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Project Management > Financial Project > Flashcards

Financial Project Flashcards

1
Q

Difference between fixed and current assess

A

Fixed assets are long term assets so over 12 months. Current assets are short term assets that are typically used in under 12 months

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2
Q

Examples of

Costs that are not expenses

A

A cost is an amount that has to be paid. Whereas an expense has the price of it and is regular payments.

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3
Q

Example of receipts that are not revenues

A

A company’s receipts refers to the cash that the company received.
A companies revenue is the amount it has earnt and paid within 30 days

Example of receipts that are not revenues
Eg borrowing 1000 from bank
Collecting 4000 from a sale that was recorded one month earlier

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4
Q

Example of expenditure that is not (yet) a cost

A

Expense is a cost whose utility has been used up.

For example depreciation

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5
Q

Examples of receipts that are also revenues

A

When a company makes a 209 cash sale. They receive 200 rev and 200 cash receipt

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6
Q

What is capital budgeting

A

Capital budgeting is the process a business undertakes to evaluate potential major products or investments

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7
Q

What’s the difference befeeen period profit and free cash flow

A

Free cash flow is a measure of how much cash a business generates after accounting for capital expenditures such as buildings and equipment.

Period profit is excess of revenues over outlays and expenses in a business enterprise over a given period of time

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8
Q

When computing npv with residual value what do you do

A

You add residual value to the last free cash flow (last year)

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9
Q

What is meant by the term economic order quantity

A

Economic order quantity is the optimum quantity of an item to be purchased at one time in order to minimise the combined annual costs of ordering and carrying the item in inventory

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10
Q

What is the purpose of safety inventory

A

safety inventory purpose is of satisfying demand that exceeds the amount forecasted in a given period j

Safety inventory is the average inventory remaining when the replenishment lot arrives

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11
Q

What is the effect of safety inventory and economic order quantity

A

Safety inventory is having extra stock that is maintained to mitigate risks of stockpiles caused by uncertainties in supply and demand.

Whereas economic order quantity looks at the optimal way of getting inventory at the cost effective way

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12
Q

What is the purpose of customer evaluation in the context of credit management

A

Credit management is the function of granting credit terms and making sure money is collected when it becomes due. Good credit management promotes dialogue between finance and sales team to create a balancing act where risk is minimised and opportunities maximised

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13
Q

What is the purpose of debt collection policy in the context of credit management

A

Debt collection is the process of pursuing payments of debts owed by individuals or businesses.

It’s important as it allows businesses to only deem credit to individuals who are likely to oh back

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14
Q

Give three reasons why a business may wish to maintain a sufficient balance

A

Holds right about of cash to meet its immediate and long term needs

It needs a sufficient balance to survive

Cash management encompasses how a company manages its operations or business activity, financial activities and financing activities

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15
Q

List 3 drawbacks to financial statement analyses carried out using the ratio analysis method

A

Firms can make changes to financial statements to improve them - “window dressing”

Ratio’s ignore price level changes due to inflation - it uses historical costs

Accounting ratios do not resolve any financial problems of the company. They are a means to the end, not the actual solution

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16
Q

What is financial leverage

A

Financial leverage is the use of debt to buy more asssts

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17
Q

What is meant by the term solvency

A

Solvency is the possession of assets in excess of liabilities; ability to pay ones debts

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18
Q

What is meant by the term financial resilience

A

Financial resilience is defined as the ability to withstand life events that impacts ones income and or assets. Eg what would happen if there was a job loss in the household, are you financially resilient enough to withstand it

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19
Q

What is the difference between dynamic liquidity and static liquidity

A

Static liquidity results from existing assets and liabilities only. Dynamic liquidity gaps add the projected new credits and new deposits to the amortisation profiles of existing assets

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20
Q

Which value of the current ratio points to good static liquidity

A

A good current ratio is between 1.2 to 2 ( business has 2 times more current assets than liabilities to cover its debt).

Also defendant on industry and environment

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21
Q

What is the characteristics difference between fixed and variable costs

A

Fixed costs are costs that stay the same over a period of time whereas variable costs change depending on output and time

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22
Q

What is meant by the term relevant range in relation to fixed costs

A

Relevant range refers to a specific activity level that is bounded by a minimum and maximum amount. Within the designated boundaries, certain revenue or expenses levels can be expected to occur.

In terms of fixed costs, they will remain fixed as long as the level of activity stays within a certain range.

