topic 3 finance Flashcards

Question 1

Q

financial management & common financial management objectives (S/LT)

Answer

A

planning, monitoring, controlling of bus financial resources to acheive financial objs & broad goals

achieve profits, ROI, LT stability & growth
maximising profitability
growth (profitability & growth –> bus success)
efficiency
liquidity
solvency

Question 2

Q

financial resources

Answer

A

resources of a bus that have monetary value

Question 3

Q

strategic role of financial management

Answer

A

ensure bus survives, grows in comp bus enviro & achieves goals & objs by managing finances effectively

impacts other bus functions & contribute S&LT bus goals
provide financial resources for strategic plan outlining goals, objs, future direction & strats to achieve goals & objs
investment goals for capital (machinery & tech), training staff, marketing, expanding operations

managers

set financial obj & ensuring bus can achieve goals
sourcing finance
preparing budgets & forecasting future finance
prepare financial statements
maintain sufficient cash flow
distribute funds to other parts of bus

Question 4

Q

ongoing activities in strategic management of financial resources

Answer

A

monitor cash flows
set procedures & policies on cash & credit ocntrols
pay S&LT debts
balance mix of raising debt & equity finance
budgeting (monitor actual & planned performance)
record keep & analysis using financial statements & ratios
develop & implement financial controls to minimise loss of assets/errors in record systems
tax management
ensure financial resources efficiently used to generate profits & ROI for owners & SHs

Question 5

Q

mismanagement of financial resources can lead to problems such as

Answer

A

insufficient cash to pay suppliers
inadequate capital for expansion
too much stock (finished goods/raw materials)
too many unproductive assets (Dont generate revnue)
dealys receiving funds from credit sales
unable to pay LT debts
bus failure

Question 6

Q

2 important reasons why bus owners need financial plan. what must they include?

Answer

A

if they intend on seeking finance
* FIs, investors, lenders need evidence that bus will likely grow & make profit to make repayments
help owners predict bus performance

indicate whether bus viable/wasting time/money

must include

financial projections (sales forecaset, expenses budget, cash flow & income projection, balance sheet, breakeven analysis)
continuously review, revise plan
compare actual figures w/ projections

Question 7

Q

LT financial goals vs ST

Answer

A

determined for set period of time (>5 yrs)
* must have no. ST specific obj to achieve

to achieve LT objs, must satisfy no. ST, specific objs

tactical (1-2 yrs) & operations (day to day) plans of bus

Question 8

Q

obj of financial management (maximising profitability)

Answer

A

ability to make financial return from bus activities (max profits [sell output] by ensuring revenues exceed expenses [spent on inputs]largest possible margin by ^ sales & decreasing costs)

must monitor revenue & pricing policies, costs & expenses, lvls inventory & assets
satisfy owners & SHs ST but also attracting & maintaining investment for bus’ sustianabilityLT

Question 9

Q

obj of financial management growth

Answer

A

^ in size & value of bus LT by expanding product range, sales, profits, market share
achieve internally through ^demand for product, new market opps( improve productivity & new products/outlets)
externally by (purchase other bus’/through mergers & acquisitions
depends on ability to develop & use asset structure (distribution of its assets across different categories)
too much growth too fast can be unsustainable ( cash flow problems)

Question 10

Q

obj of financial management efficiency

Answer

A

ability to minimise costs & manage assets to achieve max profit w/ lowest possible lvl assets (value) (generate max returns w/ min costs)

^ outputs using same no. inputs/maintain current lvls output using fewer inputs
production cost (wages, materials, marketing) w/ quantity final output produced –> potential for ^ profitability by ^ sales rev/reducing expenses

Question 11

Q

obj of financial management liquidity

Answer

A

ability bus can pay ST debts (<12 months)

need sufficient cash flow to meet financial obligations/convert current assets to cash quickly eg. sell inventory (working capital [CL-CA])
controlling cash flow ensure supplies of cash when needed
excess/shortfalls/idle cash avoided ( lose profitability)
need to determine optimal amt working cpaital during diff periods (too much –> inefficiency eg. cash in bank/unsold stock dont generate returns other resources might (invest new equip)) (too little –> liquidity problems eg. unable pay emps, suppliers, costs –> bus failure, unable to take adv market opps)

Question 12

Q

obj of financial management solvency

Answer

A

ability bus can meet financial commitments <12 months (ST) & >12 months (LT)
for owners, creditors, shareholders important bc indicate security/risk of investment
if borrowed too much for cpaital investment (equip, machinery, premises)/to meet ST expenses (inventory, wages) & repayments exceed cash flow from sales, bus insolvent (bankrupt) & cease trading)
measure via GEARING, measures prop(%) of debt (external finance) to equity (internal finance [source equity funds from new investors is external source]) to finance bus activities
highly geared: high reliance on debt finance & higher risk of insolvency
survival depends on solvency

Question 13

Q

ST & LT financial objectives

Answer

A

based on goals of strategic plan –> S/LT

ST: tactical (1-2 yrs) & operational (day to day) plans of bus
* regularly reveiwed to see if targets met & if resources used to best adv to achieve obj
eg. update old equip w/ new tech, expanding into new markets, provide new services

LT: strategic plans determined for (set period time) 5+ yrs

to grow bus
broad goals eg. increasing profits/market share –> st goals to achieve
annually reveiw progress to decide how to finance investment (debt/equity financing)

Question 14

Q

potential conflicts betw ST & LT financial obj (eg. expansion, R&d

Answer

A

LT objs growth vs ST objs profitability, managing cash flow, repaying debt

LT growth vs ST debt repayment

capital investment can boost growth LT by ^productivity but capital investment projects take time before generate revenue (R&D, investment sourced from debt, high gearing regular repayments of principal & interest, takeSTprofit, threaten liquidity and minimise ability ST financial obligations)

SHs vs Managers

SHs willing ^risk w/ investment projects to ^profits LT.
if dont pay SHs, sell shares & purchase equity other bus
managers prioritise ST obj cash flow to operate
too much ST discorage ^ profits but too mcuh LT –> insolvency before investment benefits

eg. to expand, supported by managers, employees, suppliers but increase costs & gearing –> lower profits ST conflict shareholders, owners, investors but LT most owners support if increase value bus

Question 15

Q

interdependence of finance w/ other functions

Answer

A

interdependence: mutual dependence of bus functions on one another, unsuccessful operating in isolation

each help Finance generate sales & income, impact financial performance so must evaluate & control to achieve objs
finance funds activities & provides other functions data to measure & evaluate performance (output volume, sales figures, absenteeism) & hence dependent on success ofo ther 3 to achieve financial objs
raise finance –> ^capital –> ^efficiency

Question 16

Q

operations in achieving financial objs (interdependence)

