Processes

Question 1

PLANNING AND IMPLEMENTING

Answer 1

Financial needs, record systems, budgets, controls, Risk

Question 2

Financial Needs

Answer 2

Determined by: Size, phase of BUS cycle, future plans for growth and development, capacity to source finance, management skills for assessing financial needs

Question 3

Budgets

Answer 3

What: Budgets provide info in quantitative terms about requirements to achieve a particular purpose and reflect the strategic planning decisions and how resources should be used. Resource allocation!
Why: Provide framework for a BUS, outline plans, allocate financial resources effectively, assists forecasting
Drawn to show: Resource allocation, number and cost of labour hours required, estimate use of raw materials, cash required for a period
Types: Operating, projects, financial

Question 4

Record Systems

Answer 4

Mechanisms employed by the BUS to ensure data recorded and the info provided by financial systems is accurate, reliable, efficient and accessible.
Global BUS have complexities such as currency, language, legal regulations which may differ between nations

Question 5

Financial Risk

Answer 5

The risk of being unable to fulfill financial obligations.
Q's: Should BUS borrow
Will shareholders assist in expansion
Will interest rates go up
Implications: 
Gearing ratio 
When borrowings are due to be paid
Interest rates

Question 6

Financial Controls

Answer 6

Policies and procedures that ensure the plans of a BUS will be achieved in an efficient way
WHY: theft, fraud, damage of assets, errors in records systems
HOW: - separation of duties
Internal audited (reviews which suggest ways of improving policies and procedures)
Clear authorisation
Control of cash
cheque signatures
protection of assets (register)
Control of credit procedures, follow up on outstanding accounts

Question 7

Debt finnance Adv

Answer 7

1. Interest payments are tax deductible reducing the costs 2. Lender does not gain ownership in the BUS, 3. Allows access to a large pool of funds to conduct necessary activities.

Question 8

Debt Finnance DIS

Answer 8

1. Regardless of income the BUS has to meet the repayment requirements, 2. Can be difficult to obtain particularly for new BUS 3. Property and other assets can be repossessed by the lender if payments are not made

Question 9

Equity Adv

Answer 9

1. No repayments since funds are from internal sources 2. Dividend payments are from the businesses profits so if no profit is made they do not have to pay dividends.

Question 10

Equity Dis

Answer 10

1. Dividends are paid to shareholders from the businesses profits 2. Dilution of ownership when a BUS raises funds from equity/shareholders therefore loose control of the business.

Question 11

Matching Principle

Answer 11

Short term debt finance smaller short term commitments and long term debt finance as a source of finance in order to finance long term commitments.
If not achieved, financial risk due to short term debt

Question 12

Cash Flow

Answer 12

Link between an income statement and a balance sheet
The movement of cash within a BUS and can determine whether a BUS can meet financial obligations
Determines if the business has sufficient funds

Question 13

Balance Sheet

Answer 13

Represents a businesses assets and liabilities
Assets = Liabilities + Owners Equity
Assets (CA/NCA)
Liabilities (CL/NCL)
Owners equity (Retained profits/Net profit, - drawings, capital)

Question 14

Income statement

Answer 14

Shows the income and expenses over a period of time
Financial year in AUS is July 1 - June 30
Good for comparing figures over time (previous years indicate the efficiency of the BUS)

Question 15

Liquidity ratio (working capital/current ratio)

Answer 15

Current assests/current liabilities

Benchmark is 2:1 - below that can be concerning

Question 16

Gearing Ratio (debt to equity ratio)

Answer 16

Liabilities (debt)/Total equity (Owners Equity)
Related to insolvency
0.5-1:1 is the benchmark if no industry average is provided
Lower the better - if too high there is a possibility of insolvency

Question 17

PROFITABILITY

Answer 17

Show as a %
GPR = gross profit/ sales
NPR = NP/ Sales (15% for most industries)
Return on earners equity ratio (ROE) = NP/Total equity (10-15% good)
Think about reducing expenses, cogs (cheaper suppliers), and increase revenue

Question 18

EFFICIENCY

Answer 18

Expense ratio = expenses/total (minimise expenses and maximise the sales - lower the ratio the better)
No real benchmark it depends on how long the BUS be running for, type of BUS, eco conditions
Acc rec turnover = Sales/Accounts receivable = times per year
365 divided by answer = number of days
More than 60 days is generally a problem for collecting money and impacts cash flow and liquidity.
This can allow a BUS to take corrective action and recover outstanding debts.

