MOD 7 Flashcards
1
Q
What is profitability?
A
Maximising profits and marking a financial return from business activities
2
Q
What is growth?
A
Increasing the size and value of business in long term
3
Q
What is efficiency?
A
Maximising the return while minimising inputs
4
Q
What is the difference between liquidity and solvency?
A
Liquidity refers to the ability to meet short term financial commitments while solvency is the ability to meet long term financial commitments
5
Q
What is the interdependence of marketing and finance?
A
Marketing generates sales which assists with short term financial goals by managing cash flow and finance establishes budgets and forecast market flow.
6
Q
What is the interdependence of finance and operation?
A
finance relience on operation to achieve cost leadership, so they are able to meet finance objectives
Operation relies on finance for funds to buy reasources which are used in the operation process
7
Q
What are some examples of internal sources of finance? (2)
A
Owners equity
Retained profits
8
Q
What is retained profits?
A
Money which has been earned but NOT GIVEN TO SHAREHOLDER (DIVIDENDS), rather invested back into business.
9
Q
What are internal sources of finance? (2)
A
Funds from either from:
Business owners
Outcomes of business activities
10
Q
What is the interdependence of human resource and finance?
A
Finance provides funds for wages and human resource strategies such as training and development.
11
Q
What is the owner’s equity?
A
Funds contributed by owner to establish business
12
Q
What are external sources of finance?
A
Funds obtained from outside the business
13
Q
What is the Income statement?
A
Is the summary of the income earned and the expenses incurred over a period of trading,
14
Q
What does the income statement show? (4)
A
COGS
Expenses
Gross profits
Net profit
15
Q
What are the 3 formulas of the income statement?
A
COGS= open stock + purchase - closing stock
Gross profits= sales - COGS
Net profits = gross profit - expenses
16
Q
What is the balance sheet?
A
It represents a business’s assets and the liabilities at a particular point in time.
17
Q
What are assets?
A
Items of value owned by business
18
Q
What are the 2 types of assets?
A
Current and noncurrent assets
19
Q
What Are current assets?
A
Asset which can be turned into cash WITHIN 12 MONTHS
20
Q
What are non current assets?
A
Assets which can be turned into cash over a 12 month period
21
Q
What are liabilities?
A
Claims by people outside the business against the owners assets and represents what has to be owned by the buisness.
22
Q
What are the 2 types of liabilities?
A
Current and non current liabilities
23
Q
What are current liabilities?
A
Must be repaid within 12 month
24
Q
What are non current liabilities?
A
Can be repaid after a 12 month period
25
What is an overdraft?
Banks give a business the ability to withdraw more money than they have available and paid back at a certain time.
26
What are the 3 short term debt finance?
Overdraft
Commercial draft
Factoring
27
What is an overdraft?
Banks give a business the ability to withdraw more money than they have available and paid back at a certain time.
28
What are the advantages of overdraft(1)?
Easy to make repayments
Convenient
29
What is the disadvantage of overdraft?(2)
High interest rate
Account fee
30
What are commercial drafts?
Issued by financial institutes large sum up to $100,000
31
What are the advantages of commercial drafts?(2)
Larger funds available
Lower interest rate
32
What are the disadvantages of commercial drafts?(1)
Repaid back in a short duration
33
What is factoring?
Is selling account receivable for a discounted price to a factoring company
34
What Are the Advantages of factoring(1)?
Immediate cash
35
What are the disadvantages of factoring?
Fee
Other Alternative might be cheaper
36
What are some long term debt finance(3)?
Mortgage
Debentures
Unsecured not
37
What are mortgages?
A loan which is secured by a property of the borrower
38
What are the advantages of mortgages(1)?
Long period of time
39
What is the disadvantage of mortgages? (2)
Loss of ownership
Cannot be used as a asset
40
What is a debenture?
Invites other companies to loan funds to a business and the other companies benefit by receiving interest payments
41
What are the advantages of debentures?