Answer

A

reduce prod costs/^output w/ existing input lvls, ops can help achieve EFFICIENCY –> improve PROFITABILITY via lower costs/higher revenue/both
^ scale ops by expanding –> ^ value (GROWTH) & INVESTORS receive ^ ROI (PROFITABILITY)
**inventory management **–> improve EFFICIENCY (reduce costs via less waste & storage space used), PROFITABILITY (reduce COGS & expenses from storage & insurance) & LIQUIDITY (more cash to meet ST liabilities)
LT, improve SOLVENCY by reducing bus’ dependence on debt as source of finance (maximise output w/ fewer inputs reduce need to fund purchase of physcial assets, max profits to pay debts & fund future purchases than borrowing)

Question 17

Q

marketing contribute to financial objs (interdepence_

Answer

A

^ sales revenue –> PROFITABILITY –> ^ bus’ value (net worth = owner’s equity/total assets - total liabilities) & share price (GROWTH)
improve profitability –> ^ capacity to raise funds for expansion in futureby selling new shares (sell existing shares only generates funds for SH selling em, not bus itself) sicne shares now mroe attractive to investors & can sell at higher price
also boost cash flow –> improvce LIQUIDITY by providing ^ working capital to meet ST liabilities

Question 18

Q

hwo HR achieve financial objs

Answer

A

find right staff, equips em w/ right skills through ongoing training & development –> motivated & likelier stay, proactive when replacing leaving staff –> boost labour productivity –> financial objs
EFFICIENCY & PROFITABILITY by maximising output of given lvl staff/reducing no. staff to produce given output lvl, profit through ^ in revenue/reduce costs
GROWTH - bus able expand market share & ops by lowering prices (lower labour costs per unit, quality existing products, developinnovative products)
LIQUIDITY - effective, efficient staff ^ working cpaital by ^ revenue & minimising labour costs
SOLVENCY - productive workforce can reduce bus’ dependence on debt as source of finance by ^ profits to pay existing debts & not debt finance in future

Question 19

Q

influences on financial management

Answer

A

ext factors (domestic gvt eco decisions & legislation, global eco (all aspects of op)

internal factors ( directly controlled & monitored by management through S&LT planning

Question 20

Q

activities bus involved during its life cycle & how est stage can access funds –> growth stage

Answer

A

initial set up

est new bus/buy established
expand range of products
intro new product
expand no. outlets
upgrade systems & tech
employ more staff
build new warehouse

owners/shareholders contribute funds but in growth stage, many sources of funds & ways used (int/ext)
financial decision making relevant info must be identified, collected, analysed to determine course of action

Question 21

Q

internal finance (retained profits & selling assets)

Answer

A

funds obtained within the business (owner’s equity & retained profits)

cumulative net profits after tax, not withdrawn to SHs as dividend. is a reinvestment from SHs
majority of aus bus rely for finance growth & expansion
overreliance may inhibit growth of SMEs, althocould grow more by investing in capital

sale of assets

after takeover, new entity may have surplus assets due to duplication resources which can be sold –> fund new projects

Question 22

Q

reasons why SME owners dont use ext sources of funds

Answer

A

fearful of growth
satisfied w/ current size
dunno what to grow
afraid unable to repay loan –> liquidation
BIGGEST was bc hwo they funded bus in past, dont understand alternatives

Question 23

Q

external (sources of) finance

Answer

A

funds provided by sources outside bus (banks, FIs, gvt, suppliers)

through creditors/lenders is debt finance
make regular repayments on borrowings so firms must generate sufficient earnings
^ risk using debt as interest & bank & gvt charges must be paid on top of principal borrowed
but AUS gvt promotes by providing tax deductions for interest payments
S&LT borrowing

Question 24

Q

debt for short term borrowing (debt is S&LT)

Answer

A

borrowings from outside sources where interests regularly paid on top of principle

provided by FIs via overdrafts, commercial bills, bank loans, commercial bills, factoring
* finance temp shortages in cash flow/finance for working capital
* funds repaid within 12 months
* current liabilites on balance sheet

Question 25

Q

overdraft as short term debt borrowing

Answer

A

bank allows bus to overdraw acc up to agreed limit for specified time to overcome temp cash shortfall

assist ST liquidity problems eg. seasonal decrease in sales
minimal costs, lower IRs than other borrowing
IRs variable so interest paid on daily outstanding balance (moeny not yet repaid) of acc [as u pay off the overdraft (reduce the amount you owe), the amt of interest have to pay will also decrease bc calculated on remaining amt owed, not og amount]
banks require agreed limits to ovedrraft maintained at high lvl and require security
repayable on demand (not common)
many prefer overdrafts for ST loans bc bank loans dont have same flexibility
OD owners only need to use when needed, safety net
no regular repayment schedule, owners can pay money back when able
most commonly used source of funds for small bus
can be un/secured against bus’ assets, IRs variable & lower than other forms borrowing

Question 26

Q

commercial bills as ST debt borrowing

Answer

A

ST loans issued by FIs for larger amts (>$100 000) betw 30-180 days

borrower received sum immediately & bill (promise)s to repay moeny w/ interest in future
full amt borrwed doesnt have to be repaid until end of term
flexible for interest paid & repayment period
secured against bus assets, rolled over until borrower has funds to repay loan in full

Question 27

Q

factoring as ST debt borrowing

Answer

A

raise funds immediately by selling accs receivable at discount to firm specialising in collecting accs receivable (finance/factoring bus)

bus receives up to 90% of amt of receivables w/n 48hrs of submitting its invoices to the factoring company
immediate access to funds –> improve cash flow & gearing
dont worry abt collecting accs/costs for process
full amt wont be received for accs
greater risk than other ST borrowing bc likelihoodof unpaid debts
relatively expensive source of finance bc bus responsible for debts unpaid & commission is paid on debt
last resort but more lenient now
appealing to construction, manuf, agr & mining, transport & storage, wholesale trade & labour hire markets due to longer payment cycles to clients
no security/give up equity in bus

Question 28

Q

what does it mean when a factoring company offers its services with/out recourse?

Answer

A

‘without recourse’: bus transfers responsibility for non-collection to factoring company

‘with recourse’ bad debts still responsibility of bus

Question 29

Q

factoring vs invoice discounting

Answer

A

ID ST bus uses accs receievable as collateral to borrow money, offer to established companies w/ high turnover rate (bank)

bus, NOT LENDER, collects payments from customers –> wont be aware they took cash flow finance
finance company pays 80-90% total invoice amt upfront (improve cash flow & WC) but bus collect payments & repay lender w/ fees & itnerest charges
maintain standards of customer service & keep direct relation w/ debtors

Question 30

Q

LT debt borrowing

Answer

A

funds borrowed >12 months
* purchase major assets (buildings, equip, usually security on loan)
* non-current liabilities on balance sheet

Question 31

Q

diff to leasing

mortgage as LT debt borrowing

Answer

A

loan secured by property of borrower (bus)

property cant be sold/used as security for further borrowing until mortgage repaid
finance purchasing property eg. new premises, factory, office
repaid w/ interest through regular repayments over agreed PIT
diff is OWNERSHIP: borrower owns property during fixed schedule but leasing is after fixed schedule

