Business Year 12 Semester 2

Question 1

What is profitability

Growth

Efficiency

Liquidity

Solvency

Answer 1

-ability of a business to maximise its
profits.

to increase size in
the longer term.

increase sales, profits and
market share.

Efficiency
-minimise its costs and manage its assets
-to the operations or revenue-
producing activities of the busines

Liquidity
-the extent to which a business can meet its financial commitments in the short term

Solvency
-the extent to which the business can meet its financial commitments

Question 2

What are the profitability ratios?

Profit=Revenue – expenses/costs

Answer 2

-gross profit ratio
-net profit ratio
-return on equity ratio

Question 3

What is Gross Profit Ratio?

Answer 3

GPR=Gross Profit(revenue-costs og goods sold )/sales revenue

Gross Profit=difference between sales revenue and direct cost of goods sold
This ratio gives the percentage of sales revenue that results in gross profit.

This ratio is only used by retailers, not services ADMIN, ELECTRICITY, AND ADVERTISING ARE NOT DIRECTS COSTS OF GOODS

Gives the percentage of revenue that results in gross profit.

Gross profit ratio and gross profit are differen

Question 4

What is the net profit ratio?

Answer 4

-net proft ratio is more accurate than gross profit ratio

NPR=net profit/sales

Aim for a high net profit ratio
Higher means costd have been minimised

Question 4

Rate of return on owners equity
What is the ratio?

Answer 4

return on equity ratio=net profit (after tax)/owners equity

Indicates how effectively funds contributed by the owners have been used generating profit, and hence a return on their investment.

This means that for every $1 of equity contributed by the owners, they receive 10 cents in return.

At least a 10 percent

Question 5

What is the one liquidity ratio?

Answer 5

-current ratio

Question 6

What is the current ratio

Answer 6

Current ratio (working captial ratio)=Current assets/Current liabilities
The higher the current ratio, the more capable the business is of meeting its short-term obligations.
The firm should have double the amount of assets to current liabilities
Ratio should be 2:1

Question 7

What is the solvency ratio?

Answer 7

Debt to equity ratio

Question 8

What is the debt to equity ratio?

Answer 8

Debt to Equity Ratio=total debt/total shareholders equity
its ability to meet its financial commitments in the longer term
they show whether the creditors will be paid or whether investors can expect a good return on their money.
Some industrys have higher debt to equity ratios: unavoidable:like mining

shows the extent to which the firm is relying on debt or outside sources to finance the business

A ratio of greater than 1 means that the business has less equity than debt.
A ratio of between 0 and 1 means that the business has more equity than debt.

The higher the ratio, the less solvent the firm.

The higher the ratio of debt to equity, the higher the risk.

Question 9

What is the Efficiency Ratio

Answer 9

Expense Ratio

Question 10

What is expense ratio
What does it indicate

Answer 10

Expense ratio= Total expenses/Sales
- relates to the effectiveness of management in directing and maintaining
the goals and objectives of the firm
-higher efficienchy=greater profit and financial stability
-indicates the amount of sales
that are allocated to individual expenses, such as selling, administration, cost of goods sold
and financial expenses
-indicates day-to-day efficiency of the business
-For example, if the selling expense ratio has increased, it may be that advertising costs have
not generated the expected increase in sales.
-how much of operating expenses consume revenenue generates by the product

Question 11

What are the four Major Influences on Finance

Answer 11

-Sources of Finance
-Financial institutions
-Influence of government (tax regulations and regulatory compliances)
G-lobal market influence

Question 12

Internal Sources of Finance

What does it refer to?

Examples of types of internal finance

Answer 12

-money generated within the business
example: sale of assets
kept in the business as a cheap and accessible source of finance for future activities.
-relying on retained profits to finance business

Question 13

External Sources of Finance

What does it mean

What are the two types of external finance?

Answer 13

Funds provided by sources outside the business, including banks, other financial institutions, government, suppliers or financial intermediaries.

Debt and equity finance

Question 14

External Finance- Debt Financing

What are short and long term finance sources?