Interest is fixed
42
What are the disadvantages of debentures?
Debenture holders has claims over other assets
43
What are the advantages of unsecured note?
Not secured by any assets
44
What is an unsecured note?
A loan from investors for a set period NOT secured against assets
45
What are the disadvantages of unsecured notes?
High interest
46
What is private equity?
Shares or stoves are sold to a limited group of investors, which receive partial ownership,
NOT LISTED ON THE AUSTRALIAN STOCK EXCHANGE
47
What is public equity?
Share and stocks are sold to the public to raise capital, i listed on the Australian stock exchange
48
What are the 7 financial institutions?
1- banks
2- investment banks
3- financial companies
4- unit funds
5- Australian securities exchange
6- superannuation funds
7- life insurance companies
49
What is the role of banks?
Important source for funds of a business,
50
What is the role of investment banks?
Provide the borrowing and lending of services (primarily to the business sector) and are able to customise loans for specific needs
51
What is the role of finance companies?
They are non banks institutions, which specialise in smaller commercial finance
52
What is the role of unit funds?
Funds from large number of small investors
53
What is the role of superannuation funds?
Federal government requiring employees to make a financial contribution to employees account
54
What are the Australian securities and investment commissions(ASIC)?
independent Australian Government body
55
What is the role of life insurance companies?
Non financial institution that provide covers and lumps of sums payments
56
What do the Australian securities and investment commissions(ASIC), enforce?
The corporation ACT 2001
57
What is company taxation?
All Australian businesses are required to pay company tax on their profits, must be paid before profits are distributed to shareholders as dividends.
58
What are the 3 global market influences?
-Economy –> external, uncontrolled by the business
-Availability of funds –> how easily it is for the business to gain funds( depends on risks, -demand/ supply and economic conditions
Interest rates –> cost of borrowing, which reflex the risk of the loan
59
What are the Australian securities and investment commissions(ASIC)?
They independent commission to the commonwealth parliament
60
What do the Australian securities and investment commissions(ASIC), enforce?
The corporation ACT 2001,
-ensures business are providing accurate financial statements
-monitors frauds/scams
-ensures directors are acting in the best intrest of the business
61
What is company taxation?
All Australian businesses are required to pay company tax on their profits, must be paid before profits are distributed to shareholders as dividends.
62
What are the 3 global market influences?
-Economy –> external, uncontrolled by the business
-Availability of funds –> how easily it is for the business to gain funds( depends on risks and economic conditions )
-Interest rates –> highier intrest will make invetsors to retain their money and build intrest
lower intrest will will motivate investors to borrow more money and use as funds for growth
63
How are financial needs determined by the business? (4)
- size of business
- current phase of business cycle
- future plans for growth and development
- capacity to source funds
64
What are budgets?
| SPENDING PLAN
a spending plan based on your income and expenses
65
What do budgets show? (4)
- cash required
- capital expenditure
- expenses
- use / cost of raw of raw material
66
What are financial risks?
Risks of being unable to cover financial obligations
67
What is financial control?
Are policies put in place to ensure financial objectives are achieved
68
What are some common causes of financial problems?(2)
-Theft
-Damage/loss of assets
69
What is a Cash Flow statement?
Is a financial statement, that indicates the movement of cash from transactions over a period of time
70
What is the Income statement?
Is the summary of the income earned and the expenses incurred over a period of trading,
71
What are some common policies which promote control?(3)
-Clear authorisation
-Rotation of duties
-control of cash
72
What is a positive of the cash flow statement?
Shows whether a business can
-generate a favourable cash flow
-pay its financial commitments and they are due,
-can sufficient funds for expansion and change
73
What is the balance sheet?
It represents a business’s assets and the liabilities at a particular point in time.
74
What does the income statement show? (4)
COGS
Expenses
Gross profits
Net profit
75
What are the 3 formulas of the income statement?
COGS= open stock + purchase - closing stock
Gross profits= sales - COGS
Net profits = gross profit - expenses
76
What are assets?
