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Buisness > MOD 7 > Flashcards

MOD 7 Flashcards

1
Q

What is profitability?

A

Maximising profits and marking a financial return from business activities

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2
Q

What is growth?

A

Increasing the size and value of business in long term

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3
Q

What is efficiency?

A

Maximising the return while minimising inputs

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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

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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.

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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

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7
Q

What are some examples of internal sources of finance? (2)

A

Owners equity
Retained profits

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8
Q

What is retained profits?

A

Money which has been earned but NOT GIVEN TO SHAREHOLDER (DIVIDENDS), rather invested back into business.

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9
Q

What are internal sources of finance? (2)

A

Funds from either from:
Business owners
Outcomes of business activities

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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.

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11
Q

What is the owner’s equity?

A

Funds contributed by owner to establish business

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12
Q

What are external sources of finance?

A

Funds obtained from outside the business

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13
Q

What is the Income statement?

A

Is the summary of the income earned and the expenses incurred over a period of trading,

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14
Q

What does the income statement show? (4)

A

COGS
Expenses
Gross profits
Net profit

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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

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16
Q

What is the balance sheet?

A

It represents a business’s assets and the liabilities at a particular point in time.

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17
Q

What are assets?

A

Items of value owned by business

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18
Q

What are the 2 types of assets?

A

Current and noncurrent assets

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19
Q

What Are current assets?

A

Asset which can be turned into cash WITHIN 12 MONTHS

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20
Q

What are non current assets?

A

Assets which can be turned into cash over a 12 month period

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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.

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22
Q

What are the 2 types of liabilities?

A

Current and non current liabilities

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23
Q

What are current liabilities?

A

Must be repaid within 12 month

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24
Q

What are non current liabilities?

A

Can be repaid after a 12 month period

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25
Q

What is an overdraft?

A

Banks give a business the ability to withdraw more money than they have available and paid back at a certain time.

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26
Q

What are the 3 short term debt finance?

A

Overdraft
Commercial draft
Factoring

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27
Q

What is an overdraft?

A

Banks give a business the ability to withdraw more money than they have available and paid back at a certain time.

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28
Q

What are the advantages of overdraft(1)?

A

Easy to make repayments
Convenient

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29
Q

What is the disadvantage of overdraft?(2)

A

High interest rate
Account fee

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30
Q

What are commercial drafts?

A

Issued by financial institutes large sum up to $100,000

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31
Q

What are the advantages of commercial drafts?(2)

A

Larger funds available
Lower interest rate

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32
Q

What are the disadvantages of commercial drafts?(1)

A

Repaid back in a short duration

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33
Q

What is factoring?

A

Is selling account receivable for a discounted price to a factoring company

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34
Q

What Are the Advantages of factoring(1)?

A

Immediate cash

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35
Q

What are the disadvantages of factoring?

A

Fee
Other Alternative might be cheaper

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36
Q

What are some long term debt finance(3)?

A

Mortgage
Debentures
Unsecured not

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37
Q

What are mortgages?

A

A loan which is secured by a property of the borrower

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38
Q

What are the advantages of mortgages(1)?

A

Long period of time

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39
Q

What is the disadvantage of mortgages? (2)

A

Loss of ownership
Cannot be used as a asset

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40
Q

What is a debenture?

A

Invites other companies to loan funds to a business and the other companies benefit by receiving interest payments

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41
Q

What are the advantages of debentures?

A

Interest is fixed

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42
Q

What are the disadvantages of debentures?

A

Debenture holders has claims over other assets

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43
Q

What are the advantages of unsecured note?

A

Not secured by any assets

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44
Q

What is an unsecured note?

A

A loan from investors for a set period NOT secured against assets

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45
Q

What are the disadvantages of unsecured notes?

A

High interest

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46
Q

What is private equity?

A

Shares or stoves are sold to a limited group of investors, which receive partial ownership,
NOT LISTED ON THE AUSTRALIAN STOCK EXCHANGE

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47
Q

What is public equity?

A

Share and stocks are sold to the public to raise capital, i listed on the Australian stock exchange

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48
Q

What are the 7 financial institutions?

A

1- banks
2- investment banks
3- financial companies
4- unit funds
5- Australian securities exchange
6- superannuation funds
7- life insurance companies

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49
Q

What is the role of banks?

A

Important source for funds of a business,

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50
Q

What is the role of investment banks?

A

Provide the borrowing and lending of services (primarily to the business sector) and are able to customise loans for specific needs

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51
Q

What is the role of finance companies?

A

They are non banks institutions, which specialise in smaller commercial finance

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52
Q

What is the role of unit funds?

A

Funds from large number of small investors

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53
Q

What is the role of superannuation funds?

A

Federal government requiring employees to make a financial contribution to employees account

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54
Q

What are the Australian securities and investment commissions(ASIC)?

A

independent Australian Government body

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55
Q

What is the role of life insurance companies?