Answer 14

Short term borrowing options:
1) Overdraft
2) Commercial Billa
3) Factoring

Long Term borrowing options:
1)Mortgage
2)Debentures
3)Unsecured Notes
4)Leasing

Question 15

Explain each of these short term debt finance options

Answer 15

1) Overdraft
-A type of short term borrowing.
A bank allows a business to overdraw their account up to an agreed limit and for a specified time.
2) Commercial Bills
Short-term loans issued by financial institutions, for larger amounts (usually over $100 000) for a period of generally between 30 and 180 days
3) Factoring
It enables a business to raise funds
immediately by selling accounts receivable at a discount to a firm that specialises in collecting
accounts receivable (a finance or factoring
business).

Question 15

Equity Financing

Types
What are the 2 types of ordinary shares?

Answer 15

Types:Ordinary shares and pricate equity

1)New Issues
2)Share purchase plans which are a financial offering that allows existing shareholders of a company to purchase additional shares directly from the company at a discounted price.

Question 15

Explain each of these long term debt financing options

Mortgage
Debentures
Unsecured notes
Leasing

Answer 15

1)Mortgage
A mortgage is a loan secured by the property of the borrower (business).
The property that is mortgaged cannot be sold or used as security for further borrowing until the mortgage is repaid. Long-term borrowing relates to funds borrowed for periods longer than 12 months. It can be secured or unsecured, and interest rates are usually variable.

An advantage of a mortgage is they are easy to repay, u can pay it little by little monthly
It’s still a loan and a commitment that you need to pay off every month with interest rates, that can go higher or lower.
2)Debentures
Debentures are issued by a company for a fixed rate of interest and for a fixed period of time. Companies provide them as a way to raise funds from investors, as opposed to financial institutions. A debenture is a promise made by a company to repay money that has been lent to the business.
Borrowing money not from banks but from investors.
-not secured against collatoral, high interest rate
-you have to have a prospectus
3)Unsecured Notes
-raising money from existing shareholders
-A fixed rate of interest and for a fixed period of time.
The amount of profit made by a company has no effect on the rate of interest.
-no collaterol
4)Leasing
The payment of money for the use of equipment that is owned by another party (leasing company).
Leasing company only buys equipment/places order for equipment when there is demand from another business.

Question 16

Explain each of these equity financing options

New issues

Share purchase plan

Answer 16

New issues

a security that has been issued and sold for the first time on a public market
New issues are sometimes referred to as primary shares or new offerings. An initial public offering (IPO) is when a company issues shares to the public for the first time.

Share purchase plan
an offer to existing
shareholders in a listed company to purchase
more shares in that company without brokerage fees. The shares can also be offered at a discount to the current market price.

Share purchase plans allow companies to issue new shares to current shareholders without issuing a prospectus.

They can only issue a maximum of $15 000 in new shares to each shareholder.

Question 17

Financial institutions

Explain Finance Companies

Answer 17

Finance Companies
-non-bank financial intermediaries that specialise in smaller
commercial finance
-Finance companies raise money through share issues (debentures). Debentures are for a fixed term and
carry a fixed rate of interest.
* Lenders have the security of priority over the firm’s assets in the event of liquidation.
Finance companies can provide businesses with quick access to funds, although the interest rate will
usually be higher. They are also the major providers of lease finance to businesses.

Question 18

Name all of the financial institutions

Answer 18

Banks
Life Insurance companies
Investment Banks
Superannuation Funds
Finance Companies
ASX (Australian Securities Exchange/ the share market )

Question 19

Explain Life insurance companies

Explain Superannuation funds

Answer 19

non-bank financial intermediaries who provide cover and a lump sum payment in the event of death

provide both equity and loans to
the corporate sector through receipts of insurance premiums,
which provide funds for investment. The funds received in
premiums, called reserves, are invested in financial assets.

Superannuation funds
* Superannuation funds invest the money received from
superannuation contributions in many things, such as
company shares, property and managed funds. They do this
so that their members will earn investment returns on the
money. The business sector increasingly uses superannuation
funds for long-term investment in growth and development.

Question 20

Explain Australian Securities
Exchange

Answer 20

• The ASX acts as a primary market. This primary market enables a company to raise new capital through the
  issue of shares and through the receipt of proceeds from the sale of security

Question 21

Influence of Government

What aspects do governments focus on and change for businesses?

Answer 21

The government influences a business’s financial management decision making with economic policies such as those
relating to the monetary and fiscal policy, legislation and the various roles of government bodies or departments who are
responsible for monitoring and administration’

Question 22

What is ASIC?

