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business y12 > topic 3 finance > Flashcards

topic 3 finance Flashcards

1
Q

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

A

planning & monitoring of bus financial resources to enable bus to acheive financial objs
* activities of bus impact financial perf & msut be evaluated & controlled, work close to other OMH to achieve obj

  • maximising profitability
  • growth
  • efficiency
  • liquidity
  • solvency
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2
Q

strategic role of financial management

A

ensure bus survives, grows in comp bus enviro & achieves goals & objs by managing finances effectively
* LT view of where bus going, how it’ll get there and monitor process to track progress
* investment goals for capital (machinery & tech), training staff, marketing, expanding operations

  • 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
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3
Q

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

A
  1. if they intend on seeking finance
    * FIs, investors, lenders need evidence that bus will likely grow & make profit to make repayments
  2. 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
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4
Q

LT financial goals vs ST

A

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

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

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5
Q

obj of financial management (maximising profitability)

A

excess revenue over expenses/costs

  • satisfy owners short term but also for LT sustainability
  • carefully monitor revenue & pricing policies, expenses, inventory lvls, lvl assets
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6
Q

obj of financial management growth

A
  1. growth
    ability of bus to ^ size LT.
    * depends on ability to develop & use asset structure (distribution of its assets across different categories) to increase sales, profits, market share
    * sustainable in future
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7
Q

obj of financial management efficiency

A

ability to minimise costs & manage assets to achieve max profit w/ lowest possible lvl assets (value)
* operations/revenue producing activities
* control measures to monitor assets
* aim for efficiency must monitor lvls inventories & cash, collect receivables

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8
Q

obj of financial management liquidity

A

extent bus can meet financial commitments <12 months (ST)

  • need sufficient cash flow to meet financial obligations/convert current assets to cash quickly eg. sell inventory
  • controlling cash flow ensure supplies of cash when needed
  • excess/shortfalls/idle cash avoided ( lose profitability)
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9
Q

obj of financial management solvency

A
  • extent bus can meet financial commitments <12 months (ST) & >12 months (LT)
  • for owners, creditors, shareholders important bc indicate risks of investment
  • whether bus able to repay amts borrowed for investing in vapital
  • gearing to measure % of assets bus funded by ext sources –> measure reliance on external finance
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10
Q

ST & LT financial objectives

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
* broad goals eg. increasing profits/market share –> st goals to achieve
* annually reveiw progress to determine if implement changes

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11
Q

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

A
  • to acheive LT profitability, bus need to invest in human & physical resources, many cost money & take long time to pay off, minimising ability to meet ST obligations
  • cosntantly assess achievement of obj & satisfy as many goals possible

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

eg. invest R&D expensive, takes many years to achieve useful results
* bad ST but LT money

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12
Q

interdependence of finance w/ other functions

A

each help Finance generate sales & income for department, each impact financial performance so must be evaluated & controlled to achieve bus objectives

OPERATIONS

  • funds to purchase inputes & transf processes
  • relies to produce products

Marketing

  • funds to undertake various forms of promotion

HR

  • funds to pay staff
  • to manage staff
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13
Q

influences on financial management

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

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14
Q

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

A
  1. 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

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15
Q

internal finance (retained profits)

A

fungs generated from inside the business (eg. most common profits retained to finance expansion)
* all profits not distributed but kept in bus as cheap, accessible source of finance for future activities (retained earnings)
* majority of aus bus rely for finance growth & expansion
* overreliance may inhibit growth of SMEs, altho great pace could grow more by investing in capital

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16
Q

reasons why SME owners dont use ext sources of funds

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
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17
Q

external (sources of) finance

A

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

  • through creditors/lenders is debt finance
  • increased funds for bus increase earnings –> profits
  • 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 tax system promotes by providing tax deductions for interest payments
  • S&LT borrowing
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18
Q

debt for short term borrowing

A

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

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19
Q

overdraft as short term debt borrowing

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
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20
Q

commercial bills as ST debt borrowing

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
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21
Q

factoring as ST debt borrowing

A

bus can 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 likelihood of 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

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22
Q

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

A

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

‘with recourse’ bad debts still responsibility of bus

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23
Q

factoring vs invoice discounting

A

ID only offered to established companies w/ high turnover rate
* bus, NOT LENDER, collects payments from customers –> wont be aware they took cash flow finance
* finance company pays 80-90% total invoice amt but bus decide to collect payments normally & repay lender w/ fees & itnerest charges
* maintain standards of customer service & keep direct relation w/ debtors