A

Non financial institution that provide covers and lumps of sums payments

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56
Q

What do the Australian securities and investment commissions(ASIC), enforce?

A

The corporation ACT 2001

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57
Q

What is company taxation?

A

All Australian businesses are required to pay company tax on their profits, must be paid before profits are distributed to shareholders as dividends.

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58
Q

What are the 3 global market influences?

A

-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

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59
Q

What are the Australian securities and investment commissions(ASIC)?

A

They independent commission to the commonwealth parliament

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60
Q

What do the Australian securities and investment commissions(ASIC), enforce?

A

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

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61
Q

What is company taxation?

A

All Australian businesses are required to pay company tax on their profits, must be paid before profits are distributed to shareholders as dividends.

62
Q

What are the 3 global market influences?

A

-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
Q

How are financial needs determined by the business? (4)

A
  • size of business
  • current phase of business cycle
  • future plans for growth and development
  • capacity to source funds
64
Q

What are budgets?

SPENDING PLAN

A

a spending plan based on your income and expenses

65
Q

What do budgets show? (4)

A
  • cash required
  • capital expenditure
  • expenses
  • use / cost of raw of raw material
66
Q

What are financial risks?

A

Risks of being unable to cover financial obligations

67
Q

What is financial control?

A

Are policies put in place to ensure financial objectives are achieved

68
Q

What are some common causes of financial problems?(2)

A

-Theft
-Damage/loss of assets

69
Q

What is a Cash Flow statement?

A

Is a financial statement, that indicates the movement of cash from transactions over a period of time

70
Q

What is the Income statement?

A

Is the summary of the income earned and the expenses incurred over a period of trading,

71
Q

What are some common policies which promote control?(3)

A

-Clear authorisation
-Rotation of duties
-control of cash

72
Q

What is a positive of the cash flow statement?

A

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
Q

What is the balance sheet?

A

It represents a business’s assets and the liabilities at a particular point in time.

74
Q

What does the income statement show? (4)

A

COGS
Expenses
Gross profits
Net profit

75
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

76
Q

What are assets?

A

Items of value owned by business

77
Q

What are the 2 types of assets?

A

Current and noncurrent assets

78
Q

What Are current assets?

A

Asset which can be turned into cash WITHIN 12 MONTHS

79
Q

What are non current assets?

A

Assets which can be turned into cash over a 12 month period

80
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.

81
Q

What are the 2 types of liabilities?

A

Current and non current liabilities

82
Q

What are current liabilities?

A

Must be repaid within 12 month

83
Q

What is the purpose of the net profit ratio? Gross profit/ sales

A

To show the average net profit generated on each dollar of sale

84
Q

What are non current liabilities?

A

Can be repaid after a 12 month period

85
Q

What is the purpose of the return on owners equity ratio?Net profit/ owners equity

A

Show how effective the money contribution by owners is in making profits on their investments

86
Q

What happens when the profitability ratio is high?

A

It is better if it is high, as the business will be in a better position

87
Q

What is the purpose of the Expense ratio? expense / sales

A

Shows the expenses incurred to make the sales

88
Q

What happens when the expense ratio is lowered?

A

It is better as expenses would be lowered

89
Q

What is the purpose of the account receivable turnover ratio? 360 divided by sales / account receivable

A

It shows the business how many days on average it takes customers to pay their bills

90
Q

What is normalised earning?

A

removing unusual items from the balance sheet

91
Q

What are the limitations of financial reporting? (5)

A

Normalised earnings
Capitalised expenses
Valuation assets
Timing issues
Debt repayments

92
Q

What are capitalised expenses?

A

adding a capital expense to the balance sheet as an asset rather than an expense.

93
Q

What is the valuation of an asset?

A

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
Q

What are the Timing issues?

A

Account receivable as you don’t know when you will be paid.

95
Q

What is debt payment as a financial limitation?

A

Financial reports don’t have the capacity to disclose specific information about debt repayments.

96
Q

What are the 3 cash flow/ financial flow management strategies?

A

Distribution of payment
Discount for early payments
Factoring

97
Q

What is the distribution of payment strategy?

A

Is where payments are distributed throughout the year, so large expense do not occur at the same time, causing a cash shortage.

98
Q

What does cash flow projection do?

A

Assist in identifying periods of possible shortfalls and surplus.

99
Q

What is the discount for early payment strategy?

A

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
Q

What is the Factoring strategy?

A

Is selling account receivables at a discounted price, as it saves cost on following up (unpaid accounts) and debt collectors

101
Q

What is the problem of having excess inventory or lack of control over accounts receivable?

A

Can lead to an increase level of unused assets,leading the business facing liquidity problem

102
Q

What is net working capital?

A

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
Q

What is working capital management?

A

Determining the best mix of current assets and current liabilities needed to achieve the objective of the business.

104
Q

What is working capital mean?