Answer 22

ASIC is an independent statutory commission accountable to the Commonwealth
parliament. It enforces and administers the Corporations Act 2001 and protects
consumers in the areas of investments, life and general insurance, superannuation
and banking (except lending) in Australia.
The aim of ASIC is to assist in reducing fraud and unfair practices in financial markets and financial products. ASIC ensures that companies adhere to the law, collects information about companies and makes it available to the public. This includes the financial information that companies must disclose in their annual
reports.

Question 23

What is company taxation?

Answer 23

All Australian businesses that have been incorporated — that is, all private and public companies — are required to pay company tax on profits. This tax is levied at a flat rate, unlike personal income taxes, which use a progressive scale. Prior to 2017, the company tax rate was 30 per cent for all companies; however in 2016, the company tax rate was reduced to 27.5 per cent for some businesses.
In order to be eligible for the lower company tax rate, the company has to have a turnover of less than $50 million.

This rate was scheduled to reduce
to 26 per cent in the 2020–21 income year and 25 per cent in the 2021–22
income year

Question 24

Global market influence

What are the three global market influences

Answer 24

Economic Outlook

Availability of Funds

Interest Rates

Question 25

Explain what each of these global market influences are

Economic Outlook

Availability of Funds

Interest Rates

Answer 25

Economic Outlook
-projected changes to the level of economic growth throughout the world
-positive outlook= impacts on financial decisions of the business
-effects demand for australian exports
Availability of Funds
-the ease to which a business can access funds for borrowing on a financial markets
-banks are reluctant to lend money when the world has a bad financial outlook
Interest Rates
-the cost of borrowing money
-the higher the level of risk involved in lending to a business, the higher the interest rates
-overseas interest rates affect businesses who borrow from offshore
-recession effects a businesses =s profitability

Question 26

Processes if financial management
What are the four Financial processes

Answer 26

Planning and implementing
Monitoring and controlling

Question 27

What does planning and implementing entail

Answer 27

-essential to achieve goals
-determines how a businesses will achieve this goals

1) Determine Financial Needs:
Financial needs could be determined by the size of the business, the current phase of the business cycle and future plans for growth and development (where the
business is and where it is heading)

2)Develop budgets
A budget is a financial document used to estimate future revenue and expenses over a period of time. A budget should provide an accurate picture of income and
expenses and should be used to drive important business decisions such as whether to increase marketing, hire staff, cut expenses or purchase new assets

Budgets are drawn up to predict financial needs, they show (usually in dollar terms) the costs and benefits of a proposal. Budgets help managers allocate
resources, evaluate performance and formulate plans.

3)Maintain record systems
Record systems ensure that data is recorded and the information provided by record systems is accurate, reliable, efficient and accessible.

• Accurate and reliable financial records are an essential part of financial decision making

4)Identify financial risks

Question 27

Monitoring and Controlling

What happens with monitoring and control is bad?

What are the main controls used for monitoring finance in business?

Answer 27

-inconsistent methods of recordkeeping impact business viability and requires management’s to monitor the internal and external factors that will
impact financially on business operations.

This may include economic outlook, internal production methods and changes to workplace laws

Main controls:
1) Cash Flow Statement
2) Income Statement
3) Balance Sheets

Question 28

Cash Flow Statements

What does it indicate?

What are the three categories are the activities of the business generally divided into?

Explain each and what expense/ income is divided into each

Answer 28

-the movement of cash receipts and cash payments from transactions overtime
-what a company owns, financial status
-identify trends and used to predict changes

Important things to remember
-include additions and subtractions
-put subtractions in brackets

Categories= operation, investing, financing activities.

What are operating Activities?
-related to the main activities of the business
-the provision of goods and services.
-includes income from sales, monthly wages, rent, receipts from customers, payment to suppliers, dividends received,

Investing activities
-cash in and outflows relating to the purchase of current and noncurrent assets and investments
-assets that are used to generate money for the business
Includes selling old vehicle, equipment. payment of plant and equipment, sale of assets

Financing activities
-cash in and outflows related to the borrowing activities of the business
-can relate to equity (issue of shares or capital donation from owner) or debt (loan from financial institution)
-outflows relate to the repayment of debt and cash drawings of the owner for dividends to shareholders
Includes: loan repayment, issue of shares, interest received, dividends paid, proceeds from borrowing

Question 29

Incomes Statements

What is it?

