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Business Studies > FINANCE: Processes > Flashcards

FINANCE: Processes Flashcards

1
Q

What is a budget?

A

A financial document used to estimate future revenue and expenses over a period of time.

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2
Q

What are the 3 types of financial budgets?

A

Operating budgets: production, raw materials etc.
Project budgets: research and development.
Financial budgets: cash flow, income statements, balance sheets.

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3
Q

What are record systems?

A

The mechanisms used to ensure that data recorded is accurate and reliable.

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4
Q

Why are record systems important in financial management?

A
  1. Decision making.

2. Businesses are required by law to keep records of financial transactions for at least five years for tax purposes.

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5
Q

What is credit risk?

A

The danger associated with borrowing money.

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6
Q

What is market risk?

A

The risk of changing conditions in the specific marketplace.

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7
Q

What is operational risk?

A

Dangers faced during the day-to-day management such as fraud risk, HR issues.

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8
Q

What are financial controls?

A

The procedures and policies by which a business monitors and controls the usage of its resources.

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9
Q

What are the advantages of debt financing?

A
  1. Funds are readily available and ready at short notice.
  2. Increased funds should lead to increased profits.
  3. Ownership is not diluted.
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10
Q

What are the disadvantages of debt financing?

A
  1. Security required.
  2. Regular repayments have to be made.
  3. Expensive - interest.
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11
Q

What are the advantages of equity financing?

A
  1. Does not have to be repaid unless the owner leaves the business.
  2. Cheaper - no interest payments.
  3. Low gearing.
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12
Q

What are the disadvantages of equity financing?

A
  1. Lower profits and lower returns for the owner.

2. Ownership is diluted.

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13
Q

Matching the terms and source of finance.

A

Short-term finance should be used to purchase short-term assets and vis versa.

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14
Q

Cash flow statements.

A

It indicates the movement of cash receipts and cash payments.

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15
Q

What are operating activities in the cash flow statement?

A

The cash inflows and outflows relating to the main activity of the business (provision of goods and services).

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16
Q

What are investing activities in the cash flow statement?

A

The cash inflows and outflows relating to the purchase of non-current assets.

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17
Q

What are financing activities in the cash flow statement?

A

The cash inflows and outflows relating to the borrowing activities of the business.

18
Q

Income statements.

A

A summary of the income earned and expenses over a period of time.

19
Q

What are the 3 steps in income statements?

A
  1. Calculate COGS: start inventory + purchases – ending inventory.
  2. Calculate gross profit: revenue - COGS.
  3. Calculate net profit: gross profit - expenses.
20
Q

What are the types of expenses?

A

Selling: salaries, wages etc.
Administrative: costs related to the general running of the business like stationary, rent etc.
Finance: lease, dividends etc.

21
Q

What are balance sheets?

A

Represents a business’s assets and liabilities at a point in time and its equity.

22
Q

What are the types of assets on balance sheets?

A

Current: assets that a business will use up within 12 months, e.g. cash, accounts receivable and inventory.
Non-current: assets that have an expected life of longer than 12 months.

23
Q

What are the types of liabilities on balance sheets?

A

Current: overdraft and accounts payable.

Non-current: mortgage, debenture.

24
Q

What is owners equity on the balance sheet?

A

The funds contributed by the owner.

Assets = liabilities + owner’s equity.

25
Q

What is the current ratio.

A

Current assets/Current liabilities.

Good position is a ratio of 2:1.

26
Q

What is the debt to equity ratio?

A

Total liabilities/Total equity.

The higher the ratio the higher the risk.

27
Q

What is the gross profit ratio?

A

Gross profit/Sales.

Gross profit must be sufficient to pay expenses otherwise alternate suppliers need to be sourced.

28
Q

What is the net profit ratio and return on equity ratio?

A

Net profit ratio = Net profit/Sales.

Return on equity ratio = Net profit/Total equity.

29
Q

What is the expense ratio?

A

Total expenses/Sales.

The lower the percentage, the better.

30
Q

What is the accounts receivables ratio?

A

Sales/Accounts receivable/365 days.

Preferably under 30 days.

31
Q

What are normalised earnings?

A

The earnings that have been adjusted to take into account changes in the economic cycle or one-off items.

32
Q

What is the implication of normalised earnings?

A

Affects short-term cash flow but does not indicate long-term performance.

33
Q

What is capitalising expenses?

A

Costs are recorded as assets when they have not been used up.

34
Q

What is the historical cost?

A

Assets are listed on a balance sheet with the value at which they were purchased.

35
Q

How can valuing assets be a disadvantage in financial management?

A

Some items depreciate which can be a limitation because the depreciation rate is an estimate.

36
Q

Why are intangible assets difficult to value?

A

There is room to overvalue or undervalue them.

37
Q

How are debt repayments a limitation to financial reporting?

A

Financial reports do not show the conditions around the debt, just the figures. E.g. they don’t show how long the business has been recovering the debt.

38
Q

What are audited accounts?

A

An independent check of the accuracy of financial reports.

39
Q

What are the implications of inappropriate cut-off periods?

A

If revenue is not recorded appropriately it will reduce the business’s profit for the year resulting in a lower tax burden. This is made illegal by the ATO.

40
Q

Why is the misuse of funds an ethical issue?

A

A person who has received money or inventory and is required to pay it to someone may steals or embezzles it.

Business Studies (17 decks)

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