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23
Q

What is usually chosen as normal output when using absorption costing

A

all manufacturing costs have been assigned

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24
Q

Why is an output level variance used to calc the operating profit under absorption costing

A

The output level variance measures the amount of overhead applied to the number of units produced. It is the difference between the actual number of units produced in a period and the budgeted number of units that should have been produced, multiplied by the budgeted overhead rate

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25
Q

Why do companies draw up a master budget

A

A master budget is the central planning tool that a management team uses to direct the activities of a corporation, as well as to judge the performance of its various responsibility centres

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26
Q

What is the accrual basis of accounting

A

Accrual basis is a method of recording accounting transactions for revenue when earned and expenses when incurred.

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27
Q

What is the difference between product matching and period matching

A

Product matching is the challenge of examining two different representations of retail products (think items that you see on e-commerce websites) and determining whether both refer to the same product

Period matching is an accounting guideline which helps Match items, such as sales and costs related to sales for the same periods

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28
Q

What is meant by the going concern assumption

A

Going concede means a company has the resources needed to continue operating indefinitely.

If a business is not a going concern it means it’s gone bankrupt and it’s assets were liquidated

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29
Q

Which four qualitative conditions must financial statements satisfy?

A

Understandability
Relevance
Reliability
Comparability

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30
Q

What is meant by creative accounting

A

Creative accounting is the exploitation of loopholes in financial regulation in order to gain advantage or present figures in a misleadingly favourable light

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31
Q

What is the purpose of an auditors report

A

The purpose of an audits report is to document reasonable assurance that a company’s financial statements are free from error

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32
Q

Free cash flow equation.

A

Free cash flow = period profit after tax + dep - investments + disinvestemnts

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33
Q

Free cash flow example question

Sales 3750

Op costs 1250

Dep 450

No dis investments

A

Profit before tax:
3750-1250-450=2050

After tax 2050*.075=1537.50

Add dep :
1537.5+450=1987.50

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34
Q

Accounting rate of return

A

Average profit / average invested capital (av book value which is initial investment + residua value /2

ads: simple and straight forward Calc
Dis: ignores free cash flows

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35
Q

Payback period

A

Period between the original investment and the cash inflows up to the amount of the investment

Ads: simple and easy to Calc
Dis: partially account for free cash flows, does not account for free cash flows after payback period

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36
Q

Compound interest rate

A

If you save 1000 for 4 years @ 5%

1000*(1.05^4) =1215

37
Q

Discount rate

A

If you want to receive 1000 in 4 years @ 5%

1000/(1.05^4) =822

38
Q

Npv

A

Present value of all expected future free cash flows including the initial investment

39
Q

Internal rate of return

A

Discount rate where the npv of a project equals zero

Iff irr > Wacc project is accepted

40
Q 
Working out irr
Duration 3 years 
Investment 500,000
Free cash flow 1:150,000
Free cash flow 2: 200,000
Free cash flow 3: 400,000
A

0= -500+150/(1+i) + 200/(1+I)^2 * 400 /(1+I)^3

I =0.19

41
Q

Npv vs irr

A

They give contradictories

Npv does not measure the rate of return and tends to favour projects with a longer duration

Irr assumes that free cash flows received before the end of the project can be invested during the remaining period with a return equal to the irr

42
Q

Uncertainty in the ratios

A

Future free CAsh flows are only estimates, not known in advance

Sensitivity analysis: analysis of the effect of change in sales/costs on profits and cash flows

Risk premium: adding a premium to the discount rate

43
Q

Working capital

A

Working capital is money available to the organisation for day to day ops

Working capris = current assets (cash, acc rec, inv) - current liabilities (acc pay)

44
Q

Cash flow cycle

A

Purchase of goods > payment to supplier > sale of goods > receipts debtors

45
Q

Economic order quantity eqn

A

Q= square root of 2df / c

Q = optimal order size

D = tots demand per period

F = fixed ordering costs per period

C = carrying costs per unit per period

46
Q

Cash management

A

Not just hard cash but also money that is easily available like banks

47
Q

Calculating indifference point

Machine a
Fc 450,000
Vc 250
Sp 625

Machine b
Fc 750,000
Vc = 156.25
Sp = 625

A

Increase in total fixed costs: 750,000-450,000=300,000

Reduction in vc = 250-156.25 = 93.75

Indifference point: 300,000/93.75 =3200 units

3200*625= 2,000,000 annual turnover

48
Q

Indifference point

A

Indifference point is the level of production volume at which from a cost perspective it makes no difference whether an investment is made in a new production technology or not

49
Q

Output level variance

A

Expected/actual output - normal output times by fixed cost per unit

50
Q

Absorption costing

A

Unit cost = total fixed costs + tttal variable cost / normal output + actual output

51
Q

Absorption and direct for income statement

A

Absorption costing is cost of goods sold

direct costing is variable costs of goods sold and fixed costs

52
Q

Physical life

A

Period during which an asset can perform those things for which it was brought

53
Q

Economic life

A

Periods during which the average costs per unit produced by the asset are the lowest

54
Q

Example of economic life

Company purchases machine for 150,0000.
Yearly production 10,000 units.
Complementary costs 20,000. Increase yearly with 10,000
Residual value: 100,000 year 1, 70,000 after year 2, 30,000 after year 3, and 0 after year 4.