Question 32

Q

debentures as LT debt borrowing

Answer

A

loan certificatesissued by company for fixed IR for fixed PIT, secured against bus assets

provide to raise funds from investors > FIs
investor lends money & in return, company issues a debenture with promise to make regular interest payments for a defined term & repay loan at PIT future
on maturity, companyrepays amt by buying back debenture
need prospectus, tell investors abt company, how they’ll use funds & terms of investment (return compensate for risks)
finance companies raise funds debenture issues to prublic

Question 33

Q

unsecured notes as LT debt borrowing

Answer

A

loan from investors(made by finance companies) for set PIT, not secured against bus assets and most risk to investors (lender)

higher IR than debentures bc unsecured loan
usually 3 months-3yrs at fixed IR
companies sell theseto generate money eg. for share repurchases & acquisitions

Question 34

Q

leasing as LT debt borrowing + 2 types of leases

Answer

A

payment of money to use equip owned by another party

lessee uses equip & lessor owns & leases equip for agreed PIT
can borrow funds & use equip w/o large capital outlay required
costs & benefits of financial asset transferred from lessor to lessee
usually used by finance companies
corporations required by law to reveal sig leases in published financial statements
bus choose equip, arrenge for finance company to purchase it & lease from finance company, retaining ownership for lease period
1. operating
assets leased for short periods (shorter than life of asset)
lessee doesnt gain ownership of asset at end of lease
owner carries maintenance on asset
can be cancelled often w/o penalty
2. financial
lessor purchases asset on behalf of lessee
for life of asset
lessee’s payment covers interest and eventual purchase of asset
lease repayments fixed for life of asset 3-5 yrs
plant, vehicle, equip, furniture
cheaper than operating (long periods)

Question 35

Q

example of a motor vehicle leased for 2 weeks

Answer

A

leased as OPERATING lease

leasing firm responsible for repairs to vehicle
if vehicle returned < 2 weeks, adjust lease payment
if leased for 3 yrs, FINANCIAL lease
firm leasing vehicel responsible for insurance & maintenance of vehicle
term close to life of vehicle

Question 36

Q

lessor vs lessee

Answer

A

lessor GRANTS lease to someone else, owns asset leased under agreement to lessee

lessee makes one time payment/series periodic payments to lessor for using asset

Question 37

Q

adv using leasing as source of finance

Answer

A

assets bus w/ cash flow bc cash outflows/payments related to leasing spread over several years saving burden of one-off large cash payment
costs of establishing leases can be lower than other financing
LT financing w/o reducing control of ownership
fixed repayments for period so cash flow easily monitored

Question 38

Q

disadv of leasing

Answer

A

IR charges can be higher than other forms of borrowing

Question 39

Q

equity as LT debt borrowing as EXTERNAL source of funds (after, equity as internal)

Answer

A

raise finance of company by inviting NEW owners

issue shares to public via ASX
alternative to debt funding
includes:
ordinary shares (new issue)
private equity

funds contributed by bus owners eg. capital/reinvest net profit back into bus aka retained profits

Question 40

Q

extra: Crowd sourced equity funding CSEF

Answer

A

innovative type of fundraising allows many individuals to make small financial investments ≤ $10 000 in exchange for equity stake in company

similar to other forms of crowdfunding, enables companies to raise funds through online portal
can raise ≤ $ 5 mill/yr

Question 41

Q

ordinary shares as LT debt borrowing

Answer

A

msot commonly traded shares in AUS

type of equity security represents partial ownership in a publicly-listed company, SH entitled to vote at general meetings & receieve dividend from distributed profits
voting rights according to no. shares they have & dividend apyments
when shareholder purchases company shares , provide** source of equity finance** for bus
value of share determiend by company’s current/future perf

Question 42

Q

4 types of ordinary shares commonly traded in AUS (1. new issue)

Answer

A

1. new issue

security issued & sold for 1st time on public market (ASX)
IPOs msot common/float when private comp lists on stock exchange for 1st time to raise funds by selling shares to public
to raise funds via IPO, company must prepare prospectus & lodge with ASIC containing all info potential investors need to make informed judgement to invest in company
IPOs give investors chance to buy shares at set price before company begins trading on ASX hoping shares rise over time
msot come from privately held companies that become public & present investors w/ new opp

Question 43

Q

rights issue as a type of ordinary share

Answer

A

invite existing shareholders to purchase more, new shares in same company

give existing shareholders securities called ‘rights’ to purchase new shares at discount to market price on future date
until set date new shares can be purchased, SH can trade rights on market as if trading ordinary shares
rights are a type of option as it gives SH right NOT OBLIGATION to purchase add shares in company
current SH have right to purchase new shares in prop to no. shares currently own
companies issue rights offering to raise additional funds/pay down debt esp if unable to borrow mroe money

Question 44

Q

(private) placements as a type of ordinary share

Answer

A

company issues new shares to (persuade) group institutional investorsat discount to current market price to RAISE CAPITAL QUICK w/o full public offering

can raise up to 15% of their existing capitalisation w/o seeking approval of existing SHs/issuing prospectus –> quicker, cheaper (reduced regulatory requirements)
may disadv existing SH by reducing/diluting interests in company’s earnings (large discounts)

Question 45

Q

share purchase plans as type of ordinary share

Answer

A

offer exisitng SH in listed company to purchase newly issued(more) shares in company w/o brokerage fees

usually offered at discount to current market price
companies can issue new shares to current SH w/o issuing prospectus
only issue max $30 000(15?) in new shares to each existing SH in a SPP

Question 46

Q

private equity as form of LT debt borrowing

Answer

A

money invested in private company not listed on ASX
* like public listed companies who sell ordinary shares, can raise cpaital to financa future expansion/investment of business

Question 47

Q

financial institutions list 7

Answer

A

provide financial services & deal w/ financial transactions eg. investments, loans, deposits

banks
investment banks
finance companies
superfunds
life insurance companies
unit trusts
ASX

Question 48

Q

banks

Answer

A

most important source of funds for bus

wide range of financial prod & services (credit cards, insurance, overdrafts, investment & savings accs) & lend money via personal & bus loans & mortgages
services ATM, financial advice, trading in FMs, stockbroking, funds & insurance management
receive savings as deposits from ind, bus & gvt and make investments & loans to borrowers
bus wants to make profit accepting money as savings (Deposits) at LOWER IR and lends at HIGHER IR, differential is profit
NAB, comm, ANZ, Westpac

Question 49

Q

investment banks

Answer

A

FIs specialise in financial services (create capital) helping companies grow, raise funds (borrowing & lending), manage financial risks.

customise loans to suit bus needs w/ variety of diff loans
may impose conditions eg. require some equity in bus borrowing funds
trade in money, securities & financial futures
arrange LT finance for company expansion
provide working capital
advise on mergers & takeovers
arrange overseas finance

Question 50

Q

finance companies

Answer

A

NBFI specialise in smaller commercial finance

provide mainly ST & medium term loans to bus through consuemr hire-purchase loans, personal loans & secured loans
major providers of lease finance to bus
**some **specialising in factoring/cash flow financing
raise money through share issues (debentures) for fixed term w/ fixed IR
**lenders **have security over firms assets during liquidation
finance company entitled to sell bus assets to recover initial loan if bus fails
provide quick access to funds but IRs higher