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24
Q

LT debt borrowing

A

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

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25
Q

mortgage as LT debt borrowing

A

loan secured by property of borrower (bus)
* property cant be sold/used as security for further borrowing until mortgage repaid
* finance property purchases eg. new premises, factory, office
* repaid w/ interest through regular repayments over agreed PIT

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26
Q

debentures as LT debt borrowing

A

issued by company for fixed IR for fixed PIT
* companies provide to raise funds from investors > FIs
* promise made by company to repay money lend to bus
* investor lends money to company & in return, company issues a debenture with promise to make regular interest payments for a defined term & repay loan at PIT future
* companies borrow offer security to lender over comp’s assets
* on maturity, company repays amt of debenture by buying back debenture
* amt profit made by comp no effect on IR bc debentures carry FIXED IR
* debenture products must have prospectus, tell investors abt company, how they’ll use funds & terms of investment (return compensate for risks)
* finance companies raise many funds through debenture issues to prublic

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27
Q

unsecured notes as LT debt borrowing

A

loan from investors for set PIT, not secured against bus assets and most risk to investors (lender)
* attract higher IR than secured note
* companies sell these to generate money eg. for share repurchases & acquisitions

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28
Q

leasing as LT debt borrowing + 2 types of leases

A

payment of money to use equip owned by another party
* bus assets suitable (cars, plant & machinery, equip, pc, software)
* enterprise can borrow funds & use equip w/o large capital outlay required
* costs & benefits of financial asset transferred from lessor to lessee
* lessee uses equip & lessor owns & leases equip for agreed PIT
* LT lease usually cant be cancelled
* 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)
* 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
* lease repayments fixed for life of asset 3-5 yrs
* plant, vehicle, equip, furniture
* cheaper than operating (long periods)

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29
Q

example of a motor vehicle leased for 2 weeks

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

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30
Q

lessor vs lessee

A

lesser 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

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31
Q

adv using leasing as source of finance

A
  • assits 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
  • repayments are fixed for period so cash flow can be monitored easily
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32
Q

disadv of leasing

A

IR charges can be higher than other forms of borrowing

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33
Q

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

A

finance raised by 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

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34
Q

extra: Crowd sourced equity funding CSEF

A

innovative type of fundraising allows large no. 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
* BUT investors receive share of company than product
* can raise ≤ $ 5 mill/yr

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35
Q

ordinary shares as LT debt borrowing

A

msot commonly traded shares in AUS
* if individuals purchase, become part owners of publicly listed company
* voting rights according to no. shares they have & dividend apyments
* when shareholder purchases company shares , provide source of finance (equity) for bus
* value of share determiend by company’s current/future perf

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36
Q

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

A
  1. new issue
    * security issued & sold for 1st time on public market (ASX)
    * IPs 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 raise moeny to grow bus, 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
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37
Q
  1. rights issue as a type of ordinary share
A

invitation to 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
* SH doesnt have to take up rights issue
* companies issue rights offering to raise additional funds/pay down debt esp if unable to borrow mroe money

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38
Q
  1. placements as a type of ordinary share
A

‘share placement’ creates new shares in return for capital & issuing them to selected investors at discount to market price of company’s shares
* additional shares offered at discount to current trading price to special investors able to invest large sum of money
* issued w/o full disclosure document, participation limited to intitutional investors
* may disadv existing SH by reducing/diluting interests in company’s earnings

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39
Q
  1. share purchase plans as type of ordinary share
A

offer exisitng SH in listed company to purchase newly issued 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 in new shares to each SH

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40
Q

private equity as form of LT debt borrowing

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

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41
Q

financial institutions list 7

A

provide financial services & deal w/ financial transactions eg. investments, loans, deposits
* banks
* investment banks
* finance companies
* superfunds
* life insurance companies
* unit trusts
* ASX

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42
Q

banks

A

most important source of ufnds 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 makes profit
* NAB, comm, ANZ, Westpac

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43
Q

investment banks

A

provide services in borrowing & lending primarily to bus sector
* 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