Answer 29

-a summary of the income earned and expenses incurred
-shows how a company performed and operating results
-shows how much of the money entered the business as revenue, how much was expenditure (cost) and how much is profit
It shows
1) operating income: earned from the main function of the business including sale of inventory, and non operating income from operations such as interest, rent and commissions.

2) operating expenses: the purchase of inventory, payment for services and others expenses incurred during the main operation of the business such as rent, telephone and insurance

Useful because:
-managers can compare and analyse trends and make important financial decisions
-shows if expenses are increasing or decreasing, why profits have increased/decreased and what areas are changing

What are the 3 steps of constructing an income statement:
1) record the income earned by a business. A café, for example, earns income by selling food and drinks.
2)Calculate COGS and gross Profit
Record cost of goods sold, which is
the money spent on purchases of raw materials or finished
goods for resale,
Use this figure to calculate gross profit. The gross profit/loss is the amount remaining when the cost of
goods sold is deducted from revenue
3) Calculate net profit: net=all expenses deducted. Net=amount remaining when operating expenses are deducted from gross profit

Question 30

Balance Sheets

Answer 30

What does it represent?

a business’s assets and liabilities at a particular point in time and represents the net worth (equity) of the business.

It shows the financial stability of the business. The balance sheet is prepared at the end of the accounting period.
* Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure.

Items included in a balance sheet:

1. Assets= items of value owned by the business. Assets can be divided into

Current assets=assets that a business can expect to use up, or turn over, within 12 months, e.g. cash, accounts receivable (debtors) and inventory (stock)

Noncurrent assets=sets that have an expected life of longer than 12 months, e.g. land, buildings, machinery, vehicles, furniture, fixtures and fittings

2.Liabilities: items of debt owed to outside parties divided into:
Current liabilities: debts which are expected to be repaid in less than 12 months, e.g. overdraft and accounts payable (creditors
Non current liabilities: long-term items of debt, e.g. mortgage, debenture

Owners Equity:
unds contributed by the owner(s) and represents the net worth of the
business. Owners’ equity can be comprised of capital (funds contributed by the owner/s) and
retained profits.

Question 31

Balance Sheet
Accounting equations

Answer 31

Assets = Liabilities + Owners’ equity
* Owners’ equity = Assets – Liabilities
* Liabilities = Assets - Owners’ equity

Assets are what is owned by a business; liabilities and owners’ equity are what is owed by a
business. The business and the owner are separate; therefore, owners’ equity is what is to be
repaid (hopefully with increased profits) by the business to the owner. The accounting equation
shows that the assets of the business may be financed by either the owners or by parties
external to the business.
* The accounting equation can be represented in different ways but, because it is an equation, it
must always be equal.

Question 32

Identify the limitations of financial reporting

Answer 32

-caution needs to be exercised when analysing financial reports because they may not give a totally accurate depiction/ assessment of a businesses financial position
-businesses put work in to ensure the ratios LOOK good…investors must be careful
Important to consider:

Normalised earnings: earnings that have been adjusted to take into account economic cycle of to remove once off expenses that effect profitability ratios

This is done by the business to give a more accurate depiction of profitability, making it easier to compare prior years ratios if they take off profit from land sales which isnt related to the businesses core operations

Question 33

Identify Ethical Issues related to financial reports

What duties do managers have in order to adhere to this?

What is an audit?

Answer 33

-ethical considerations are strongly related to legal ones
-there is often a lag between the recognition that a business has done something illegal, emphasising the importance of ethical considerations.

Financial managers have a duty to:
-act in good faith
* exercise power for proper purpose in the name of the corporation
* exercise discretion reasonably and properly
* avoid conflicts of interest

An audit is an independent check of the accuracy of financial and accounting procedures and is an important part of the control part of the business

All accounting processes depend on how accurately and honestly data is recorded in financial reports.

Accurate financial reporting is necessary for tax and other shareholders

Question 34

Procurement

Definition

What does a company need in order to keep running?

What is the primary mission of the procurement department?

Difference between procurement and purchasing?

