What are intangible value drivers?
A
Non-physical factors that add value, such as a brand
24
Q
How does the concept of value change over time?
A
- Past value
- Present value
- Future value
25
Why are business models important?
* Reporting to shareholders
* Better long-term performance
* Responding to industry disruption
26
True or False: Organizations with business models perform worse over the long term.
False
27
What can lead to industry disruption?
New technological innovations altering traditional business models
28
What is industry disruption?
Industry disruption is a change in industries and businesses often resulting from a new technological innovation that alters a traditional business model.
29
Give an example of industry disruption.
Uber disrupting the taxi industry through the use of apps and driver-owned vehicles.
30
Why must organizations adapt their business models?
To ensure their business model continues to be appropriate and drives the company's success in the long term.
31
What is the difference between short-term and long-term value?
Short-term value focuses on immediate financial gains, while long-term value balances financial and non-financial objectives for sustainable success.
32
What quote emphasizes the importance of objectives in business?
“Failure comes only when we forget our ideals and objectives and principles.” - Jawaharlal Nehru
33
What defines an incorporated entity?
An incorporated entity is a separate legal entity from its owners, where owners are not liable for corporate debts.
34
What is an unincorporated entity?
An unincorporated entity has no legal distinction from its owners, making them liable for the business's debts.
35
How does ownership affect objectives in incorporated vs. unincorporated entities?
Incorporated entities often have numerous owners leading to more disagreements in objectives compared to unincorporated entities with fewer owners.
36
What distinguishes quoted from unquoted entities?
Quoted entities can sell shares on the stock market, while unquoted entities cannot.
37
What challenges do quoted entities face?
Quoted entities must satisfy many investors and cope with scrutiny from the financial markets and regulators.
38
What are the three 'E's objectives of public sector organizations?
* Effectiveness
* Efficiency
* Economy
39
What is the primary objective of for-profit entities?
To make money and maximize shareholder wealth.
40
What is the main objective of not-for-profit entities?
To provide a benefit to a certain group of people, not to make a profit.
41
What does value for money mean in not-for-profit entities?
Achieving economy, efficiency, and effectiveness in performance.
42
What are some typical financial objectives for businesses?
* Earnings growth
* Dividend growth
* Increasing the share price
* Maintaining gearing levels
* Liquidity and cash flow management
* Operating within budgetary limits
43
What can happen when a CEO focuses only on short-term financial goals?
Short-term decisions can undermine long-term business performance.
44
What is the financial objective of Jubbly Jobs?
To achieve financial balance during the year.
45
What is the non-financial objective of Jubbly Jobs?
To provide a high-quality jobs service.
46
What is the risk associated with management in an organization?
Managers may act in their own interests at the expense of maximizing returns for shareholders.
47
Who are considered internal stakeholders?
* Employees
* Management/directors
48
What do external stakeholders typically seek from businesses?
Economic growth, healthy competition, and employment.
49
What are connected stakeholders?
* Shareholders
* Fund lenders
* Customers
* Suppliers
50
True or False: Not-for-profit organizations do not have any financial objectives.
False. They have a secondary objective of maximizing funds raised.
51
Fill in the blank: The elements of value for money are _______.
[Effectiveness, Efficiency, Economy]
52
What are the key indicators related to shareholder wealth?
Earnings growth and dividend growth
## Footnote
Both objectives relate to profit, and typically, more profit results in increased dividends.
53
How is dividend growth measured?
Calculated as: Increase in dividend value / Original dividend x 100%
## Footnote
For example, a dividend increase from 10p to 10.5p represents a 5% growth rate.
54
What is the significance of profits in relation to dividends?
Without profits, there cannot be dividends
## Footnote
Dividend growth is crucial for business valuation based on growth rates.
55
What is gearing?
A measure of an entity's financial leverage, calculated via the gearing ratio: total debt / total equity
## Footnote
Appropriate gearing levels are necessary for all entities, regardless of profit status.
56
What are non-financial objectives?