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44
Q

finance companies

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

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45
Q

life insurance companies

A

NBFIs provide cover & lump sum payment if death occurs
* 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 corporate sector through receipts of insurance premiums which provide funds for investment
* funds received in premiums (reserves) invested in financial assets

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46
Q

superannuation funds

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
* superfunds 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
* stil have to if self-employed

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47
Q

APRA

A

prudential regulator of AUS ifnancial services industry
* oversees banks, credit unions, building societies, general insurance companies, most members of super industry
* funded largely by industries it supervises,

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48
Q

unit trusts as a FI

A

aka mutual funds take funds from large no small investors & invest into specific types financial assets
* invest in mixture of cash, aus/international shares, fixed interest securities (eg. gvt bonds), property
* recently invest in gold, silver, oil, gas
* usually connected to firm management for diversified investment portfolio for investors

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49
Q

ASX, products & services it offers

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,

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50
Q

5 biggest stocks traded on ASX

A
  1. BHP Billiton
  2. CBA
  3. Rio Tinto
  4. CSL
  5. Westpac
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51
Q

primary vs secondary market

A

enables company to raise new capital by issuing shares through receipt of proceeds from selling securities

2nd hand securities 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

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52
Q

most common way to buy & sell shares

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

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53
Q

how does gvt influence financial management decision making (2)

A

eco policies eg. fiscal, monetary policy,
* legislation
* roles of gvt bodies responsible for monitoring & admin
1. ASIC
2. company taxation

54
Q

ASIC as gvt influence on financial managmenet

A

independent statutory commission accountable to fed parliament
* enforces & administers the Corporations Act 2001 and protects consumers in investment, life & general insurance, super, banking (exccept lending) in AUS
* aim to assist reducing 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
* if bus breaches law, ASIC investigates and determines remedy depending on seriousness of misconduct (Imprisonment, monetary penalty)
* failure to comply generates negative publicity for bus
* regulates insolvent companies
* directors protected from personal liability under insolvent trading rules if debts incurred except when break law

55
Q

company taxation gvt influence on financial management

A

all incorporated bus (private & public companies) need to pay CT on 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)

56
Q

3 global market influences

A
  1. eco outlook
  2. availability of funds
  3. IRs
    * largely uncontrollable financial influences, ext bus enviro
    * globalisation on world FMs create more interdependence betw ecos & bus (+financial) sector relying on trade for expansion and ^ profits
57
Q

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

A

projected changes to lvl eco growth throughout world
if positive (world eco growth ^):
* ^ demand for products & services, bus need to ^ production to meet demand & require funds to purchase equipment, employ/train staff, expand size
* decrease IRs on funds borrowed internationally from money market from decrease lvl risk of repayments (sales increase, profits also but increase demand for funds puts upward pressure on IRs)

58
Q

availability of funds as global market influence

A

ease bus can access funds for borrowing on international FMs
* int FMs made up of institutions, companies, gvts prepared to lend money to ind, comp, gvts who need to raise capital
conditions & rates based primarily on:
* risk, demand & supply, domestic eco conditions

59
Q

aus financial system deregulated

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

60
Q

IRs as global market influence

A

cost of borrowing money
* higher lvl risk in lending to bus, higher
* bus plans to relocate offshore/expand domestic production facilities to ^ direct exporting need to raise finance
* aus IRs usually above other countries, aus bus temped to borrow finance from overseas source to gain adv of lower IRs
* BUT exchange rate movements big risk as adverse currency fluctuation can quickly eliminate cheaper overseas IRs so LT may cost more

61
Q
  1. determining financial needs in planning & implementing cycle (determined by 5 things)
A

collect important financial info before making future plans (balance sheets, income statements, cash flow statements, sales & price forecasts, budgets, bank statements, breakeven analysis, financial ratio analysis)
* when seeking finance/support from FI/potential investors who need a guarantee that financial commitment to bus will be successful
* plan sets how much finance required, sources of ifnance, financial statements
* type financial info in plan depends on employees, owners, lenders, potential investors (audience)
* financial info must show bus can generate acceptable return for investment 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

