Processes of financial management

Question 1

What does planning and implementing involves

Answer 1

• the setting of goals and objectives
• determining the strategies to achieve these goals and objectives
• identifying and evaluating alternative purses of action
• choosing the best alternative for the business.

Question 2

what are the financial needs of a business

Answer 2

The size of the business
Stage of the business life cycle
Capacity to source finance
Management skills
Future growth plans of the business

Question 3

what are budgets

Answer 3

Budgets provide information in quantitative terms

Budgets can show the following; cash required, expenditure expectations and forecasted revenue
- Budgets enable businesses to perform the control function, as they allow management to determine if objectives are being met

Question 4

what are record systems

Answer 4

Record systems are the mechanisms employed by a business to ensure that data are recorded and the information provided by record systems is accurate, reliable, efficient and accessible

Question 5

what are financial risks

Answer 5

• unable to cover its financial obligations
• being unable to cover debt
• not maintaining solvency / liquid

Question 6

what are financial controls

Answer 6

Policies and procedures that ensures that the plans of a business will be achieved in the most effective way

Question 7

what is monitoring and controlling involve

Answer 7

• cash flow statement
• income statement
• balance sheet

Question 8

define monitoring

Answer 8

Monitoring - the process of measuring actual performance against planned performance

Question 9

define controlling

Answer 9

Controlling - involves the comparison of planned performance against actual performance and taking corrective action to make sure the objectives are attained

Question 10

what is a cash flow statement

Answer 10

Financial statement that indicates the movement of cash receipts and cash payments resulting from transactions over a period of time

• show if a business can meets its financial commitments

Question 11

what is a income statement

Answer 11

Shows the operating results for a period. It shows the revenue earned and expenses incurred over the accounting period with the resultant profit or loss

Question 12

what is a balance sheet

Answer 12

Represents a business’s assets and liabilities at a particular point in time, expressed in money terms and represents the net worth of the business

Question 13

what is the ratio for liquidity

Answer 13

current ratio
- higher the better
- balance sheet
- measures the ability of the business to pay its short term debts when they fall due

Question 14

what is the solvency / gearing ratio

Answer 14

debt to equity ratio
- balance sheet
- lower the better
- ability of a business to pay its debts in the long term

Question 15

profitability ratios: Gross Profit

Answer 15

• revenue statement
• %
• percentage of each dollar that is GP
• higher the better

Question 16

profitability ratio; Net Profit

Answer 16

• revenue statement
• %
• percentage of each dollar that is net profit
• higher the better

Question 17

profitability ratio: return on equity

Answer 17

• revenue statement + balance sheet
• how much the owners investment in the business is earning
• %
• higher the better

Question 18

efficiency ratio: Expense ratio

Answer 18

• revenue statement
• %
• percentage of sales that are taken or absorbed by expenses
• lower the better

Question 19

efficiency ratio: Account receivable turnover ratio

Answer 19

• revenue statement + balance sheet
• how efficient the business is in collecting its account receivable
• number of dats to collect debt
• under 30 days = good

Question 20

comparative ratio anaylsis

Answer 20

• ‘snapshot’ of a particular point in time
• identify trends

Question 21

COGS formula

Answer 21

opening stock + purchases - closing stock

Question 22

Gross Profit formula

Answer 22

sales - COGS

Question 23

Net profit formula

Answer 23

gross profit - expenses

Question 24

Assets formula

Answer 24

liabilities + owners equity

Question 25

Limitations of financial reports acronym

Answer 25

N - normalised earnings
C - capitalising expenses
V - valuing assets
T - timing issues
D - debt repayment
N - notes to the financial statement

Question 26

Define normalised earnings

Answer 26

Process of removing one time or unusual influences from the balance sheet to show the true earnings of a company

Creates a picture of what the business performs like on a normal day to day basis

Question 27

define timing issues

Answer 27

Financial reports cover activities over a period of time ( usually a year ) - hence, the business financial position may not be a true representation if the business has experienced seasonal fluctuations
Eg. selling particular assets on purpose to improve financial position

Question 28

What are the ethical issues

Answer 28

debt funds
ethical consideration
ASX

Question 29

how is debt funds an ethical issue

Answer 29

If debt funds are used extensively to finance activities in a business, although debt funds may be used to increase profits, there is added risk for shareholders.

Question 30

In terms of ethical consideration, directors have a duty to …

Answer 30

Act in good faith

Exercise power for proper purpose in the name of the corporation

Exercise discretion reasonably and properly

Avoid conflicts of interest

Question 31

how does the ASX link to ethical issues

Answer 31

The australian securities exchange corporate governance council officiates the requirements of corporations listed with the ASX and their responsibilities in regard to compliance with law, disclosure and transparency of company details to shareholders and the public.