Question 51

Q

life insurance companies

Answer

A

NBFIs provide cover & lump sum payment if death occurs

issue policies for financial protection to beneficiaries after the death of the insured to help loved ones pay off debts and meet future financial needs.
policy holders apy regular premiums & insurer guarantees to pay designated beneficiary as sum of money upon death of insured person specified in contract
provide equity & loans to bus sector through receipts of insurance premiums
–> funds received in premiums (reserves) invested in financial assets

Question 52

Q

superannuation funds

Answer

A

scheme set by fed gvt requiring employers to make financial contribution to a fund that will provide benefits to emp when they retire

employees 18-69 paid $450+ before tax every month
contributions for ppl under 18 who work 30+ hrs/week and still earn more than 450….
must pay 9.5% of employees salary into superfund acc on top of emp salary/wages
invest money into company shares, property & managed funds so members earn investment **returns **on money
takes pressure off age pension, most expensive welfare measures due to ^ life expectancy, wanna increase from 11.5% to 12% 2025
have to if self-employed

Question 53

Q

APRA

Answer

A

regulatory body oversees AUSFIs.

ensure stability, safety, and soundness of the financial system by regulating and supervising banks, credit unions, insurance companies, superannuation funds
protect lenders & depositers
funded largely by industries it supervises,

Question 54

Q

unit trusts as a FI

Answer

A

collective investment scheme pools money from many small investors to invest in a diversified portfolio of assets, (stocks, bonds, real estate).

managed by professional fund managers, make investment decisions on behalf of the investors.
invest in mixture of cash, aus/international shares, fixed interest securities (eg. gvt bonds), property
recently invest in gold, silver, oil, gas
main adv diversification bc invests in variety of assets, individual investors reduce exposure to the risks with any one investment.

Question 55

Q

ASX, products & services it offers

Answer

A

created by merger of ASX & Sydney Futures Exchange July 2006

primary stock exchange group in aus where shares bought & sold
primary & secondary market for sale of shares to public
market operator, clearing house & payments system facilitator
oversees compliance with rules & promotes standards of corporate governance among AUS’ listed companies.

offers products/services:
* shares, futures, exchange traded options, IR securities,

Question 56

Q

5 biggest stocks traded on ASX

Answer

A

BHP Billiton
CBA
Rio Tinto
CSL
Westpac

Question 57

Q

primary vs secondary market (ASX)

Answer

A

public company raise new capital by issuing new ordinary shares

2nd hand securities from existing company eg. shares traded betw investors (ind, bus, gvt, FI)

transactions dont increase total amt financial assets but increases LIQUIDITY of ifnancial assets, which influences primary market for securities

Question 58

Q

most common way to buy & sell shares

Answer

A

on the share market using a full service broker, online trading acc, company itself when offers shares through public float
* online broking service allows investors to make investment decisions for lower fees
* full service broker charges more but gives advice on what to buy & sell

Question 59

Q

how does gvt influence financial management decision making (2)

Answer

A

roles of gvt bodies responsible for monitoring & admin (ASIC
restrictions on imports & exports, –> prod costs, int competitiveness –> profitability
MP –> IRs (cost of borrowing money) by changing cash rate
FP –> company taxation

Question 60

Q

ASIC as gvt influence on financial managmenet

Answer

A

independent (aus) gvt org regulates aus companies & FMs

enforces & administers the Corporations Act 2001
protects consumers in investment, insurance, super, banking (exccept lending) in AUS
reduce fraud & unfair practices in FMs and products
ensure companeis adhere to law, collects info abt em and publicises it eg. financial info must disclose in annual reports
regulates insolvent companies
if bus breaches law, investigate & determine remedies based on seriousness of misconduct (monetary penalties, imprisonment –> neg publicity)
directors protected from personal liability under insolvent trading rules if debts incurred except when break law

Question 61

Q

company taxation gvt influence on financial management

Answer

A

all incorporated bus (private & public companies) need to pay CT on net profits before they’re distributed to shareholders as dividencds

levied at flat rate (prop) 30% but 27.5% turnover <$50 mill
improve AUS international competitiveness, more attractive to invest for LT eco growth
more jobs, higher wages for AUS workers
OECD AUS marginal company tax rate one of highest (3rd 2020)

Question 62

Q

3 global market influences

Answer

A

eco outlook
availability of funds
IRs

largely uncontrollable financial influences, ext bus enviro
globalisation of FMs create more interdependence betw ecos & bus (+financial) sector relying on trade for expansion and ^ profits

Question 63

Q

global eco outlook as global market influence (positive, neg is opp)

Answer

A

projected fluctuations in global BC (lvl EG)

if positive (world eco growth upswing):

^ demand for products & services, bus need to ^ production to meet demand & raise finance to purchase equipment, employ/train staff (FOP), expand size
IR decreases on funds borrowed internationally from money market bc risks of defaults(sales ^, profits^) reduced & demand for loanable funds ^ at slower pace since bus’ less reliant on debt finance (but ^ demand for funds puts upward pressure on IRs)

Question 64

Q

availability of funds as global market influence

Answer

A

ease bus can access funds for borrowing on international FMs

int FMs made up of institutions, companies, gvts who lend money to ind, comp, gvts who need to raise capital

conditions & rates based primarily on:

risk, demand & supply, domestic eco conditions

Answer 65

A

1970s and 1980s
* barriers to cross-border financial flows dismantled, aus eco more integrated with GF system
* aus can borrow & invest in financial assets overseas
* foreigners too, increase availability of funds

Answer 66

A

cost of borrowing money

higherlvl risk in lending to bus, higher
aus IRs usually > other c’s, aus bus borrow finance from overseas source to gain adv of lower IRs
BUT ER movements risk adverse currency fluctuation can quickly eliminate cheaper overseas IRs so LT may cost more
domestic appreciate/depreciate relative foreign IR, debt repayments (profit, foreign debt finance)

Answer 67

A

bus plan sets out goals & future direction of bus & develops strats to achieve. collect financial info before making plans (balance sheets, income & cash flow statements, sales & price forecasts, budgets, bank statements, breakeven analysis, financial ratio analysis)

identify amt finance needed
sources of finance available

FI/potential investors need guarantee that financial commitment to bus will be successful
3. methods of reporting financial data
type financial info in plan depends on employees, owners, lenders, potential investors (audience)
financial info must show bus can generate acceptable ROI must analyse financial performance, income statement, balance sheet, financial ratio analysis reports.

determined by:

bus size
current phase of bus cycle
future plans for growth & development
capacity to source finance (debt, equity)
management skills in assessing financial needs & planning

Answer 68

A

financial document to estimate future revenue & expenses over PIT

accurate pic of income & expenses to drive important bus decisions eg. if increase marketing, hire staff,cut expenses, purchase new assets
financial info for bus goals in strategic, tatical, operational planning
managers allocate resources, coord plans made by diff sectors of bus, evaluate perf, plan for future, monitor past & present perf make adjustments
provide figures for planning & decision making to constantly monitor progress and weak areas
(control: planned performance measure against actual, corrective action)