62
Q

planning & implementing budgets

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
* reflect strategic planning decisions
* help managers allocate resources, coord plans made by diff sectors of bus, evaluate perf, plan for future, monitor past & present perf
* financial info for bus goals in strategic, tatical, operational planning
* constantly monitor obj & provide basis for administrative control, directing sales effort, production planning, control stocks, set prices, controlling expenses& production costs
* provide figures for planning & decision making to constantly monitor progress and weak areas
* signal where things not going according to plan so can make adjustments and whoe where obj achieved
* used in planning & control aspects of bus (control: planned performance measure against actual, corrective action)

63
Q

6 factors to considor when preparing a budget (prob dont need to know all)

A
  1. review past figures & trends, estimates from departments
  2. potential market share/actual, trends & seasonal fluctations in market
  3. proposed expansion/discontinuing projects
  4. proposals to alter price/quality of products
  5. current orders & plant capacity
  6. consider ext enviro eg. financial trends, availability of materials, labour
64
Q
A
65
Q

operating budgets (out of 3 types)

A

main activities of a bus eg. budgets relating to sales, production, raw materials, direct labour, expenmses & COGS
* info in theses used to prepare budgeted financial statements

66
Q

project budgets

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

67
Q

financial budgets

A

financial data of bus
* predictions of operating & project budgets included in budgeted financial statements
* include budgeted income statement, balance sheet (both reflect results of operating activities), cash flows (bus liquidity)

68
Q

record systems for planning & implementing

A

mechanisms employed by bus to ensure data recorded and info rovided accurate, reliable, efficient, accessible
* management bases decisions on info when needed, record all info they need
* 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

69
Q

manual vs electronic record keeping

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

70
Q

planning & implementing financial risks + 4 common ones COLM

A

possibility of financial loss to bus
* every bus subject to, not all risks can be controlled eg. changesi n IRs
1. 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

  1. market risk
    * risk changign conditions in marketplace where company competes for bus
    * increasing no. consumers shop online/^ comp
    * market subject to changing conditions affect profitability
  2. lqiudity risk
    * bus cash flow, whether sufficient funds to meet ifnancial obligations
    * how easily bus can convert assets to cash if need funds
    * cahs flow management crucial for success as consequences when dont have enough cash to pay expenses
  3. operational risk
    * day to day management (when they have poor management)
    * legal problems, fraud, HR issues, bus model risk( marketing/growht plans inaccurate, inadequate)
71
Q

financial controls in planning & implementing + 6 common policies to promote w/n business

A

procedures, policies bus monitors & controls allocation & usage of its resources
* ensure followed by employees & management
* control vry important in assets eg. accounts receivable, inventory, cash
* budgets (estimate resource requirements for future period to predict what bus will achieve) 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
* separation of dutues (one for ordering, one for receiving inventories)
* qualification restrictions & employing only qualified certified staff for roles
* control cash (cash registered, card > cash payments)
* protect assets ( buildings locked, regularly check inventory)
* control credit procedures (follow up overdue accs a& consumer credit checsk)

72
Q

factors to consider when determining how much debt bus take on, why important to balance how much debt to have

A
  • industry risk
  • projected income
  • analyse cash fow
  • if bus struggling to survive/able to respond to changes in ext bus enviro
73
Q

debt finance

A

funds usually readily avaialbel & interest payments tax deductible, reducing cost
* carefully consider risk & return when determining debt/equity finance
* greater lvl risk when borrowing, impact on future profitability & financial stability of bus
* 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 to bus, determine share prices of corporations
* SMEs reluctant to seek

74
Q

adv & disadv of debt finance

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

75
Q

equity finance

A

shareholders’ funds represent highest prop of total funds to finance bus operations & assets
* most important source of funds for companies, remained 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

76
Q

adv & disadv of equity finance

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)

77
Q

2 most common types of finance obtained by small businesses

A

new credit cards & bank overdrafts

78
Q

self-financing (extra)

A

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

79
Q

matching the terms & source of finance to bus purpose (also structure & credit rating)

A

small bus have many sources avaialble for debt finance (for purchasing new equip, stock, premises) but range greater with larger bus bc lenders concerned abt risk & security
* larger equity capital on bus, more secure financial structure of bus, likelier opp to borrow
* lenders prefer to lend to firms with strong equity capital bc indicates stability of bus & commitment of owners stock
* 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
80
Q

trade credit

A

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

81
Q

monitoring & controlling finance + 3 main financial controls used for monitoring

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

82
Q

cash flow statements for monitoring

A

financial statement indicates movement of cash receipts & cash payments from transactions over PIT
* link betw incoem statement & balance sheet, info of firms ability to pay debts on time
* identify trends, predict change
* bus needs cash to pay for g&s to continue operating
* w/o cash flow, unable to maintain payments to creditors & ensure other obligations (wages, utilities expenses, tax) can be covered 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

