Processes of Financial Management

Question 1

what are the 5 parts of the processes of financial management?

Answer 1

1. planning and implementing
2. monitoring and controlling
3. finanial ratios
4. limitations of financial reports
5. ethical issues related to fianncial reports

Question 2

what are the 4 main parts of planing and implementing?

Answer 2

1. financial needs
2. budgets
3. record systems
4. financial risk

Question 3

what are the 5 advantages of financial debt

not that important

Answer 3

answer could have been one of
1 - finds readily available at short notice
2 - Increased finds generally = increased profits
3 - Interest payments are tax deductible
4 - Flexible payment periods are available
5 - Existing ownership of a business is maintained

Question 4

what are the 5 disadvantages of debt finance

not that important

Answer 4

1 - Potential increase in interest rate
2 - Security is required by the business
3 - Regular payments with interest
4 - Lenders have first claim on any money if the business ends up bankrupt
5- Expensive to service the debt with an interest rate

Question 5

name the 4 advantages of equity finance

not that important

Answer 5

answer could have been one of
1 - doesn’t have to be repaid unless shareholder leaves the business
2 - Cheaper than other sources of finance due to no interest payments
3 - Using the owners own recourses without using other external sources of finance - less debt
4 - Less risk

Question 6

name the 4 disadvantages of equity finance

Answer 6

answer could have been one of
1 - Expectations from owner/shareholder on the return investment
2 - Long and expensive process to obtain funds
3 - Extensive documentation (prospectus) required
4 - Ownership is diluted – more shareholders = more owners = current owners have less control

Question 7

what are the 3 methods used in monitoring & controlling?

Answer 7

1. cash flow statements
2. income statements
3. balance sheets

Question 8

what are the 3 things a cash flow statement can show us?

a cash flow statement is:
a financial statement that indicates the movement of cash receipts ( money coming in/inflows) & cash payments ( outflows) from transactions over time

Answer 8

1. operating activities
2. investing activites
3. financing activites

Question 9

what does an income statement tell us?

Answer 9

income earned from the main function of the business, such as sales of inventories, services and non-operating revenue earned from other operations, such as interest, rent and commission

Question 10

what are the 5 main things an income statement shows us?

Answer 10

1. revenue/income
2. cost of coods sold (= opening stock + purchases - closing stock)
3. gross profit (= sales - COGS)
4. expenses
5. net profit (= gross profit - expenses)

Question 11

what does a balance sheet tell us?

Answer 11

the financial stability of the business.

the balance sheet can indicate whether:

• the business has enough assets to cover its debts
• the interest and money borrowed can be paid
• the assets of the business are being used to maximise profits
• the owners of the business are making a good return on their investment.

Question 12

what are the 3 things a balance sheet shows us?

Answer 12

1. business assets (= liabilities + owners equity)
2. liabitilies (= assets - owners equity)
3. owners equity (= assets - liabilities)

Question 13

what are the 5 catagories of financial ratios

Answer 13

1. liquitidy
2. gearing
3. profitability
4. efficiency
5. comparative ratio analysis

Question 14

what is the formula for liquidity?

Answer 14

current ratio = Current assets/Current liabilities

you want a 2:1 ratio

it is the meassure of a businessnes solvency ( ability to stay afloat in the long term)

Question 15

what are the 3 formulas for profitability?

Answer 15

1. gross profit ratio = gross profit/sales x 100
2. Net Profit Ratio = Net Profit/Sales x 100
3. Return on Equity Ratio =Net Profit/Total Equity x 100

Question 16

what is the formula for gearing

long term

Answer 16

Debt to Equity Ratio = Total Liabilities/Total Equity

Question 17

what are the 2 formulas under efficiency?

Answer 17

1. Expense Ratio = Total Expenses/Sales x 100
2. Accounts Receivable Turnover Ratio = (Sales /Accounts Receivable) then divide 365 by the number you got

Question 18

what are the 3 forms of comparative ratio analysis?

Answer 18

1. compared over different periods of time
2. compare against business’ standard/objectices
3. compare with simmilar business’ achievements

Question 19

what are the 6 limitations of financial reports?

Answer 19

1. normalised earnings
2. capatilising expenses
3. valuing assets/historical cost
4. timing issues
5. debt repayments
6. notes to the financial statement

Question 20

limitations of financial reports

what are normalised earnings?

Answer 20

• Earnings that have been adjusted to account for changes in the business cycle or to remove items that will affect profitability
• May show an inaccurate display of a companies true earnings

Question 21

what is capitalising expenses?

Answer 21

• Accounting method where a business records an expense as an asset on the balance sheet rather than as an expense on the income statement.
• Does not represent true financial conditions of a business

Question 22

what is valuing assets/histoical cost?

Answer 22

The process of estimating the value of assets when recording them on a balance sheet. Its difficult to estimate non-current assets when being recorded on a balance sheet.

Question 23

what are timing issues?

Answer 23

One accounting concepts is the matching principle: expenses that are directly related to revenue are recorded on the income statement for the same accounting period

Question 24

what are debt repayments?

Answer 24

the regular payments made by borrowers to lenders to return the money borrowed - hard to record

Question 25

what are notes to the financial statement?

Answer 25

• Notes report the details and additional information that are left out of the main reporting documents.
  often difficult to understand due to their technical characteristics.

contain information such as the accounting methodologies used for recording and reporting transactions that can affect the return expected from an investment.

Question 26

ethical issues related to financial reports

what are the 5 ethical dilemmas?

Answer 26

1. Conflict of interest
2. Payroll confidentiality
3. Illegal fraud
4. Pressure from management to inflate earnings
5. Clients who request manipulation of financial statements

Question 27

ehtical issues relatinf to finacnail reports

what is auditing?

Answer 27

An independent checking of the accuracy of financial reports & the procedures for recording & safeguarding info and finances

Question 28

what are the 3 types of audits?

Answer 28

1. internal audits
2. management audits
3. external audits

Question 29

ethical issues related to financial reports

what is an internal audit?

Answer 29

Employees check accounting procedures and see if change is needed

Question 30

Ethical issues related to financial reports

what is a management audit?

Answer 30

Review of strategic plan and allocation of financial resources

Question 31

Ethical issues related to financial reports

what is an external audit?

Answer 31

required by law (corporations act) to show that a company is meeting international financial reporting standards (IFRS) and ensuring the reports are accurate.

Question 32

Ethical issues related to financial reports

what does record keeping do?

Answer 32

Business’ that conduct a large number of cash transactions may not record them to avoid paying tax. (tax fraud) enforces by the ATO.

Question 33

ethical issues influencing financial reports

who are the big 4 accounting firms?

Answer 33

KPMG, Ernest & young, PwC and deloitte