Objectives that focus on stakeholder needs rather than profit
## Footnote
Examples include healthcare objectives for not-for-profit entities and ethical labor practices.
57
What are typical areas for non-financial objectives?
* Human
* Intellectual
* Natural
* Social
* Relationship
## Footnote
Each area addresses different stakeholder interactions and responsibilities.
58
What is an example of a company balancing financial and non-financial objectives?
American Apparel, which avoids cheaper exported labor due to moral concerns
## Footnote
This approach enhances customer loyalty and company reputation.
59
What are value drivers?
Features of a service or product that add to its perceived value
## Footnote
They can be tangible (physical changes) or intangible (brand value).
60
What distinguishes tangible value drivers from intangible value drivers?
Tangible value drivers involve physical changes to a product, while intangible value drivers involve brand perception or other non-physical attributes
## Footnote
Example: Waterproofing a bag vs. adding a logo.
61
How can organizations measure tangible value drivers?
By checking the value of an asset or the cost associated with added value
## Footnote
For example, measuring the cost of waterproofing a product.
62
What is a challenge in measuring intangible value drivers?
Lack of physical substance makes measurement difficult
## Footnote
Customer satisfaction is an example of an intangible driver that can be monitored through feedback systems.
63
What are critical success factors (CSFs)?
Key areas in which an organization must excel to remain competitive and profitable
## Footnote
CSFs should align with the organization’s strategy.
64
What are key performance indicators (KPIs)?
Metrics used to measure the performance against critical success factors
## Footnote
Examples include employee satisfaction and customer satisfaction before and after acquisitions.
65
What is corporate governance?
The way organizations are directed, administered, and controlled to ensure stakeholder interests are met
## Footnote
It includes managing the needs of shareholders and other stakeholders.
66
What is the agency problem?
A conflict of interest between shareholders (principals) and directors (agents)
## Footnote
Directors may prioritize personal interests over those of shareholders.
67
How does information asymmetry relate to the agency problem?
Directors often have more information than shareholders, which can hinder accountability
## Footnote
This allows directors to manipulate information presented to shareholders.
68
What prompted changes in corporate governance regulations?
High-profile corporate scandals, such as Enron and WorldCom
## Footnote
These led to the Sarbanes-Oxley Act in 2002 to enforce stricter governance standards.
69
What significant corporate governance report was produced in the UK in 1992?
The Cadbury Report
## Footnote
The report was produced after financial collapses like BCCI, the Mirror Group, and Polly Peck.
70
What act was passed in the US in response to corporate scandals including Enron and WorldCom?
The Sarbanes-Oxley Act of 2002
## Footnote
This act imposed strict governance standards on US companies.
71
What are the two main approaches to corporate governance?
* Rules-based approach
* Principles-based approach
72
What is a key characteristic of a rules-based approach to governance?
It is legislated and sets out detailed requirements that must be followed.
73
What is the focus of a principles-based approach to governance?
It presents general principles around which businesses are expected to operate.
74
What is one argument in favor of a rules-based governance approach?
Clarity – Clear and specific rules leave no room for misinterpretation.
75
What is one argument against a rules-based governance approach?
Lack of flexibility – A rigid set of rules may not suit all entities.
76
What is the first key principle of corporate governance?
Ensuring the basis for an effective corporate governance framework.
77
What does the corporate governance framework promote according to the key principles?
Transparent and efficient markets.
78
What is meant by the rights of shareholders in corporate governance?
Organisations should respect the rights of shareholders and help them exercise those rights.
79
What is the significance of equitable treatment of shareholders?
All shareholders, including minority and foreign shareholders, should be treated fairly.
80
What is the role of stakeholders in corporate governance?
Organisations must recognize obligations to all stakeholders, including employees and customers.
81
What is a critical aspect of disclosure and transparency in corporate governance?
Timely and accurate disclosure on all material matters regarding the corporation.
82
What responsibilities does the board have in corporate governance?