Items of value owned by business
77
What are the 2 types of assets?
Current and noncurrent assets
78
What Are current assets?
Asset which can be turned into cash WITHIN 12 MONTHS
79
What are non current assets?
Assets which can be turned into cash over a 12 month period
80
What are liabilities?
Claims by people outside the business against the owners assets and represents what has to be owned by the buisness.
81
What are the 2 types of liabilities?
Current and non current liabilities
82
What are current liabilities?
Must be repaid within 12 month
83
What is the purpose of the net profit ratio? Gross profit/ sales
To show the average net profit generated on each dollar of sale
84
What are non current liabilities?
Can be repaid after a 12 month period
85
What is the purpose of the return on owners equity ratio?Net profit/ owners equity
Show how effective the money contribution by owners is in making profits on their investments
86
What happens when the profitability ratio is high?
It is better if it is high, as the business will be in a better position
87
What is the purpose of the Expense ratio? expense / sales
Shows the expenses incurred to make the sales
88
What happens when the expense ratio is lowered?
It is better as expenses would be lowered
89
What is the purpose of the account receivable turnover ratio? 360 divided by sales / account receivable
It shows the business how many days on average it takes customers to pay their bills
90
What is normalised earning?
removing unusual items from the balance sheet
91
What are the limitations of financial reporting? (5)
Normalised earnings
Capitalised expenses
Valuation assets
Timing issues
Debt repayments
92
What are capitalised expenses?
adding a capital expense to the balance sheet as an asset rather than an expense.
93
What is the valuation of an asset?
of estimating the market value of assets or liabilities The owner might put the value the asset was purchased at rather than the original cost which may be different to the current market value, therefore being misleading.
94
What are the Timing issues?
Account receivable as you don't know when you will be paid.
95
What is debt payment as a financial limitation?
Financial reports don’t have the capacity to disclose specific information about debt repayments.
96
What are the 3 cash flow/ financial flow management strategies?
Distribution of payment
Discount for early payments
Factoring
97
What is the distribution of payment strategy?
Is where payments are distributed throughout the year, so large expense do not occur at the same time, causing a cash shortage.
98
What does cash flow projection do?
Assist in identifying periods of possible shortfalls and surplus.
99
What is the discount for early payment strategy?
Offering debtors (people who owe the debt), a discounted early payment encourages customers to pay before the payment period payment is due to improve business cash flow status.
100
What is the Factoring strategy?
Is selling account receivables at a discounted price, as it saves cost on following up (unpaid accounts) and debt collectors
101
What is the problem of having excess inventory or lack of control over accounts receivable?
Can lead to an increase level of unused assets,leading the business facing liquidity problem
102
What is net working capital?
Difference between current assets and current liabilities it represents the funds that are needed day to day activity, to be ablweto pay short term debts
103
What is working capital management?
Determining the best mix of current assets and current liabilities needed to achieve the objective of the business.
104
What is working capital mean?
Having the funds available for short term financial commitments
105
What are 3 current assets that must be controlled?
Cash
accounts receivable
Inventory
106
Why should you control cash?
It ensures business can pay its debt and also enables management to take advantage of interest opportunities reserves of cash guard against sudden shortages or distribution to cash flow.
107
Why should you control account receivable?
Quicker the debtors pay better the cash position
108
How to manage account receivables?
factoring
policies in place to stop people with bad creidt from purchasing
intrest free for short time
109
Why should you control inventory ?
Excessive inventory will lead to cash shortage as cash is going to be tied up in inventory,
And if insufficient inventory when there is high demand then there is a loss of sales.
110
What are 3 current assets that must be controlled?
Cash
accounts receivable
Inventory
111
What is the problem of having excess inventory or lack of control over accounts receivable?
Can lead to an increase level of unused assets,leading the business facing liquidity problem
112
Why should you control cash?
It ensures business can pay its debt and also enables management to take advantage of interest opportunities reserves of cash guard against sudden shortages or distribution to cash flow.