Question 19

Comparative ratio analysis (LIT)

Answer 19

Analysis involves budget figures so that projected figures can be compared against actual figures
IDENTIFY TRENDS THEN TAKE CORRECTIVE ACTION

Question 20

Benchmark against similar firms ie

Answer 20

Ensures the BUS is operating effectively in comparison to its competitors
Identify if they are above or below peers
If not they will have to change something such as increase marketing or make it better

Question 21

Industry average

Answer 21

Comparison against the industry average (i.e Tech industry)
Used as a guide - enables the BUS to examine risk and analyse the reasons for the differences and then they are able to take corrective action
Increases in globalisation has led to comparing against global industry standards

Question 22

Limitations of financial ratios

Answer 22

1. Normalised earnings 2. Capitalising expenses
2. Debt Repayments. 4. Valuing assets
3. Timing issues. 6. Notes with financial statements

Question 23

1. Normalised earnings

Answer 23

It’s the solution
Removes a one off or unusual influence such as seasonal or cyclical patterns in the economy which will affect profitability
An attempt to show a more accurate representation of the business and its activities
Allows for year to year comparisons

Question 24

2. Capitalising expenses

Answer 24

Adding the expense to the balance sheet in assets rather than an expense (R and D)
It may understate the BUS expenses and overstate the assets and profitability
Could be correct if it is adding significant value to growth of the Business
May be a misrepresentation and misleading for investors

Question 25

3. Debt Repayments.

Answer 25

Debt liabilities may not be disclosed
Reports do not have the ability to specify info about repayments such as:
How long BUS has had the debt
The capacity of the BUS or debtor to pay the amount owed
When the debt is due
The adequacy and the methods the BUS has for recovering the debt

Question 26

4. Valuing assets

Answer 26

Estimating the market value of assets or liabilities
May be listed under the original cost of the asset not the current market value
ADV is that that historical cost can be verified
DIS may distort the BUS balance sheet meaning that it may not accurately represent the true worth of the BUS assets because it’s the original cost of the business
Intangibles are difficult to value
Appreciation or depreciation of the asset must be considered

Question 27

5. Timing issues

Answer 27

Represents the 12 month period from July 1 - June 1 which may not show the true position of the BUS
Inappropriate cut off periods or the use of different cut off methods may give a misleading representation of the BUS financial performance
Overstate profits to attract investors or understate to avoid tax payments
True representation includes the matching principle should apply i.e. revenue and costs should match the period in which they occur.

Question 28

6. Notes with financial statements

Answer 28

Notes contain important info that are left out of the main reporting documents such as:
Info that may be useful to stakeholders to help make sense of the statements
Accounting methodologies for recording and reporting transactions that can affect the bottom line expected from an investment in a company
Containing further details about how the figures in the financial statements were calculated and the procedures that were used to develop them

Question 29

ETHICAL ISSUES WITH FINANCIAL REPORTS

Answer 29

To do with the moral values with BUS methods ie what they believe is right and wrong
Transparency and trust are the main concerns with financial management have to be honest

Question 30

Relation to financial Management:

Answer 30

Act in good faith
Exercise power for the purpose in the name of the corporation
Exercise discretion reasonably and properly
Avoid conflicts of interest

Question 31

How to ensure that you meet ethical needs

Answer 31

Follow accounting conventions
Disclosure of all relevant info the stakeholders
Social responsibility regarding the the financial returns (society and environment factored into the framework of the BUS)
Payment to directors - Bonuses / Misuse of funds

Question 32

How to demonstrate the ethical approach

Answer 32

Provide the triple bottom line
Internal audits beyond the mandatory external audits for public firms
Provide greater transparency

Question 33

Audited Accounts

Answer 33

An independent check of financial accounting procedures
Internal Audits - Systematic review of the operations . Aimed at identifying how well risks are managed , whether right processes are in place. Can identify areas where efficiencies or innovations may be made.
Management Audits - Establish the current level of efficiency, suggest improvements, lay down standards for future performances, critically evaluate the senior executives as a management
External Audits - Has to be done by law by an external source. Determines whether accounting reports are complete and accurate, statements present the firm’s position fairly.