* Strategic guidance of the company
* Effective monitoring of management
* Accountability on behalf of shareholders
83
What should the board ensure regarding its composition and succession?
Board appointments should be formal, rigorous, and promote diversity.
84
What is the purpose of the UK Corporate Governance Code?
To provide principles of good corporate governance for companies listed on the London Stock Exchange.
85
What does the term 'comply or explain' refer to in corporate governance?
Companies must disclose how they comply with the UK Corporate Governance Code and explain any deviations.
86
What is one key principle from the 2018 UK Corporate Governance Code related to board leadership?
Effective Board – A successful company is led by an effective and entrepreneurial board.
87
What should the board establish according to the principle of risk and control?
A framework of prudent and effective controls to manage risk.
88
Fill in the blank: The corporate governance framework should ensure timely and accurate _______ on all material matters.
disclosure
89
True or False: The Sarbanes-Oxley Act is a principles-based approach to corporate governance.
False
90
What is one of the responsibilities of non-executive directors?
To provide constructive challenge and strategic guidance.
91
What should remuneration policies be aligned with according to good governance principles?
Company purpose and values.
92
What is one method to ensure accountability in executive remuneration?
No director should be involved in deciding their own remuneration outcome.
93
What is a common benefit often provided to directors in terms of remuneration?
Health insurance.
94
What should the board do to ensure effective engagement with shareholders?
Encourage participation from shareholders.
95
What is the purpose of a share options scheme?
To provide incentives for directors based on performance
## Footnote
Share options are often linked to company performance and can motivate directors to increase shareholder value.
96
Why is health insurance considered a standard item for directors?
It ensures prompt treatment for directors, benefiting the company by reducing downtime
## Footnote
Healthy directors can return to work sooner, positively impacting company performance.
97
What is a common benefit for directors that may be considered unnecessary?
Company jet
## Footnote
Given the nature of the business, a company jet is often seen as excessive and not providing good shareholder returns.
98
What are the three major board committees mentioned?
* Audit Committee
* Remuneration Committee
* Nomination Committee
## Footnote
These committees are essential for governance and oversight in a company.
99
What is the main responsibility of the audit committee?
Monitoring the integrity of financial statements and reviewing internal controls
## Footnote
The audit committee plays a crucial role in ensuring transparency and accountability in financial reporting.
100
What should remuneration packages for directors achieve?
Attract, retain, and motivate high-quality directors
## Footnote
Remuneration should be fair and linked to performance, avoiding excessive pay.
101
What is the role of the nomination committee?
To ensure a fair and transparent process for appointing new directors
## Footnote
This helps mitigate risks of nepotism and ensures qualified candidates are selected.
102
List the benefits of non-executive directors (NEDs).
* Independent review of risk and reporting
* Independence in dealing with auditors
* Fair pay for directors
* Fair appointment of new directors
## Footnote
NEDs provide an independent perspective that supports governance.
103
True or False: Ethical conflicts should be disclosed to avoid accusations.
True
## Footnote
Transparency is essential in handling potential conflicts of interest.
104
What should a professional accountant do if they encounter a conflict of interest?
Disclose and discuss it with the appropriate authority
## Footnote
Addressing conflicts is crucial to maintain integrity and ethical standards.
105
What are the common threats to compliance with ethical principles identified by IFAC?
* Self-interest threats
* Self-review threats
* Familiarity threats
* Intimidation threats
* Advocacy threats
## Footnote
Each threat can compromise ethical behavior and decision-making.
106
What is the CIMA ethical code designed to ensure?
That accountants act according to established ethical standards
## Footnote
The code emphasizes integrity, transparency, and accountability in financial reporting.
107
What is the legal minimum standard of behavior in society?
Law
## Footnote
Laws are created to protect society and regulate behavior, setting the baseline for conduct.
108
How does ethical behavior differ from legal compliance?
Ethical behavior goes beyond laws and regulations
## Footnote
It involves adhering to moral principles and promoting transparency and integrity.