83
Q

cash flow shows whether firm can do 5 things:

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
84
Q

cash fows can be a better predictor of a bus’ _____ than profitability

A

status

85
Q

preparing cash flow statement OIF

A
  1. 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)
  2. investing activities
    * cahs inflows & outflows relating to purchase & sale of non-current assets & investments to generate income eg. purchase new plant & equip/property
  3. financing activities
    * cash inflows & outflows relating to borrowing activities of bus
    * borrowing inflows can relate to equity (issue shares/owner contirbutes capital)/debt (loans from FIs)
    * cash outflows repayments of debt & drawing cash drawn from owner/pay dividends to SHs
86
Q

income statement (what it shows)

A

summary of income earned & expenses incurred over period of trading
* info see how much money come into bus as revenue and gone out 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)
* operating expenses eg. purchase inventories, pay for services ads, rent, insurance

  • if income high enough to cover expenses
  • if mark-up on purchases sufficient
  • is bus making enough profit
  • if expenses in proportion to revenue earned
  • if inventory turnover is appropriate
87
Q

steps of income statement

A
  1. record income earnedby bus
  2. record COGS (money spent on purchasing raw materials/finished goods for resale to calculate gross profit (amt remaining when revenue - COGS
  3. calculate net profit (amt remaining when operating expenses deducted from gross profit)
88
Q

3 types of expenses on income statement

A
  1. selling
    costs related to selling g/s which can be directly traced to need for sales
    * salaries, wages
    * advertising
    * delivery
    * electricity
  2. administration
    costs directly related to general running of bus
    * rent
    * insurances
  3. financial
    costs w/ borrowing money from outside ppl/orgs & minimising bus risk
    * interest & lease payments
    * dividends
    * insurance payments
89
Q

‘operating income’ means

gross profit formula

COGS formula

net profit

A

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

operating income/sales/revenue - COGS

opening stock + purchases - closing stock

gross profit-expenses

90
Q

balance sheet 3 things it includes

A

bus’ assets & liabilities at PIT, represents equity/net worth of bus
* shows financial stability
* shows return on owners’ investment, sources & extent of borrowings, lvl inventories
* prepare at end of accounting period

  1. ASSETS (left)
    items of value owned by business
    * 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
  2. 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
  3. 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
91
Q

what does analysing the balance sheet show?

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 return on investment
92
Q

the accounting equation in the balance sheet

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

93
Q

analysis (financial POV) + 3 main types VHT

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
  1. VERTICAL
    * compares figures w/n 1 financial year
    * eg. gross profit as % sales, compare debt to equity
  2. HORIZONTAL
    * compare figures from diff financial yrs
    eg. 2020 & 2021
  3. TREND
    * compares figures for periods 3-5 yrs
94
Q

analysis can provide hints of success/problems whcih can be (less important)

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
95
Q

type of analysis chosen depends on

A

reasons info required & decisions to make from info
* compare figures, %s, ratios for departments, diff products or against industry
* monitor trends over years/compare items w/n financial statement, selling expenses & sales

96
Q

liquidity (financial ratio)

A

extent bus can meet financial commitments SHORT TERM, <12 months
* need sufficient resources 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
* current assets & liabilities determine liquidity/ST financial stability to generate cash quickly but not too much that resources not used to produce rev

97
Q

what is the liquidity financial ratio

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 indication of ability to meet
* nature & composition of current assets can vary considerably
* 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

98
Q

strats to improve liquidity

A
  • factoring
  • selling non-essential NC assets & using 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 lower than 1.5:1)
99
Q

gearing (solvency) ratio

A

gearing ratios determines firm’s solvency ( abiltiy to meet financial commitments in LT aka LT financial stability)
* investors & creditors interest (if creditors will be paid, investors expect good return on moeny)
* 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 w/ strong markets have high debt & potential for profit greater
    (highly geared = higher prop debt to equity = greater risk = greater potential for profit)
  • debt affects stakeholders & 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 financial strucutre (control of debt & equity) for LT survival
  • greater owners’ financial interest in bus likely more solvent in ST
100
Q

capital structure of a bus determined by

A

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

101
Q

how to balance gearing? what must bus consider?