113
Why should you control account receivable?
Quicker the debtors pay better the cash position
114
How to manage account receivables(3)?
1-factoring
2-strict policies that only allow customers with good credit
3-short peroid with free intrest to enocourage to pay back quicker
115
Why should you control inventory ?
Excessive inventory will lead to cash shortage as cash is going to be tied up in inventory,
And if insufficient inventory when there is high demand then there is a loss of sales.
116
What are 3 current liabilities that must be controlled?
Account payables
Loans
Overdrafts
117
Why should you control account receivable?
They are money owed by a business to another entity, should be paid at the final due to improve liquidity
118
Why should you control loans?
Monitor interest rate and ongoing costs
119
Why should you control overdrafts?
Higher interest, however establishment and account keeping fee must be taken into consideration.
120
What are the advantages of leasing?
Cash flow is spread, reduces the risk being out of used (as leased asset can be upgraded)
Tax deductible
121
What are 2 strategies that manage working capital (liquidity)?
-Leasing
-sale and leaseback
122
What is leasing?
Contract between the lessor (owner of asset) and lessee(user of asset) uses the asset in exchange for payment
123
What is sale and leaseback?
Process of selling and owned asset to lessor and leasing back through fixed payments over specific period of time
124
What are the advantages of sale and leaseback?
Improves liquidity (received large sum)
Have access to asset
125
What are the 2 profitability management?
Cost control
Revenue conrtol
126
What are 3 cost controls?
Fixed and variable cost
Cost centre
Expense minimisation
127
What is the fixed cost?
Costs that don't depend on the level of operational activity in a business
128
What is cost control?
Minimise cost and void unnecessary spending
129
What is variable cost?
Costs that do depend on the level of operational activity in a busines
130
What is the indirect cost?
Cost incurred by more than one particular product / activity in a control centre
131
What is the direct cost?
Cost incurred by one particular product / activity in a control centre
132
What is the role of revenue control
Maximise revenue
133
What are expense minimisation?/
Reducing expense across a business where possible
134
What is the role of profitability management?
Maximising profits through maximising revenue and minimising expenses
135
What is a cost centre and the aim?
department that requires fundings, and monitors where the cost is going.
Aim: minimise expenses
136
What is cost volume profit analysis?
| level of revenue
Can determine the level of revenue sufficient to cover cost to break even
137
How does pricing policies affect revenue?
As cost is tied directly with revenue as cost is too high loss of revenue
Cost too low cash shortage
138
What is foreign exchange market?
Determine the price of one currency relative to another
139
What is foreign exchange rate?
Ratio of one currency to another currency, to tell us how much one unit of currency is worth over another
140
What happens when appreciation in the AUD?
Export become more expensive, import becomes cheaper
141
What happens when depreciation in the AUD?
Export becomes cheaper and import become expensive
142
What Are the 4 international payments?
Payment in adv
Letter of credit
Bill of exchange
Clean payment
143
What are the features of the bill of exchange, ?
**Document against payment **, the importer can collect after paying
**Document against acceptance **, importer may collect the good before paying for them .
144
what are the 2 types of bills of exchange?
Document against payment using the method
Document against acceptance using the method
145
What are the features of payment in advance?
Allows exporter to receive payment and arrange for the good to be sent
146
What are the features of a letter of credit?
Is a document that is requested from importer’s bank to exporter promising to pay them a specific amount once conditions are met
147
What are the features of clean payment?
Where the exporter ships the good before the importer payment is received, used with very loyal customers
148
What is the stop exchange rate?
Is the value of one currency in another currency on particular day
149
What is hedging?
Process of minimising the risk of currency fluctuation
150
What are derivatives?
Financial instruments that may be used to lessen the exporting risk associated with currency fluctuations
151
What is a forward exchange contract?
Where the back guarantees a specific exchange between currencies for a set date, in future
152
what are the 4 financial stratgies?
cash flow mangement
working capital management
profitability management
global financial management