What is the economic life of the machine

A

Determine av cost per unit of output for each year:

1: dep 50,000 com 20,000 =70,000 so av cost is 7
2: dep 30,000 com 30000 = 60,000 av cost is 6
3: dep 40,000 com 40,000 = 80,000 av cost is 8
4: dep 30,000 com 50,000 =80,000 av cost is 8

The economic life is 2 years. After 2 years the average cost of output per unit increase

55
Q

Static budget

A

Static budget based on forecast production level

56
Q

Flexible budget

A

Flexible budget is adjusting to reflect actual production level

57
Q

Efficiency variance

A

Standard quantity - actual quantity *standard price

58
Q

Price variance

A

Standard price - actual price * actual quantity

59
Q

Budget variance

A

Standard quantity * standard price - (actual quantity * actual price)

60
Q

Output level variance

A

Actual output - normal output * fixed cost per unit

61
Q

Efficiency variance example

Actual quantity 53750 kilos
Standard price 15 a kil
Standard quantity is 55,000 kg

A

Efficiency variance=
Standard quantity - actual quantity * standard price

55,000-53750 *15=18750 fav

62
Q

Price variance example

Acc quantity 53750
Standard price 15
Acc price 15.50

A

Price variance is standard price - actual price * actual quantity

15-15.50 * 53750 = 26875 U

63
Q

Balance sheet how they do it

A

Debt side (on left) shows the value of the assets a company has invested in

Credit side (on right) shows how the company’s assets are finance

64
Q

Layout of their p&l account

A 
Left side: costs of raw mats 
Employee benefit costs
Dep costs
Other expenses
Finance costs

Right side: Revs

65
Q

Provision

A

A provision is an event of future obligations/ expense as a result of business activities in the past year

Eg bad debts, losses,

66
Q

Gross profit margin

A

Gross profit is operating income / sales

67
Q

Return on assets

A

Indicator for long term operati result to allow for requires dividend and interest payments

Roa = e bit / total assets

68
Q

Return on equity ROE

A

Indicator for long term operating profit result for the Owners

Roe= net income / average equity

Or op profit after interest before tax / av equity

69
Q

Average cost of debt

A

For the creditors profitability equals the agreed interest percentage

Average cost of debt = interest / average debt

70
Q

Financial leverage effect

A

Roa- average cost of debt * debt / equity

71
Q

Debt ratio

A

Debt / total assets or debt / equity

Or equity / total assets

72
Q

Indicator of financial resilience

A

Ebit / interest

73
Q

Liquidity ratios

A

Net working capital: current assets - current liabilities

Current ratio: current assets / current liabilities

Quick or acid test ratio: current assets - inventory / current liabilities

74
Q

Compatibility issues

A

Financial reports allow for comparison over time and across companies

75
Q

Prudence

A

Prudence is expected losses of unfinished activities are included in the financial accounts

76
Q

Completed contract method

A

Revenues and costs only recognised when goods and services are sold and delivered

77
Q

Percentage of completion method

A

Revenues and costs recognised gradually, corresponding with the progress of the work

78
Q

Work out cost per unit:

A

Fixed costs / normal out put +

Variable costs / actual output

79
Q

Output level variance

A

Actual - number output *

Fixed costs / normal output

80
Q

Disinvestment

A

Disinvestment is the remaining value of an asset when the project has finished, assuming it is sold

81
Q

Sensitivity analysis

A

Sensitive analysis is the analysis of the effect of change in sales on profit and cash flow

82
Q

Risk premium

A

Risk premium is adding a risk premium to the discount rate

83
Q

Ordering costs

A

Ordering costs relate to procurement and transportation

84
Q

Carrying costs

A

Carrying costs relate to storage, financing and insurance

85
Q

Consequences of accounts receivables

A

Extra capital requirement
Processing and collection costs
Risks of non paymen t

86
Q

Three motives for maintaining cash

A

Transactional motive = safeguard continuity of the production process

Precautionary motive = cover random, unforeseen fluctuations in cash in and outflows

Speculative motive = anticipate any asset price changes

87
Q

Purchase and operation of a fixed asset incurs costs

A

Depreciation
Interest
Complementary costs : all costs related to the use of fixed asset (operating costs)

88
Q

Types of lifespan

A

Technical lifespan = the period during which as asset is able t perform those things for which it was brought

Economic lifespan = the period during which the average costs per product produced by the asset are the lowest

89
Q

Debt ration

A

Debt / total assets

Or debt / equity is

Project Management (6 decks)

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