Chapter 6 - The Finance Function and Financial Information

Question 1

What are the tasks of the finance function? 4

Answer 1

The finance function involves 1. Recording Financial Transactions (legal requirement), 2. Management Accounting, 3. Financial Reporting, and 4. Treasury Management.

Question 2

What does ‘Recording financial transactions’ involve?

Answer 2

Ensuring that the business has an accurate record of its revenue, expenses, assets, liabilities, and capital.

Question 3

What is the purpose of Management Accounting? Examples of tasks

Answer 3

Providing information to assist managers and other internal users in decision-making, performance measurement, planning, and control activities. Management accounting: planning, budgets, forecasts, costings, management accounts, variance analysis, project appraisal.

Question 4

What does Financial Reporting provide? Examples of tasks

Answer 4

Providing information about a business to external users. Financial accounting: preparation of financial statements, preparation of tax returns, reports to financial markets, working with external auditors

Question 5

What does Treasury Management focus on? Examples of tasks

Answer 5

Managing business funds, including cash/working capital, long-term investments, debt, and equity finance. Treasury management: cash flow forecasting, cash management, foreign currency management, investment into liquid and long term assets, financial risk management, raising of finance through lenders or shareholders.

Question 6

What is business partnering in the context of the finance function?

Answer 6

Business partnering involves the finance function working alongside other business functions to provide advice and support, helping maximize performance.

Question 7

What are the roles of the finance function in business partnering?

Answer 7

Members of the finance function act as advisors, providing support in strategy formulation, decision-making, analysis, and facilitating productive discussions.

Question 8

What are some key activities involved in business partnering?

Answer 8

Key activities include strategy formulation, implementation and communication, commercial decision-making, business analysis, and acting as a trusted advisor or facilitator.

Question 9

Why do businesses and managers need financial information?

Answer 9

Businesses and managers need financial information for planning, controlling, recording transactions, performance measurement, and decision-making.

Question 10

What are the purposes of planning information?

Answer 10

Planning information helps people involved in the planning process.Help us to meetobjectives, implementation, resources needed, timescales

Question 11

What is the role of operational information?

Answer 11

Operational information helps people carry out their day-to-day activities, such as determining how many operatives are needed on one shift.

Question 12

What does tactical information help with?

Answer 12

Tactical information helps people deal with short-term issues and opportunities, such as monthly variance reports for the factory. e.g. monthly.quarterly

Question 13

What is the focus of strategic information?

Answer 13

Strategic information supports major long-term decision-making, for example, determining if resources can be made available to expand production.

Question 14

What information do present and potential investors (shareholders) need?

Answer 14

They need information to make equity investment decisions, such as assessing the risk and return of investment and the ability of the company to pay dividends.

Question 15

What do lenders and other payables assess using financial information?

Answer 15

They assess whether loans will be repaid and whether related interest will be paid when due.

Question 16

What aspects do employees assess about their employer using financial information?

Answer 16

Employees assess their employer’s stability and profitability, as well as their ability to provide remuneration, employment opportunities, and retirement or other benefits.

Question 17

Why do customers need financial information?

Answer 17

Customers assess whether the business will continue to exist, especially if they have long-term involvement or dependency on the business, such as being supply chain partners.

Question 18

What do suppliers or business partners assess using financial information?

Answer 18

Suppliers or business partners assess the likelihood of being paid when due.

Question 19

How do governments and agencies use financial information?

Answer 19

Governments and agencies use it to assess resource allocation, regulate activities, assess taxation income, provide national statistics, and direct policies on health, safety, and equal opportunities.

Question 20

Why is financial information important to public and community representatives?

Answer 20

They use it to assess trends and developments in the business’s prosperity and its contributions to the local economy, such as employment and using local suppliers.

Question 21

What are the fundamental qualitative characteristics of financial statements?

Answer 21

Fundamental characteristics include relevance and faithful representation.

Question 22

What are the enhancing qualitative characteristics of financial statements?

Answer 22

Enhancing characteristics include understandability, comparability, verifiability, and timeliness.

Question 23

What does relevance mean in the context of financial statements?

Answer 23

Relevance means the information has predictive or confirmatory value and is affected by the nature and materiality of items (size of error).

Question 24

What is faithful representation in financial statements?

Answer 24

Faithful representation means the information is complete, neutral, and free from error.

Question 25

What does understandability mean for financial statements?

Answer 25

Understandability means the information is clear and concise.

Question 26

What is comparability in financial statements?

Answer 26

Comparability ensures measurement and display are consistent over time and across businesses.

Question 27

How is verifiability achieved in financial statements?

Answer 27

Verifiability is achieved when knowledgeable and independent observers can reach consensus about the information.

