Business Functions: Finance

Question 1

What are the 3 main areas of financial management?

Answer 1

Capital budgeting
Capital structure
Financing decision

Question 2

What is capital budgeting?

Answer 2

The process of planning and managing a business’s long-term investments

Question 3

What are the five steps in capital budgeting?

Answer 3

Review and analysis
Proposal generation
Decision-making
Implementation
Follow-up

Question 4

What is capital structure?

Answer 4

The mixture and management of long-term debt and equity

Question 5

What is working capital?

Answer 5

Short-term assets less short-term liabilities

Question 6

What are the 3 key decisions of financial management?

Answer 6

Investment decision
Financing decision
Asset management decision

Question 7

What is liquidity?

Answer 7

A measure of how well working capital is managed

Question 8

What is solvency?

Answer 8

The ability to short and long term obligations as they become due

Question 9

What is the long-term objective of a business?

Answer 9

Growing shareholder wealth

Question 10

What is the time value of money principle?

Answer 10

An amount of money received today is more valuable than that amount received tomorrow

Question 11

What is the risk-return trade-off?

Answer 11

The probability of higher return is associated with higher risk

Question 12

What is the principle of cash flows are the source of value?

Answer 12

Businesses use cash, not profits, to reinvest their money

Question 13

What is the CVP analysis?

Answer 13

The cost-volume-profit analysis determines how changes in costs and volume affect operating income

Question 14

What is EBIT?

Answer 14

Earnings before interest and taxes is operating income

Question 15

What is a business’s cost structure?

Answer 15

The relevant proportion of fixed, variable and mixed costs present in a business

Question 16

What is the break-even analysis?

Answer 16

A measurement system used to determine the amount of sales revenue required to pay fixed and variable expenses

Question 17

What is the contribution margin?

Answer 17

The business’s financial resources to cover fixed costs

Question 18

How is the break-even point in sales value calculated?

Answer 18

Fixed cost ÷ contribution margin ratio

Question 19

What is a balance sheet?

Answer 19

Summary of a business’s financial position at a given date

Question 20

What is an income statement?

Answer 20

Business’s financial performance in terms of net profit or loss over a specific period

Question 21

What is a cash flow statement?

Answer 21

A business’s flow of funds over a period

Question 22

What is a statement of retained earnings?

Answer 22

Movement of owner’s equity over a period

Question 23

What is vertical analysis?

Answer 23

Comparison of financial data within one financial year

Question 24

What is horizontal analysis?

Answer 24

Comparison of financial data from different financial years

Question 25

What is trend analysis?

Answer 25

Comparison of financial data for periods of 3-5 years

Question 26

What are the 5 financial ratio types?

Answer 26

Liquidity Activity Debt Profitability Market

Question 27

What are the liquidity ratios?

Answer 27

Current Quick Cash Net working capital to total assets

Question 28

What is the function of the current ratio?

Answer 28

To help establish short-term financial position

Question 29

What is the function of the quick ratio?

Answer 29

To establish a business's ability to settle short-term obligations

Question 30

What is the function of the cash ratio?

Answer 30

Establish ability to settle short-term debt if required to pay cash

Question 31

What is the function of the net working capital to total assets ratio?

Answer 31

Determine percentage of assets carried as net working capital

Question 32

What are the solvency ratios?

Answer 32

Debt Long-term debt

Question 33

What is the function of the debt ratio?

Answer 33

Measure percentage of total assets finances by debt

Question 34

What is the function of the long-term debt ratio?

Answer 34

Provide more insight into debt management policy by excluding potentially irrelevant current liabilities

Question 35

What are the asset management ratios?

Answer 35

Accounts receivable turnover Receivables collection period Inventory turnover Inventory processing period Accounts payable turnover Accounts payable payment period Asset turnover

Question 36

What is the function of the accounts receivable turnover ratio?

Answer 36

Measure number of times accounts receivable are generated and also collected in a year

Question 37

What is the function of the receivables collection period?

Answer 37

Number of days it takes to convert accounts receivable into cash

Question 38

What is the function of the inventory turnover ratio?

Answer 38

Calculate how often a business's inventory is replenished

Question 39

What is the function of the inventory processing period?

Answer 39

Determine the time frame that it takes to turn over the business's entire inventory

Question 40

What is the function of the accounts payable turnover ratio?

Answer 40

Measures amount of times accounts payable are generated and paid during a year

Question 41

What is the function of the accounts payable payment period?

Answer 41

Measure how long it takes to settle accounts payable

Question 42

What is the function of the assets turnover ratio?

Answer 42

Measure the efficiency of utilising assets to generate sales

Question 43

What are the profitability ratios?

Answer 43

Gross profit margin Operating profit margin Net profit margin Return on assets Total return on assets Return on total equity DuPont analysis

Question 44

What is the function of the gross profit margin ratio?

Answer 44

Measure the relationship between gross profit and net sales

Question 45

What is the function of the operating profit margin ratio?

Answer 45

Indicate how well business operational efficiency is

Question 46

What is the function of the net profit margin ratio?

Answer 46

Measure overall operating efficiency

Question 47

What is the function of the return on assets ratio?

Answer 47

Measures how much net income is made for every R1 invested in total assets

Question 48

What is the function of the total return on assets ratio?

Answer 48

By deducting interest expense, businesses with large debt financing will have lower return on assets

Question 49

What is the function of the return on total equity ratio?

Answer 49

Measures return earned on capital from shareholders

Question 50

What is the function of the DuPont analysis ratio?

Answer 50

Measures money gained using capital investment from shareholders and determining whether changes are due to changes in the profit margin, sales or total assets

Question 51

What are the market value ratios?

Answer 51

Price/earnings Market-to-book value Dividend yield Dividend pay

Question 52

What is the function of the P/E ratio?

Answer 52

Provide insight to how much investors are willing to pay for shares

Question 53

What is the function of the market-to-book value ratio?

Answer 53

Measures market value relative to book value

Question 54

What is the function of the dividend yield ratio?

Answer 54

Measures amount of cash dividends distributed to shareholders

Question 55

What is the function of the dividend payout ratio?

Answer 55

Measures percentage of net income returned annually as dividends