Finance: Processes of Financial Management Flashcards
what are financial needs
funds required to allow a business to operate and achieve its goals
what four factors affect the financial needs of a business
size
stage of the life cycle it is in
its future plans- expand or downsize
its capacity to source finance
what do budgets illustrate
how financial resources will be used to achieve a business’s objectives
what are the three types of budgets
operating budgets
project budgets
financial budgets
what is an operating budget
outlining the main activities of a business
what is a project budget
outlines capital expenditure and research & development
what is a financial budget
the overall financial situation of a business
what does a financial budget also include
predictions of operating and project budgets
what do budgets provide that makes them essential financial management tools
they co-ordinate departments
plan for the future
compare planned and actual performance
what are record systems
cash flow and income statements, balance sheets
what is a way of maintaining accurate record systems
recording all transactions twice “double entry system”
how long does the australian taxation office (ATO) require businesses to keep records for
5 yrs
what are some examples of financial risks businesses are susceptible to
theft, fraud, damage to assets, loss of assets, errors in record systems
what are financial controls
policies and procedures aimed at reducing financial risk
when are financial controls particularly important
when managing current assets, as they can be stolen or go unpaid
what are 5 financial controls
- separating staff duties
- rotating staff duties
- regulating the use of cash
- regularly checking inventory levels
- using surveillance systems
should the term of a loan match the economic lifetime of the asset being purchased
yes
when should current assets be repaid
within 12 months
when should long term assets be repaid
over more than 12 months
why is not matching financing to the economic lifetime of an asset detrimental to the business
eg. non-current asset is paid within 12 months
or current asset repaid over more than 12 months
payment is due before the asset has generated revenue
the business continues make repayments after the asset has been used WITH INTEREST
why is monitoring and controlling important
inconsistent methods of review and systems control will have an immediate impact on the viability of the business and requires management to monitor internal and external factors that will have a financial impact.
what do cash flow statements measure
Movement of cash receipts and payments over time. Measures inflows and outflows.
what do income statements show
Shows how much money comes into the business as revenue, how much goes out as expenditure and how much profit.
what do balance sheets show and when are they prepared
Represents a business’s assets and liabilities at a particular point in time and represents the net worth of the business.
Prepared at the end of an accounting period.
what does the current ratio measure
liquidity
what is the current ratio
current assets ➗current liabilities
where is the current ratio found
balance sheet
what does the gross profit ratio measure
profitability
what is the gross profit ratio
gross profits ➗sales revenue x 100
where is the gross profit ratio found
income statement
what does the net profit ratio measure
profitability
what is the net profit ratio
net profit ➗sales revenue x 100
where is the net profit ratio found
income statemnet
what does the return to owner equity ratio show
profitability
what is the return to owner equity ratio
netprofit ➗owners equity x 100
where is the return to owner equity ratio found
balance and income sheet
what does the debt to equity ratio show
solvency and gearing
what is the debt to equity ratio
total liabilities ➗owners equity x 100
where is the debt to equity ratio found
balance sheet
what does the expense ratio show
efficiency
what is the expense ratio
total expense ➗sales revenue x 100
where is the expense ratio found
income statement
what is the accounts receivable turnover ratio
(2 steps)
- sales ➗accounts receivable = ___
- 365 ➗ _____
where is the accounts receivable turnover ratio found
balance and income statement
what are normalised earnings and how are they a limitation of financial reports
Earnings have been adjusted to consider changes in the economic cycle to remove abnormal items that affect profitability. This gives a more accurate description of the true earnings of a company.
what are capitalising expenses and how are they a limitation of financial reports
Putting expenses on a balance sheet as assets to make the balances look better.
what is valuing assets and how are they a limitation of financial reports
Value of assets may not be correct on balance sheets, as value often depreciated eg. a car bought 5 yrs ago was valued at $30 000, and it says that on the balance sheet but it doesn’t account for the depreciated price.
what are timing issues and how are they a limitation of financial reports
Not accurately reporting when revenue or expenses were made or what direct expenses were made at the time to have the revenue.
what are debt repayments and how are they a limitation of financial reports
Debt repayment information may not be included in the financial report, such as when the repayments are made, if the payments are being paid, how large the loan is, and at what interest.
what are notes to financial reports and how are they a limitation of financial reports
Additional information normally at the end of financial reports
Notes provide additional information and details about items included in the balance sheet and income statement
They may not be clear, explicit or not detailed enough
what are three common ethical issues related to financial reports
- misrepresentation of financial statements. eg. overstating profits
- misuse of funds eg. making up expenses that don’t exist
- tax minimisation eg. recording sales in countries with low tax rates or understating revenue to minimise company tax
how is ethical financial reporting enforced?
through auditing, which the standards are set by Australian Auditing Standards (AAS)
Who sets the code of ethics for professional accountants?
Australian Professional and Ethics Standards Board (APES)
What can companies do to abide by accounting standards?
record keeping
internal audits
management audits
external audits
why is record keeping important
it is a way for the ATO to regularly monitor businesses transactions, and penalise those evading tax
what are internal audits
audits conducted internally-check accounting procedures and accuracy of records
what is an audit
an independent check of the accuracy of financial records and accounting procedures
what is a management audit
reviewing a firms financial plan and taking corrective action if needed
what are external audits
independent and specialised audit accountants investigate a firms financial reports
under what Act are external audits a requirement of
the Coporations Act 2001- commonwealth