Answer 69

A

review past figures & trends, estimates from departments
potential market share/actual, trends & seasonal fluctations in market
proposed expansion/discontinuing projects
proposals to alter price/quality of products
current orders & plant capacity
consider ext enviro eg. financial trends, availability of materials, labour

Answer 70

A

capital expenditure (strategic plan includes info abt purpose of purchasing an asset, its life span and revenue it would generate) , R&D

included in budgeted financial statements

Answer 71

A

plan predicting revenue & expenses of bus for future PIT

managers interpret diffs betw planned & actual budgets to understand current bus perf & adjustments for future
availability of funds to pursue new projects to achieve goals
OPERATING (main daily activities), PROJECT (capital expenditure + R&D), FINANCIAL (record predictions of operating & project budgets, financial data) budgets
include budgeted income statement, **balance sheet **(both reflect results of operating activities), cash flows (bus liquidity)

Answer 72

A

mechanisms bus use to store data and ensure info rovided accurate, reliable, accessible (sales, expenses)

to improve efficiency, monitor performance, produce financial reports, identify issues (theft, fraud)
poor record keeping major cause of bus failure, need accounting program to manage well
maintaining accurate records is obligation, imp for decision making - w/o, owner has restricted understanding of how bus performing & where improvements need to be made
investors & FIs unlikely to invest/make loans to bus cant demonstrate financial position
required by law to keep records of finacnaial transactions AT LEAST 5 yrs for TAX purposes (docs for income, expnses eg. receipts, bank statements, employee contracts, tax invoices)
ATO allows bus to keep info electronically but need to be secured
maintaining accurate records time consuming task but having right systems & strats can cut down & simplify workload significantly

Answer 73

A

paper-based journals divied into separate sections for receipts, payments, wages, super, inventory

managers record bus transactions manually in sections every month
less expensive to set up
lower risk of losing data

electronic spreadsheet

more efficient way
pc programs allow managers easily generate orders, reports, invoices, financial statements, pay records
accounting programs allow users to email & send financial info to clients, suppliers, ATO
less storage space, easier to meet tax & legal obligations
must ensure records secure, create backup sstem to ensure records nt lose
must be familiar with accounting principles, may need training to udnerstand hwo software works

Answer 74

A

financial risk: possibility of financial loss (chance financial decision result in financial loss)

bus’ take risks to achieve financial objs of profit & growth (greater risk, larger potential financial return but must minimise)
biggest is inadequate cash flow to meet financial obligations. debt finance –> repaid in future
methods of risk minimisation: hedging, derivatives, insurance, diversification
every bus subject to, not all risks can be controlled eg. changesi n IRs
1. determine financial needs
2. develop budgets (see below)
3. maintain record systems
4. minimise financial risks
5. establish financial controls

credit risk

from borrowing money, need to ensure sufficient funds to meet repayments when due otherwise incur severe penalties
risk when extending credit to customers unable to pay for g/s
when borrow money, risk movements in IRs –> financial performance by ^ interest expenses

market risk

risk changing market conditions where company competes for bus
increasing no. consumers shop online/^ comp
affect profitability

lqiudity risk

bus cash flow, whether sufficient funds to meet ifnancial obligations
how easily bus can convert assets to cash if need funds

operational risk

day to day management (when they have poor management)
legal problems, fraud, HR issues, bus model risk( marketing/growht plans inadequate

Answer 75

A

procedures, policies provide feedback on bus’ financial perf bus

financial statements
financial ratios
comparative analysis

monitors & controls allocation & usage of its resources
control vry important in assets eg. accs receivable, inventory, cash
budgets (estimate resource requirements for future period) used eg. prepare cash budget enable bus to predict cash shortages

common policis promote control w/n bus:

clear authorisation & responsibility for tasks in bus
separate duties (one for ordering, one for receiving inventories)
qualification restrictions & employing only qualified staff for roles
control cash (cash registered, card > cash payments)
protect assets ( regularly check inventory)
control credit procedures (follow up overdue accs a& consumer credit checsk)

Answer 76

A

industry risk
projected income
cash fow
if bus struggling to survive/able to respond to changes in ext bus enviro

Answer 77

A

S&LT borrowings from ext sources of bus. interest paid on top of principle through regular repayments

funds usually readily avaialbel & interest payments tax deductible, reduce cost
carefully consider risk & return when determining debt/equity finance
^ risk when borrowing, impact on future profitability & financial stability
if high lvl debt financ,e risk > equity finance
amt risk affected by how much bus borrowed when loans have to be repaid & required lvl current assets for bus
higher risk investment, higher return, determine share prices of corporations
SMEs reluctant to seek

Answer 78

A

ADV

funds usually readily available & can be acquired at short notice
increased funds SHOULD ^ earnings & profits
interest payments tax deductible
flexible payment periods & types of debt
wont dilute current ownership in bus

DISADV

^ risk if debt from FIs (interest, bank & gvt charges may ^)
requires security by bus
make regular payments
lenders have 1st claim on money if bus in bankruptcy

Answer 79

A

finance raised by company by inviting new owners/SHs, diluting og owner’s share of bus

most important source of funds for companies,remain in bus for indefinite time, dont have to be repaid at set date
safer than debt but requires sufficient profits made so bus can continue operating
confidence to creditors & lenders more willign to lend if there are equity funds
safety net for unexpected downturns/change bus activities

Answer 80

A

ADV

dont have to be repaid unless owner leaves bus
cheaper than other sources (no interest payments)
owners who contributed equity retain control over hwo finance used
low gearing (uses owner’s resources and not external sources)
less risk bus & owner

DISADV

lower profits & returns ofr owner
expect owner ROI
LONG, EXPENSIVE PROCESS TO obtain funds
ownership diluted (current ownerships less control)

Answer 81

A

new credit cards & bank overdrafts

Answer 82

A

entrepreneurs invest own money into bus w/o external source/credit aka bootstrapping

Answer 83

A

small bus have many sources avaialble but range greater with larger bus bc lenders concerned abt risk & security

larger equity capital on bus, more secure financial structure, likelier opp to borrow
terms must suit purpose of requiring funds eg. ST finance to fund LT assets financial problems bc amt borrowed msut be repaid before LT assets have time to generate ^ cash flow
using LT finance to fund ST assets/situations bus still paying mortgage long after resolves/stock sold, reduce profits
match length/term of loan with eco lifetime of asset finance used to purchase (ST finance to purchase ST assets eg. inventory (current, ST asset) purchased w/ trade credit whereas building (non current asset) purchased w/ mortgage)
STRUCTURE influence finance decisions eg. companies raise funds by issuing shares to public/issue debentures whereas unincorp bus cant
credit rating affects availability of finance, indicates bus ‘track record’ meeting ifnancial commitments. higher = greater no. available sources & banks more willing to supply funds

Answer 84

A

agreement betw supplier & bus allows bus to delay payment for g&S already been delivered (manage cash flow)
* ST debt