Answer 34

Definition:
the process of obtaining the goods and service a business needs to support its daily operationg through a 3rd party vendor (supplier)

Business needs materials, goods, and services to achieve its desired outcomes. Whether it’s software for communication, raw materials for making products, or services to maintain facilities, keeping the organisation running is an expensive and time-consuming task.

To acquire the goods a business needs at the best price and terms.

Purchasing=the act of buying a good or a service
Procurement= a larger concept covering purchasing, the policies that cover purchasing and trying to get this at the best bulk price

Question 35

Why is procurement important?

Answer 35

Cost Efficient:
-efficient procurement helps business reduce costs through negotiations, bulk purchasing, and supplier evaluation. Lower costs can result in increased profit margins.

Quality Assurance:
rocurement ensures that the products or services acquired meet the company’s quality standards. This can help maintain the business’s reputation and customer satisfaction.

Risk Management:
Effective procurement can help mitigate risks associated with supply chain disruptions, fluctuations in prices, and supplier reliability. Diversifying suppliers or having contingency plans can reduce vulnerabilities.

Supplier Relationship Management:
Building strong relationships with suppliers can lead to better terms, priority access to resources, and enhanced collaboration. Long-term partnerships can provide a competitive advantage.

Question 36

What’s the relationship between procurement and finance?

Answer 36

-procurement department saves money for finance team that sets the budget for the business
-finance team is responsible for paying whatever the procurement team orders/receives

-when financial management works well, there is enough money to purchase/procure everything

-auditing is recommended for purchases over a certain amount

Question 37

What is the procurement process?

Answer 37

1) Planning
-Identify needs, establish budgets, create and submit a purchase plan request. When a purchase request is approved, it becomes a purchase order.

2) Sourcing
-Use competitive analyses and current strategic sourcing partnerships to identify the best suppliers to meet company needs. Several requests for quotation are sent so that the team can compare prices.

3)Acquisition and Payment
-Order, reconcile and pay for goods and services and meet business’ needs while maintaining spending control
-Finalise the purchase order (a legally binding document that confirms an order)

4)Evaluation
-Check goods and services once delivered, Use past performance and current data to understand and strengthen supplier relationships, prepare for future spending, and analyse available data to uncover further cost savings.

Question 38

Procurement Fraud

What is…

The Lure of Kickbacks

Phantom Vender

Answer 38

The Lure of Kickbacks
-A vendor pays bribery (kickbacks) to employees who facilitate the payment of false or inflated invoices OR an employee receives kickback for choosing one contractor over another.

Phantom Vender
-An employee sets up a fictitious vendor and uses it to submit false invoices.

Question 39

Social Procurement

What is it?

What aspects of society could it help and what specific groups could it benefit?

Role of Government in Social Procurement

Answer 39

Definition: involves making deliberate
choices around buying and selling that provide social benefit.

engaging with or
improving the economic development of a local
community; improving sustainability; improving
fair trade; or targeting benefits to a particular
group of people who may be disadvantaged, such
as people with disabilities, beneficiaries, women,
migrants and refugees, or indigenous
communities and other ethnic minorities

Social procurement allows the government to support businesses owned by minority groups, therefore, the gov can contribute to economic inclusion, reducing wealth and opportunity gaps

Prioritising local suppliers can boost the local economy. Government procurement=catalyst for regional growth and jobs.

Allows gov to address social problems such as environmentally friendly production methods and ethical production.

Enhance public trust of the government as it demonstrates the govs ability to to be transparent and have accountability in its purchasing decisions. Shows public money (taxes) is being used for good.

Social procurment=promote diversity and inclusion. Promotes supply chain diversity and social inclusion as a result.

Question 40

Solvency

Liquidity

Answer 40

Gearing ratio

Quick ratio

Question 41

Preparing budgets and forecasting

What are the 3 types of budgets?

Answer 41

Types of Budgets:

Operating budget

Project budget

Financial budget

Question 42

Explain each of the budgets:

Operating budget

Project budget

Financial budget

Answer 42

operating: relates to the main activities of a business include budgets relating to sales, production and raw materials, direct labour, expenses and costs of goods sold

project: Capital expenditure budgets in a business’s strategic plan include
information about the purpose of the asset purchase, life span of
the asset and the revenue that would be generated from the
purchase. Capital expenditures would be tracked in this budget

Financial Budget: The budgeted income statement, balance sheet and cash flows.