109
What should be included in the preparation of financial statements?
Fair and honest preparation in accordance with relevant professional standards
## Footnote
This ensures that the financial information is clear and reliable for stakeholders.
110
Fill in the blank: Directors' pay should be structured to link rewards to _______.
[corporate and individual performance]
## Footnote
Emphasizing long-term performance is critical for sustainable success.
111
What should a professional accountant do if they become aware of misleading information?
Take steps to disassociate from that information
## Footnote
Professional accountants must maintain integrity and transparency in their work.
112
What is the role of ethical conduct programs in organizations?
To provide guidance on ethical issues
## Footnote
These programs help employees navigate ethical dilemmas and reinforce organizational values.
113
What is a key area of concern regarding the treatment of workers in business ethics?
Not subjecting them to unreasonable working hours, pay, conditions or demands.
## Footnote
This includes ensuring fair labor practices and a safe working environment.
114
What does avoiding bribery in business ethics entail?
A manufacturer pays a politician to vote their way, for example.
## Footnote
This relates to maintaining integrity in business dealings and avoiding corrupt practices.
115
What is meant by good professional conduct and honesty in business ethics?
Avoiding misleading advertising or sales practices, respecting refunds and so on.
## Footnote
This includes transparency and accountability in business transactions.
116
How should businesses respect people's personal data?
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.
## Footnote
This is critical in maintaining trust and complying with data protection regulations.
117
What constitutes appropriate and fair advertising in business ethics?
Should you market sugary drinks directly to children, for example?
## Footnote
This raises questions about target audiences and the ethical implications of marketing strategies.
118
What is the primary reason why ethics is important in business?
Reputation
## Footnote
An organization trades on its reputation, which influences its ability to do business.
119
What are two perspectives from which ethics can be viewed in business?
* Risk
* Competitive advantage
120
What is a potential consequence of unethical practices in business?
Legal action
## Footnote
Unethical practices can lead to legal challenges for misleading customers.
121
How can ethical practices affect employee morale?
Generates good feeling among staff
122
What competitive advantage did The Body Shop use in its marketing?
Ethical treatment of animals
123
In the context of ethics, what does 'cognitive dissonance' refer to?
The conflict between personal moral codes and workplace practices
124
What was Tesco's ethical stance during the chicken price war in 2007?
They chose to uphold ethical sourcing over competing on price.
125
What are the three key approaches to ensuring ethical decisions in an organization?
* Personal ethics
* Organisational culture
* Ethical code
126
What does personal ethics refer to?
The moral principles held by individuals
127
What is meant by 'organisational culture'?
The combination of beliefs, values, and standards of behaviour in an organization
128
What is an ethical code?
A set of ethical rules and guidelines communicated to all staff
129
What are CIMA's five fundamental ethical principles?
* Integrity
* Objectivity
* Professional competence and due care
* Confidentiality
* Professional behaviour
130
What does the principle of integrity require?
Being straightforward, honest, and truthful in all professional relationships
131
What does the principle of objectivity emphasize?
Not allowing bias or conflicts of interest to override professional judgment
132
What is required under the principle of professional competence and due care?
An ongoing commitment to maintain professional knowledge and skill
133
What must accountants do under the principle of confidentiality?
Respect the confidential nature of information acquired
134
What does professional behaviour entail?
Compliance with relevant laws and regulations
135
Fill in the blank: An ethical organization tends to go above and beyond legal _______.
minimums
136
True or False: Unethical practices can enhance a company's reputation.
False
137
What happened to Paschal in the example regarding his ethical breaches?
He risks being fined and potentially expelled from CIMA.
138
What did Paschal fail to uphold in terms of integrity?
He lied about knowing how to do a Corporation Tax Return.
139
What was the consequence of Paschal’s actions regarding professional competence?
He should not have completed a tax return without the necessary knowledge.
140
What risk did Paschal's actions pose to Un-EthiCal Ltd?
Violation of tax laws and damage to reputation
