Influences on Financial Management

Question 1

What are the 5 major influences on financial management?

Answer 1

1. Internal Sources
2. External Sources
3. Financial Institutions
4. Government
5. Global Market

Question 2

What are internal sources of finance and examples?

Answer 2

Funds contributed by the owners or from business activities.
1. Owners Equity
2. Retained Profits

Question 3

What are the benefits of sourcing finance internally?

Answer 3

• No interest
  -No need to pay back funds
  -Unlimited access to funds

Question 4

What are the disadvantages of sourcing finance internally?

Answer 4

Owners have the potential to dissolve their funds

Question 5

What are examples of short term debt?

Answer 5

Commercial Bills, Overdraft and Factoring

Question 6

What is a commercial bill?

Answer 6

A short term loan for 30-180 days of a large amount usually above $100K. Business assets are secured by the bank until fully repaid

Question 7

What is factoring?

Answer 7

The selling of ‘Accounts Receivable’ to a finance company at a discounted price

Question 8

What are examples of long term debt?

Answer 8

Mortgage, Unit Trusts, Debentures and Leasing

Question 9

What are advantages of leasing?

Answer 9

-Low costs
-Better cash flow
-Tax deductible
-Payment includes insurance and maintenance costs

Question 10

What are the different types of shares?

Answer 10

-Ordinary
-New Issue
-Rights Placement
-Purchase Plan

Question 11

What are the different financial instituitions?

(7)

Answer 11

-Banks
-Investment Banks
-Finance Companies
-Superannuation
-Life Insurance
-Unit Trusts
-ASX

Question 12

What do financial institutions do?

Answer 12

Accumulate funds and invest them

Question 13

What Act does ASIC administer and what does it do ?

Answer 13

Corporations Act 2001
Attempts to protect consumers and investors in banking, superannuation and insurance. Aim to reduce fraud and unfair practices

Question 14

How does Company Tax influence a business?

Answer 14

It influences the way they choose to spend money and report profits.

Question 15

How does the global market influence a business?

Answer 15

Unexpected changes can change the active system of supply and demand abruptly. It may be harder to gain funding if in negative conditions. Interest repayments will be affected

Question 16

What happens if ASIC discovers a business may not be complying with the law?

Answer 16

The business will be investigated and if breached, they will be penalised and this can possibly disrepute a business

Question 17

How does the government influence a business?

(4 Ways)

Answer 17

1. Taxation regulations require sound financial managemt so the business can have adequate funds
2. Some decisions may be better for taxation regualtions
3. Ensures compliance
4. Influences of a legal structure as different legal structures come with different obilagtions

Question 18

A statement of cash flows can show whether a business can….

Answer 18

• Generate favourable cash flow
• Pay its finanacial commitments as they fall due
• Have suffcient funds for future expansion
• Pay drawings to owners or dividends for shareholders

Question 19

What do cash flow statements do in general?

Answer 19

Show how effectively finance is being used in a business and show whether the business has enough funds to meet unforseen circumstances

Question 20

What does a balance sheet do?

Statment of finanacial position

Answer 20

Represents a business’s assets and liabilities in a particular pointi in time and represents the net worth of a business.

Question 21

What does an income statement show?

Statement of finanacial performance

Answer 21

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.

Question 22

What does a balance sheet show?

Answer 22

Whether:
* A business has enough assets to cover its debt
* The interest and money borrowed can be repaid
* The assets of the business are being used to maximise profits

Question 23

What is a Mortgage?

Answer 23

Long term loan secured by the property of a business. Usually to purchase non-current assets

Question 24

What is a Debenture

Answer 24

Loan issued by company for a fixed interest over a fixed period of time against an asset.

Question 25

What is an Unsecured Note?

Answer 25

Loan that is not secured over the business’s assets (hence very risky to the investor) with very high interest rates

Question 26

What is Leasing?

Answer 26

Payment to use equipment owned by another company without purchasing it.

Question 27

What is a New Issue?

Answer 27

Security that is traded for the first time e.g. an IPO

Question 28

What is a Rights Issue?

Answer 28

After an IPO to buy new shares of a company

Question 29

What is a Placement?

Answer 29

Additional shares offered at a discounted price to specific investors

Question 30

What is a Share Purchase Plan?

Answer 30

Invitation to existing shareholders to purchase more shares without brokerage fee or at a discounted price WITHOUT PROSPECTUS

Question 31

How much can a business issue in new shares to a shareholder?

Answer 31

$15000

Question 32

What is Private Equity?

Answer 32

Rasing funds by equity for private companies not listed on the ASX to finance future expansion/investment

Question 33

What are the 2 ways the government is an influence?

Answer 33

• ASIC
• Company Taxation