A

Having the funds available for short term financial commitments

105
Q

What are 3 current assets that must be controlled?

A

Cash
accounts receivable
Inventory

106
Q

Why should you control cash?

A

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
Q

Why should you control account receivable?

A

Quicker the debtors pay better the cash position

108
Q

How to manage account receivables?

A

factoring
policies in place to stop people with bad creidt from purchasing
intrest free for short time

109
Q

Why should you control inventory ?

A

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
Q

What are 3 current assets that must be controlled?

A

Cash
accounts receivable
Inventory

111
Q

What is the problem of having excess inventory or lack of control over accounts receivable?

A

Can lead to an increase level of unused assets,leading the business facing liquidity problem

112
Q

Why should you control cash?

A

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
Q

Why should you control account receivable?

A

Quicker the debtors pay better the cash position

114
Q

How to manage account receivables(3)?

A

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
Q

Why should you control inventory ?

A

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
Q

What are 3 current liabilities that must be controlled?

A

Account payables
Loans
Overdrafts

117
Q

Why should you control account receivable?

A

They are money owed by a business to another entity, should be paid at the final due to improve liquidity

118
Q

Why should you control loans?

A

Monitor interest rate and ongoing costs

119
Q

Why should you control overdrafts?

A

Higher interest, however establishment and account keeping fee must be taken into consideration.

120
Q

What are the advantages of leasing?

A

Cash flow is spread, reduces the risk being out of used (as leased asset can be upgraded)
Tax deductible

121
Q

What are 2 strategies that manage working capital (liquidity)?

A

-Leasing
-sale and leaseback

122
Q

What is leasing?

A

Contract between the lessor (owner of asset) and lessee(user of asset) uses the asset in exchange for payment

123
Q

What is sale and leaseback?

A

Process of selling and owned asset to lessor and leasing back through fixed payments over specific period of time

124
Q

What are the advantages of sale and leaseback?

A

Improves liquidity (received large sum)
Have access to asset

125
Q

What are the 2 profitability management?

A

Cost control
Revenue conrtol

126
Q

What are 3 cost controls?

A

Fixed and variable cost
Cost centre
Expense minimisation

127
Q

What is the fixed cost?

A

Costs that don’t depend on the level of operational activity in a business

128
Q

What is cost control?

A

Minimise cost and void unnecessary spending

129
Q

What is variable cost?

A

Costs that do depend on the level of operational activity in a busines

130
Q

What is the indirect cost?

A

Cost incurred by more than one particular product / activity in a control centre

131
Q

What is the direct cost?

A

Cost incurred by one particular product / activity in a control centre

132
Q

What is the role of revenue control

A

Maximise revenue

133
Q

What are expense minimisation?/

A

Reducing expense across a business where possible

134
Q

What is the role of profitability management?

A

Maximising profits through maximising revenue and minimising expenses

135
Q

What is a cost centre and the aim?

A

department that requires fundings, and monitors where the cost is going.

Aim: minimise expenses

136
Q

What is cost volume profit analysis?

level of revenue

A

Can determine the level of revenue sufficient to cover cost to break even

137
Q

How does pricing policies affect revenue?

A

As cost is tied directly with revenue as cost is too high loss of revenue
Cost too low cash shortage

138
Q

What is foreign exchange market?

A

Determine the price of one currency relative to another

139
Q

What is foreign exchange rate?

A

Ratio of one currency to another currency, to tell us how much one unit of currency is worth over another

140
Q

What happens when appreciation in the AUD?

A

Export become more expensive, import becomes cheaper

141
Q

What happens when depreciation in the AUD?

A

Export becomes cheaper and import become expensive

142
Q

What Are the 4 international payments?

A

Payment in adv
Letter of credit
Bill of exchange
Clean payment

143
Q

What are the features of the bill of exchange, ?

A

**Document against payment **, the importer can collect after paying
**Document against acceptance **, importer may collect the good before paying for them .

144
Q

what are the 2 types of bills of exchange?

A

Document against payment using the method
Document against acceptance using the method

145
Q

What are the features of payment in advance?

A

Allows exporter to receive payment and arrange for the good to be sent

146
Q

What are the features of a letter of credit?

A

Is a document that is requested from importer’s bank to exporter promising to pay them a specific amount once conditions are met

147
Q

What are the features of clean payment?

A

Where the exporter ships the good before the importer payment is received, used with very loyal customers

148
Q

What is the stop exchange rate?

A

Is the value of one currency in another currency on particular day

149
Q

What is hedging?

A

Process of minimising the risk of currency fluctuation

150
Q

What are derivatives?

A

Financial instruments that may be used to lessen the exporting risk associated with currency fluctuations

151
Q

What is a forward exchange contract?

A

Where the back guarantees a specific exchange between currencies for a set date, in future

152
Q

what are the 4 financial stratgies?

A

cash flow mangement
working capital management
profitability management
global financial management

Buisness (5 decks)

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