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
102
Q

what is the debt to equity ratio for?

A

gearing (solvency)
* total liabilities ÷ total equity
* extent firm relying on debt/ ext sources to finance
* sig control aspect bc relation betw debt & equity must balance
* ratio > 1 = bus has less equity than debt (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 to firm coz greater financial risk
* ratio 0–>1 bus mroe equity than debt
* 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

103
Q

how to improve a bus gearing

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
* inc equity retain more profits/inject more equity funding by selling mroe shares (if public comp) or invite new owners

104
Q

why is the financial sector as a whole have oneo f the highest debt to equity ratios

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

105
Q

profitability financial

A

earning perf of bus, indicate capacity to use resources to maximise profits
* depends on revenue earned by bus & ability to ^ selling prices to cover purchase costs & other expenses incurred in earning income
* ability to generate profis MOST IMPORTANT FINANCIAL OBJ
* amt determined by volume of sales, mark-up on purchases, lvl expenses
* examined to see where changes occurred, where they need to be made in future

106
Q

which parties are interested in bus profitability

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
107
Q

profitability/earning capacity measured by… 3 financial ratios

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

108
Q

gross profit ratio (profitability)

A

sales rev - COGS
* amt sales available to meet expenses –> net profit
* fall GP fall amt NP, amt decrease depends on price reductions due to specials/sales, mark-downs on out of date stock, changes in mark-up policies
* ratio gives % sales rev resulting in GP, 1 way to measure profitability
* 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

109
Q

net profit ratio (profitability)

A

profit/return to owners
* 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
* shows amt sales rev results in NP
* costs after GP must be low enought to generate NP
* no set figure for profit ratios
* aim at higher G&NP ratio & compare w/ past perf, competitors, industry avg

110
Q

industries w/ highest profit margins in AUS???

A

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

111
Q

return on equity ratio

A

how effective funds contributed by owners been generating profit (ROI)
* return for owners must be better than any return gained from alt investments eg. bank inv
* if ROE rises due to ^ debt, carry ^ risk
* owners also compare current yr’s return w/ previous yrs & against industry avges
* compare return w/ alt investment considerations eg. interest earned via FI
* higher ratio/%, better return for owner, consider expansion/diversification
* unfavourable return owners consider selling off bus
* most investors want ≥ 10% return bc wont risk investing when could get same return by investing moeny in bank/gvt bonds

112
Q

efficiency (financial ratio)

A

ability of bus to use resources effectively to ensure financial stability & profitability
* of management in directing & maintaining goals & obj of firm, greater profits & financial stability

113
Q

expense ratio (efficiency)

A

compare total expenses w/ sales
* 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 avges
* lower % better, if too high then need to monitor & control expenses to avoid unnecessary

114
Q

accs receivable turnover ratio (efficiency)

A

measure effectiveness of firms credit poliy & how efficient collects debts
* measure how many times accs receivable balance converted into cash/how quickly debtors pay their accs
* 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

115
Q

assess business performance using comparative ratio analysis (how to have meaningful analysis)

A

figures, %s, ratios dont provide complete pic for analysis, must be meaningul, comparisons & benchmarks needed
* judgements made by comparing firm’s analysis against other figures (%s, ratios) aka comparative ratio analysis
* ratios for PIT
* sales & stock lvls vary sig throughout year, info varies
* look at trends in financial info over several years,
* figures from 2/+ years ago indicate directions/trends and 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

116
Q

how can bus mkake comparisons (bus perf using comparative ratio analysis)

A

compare ratios with their results from previous yrs, w/ similar bus, against common idnustry standards/benchmarks
* over diff time periods, against standards, w/ similar bus
* common to compare results against standards develoepd for certain industry
* ensure same things compared, each firm different and 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

117
Q

6 limitations of financial reporting

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

118
Q

normalised earnings as limitation of financial reporting

A

earnings adjusted to take account changes in eco cycle/to remove one-off/unusual items affecting profitability
* for more accurate depiction of true earnings of company
* easier to compare profitability figures for bus from a year to next & against other bus’
eg. remove land sale from retailer’s financial statements bs selling products (NOT LAND) is core business
* 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