Answer 85

A

inconsistent methods of review & systems of control immediately impact viability of bus, requires management to monitor internal & ext factors financially impact operations
1. cash flow statements
2. incoem statements
3. balance sheets

how effectively finance used, provide info on whether bus has sufficient funds to meet contingencies

Answer 86

A

financial statement summarises movement of cash receipts & cash payments from transactions over PIT

operational flows: produce & sell output, include cash inflows & outflows
CASH INFLOWS (sales rev, interest revs, dividends from equities of other firms)
CASH OUTFLOWS (payments to suppliers, employees, gvt, other expenses, interest expenses)
info of firms ability to pay debts on time
identify trends, predict change
w/o cash flow, unable to maintain payments to creditors& other obligations (wages, utilities expenses, tax), SMEs fail bc of inadequeate cash flow
creditors, lenders, owners, SHs use to assess ability of bus to manage cash
potential SHs check positive cash flows over years, fluctuating pattern = difficulty
prepared from income istatement & balance sheet (tjhey summarise transactions) but only CASH ones included in cash flow statement

Answer 87

A

generate positive cash flow (inflow > outflow)
pay financial commitments when due (interest, repayment of borrowings, accounts payable)
sufficient funds for future expansion/change
obtain finance from ext source when needed
pay dividends to SHs

Answer 88

A

operating activities

cash inflows & outflows for main activities (providing g&s)
income from sales (cash & credit) main operating inflows + dividends & interest
outflows payments to suppliers, employees, operating expenses (insurance, rent, ads)

investing activities

cahs inflows & outflows relating to purchase & sale of NC assets & investments to generate income eg. purchase new plant & equip/property

3.** financing** activities

cash inflows & outflows relating to borrowing
borrowing inflows can relate to equity (issue shares/owner contirbutes capital)/debt (loans from FIs)
cash outflows debt repayments & cash drawn from owner/pay dividends to SHs

Answer 89

A

summary of income earned & expenses incurred over period of trading

info see how much money come into bus as revenue and gone as expenditure, how much profit

shows:

operating income earned from main function of bus (inventories sales, services & non operating revenue earned from other operations eg. rent, commission, interest)
if income high enough to cover expenses
if mark-up on purchases sufficient

SELLING expenses: costs associated w/ selling (wages, ads)
ADMIN expenses: costs general running (rent)
FINANCE expenses: debt repayments & risk minimisation (interest, lease payments)

Answer 90

A

record income earnedby bus
record COGS (money spent on purchasing raw materials/finished goods for resale to calculate gross profit (revenue - COGS)
calculate net profit (gross profit - operating expenses)

Answer 91

A

selling
costs related to selling g/s which can be directly traced to need for sales

salaries, wages
advertising
delivery
electricity

2.** admin**istration
costs directly related to general running of bus

rent

financial
costs w/ borrowing money from outside ppl/orgs & minimising bus risk

interest & lease payments
dividends
insurance payments

Answer 92

A

total value of all g/s sold aka sales/revenue

operating income/sales/revenue - COGS

opening stock + purchases - closing stock

gross profit-expenses

Answer 93

A

bus’ assets & liabilities at PIT, represents equity/net worthof bus

shows financial stability
shows return on owners’ investment, sources & extent of borrowings, lvl inventories
prepare at end of accounting period

ASSETS (left)

items of value owned by bus
CURRENT (turn over within 12 months) eg. cash, accs receivable (Debtors), inventory (Stock)
NON CURRENT (expect life > 12 months) eg. land, buildings, machinery, furniture
liabilities + owner’s equity
can be financed by owners/external parties

LIABILITIES (right)

items of debt owed to outside parties
CURRENT (debts expect to be repaid < 12 months) eg. overdraft, accts payable (creditors)
NON CURRENT (LT items of debt) mortgage, debenture

OWNER’S EQUITY (right)

funds ocntributed by owner/s, net worth of bus
capital (funds by owners) and retained profits
w/ liabilities owed by bus
reapid (hope w/ ^d profits) by bus to owner

Answer 94

A

if it has enough assets to cover debts & continue makign profits in LT
how much of assets financed from outside borrowings
if bus can expect to meet financial obligations in S/LT
compare with previous year
interest & money borrowed can be paid
assets used to maximise profits
owners making good ROI

Answer 95

A

AE forms basis of accounting process, showing relations betw assets,liabilities, owners equity
* assumes financial info records for bus kept separate from owner’s
* just the formula for assets, owner’s equity, liabilities

Answer 96

A

financial info into meaningful forms & highlighting relations betw diff aspects of bus
compare similar items in income statement & balance sheet
calculate figures, %s, ratios (R for profits, solvency, efficiency, growth, liquidity)
BUT w/o INTERPRETATION meaningless need to make judgements & decisions using data from analysis

VERTICAL
* compares figures w/n 1 financial year
* eg. gross profit as % sales, compare debt to equity
HORIZONTAL
* compare figures from diff financial yrs
eg. 2020 & 2021
TREND
* compares figures for periods 3-5 yrs

Answer 97

A

how effectively assets used in bus
why ^ advertising expenses havent generated more sales revenue than anticipated
why sales decreased over past 2 years
why overdrafts continue to increase

Answer 98

A

reasons for info & decisions to make using it (profitability, efficiency, liquidity, solvency)

compare figures, %s, ratios for departments, diff products or against industry
monitor trends over years/compare items w/n financial statement, expenses & sales

Answer 99

A

ability to meet financial commitments ST, <12 months

measure bus’ ability to pay back CL w/ CA
2:1 (for every $1 CL, $2 CA)
CA/CL
need to pay debts, enough funds for unexpected expenses
assess sufficient cash (accs payable), lvl assets (interest), inventories (loans) can be converted quickly to repay debts whendue
holding OUTSTANDING debts = bus has less cash to earn revenue
quicker receive cash from accs receivable, quicker funds used to earn rev

Answer 100

A

CURRENT ratio /working capital ratio

current assets ÷ current liabilities
measure ability to pay back current liabilities w/ current assets
higher, more capable of meeting ST obligations
2:1 sound financial position, double current assets to cover C liabilities
‘acceptable’ depends on type of firm, how other firms in industry oerating, ext enviro
limited representation of ability to meet
if too high, bus using current assets inefficiently (have lot of cash)problems in working capital management
firms that sell finished goods & keep large lvls inventories need higher ratio than firms selling on credit > cash
large bus in food industry use lower ratio 0.6:1
service industries eg. doctors rely on cash payments for services dont need high ratio

Answer 101

A

factoring
sell non-essential NC assets & use funds toreduce current liabilities
inject more equity into bus to pay off liabilities
too low may have to sell NC assets to cover liabilities, reducing capacity to earn profits/borrow ST w/ higher interest payments (avoid < 1.5:1)

