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Business Studies > Processes of Financial Management > Flashcards

Processes of Financial Management Flashcards

1
Q

What is involved in planning and implementing?

A
  1. Financial Needs
  2. Budgets
  3. Record Systems
  4. Financial Risks
  5. Financial Controls
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2
Q

What is the formula for the liquidity ratio?

A

Current Assets/Current Liabilities

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3
Q

How can liquidity be improved?

A
  • Sell current assets
  • Factoring and leasing
  • Liabilities need to be matched to their long term use

(Any way that will allow for immediate cash)

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4
Q

What is the gearing ratio?

(Debt to Equity Ratio, Solvency)

A

Total Liabilities/Total Equity

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5
Q

What does gearing measure?

A

How much debt is being used compared to equity

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6
Q

What is the ideal gearing ratio amount?

A

There isn’t one as it is hard to generalise.

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7
Q

How to fix gearing?

A

Either decrease debt or increase equity such as:
* sell assets to repay debt
* reatin more profit
* invite new owners
* issue more shares

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8
Q

What is the Gross Profit ratio?

A

Gross Profit/Total Sales x100

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9
Q

What does the GPR tell us?

A

The percentage of revenue that results in Gross Profit. aka the amount of GP in every $ of sales.

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10
Q

What is the Net Profit Ratio?

A

Net Profit/Total Sales x100

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11
Q

What is the Return on Equity ratio?

A

Net Profit/TotalEquity

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12
Q

What is the Expenses ratio?

A

Total Expenses/Total Sales x100

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13
Q

What are the 6 types of limitations in financial reports?

A
  1. Debt Repayments
  2. Normalised Earnings
  3. Capitalising Expenses
  4. Valuing Assets
  5. Timing Issues
  6. Notes to Financial Statement
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14
Q

What does a Budget fundamentally do?

A

Provide information in quantative terms and reflect how resources will be used

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15
Q

What can Budgets be used for?

A
  • Cash required for certain days
  • Estimated cost of COGS
  • Number of estimated labour hours for production
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16
Q

What is a Financial Risk?

A

Risk of a business unable to cover its financial obliagtions

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17
Q

What are examples of financial risks?

A
  • Should the business borrow to expand?
  • Will interest rates go up?
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18
Q

What are the most common financial lossess?

A
  • Theft
  • Fraud
  • Damage or loss of assets
  • Errors in record systems
19
Q

Define financial controls

A

Systems to ensure plans of a business will be achieved in the most effcient way

20
Q

What are the 5 stages of planning and implementing?

DDMIE

A
  1. Determining financial needs
  2. Developing budgets
  3. Maintaining and record systems
  4. Identifying financial risks
  5. Establishing financial controls
21
Q

What are examples of Financial controls?

A
  • Clear authorisation
  • Separation of Duties
  • Rotatating Duties
  • Controlling cash e.g use of registers and no money kept overnight
22
Q

What are advantages of Debt Financing?

A
  1. Funds are readily available and can be acquired at short notice
  2. Interest payments are tax deductible
  3. Flexible payment periods and various types of debt to suit business needs is available
  4. WILL NOT dilute ownership
  5. Easier to budget with
23
Q

What are disadvantages of Debt Financing?

A
  1. Increased risk of interest rates increasing
  2. Security is usually recquired
  3. Regular payments affect cash-flow (fixed cost)
  4. If you go bankrupt, lenders have first claim on money
24
Q

Why is Equity the most important source of fund for a business?

A

It remains in the business for an indefinite time because funds do not need to paid back.

25
Q

What are advantages of Equity Financing?

A
  1. Does not have to be repaid
  2. Cheaper because no interest payment
  3. If business fails, funds do not have to be repaid to investors
  4. Financial risk is low as there are no liabilities, hence solvency is not affected.
26
Q

What are the disadvantages of Equity?

A
  1. Must share profit in the form of dividends. Dividends are not tax deductible
  2. Ownership will become diluted increasing the risk of conflict
  3. Connecting with new investors is costly as being listed on the ASX requires a prospectus which is timely and costly
  4. Expectation that the ROI will be statisfactory for shareholders
27
Q

What happens if you don’t match funds of finance correctly?

A
  • Using long term finance to fund short term assets will result in paying for assets long after they have been sold, reducing profit and affecting cash flow
  • Using short term finance for long term assets will cause financial problems because the amount borrowed must be repaid before the assets generate any revenue
28
Q

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

A
  • 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
29
Q

What do cash flow statements do in general?

A

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

30
Q

What does a balance sheet do?

Statment of finanacial position

A

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

31
Q

What does an income statement show?

Statement of finanacial performance

A

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.

32
Q

What does a balance sheet show?

A

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

33
Q

What are the 3 types of activities listed on a cash flow statement?

A
  1. Operating Activities
  2. Investing Activities
  3. Financing Activities
34
Q

What are the 3 types of expenses on an income statement?

(Statement of financial performance)

A
  1. Selling Expenses
  2. Administrative Expenses
  3. Financial Expenses
35
Q

Define Capitalising Expenses

A

Accounting method where a business records an expense as an assets on the balance sheet rather than an expense on the income statement
Problem
* Overstate profitability and understate expenses

36
Q

What are Normalised Earnings and what is their aim?

A

Removing one off or unusual transactions which can affect profitability.
There aim is to give a more accurate depiction of the true earnings of a company, allowing for better comparison.

Problem
* Not a true relflection of a company’s complete performance

37
Q

What is Valuing Assets and it’s problem?

A

The process of estimating the market value of assets or liabilities, especially with intangible assets e.g. goodwill
Problem
* Limiting accuracy
* Overstating assets, understating expenses

38
Q

What are Timing Issues?

A

Businesses can make adjustments to the timing of activities to make profits seem higher or expenses seem lower

E.g. recording purchase of new equipment in upcoming year and recording sale of cars in past year, even if bought at the same time.

39
Q

What are Debt Repayments and it’s problem?

A

Financial reports cannot disclose specific information about debt because **they only show who is owed and how much. **When its due, rate of interest and capacity of debtor to repay is not included.
Problem
* Companies can choose to project favourable overview of the business and not disclose debt repayment information.

40
Q

What are Notes to the Financial Statements and the problem associated?

A

Any additional information that is left out of the main report. Often they are included at the end but are NOT COMPULSORY.

Problem
* They are OPTIONAL to include

E.g. summary of accounting methods, depreciating assets or how explanation of how assets have been valued

41
Q

What are 3 Unethical Financial Reporting Practices

A
  1. Misinterpretation of Funds
  2. Misuse of funds (embezellment)
  3. Tax Minimisation
42
Q

What are 3 Ethical Financial Reporting Practices?

A
  1. Auditing Accounts
  2. Record Keeping (helps prove transactions are valid and restricts tax evasion)
  3. Reporting Practices (gotta share financial reports to shareholders)
43
Q

What are the 3 different types of Audits?

A
  1. Internal Audit e.g suprise stocktake
  2. External Audit
  3. Managment Audits
44
Q
A

Business Studies (7 decks)

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