Question 28

Why is timeliness important in financial statements?

Answer 28

Timeliness ensures that information is available to decision-makers in time to influence their decisions.

Question 29

What are some limitations of financial information in meeting users' needs?

Answer 29

Limitations include conventional representation, being backward-looking, and omission of non-financial information.

Question 30

What does 'conventional representation' mean as a limitation of financial information?

Answer 30

'Conventional representation' means financial information is often standardized and highly aggregated, which can limit its usefulness.

Question 31

Why is financial information considered 'backward-looking'?

Answer 31

Financial information is considered backward-looking because financial statements cover a period that has already ended.

Question 32

What is omitted from financial information that limits its usefulness?

Answer 32

Non-financial information, such as narrative descriptions of major operations, discussions of business risks, and narrative analysis of performance and prospects, is omitted.

Question 33

What are the key attributes of effective information processing (CATIVA)?

Answer 33

The key attributes are Completeness, Accuracy, Timeliness, Inalterability, Verifiability, and Accessibility. * Completeness – Everything that needs to be processed should be processed - looking at date and time stamps * Accuracy – Data remains true to its sources and contains no errors *  Timeliness – Processing should occur when data is available and provide real time access * Inalterability – The process should be open to neither unauthorised intervention whilst in action nor alteration once completed - audit trails, logs, checksums and blockchain - test integrity of transcations. * Verifiability – The sources of the data and the trail through processing * Accessibility – The effectiveness of the processing should be open to scrutiny e.g. internal audit can check for controls, reconcliations, analysis of nominal ledger accounts

Question 34

What does information processing involve?

Answer 34

Information processing involves converting collected data into information for broader communication within the business.

Question 35

What is a system in the context of information management?

Answer 35

A system is a set of interacting components that work together to achieve a purpose.

Question 36

What is a business system?

Answer 36

A business system is a collection of people, machines, and methods organized to accomplish a set of specific functions.

Question 37

What are information systems (IS)?

Answer 37

Information systems include all systems and procedures involved in the collection, storage, production, and distribution of information.

Question 38

What is the role of information technology (IT) in information systems?

Answer 38

The equipment used to capture, store, transmit or present information. IT provides a large part of the information systems infrastructure.

Question 39

What is information management?

Answer 39

Information management is a business's approach to managing its information, including planning IS/IT developments, the organizational environment of IS, control, and technology.

Question 40

What are the three main components of a system? Example

Answer 40

A system has three component parts: inputs, processes and outputs. Other key characteristics of a system are the environment and the system boundary. Example Input a purchase invoice, processing match up the PO with the invoice and output 1. payment is made 2. entry + visibility in the management accounts.

Question 41

What is a system boundary?

Answer 41

A system boundary separates the information system from its environment, defining what belongs to the system and what is external.

Question 42

What is a transaction processing system (TPS)?

Answer 42

A TPS performs, records, and processes routine transactions, supporting most business functions.EPOS (electronic point of sale system) e.g. cash register.

Question 43

What is a management information system (MIS)?

Answer 43

An MIS converts data from internal sources into information that enables managers to make timely and effective decisions.

Question 44

What are some risks to data in an organization? 5

Answer 44

Risks include human error, entering incorrect transactions, technical errors, natural disasters, and deliberate actions such as fraud, malicious damage, or commercial espionage.

Question 45

What are the aspects of security for information systems? 6

Answer 45

The aspects of security are prevention, detection, deterrence, recovery, correction, and avoidance.

Question 46

What does ACIANA stand for in the context of a secure information system? 6

Answer 46

ACIANA stands for Availability, Confidentiality, Integrity, Authenticity, Non-repudiation, and Authorisation.Relates to the qualities of a secure information system.

Question 47

What measures can be taken for physical access control in information security?

Answer 47

Measures include manning premises with receptionists and security guards, installing door locks, installing intruder alarms, and securing computer devices.

Question 48

How can we ensure integrity controls in the system 5

Answer 48

Integrity controls in the system  Data verification involves ensuring data entered matches source documents  Data validation involves ensuring that data entered is not incomplete or unreasonable.  Back up and archive strategy  Personnel selection  Segregation of duties

Question 49

What is data verification in the context of information systems?

Answer 49

Data verification ensures that the data entered matches source documents.

Question 50

What is data validation in the context of information systems?

Answer 50

Data validation ensures that data entered is not incomplete or unreasonable.

Question 51

What are some examples of data validation checks? 5

Answer 51

Examples of data validation checks include Check Digits, Control Totals, Hash Totals, Range Checks, and Limit Checks.

Question 52

What is the purpose of a backup and archive strategy in information systems?