119
Q

capitalising expenses in limitations of financial reporting + 2 options when adding a cost to their financial statmeent

A

how a cost is treated on a bus’ financial statement
1. 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

120
Q

valuing assets as limitation of financial reporting

A

estimating value of assets when recording them on balance sheet
* esp diff for NC assets to estimate
* asset value sometimes written as its historical cost ( accountign method where assets lsited on balance sheet w/ value they were purchased)
* 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
* calculating & adjusting value of company’s goodwill issue takes most time & effort of auditors of ASX listed firms (intangible assets)

121
Q

main adv & 2 disadv of using historical cost in valuign assets (limitations of financial reporting)

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

122
Q

how do bus value NC assets that depreciate over time

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

123
Q

timing issues as limitation of financial report

A

matching principle: expenses incurred must be recorded on income statement for accounting period which revenue earned from expenses
* when accountant records revenue, record same time expenses directly related to revenue
* revenue earned will match costs incurred to earn that revenue, presenting more accurate representation of financial position
eg. sell property in june receive commission in july record expense in june

124
Q

debt repayments as limitation of financial reports. what info does financial reports themselves not have?

A

analysing em gearing ratio often used to 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 –> ^ profits in future
*recording debt repayments can distory bus status and provide more faovurable view at PIT
dont have info abt debt repayments eg.
* how long bus has/had been recovering debt
* capcity of bus/debtor to repay amt/s owed (debtor could be close to bankruptcy and unable to repay)
* adequacy of provisions & methds bus has to recover debt (large bus can outsource debt recovery by hiring agent to undertake process but smaller not havec resources to, costly & time consuming)
* provision bus has for doubtful debts & how its evident in financial reports
* if debt repayments held over until another accounting period –> false impression of situation
* when debts due

125
Q

notes to financial statement limitation of financial report

A

report detailes & additional info left out of main reporting documents (balance sheet, income statement, cash flow statement)
* 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 calculates & proecdures used to develop them

126
Q

ethical issues related to financial reports

A

managers & accountants ethical & legal obligation to ensure financial records accurate
* ethical considerations important eg. valuing assets (inventories, accs receivable) influence lvl working capital –> ST financial stability, if overvalued, & bus makes no provisions for doubtful debts, high working capital & untrue figure
* impact of debt funds on risks to SHs ethical issue
* estimate expenditure & revenue when preparing budgets, may overestimate & understate
* legislation guard against unethical activity but often time lag between recognising problem and implementing through law
* directors duty to exercise discretion reasonably, avoid conflicts of interest
* ASX corporate governance council officiates requirements of corporations listed w/ ASX & compliance w/ law, disclosure & transparency of company details to SHs & public

127
Q

examine ethical financial reporting practices (audited accounts)

A

audit independent check accuracy of financial records & accounting procedures
* to obtain independent opinion on financial statements of bus to ensure reocrds provide accurate info for users
* auditors establish if financial satements fialry presented & in accordance w/ accounting principles
* info can be used by FIs, owners & SHs, potential investors rely on auditor independent check before makign decisions
* important part of control function (planning, monitoring, control, corrective action) to examine financial affairs
* 2005 bus had to adopt new international financial reporting standards (IFRS) for greater transparency & accountability for all bus regardless size. globally standardised accounting hepled even TNCs

128
Q

3 types of audits (ethical ifnancial reporting practices)

A
  1. internal audits
    * conducted internally by employees to check accounting procedures & accuracy of financial records
  2. management audits
    * conducted to review firm’s strategic plan & determine if changes should be made
    * HR, PP, finance affect strategic plan

3/ external audits
* bus financial reports investigated by independent & specialised accountants to guarantee authenticity. when satisfied, auditor issues statement that records accurate to knowledge & give true view of state, 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:
* consolidated revenue of $50 mill/+, gross assets $25 mill/+, 100/+ employees
* small bus, external auditors only used if bus is for sale/check fraud

129
Q

what do internal & external audits guard against, how do auditors check control procedures of the business?

A

unnecessary 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

130
Q

record keeping as ethical issue related to financial reports

A

all accounting processes depend on how accurately & honestly data recorded in financial reports
* source 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
* proper financial records must be kept min 5 yrs

131
Q
A

business y12 (6 decks)

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