Answer 102

A

gearing ratios determines firm’s solvency ( abiltiy to meet financial commitments in LT aka LT financial stability)
* if creditors will be paid, investors expect ROI
* direct affect on ST & immediate solvency of bus

gearing measures relation betw debt & equity, prop of debt (ext finance) and prop of equity (int finance) to finance activities
deg depends on type of industry & management
industry w/ higher risk but likely generate large profits eg. mining higher debt: equity ratio (highly geared)
manuf industries high debt (highly geared = higher prop debt to equity = greater risk = greater potential for profit)
debt affects potential investors bc high risk can discourage investment (risk, return, deg of control)
no optimal lvl but rare for company to have no gearing
lvl solvency reflects (control of debt & equity) for LT survival

Answer 103

A

mix of debt & equity & prop of both (gearing/solvency)

Answer 104

A

to balance gearing of bus, consider owner lvl control
profits earned ust be sufficient to cover interest payments
if funds unabailable to meet, & accs arent paid, lenders & creditors have right to claim payment from business
ROI
cost of debt
size & stability of bus’ earning capacity
liquidity of bus’ assets (greater cash flow & more liquid assets more likely interest charges paid)
purposes of ST debt

Answer 105

A

total liabilities ÷ total equity
extent firm relies on debt/ ext sources to finance
ratio > 1 = bus has debt > equity (less solvent, higher risk)
careful for IRs, bus confidence & eco to determine if balance appropriate for industry
highly geared not good for LT financial stability as investors less attracted coz greater financial risk of insolvency
lowly geared: financial resources not used effectively
ratio 0–>1 bus debt < equity
type of bus determine how highly geared eg. less influenced by eco fluctuations higher but sell essentials can carry more debt less affected by eco downturns

Answer 106

A

ways to reduce debt/increase equity

dec debt by selling non-essential assets to pay off/re-negotiate loans to spread payments over longer period
alt lease assets > purchasing
^ equity retain more profits/equity funding by selling mroe shares (if public comp) or invite new owners

Answer 107

A

banks borrow large amts funds to loan large amts moeny
* higher than 2:1 common in industry
* other industries also high are capital-intensive eg. large manuf companies

Answer 108

A

ability to make financial return from bus activities(revenue-expenses)

satisfy owners & SHs ST but also crucial for bus’ LT sustainability
depends on revenue earned by bus & ability to ^ selling prices to cover costs & other expenses incurred in earning income
MOST IMPORTANT FINANCIAL OBJ
amt determined by volume of sales, mark-up on purchases, lvl expenses

Answer 109

A

owners & shareholders wanna know if firm earning acceptable ROI
creditors wanan know if they’ll be paid & should offer credit in future
lenders wanna know if principal on loan & interest will be repaid, if lend to firm in future
management uses to decide policy adjustment

Answer 110

A

income statement
1. gross profit ratio

gross profit ÷ sales
2. net profit ratio

net profit ÷ sales
3. return on equity ratio

net profit ÷ total equity

Answer 111

A

gross profit/sales(rev)

measures % sales rev ends up as gross profit,
depends on industry type
fall GPfall amt NP, amt decrease depends on price reductions due to specials/sales, mark-downs on out of date stock, changes in mark-up policies
GP must be suffieicnet to pay expenses & still provide profit for owner
only calculated by bus that sell stock (not service bus) thsoe who purchase goods from suppliers & sell at higherp rice to customers
changes from 1 accounting period to another, effectiveness of policies on pricing, sales, discounts, value of stock
low ratio might need to source alt suppliers, investigate competitors
other expenses eg. wage, electiricty, advertising deducted from GP for NP, NP ratio mroe accurate to indicate profitability

Answer 112

A

measures % of sales rev ends up as net profit

NPR 30% = $0.3 net profit contributed by every $1 sales rev
for soletraders & partnerships represents return on contribution to bus
company usually return part of NP to shareholders as dividends and retain some for future expansion
no set figure for profit ratios
aim at higher G&NP ratio & compare w/ past perf, competitors, industry avg

Answer 113

A

super funds, iron ore mining, car sharing providers, electricity distributors

Answer 114

A

measure how (much owner’s investment earning) effective funds contributed by owners been generating profit (ROI)

if ROE 10%, for every $1 contributed by owners, receive $0.1 in return
net profit/total equity
return for owners must be better than return gained from alt investments
if ROE rises due to ^ debt, carry ^ risk
owners also compare current yr’s return w/ previous yrs & against industry avgs
compare return w/ alt investment eg. interest earned via FI
higher ratio/%, better return for owner, consider expansion/diversification
if unfavourable return, owners consider selling bus
most investors want ≥ 10% return bc wont risk investing when could get same return by investing moeny in bank/gvt bonds

Answer 115

A

ability of bus to use resources effectively to ensure financial stability & profitability

management in directing & maintaining goals & obj of firm, greater profits & financial stability
expense+ accs receivable turnover ratio

Answer 116

A

expenses/sales(rev)

measre how much expenses bus made making every $1 sales rev
expense ratio 30% = every $1 sales rev, $0.3 expenses
amt sales allocated to ind expenses eg. selling, admin, COGS, financial expenses
day to day efficiency
determine where highest expenses from & why ratio inc/decreased eg. inc maybe ad costs not generated expected ^ sales/decline from lower IRs/less debt used
no ideal, examine carefully by comparing results w/ past perf & industry avgs
lower % better, if too high then need to monitor & control expenses

Answer 117

A

measure effectiveness of firms credit poliy & how efficient collects debts, credit sales/accs receivable

avg collection time: 365/turnover ratio
if turnover ratio 10 = accs receievable turned over 10 times during financial yr (avg is 36.5 days, standard time to repay credit 14-30 days)
measure how many times accs receivable balance converted into cash/how quickly debtors pay their accs
measure how long to receive cash for its credit sales from debtors
divide ratio 365 to determine avg length time to convert balance into cash
if credit policy shorter than accs receivable turnover, need to examine cash flow, credit policies, costs, credit colelction procedures
if not efficient in collecting accs receiavable, charge interest on overdue payments, offer discounts for early payments, more selective when granting credit

Answer 118

A

comparing ratio of bus over various periods helps identify trends & interpret results
compare ratios against industry standards eg. industry avgs & benchmarks to assess bus’ financial state
comparing ratios with bus’ in same industry & same structure, insight into bus’ perf relative to competitors

figures, %s, ratios not complete analysis, need comparisons & benchmarks
figures from 2/+ years ago indicate trends, make ratio analysis mroe meaningful
can include budget figures so predicted figures can be compared against actual over short timr periods (month), info avaiable for interested parties w/n firm > ext stakeholders

Answer 119

A

compare ratios with previous yrs, w/ similar bus, against common idnustry standards/benchmarks

over diff time periods,
ensure same things compared, finding comparable firms difficult
benchmarks merely guide
aus bus mainly use aus standards but globalisation of bus, world standards more commonly used for benchmarking
inter-bus comparisons access relevant bus statistics from many sources eg. ABS up to date & accurately reflect industry norms

Answer 120

A

may not give completely accurate assessment of bus financia position

misleading info impacts decision making and puts risk
1. normalised earnings
2. capitalisign expenses
3. valuing assets
4. timing issues
5. debt repayments
6. notes to financial statements

