Revision Questions

Question 1

List and explain the four main objectives of Financial Management.

Answer 1

LIQUIDITY – having sufficient cash resources to meet the day-to-day running costs of the organisation.
PROFITABILITY – making sufficient excess of revenue over expenses to make running the organisation worthwhile
RISK MINIMISATION – the goal is to minimise risks whenever and wherever possible
GROWTH – looking for and taking advantage of opportunities for expansion.

Question 2

Give three financial reasons why a business may fail.

Answer 2

Lack of capital, problems with cash flow, too many long term assets

Question 3

List 3 people who are external to the organisation who can provide advice.

Answer 3

Accountants, stock brokers, financial advisors, investment planners

Question 4

What is the term given to organisations that facilitate the flow of funds from individuals and organisations wanting to save, to individuals wanting to borrow.

Answer 4

Banks- Financial Intermediaries

Question 5

Explain the difference between long-term finance and short-term finance. Give two examples of each and state who I could get this type of loan from.

Answer 5

Long term finance is when the loan commences over ten years where as short term can be a loan from 1 month or up to 3 years.

Question 6

What is the term used to describe a liability that represents money owed to parties outside the organisation?

Answer 6

Debt Finance

Question 7

What is the term which represents the monetary value of the owner’s stake in the organisation?

Answer 7

Equity finance

Question 8

What is the term used to describe a situation when the bank allows an organisation to have a negative balance in their cheque account.

Answer 8

Bank Overdraft

Question 9

What is the term used to describe a loan which is secured by specific property.

Answer 9

Mortgage

Question 10

What is the term used to describe when an asset is obtained by the organisation and
makes regular payments to the financial intermediary.

Answer 10

Leasing

Question 11

What is the term used to describe the determination of the appropriate mix of the organisations assets.

Answer 11

Investment Strategy

Question 12

Explain the difference between Current Assets and Non-Current Assets.

Answer 12

The main difference between a current and non current asset is how quickly the asset can be liquidated (sold for cash). A current asset is something that can be sold within a business cycle, which is typically a year. A non current asset is exactly the opposite - an asset that cannot be converted within a year.

Question 13

What is the term used to describe the determination of the type of finance used to purchase assets and the resulting mix between equity, short-term debt and long-term debt.

Answer 13

Financing strategy

Question 14

Explain the difference between undercapitalisation and overcapitalisation.

Answer 14

Under capitalisation is when you have insufficient funds to run your business efficiently on a daily basis. Over capitalisation is when you have exceeding amounts of money that do not benefit your businesses income.

Question 15

What is the term used to describe the process of identifying and minimising the potential cost of unfavourable events.

Answer 15

Risk Management

Question 16

What is the term used to describe the service offering protection against possible financial loss as a result of some unfavorable event in the future.

Answer 16

Insurance

Question 17

What is the term used to describe the plan for cash receipts, cash payments and the resultant cash balance at certain points of time in the future.

Answer 17

Cash Budget

Question 18

Explain the difference between Fixed Cost and Variable Cost.

Answer 18

FC -costs which remain the same over a period of time and over a wide range of sales volume; VC - vary in direct proportion to changes in sales volume

Question 19

Define Break Even Point

Answer 19

Used to determine the exact number of items you need to cover your fixed and variable costs per unit.

Question 20

What is the term used to describe when any profits made by the business are not paid to the owner but reinvested back into the business?

Answer 20

Retained profit

Question 21

What is the term used to describe when a company asks the public to subscribe for shares.

Answer 21

Public issue or ordinary shares

Question 22

What is another name for the groups of companies with the reserve bank, conducts it markets operations in the commonwealth government securities.

Answer 22

Credit Unions

Question 23

What is the term that describes organisations which facilitate the flow of funds from individuals and organisations wanting to save, to individuals wanting to borrow?

Answer 23

Financial intermediaries

Question 24

Explain how the three financial environment factors can impact on an organisation.

Answer 24

Suppliers competitors

Question 25

2. What is the name of the organisation whose main objective is to channel funds by being part owners in emerging businesses

Answer 25

Venture Capital Firms.