Answer 121

A

earnings adjusted to account changes in eco cycle/to remove one-off items **affecting profitability **

more accurate depiction of company’s true earnings
E.g. when a business sold a property that it owned in the central business district
of a large city, the sale would be substantial and give an unrealistic profit for that business for that year
easier to compare profitability figures for bus from a year to next & against other bus’
many one-off expenses (lawyer) or gains (sell asset) & even though costs & revenues realised and affect bus ST cash flow, not indicators of LT performance
diff bus’ define earnings differently –> comparing difficult
may exclude items may reflect structural probls/opps
can exclude items to present better results –> mislead investors abt actual performance

Answer 122

A

(recording an expense as an asset on balance sheet rather than expsense on income statement)
LIMITS:

understate expenses & overstate profits
^ assets
change liabilities

spread cost over multiple periods –> overstate profits ST –> , LT cash flow projection),
^s asset base of balance sheet, distort financial position and give investors & stakeholders false security of solvency
hide inefficiencies/taking more risk

expense it

included as expense on income statement & subtracted from bus revenue to determine profit
2. capitalise it
counts towards capital expenditures
on balance sheet as an asset
income statement only feature depreciation of asset
when not used up & have future eco value eg. buy van for 10 yrs

Answer 123

A

estimating value of assets when recording them on balance sheet

HISTORICAL COSTS:

if asset valued equal to cost asset at time of purchase, assumes value of AUD & ER remain unchanged throughout accounting period, not true (value/price they were purchased), overstate/underestimate value)
market fluctuations: some NC assets (land) ^ value over time but others (vehicles, machinery) lose value (depreciate)
depreciation rate is estimate & can give false impression how much bus worth
if asset valued at historical cost, not reflect true present value

VALUE of INTANGIBLE:

intagible assets (goodwill, trademarks, intellectual property) diff determine real value bcdont physically exist, no formula for calculation
excluded from balance sheet based on Int Accounting Standards
if F manager includes, tempted to overvalue to make bus appear more financially stable
esp difficult to estimate for NC assets
asset value sometimes written as its historical cost on BS (assets lsited w/

Answer 124

A

cost can be verified BUT value may distort bus’ balance sheet, not accurately represent true worth of bus’ assets bc original cost of asset can be diff from current makret value

also some assets very diff to value

intangible assets items of value to bus but dont physically exist (trademarks, goodwill, brand name) not includedo n balance sheet bc value too diff to calculate (no formula) & if include on BS, overvalue to make bus appear more financially stable than reality

Answer 125

A

estimate how much value they lose every year
* use accounting standards so value of assets on balance sheet more accurate
* can choose many methods but may mislead some investors

Answer 126

A

matching principle (accrual accounting): when revenue recorded in income statement, expenses directly relating to it must be recorded at same time (accounting period?)

revenue earned will match costs incurred to earn that revenue, more accurate representation of financial position
eg. sell property in june receive commission in july record expense in june
cash accounting: in income statement, transaction only recorded when bus receieves cash

Answer 127

A

can omit info abt debt repayments:

bad debt (recorded under accs receivables on balance sheet
adequate methods for recovering bad debt (large bus’ can outsource debt recovery by hiring 3rd party firm but SMEs no resources bc costs & time consuming)
when debts due: repayment to creditors
more faovurable status atPIT
not fully reflect cash outflows (& liquidity)
ST view overlooks LT cash obligations & risk –> mislead investors abt ability to meet future financial commitments
gearing ratio determine if bus are risk of failign to meet LT financial commitments
highly geared alarming for stakeholders but profit potential greater eg. higher debt lvls to fund growth –> ^ future profits
eg.
how LONG bus has/had been recovering debt
CAPACITY of bus to repay amt/s owed (debtor could be close to bankruptcy and unable to repay)
if debt repayments held over until another ACCOUNTING PERIOD –> false impression of situation

Answer 128

A

report details & additional info left out of ]financial statements (balance sheet, income statement, cash flow statement, accounting methods how figures calculated) may affect net profits

left out to make financial reports clearer (sometimes long, & would obscure info reported in financial statements)
info for stakeholders to explain financial statements
notes abt accounting methods to record financial transactions influence reported profits/losses affect overall financial perf & returns investors expect form investment, help stakeholders evaluate how calculated
how figures in financail statmeents calculated & proecdures used to develop them

Answer 129

A

managers & accountants ethical & legal obligation to ensure financial records accurate

legislation guard against unethical activity but often time lag between recognising problem and implementing through law
avoid conflicts of interest
ASX requirements of corporations listed w/ ASX & compliance w/ law, disclosure & transparency of company details to SHs & public

Answer 130

A

inappropriate cut-off periods

manipulate timing of revenue & expenses by extending/shortening financial period to meet targets, to understate profits to avoid tax/overstate to attract investors

misuse funds

funds used for purposes other than intended bus use, resources should use to **max SH value **

fictitious revenues

record sales/rev hasn’t occurred to inflate reported income (stakeholders make decisions based on misleading info)

hidden liabilities & expenses

omit/underreport make financial position apear stronger than is –> incorrect valuations compromise accuracy

improper disclosures

fail to disclose financial info eg. omit figures for stakeholders to make informed decisions

fraudulent asset valuation

vary historical value/reckless valuing of intangible assets

Answer 131

A

audit independent check accuracy of financial records & accounting procedures
internal audit: conducted by employees
external audit: requirement of Corporations Act 2001(cwlth), firm’s financial reports investigated by specialised audit accountants to confirm authenticity

all bus’ required to adopt international financial reporting standards IFRS to improve transparency & accountability to public, globally standardised accounting hepled even TNCs
info can be used by FIs, owners & SHs, potential investors rely on auditor independent check before makign decisions
important part of control function

Answer 132

A

internal audits

conducted internally by employees to check accounting procedures & accuracy of financial records

management audits

review firm’s strategic plan & determine if changes should be made
HR, PP, finance affect strategic plan

external audits

bus financial reports investigated by independent, specialised accountants to guarantee authenticity. when satisfied, auditor issues statement that records accurate & true, comply w/ accounting standards & practices
under Corporations Act 2001 (cwlth), when company becomes a large proprietorship must have annual financial report audited
ASIC says ‘large’ if at end of financial yr, company meets 2 of 3:
revenue of $50 mill/+, gross assets $25 mill/+, 100/+ employees
small bus, external auditors only used if bus is for sale/check fraud

Answer 133

A

waste, ineff use resources, misue of funds, fraud, theft

auditors check control procedures of bus by physically checking assets eg. count cash, condition & amt inventory, accs receivable, NC assets –> check records to see if match physical

Answer 134

A

all** accounting processes depend on how accurately & honestly data recorded in financial reports**

documents must be created for every transaction even cash - if not, not show up as rev & reduce bus’ profit for year –>lower tax burden
ATO regularly monitors, foind evading tax responsibilities fines far excess amt saved in tax
prosecutions for tax evasion can harm reputation, alienate custoemrs who want honest & ethical bus

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