Answer 52

A backup and archive strategy helps prevent data loss by ensuring data is securely stored and can be retrieved when necessary.

Question 53

Why is personnel selection important in information security?

Answer 53

Personnel selection ensures that only trustworthy and qualified individuals have access to sensitive information systems.

Question 54

What is the significance of segregation of duties in information systems?

Answer 54

Segregation of duties prevents unauthorized actions and reduces the risk of errors or fraud by dividing responsibilities among different individuals.

Question 55

What are qualitative performance measures?

Answer 55

Qualitative measures are subjective and judgmental, not expressed in numerical terms.

Question 56

What are quantitative performance measures?

Answer 56

Quantitative measures are objective, based on reliable data, expressed in numerical terms, and can be financial or non-financial.

Question 57

What are the three main points of reference for measuring performance in a business?

Answer 57

The three main points are profitability, activity, and productivity.

Question 58

What is included in profitability as a performance measure?

Answer 58

Profitability includes cost and revenue as its components.

Question 59

What are examples of activity measures in a business?

Answer 59

Examples include the number of orders received from customers (effectiveness of marketing) and the number of machine breakdowns attended to by the repairs and maintenance department.

Question 60

How is productivity defined in performance measurement?

Answer 60

Productivity is the quantity of service or product produced in relation to the resources put in, such as items processed per hour or per employee.

Question 61

How can profitability be measured?

Answer 61

Profitability can be measured in absolute terms (profit amount) and relative terms (profit margin).

Question 62

What are the types of resources a business uses to achieve its objectives? 5

Answer 62

Resources include physical assets (buildings, machinery), competences, intangible assets (customer goodwill, brands), business structure, and knowledge.

Question 63

What is the difference between economy, effectiveness, and efficiency in resource use?

Answer 63

Economy focuses on cost reduction, effectiveness measures achievement, and efficiency involves achieving effectiveness at minimum cost without losing operational effectiveness..

Question 64

What are critical success factors (CSFs)?

Answer 64

CSFs are factors critical to a business's success, varying by area (e.g., price, quality, delivery) and dependent on both resources and the competitive environment.

Question 65

What are key performance indicators (KPIs)?

Answer 65

KPIs are measurable indicators of performance linked to achieving CSFs, enabling businesses to outperform rivals.

Question 66

How can businesses set effective KPIs?

Answer 66

Businesses can set effective KPIs using benchmarking to determine acceptable levels of performance.

Question 67

What are some limitations of financial measures related to information? 2

Answer 67

Base information may be out of date, and historical cost data may not be appropriate.

Question 68

What are comparison problems in financial measures due to price changes?

Answer 68

Price changes make comparisons difficult, and changing accounting policies can affect reported results.

Question 69

What are comparison problems in financial measures related to industry norms?

Answer 69

Norms based on industry averages may not be useful, and differing sizes of firms can impact comparisons.

Question 70

What is the balanced scorecard?

Answer 70

The balanced scorecard is an integrated set of performance measures linked to the achievement of strategic objectives.

Question 71

Who developed the balanced scorecard?

Answer 71

The balanced scorecard was developed by Robert Kaplan and David Norton.

Question 72

What are the four perspectives of the balanced scorecard?

Answer 72

The four perspectives are customer, internal business processes, innovation and learning, and financial.

Question 73

What are examples of measures under the customer perspective of the balanced scorecard?

Answer 73

Examples include satisfaction ratings, retention rates, and return rates. The key question is 'How do customers see us?'

Question 74

What are examples of measures under the internal business processes perspective?

Answer 74

Examples include product quality and failure rates. The key question is 'What must we excel at?'

Question 75

What are examples of measures under the innovation and learning perspective?

Answer 75

Examples include employee retention rates and time to market for new products. The key question is 'How can we continue to improve and create value?'

Question 76

What are examples of measures under the financial perspective?

Answer 76

Examples include gross margin, net margin, return on capital employed, gearing, and interest cover. The key question is 'How do we look to our shareholders?'

Question 77

What is the purpose of financial control processes?

Answer 77

Financial control processes aim to safeguard an organization's financial assets and reduce the risk of mismanagement.

Question 78

What is financial control?

Answer 78

Financial control is a form of internal control.

Question 79

What is internal control?

Answer 79

Internal control is a process, effected by an entity's board of directors, management, and personnel, designed to provide reasonable assurance regarding operations, reporting, and compliance.

Question 80

What are the characteristics of internal controls?

Answer 80

Internal controls are geared towards achieving organizational objectives, involve tasks and activities, are effected by people, provide reasonable (but not absolute) assurance, and are adaptable to an organization's structure.

Question 81

What are the categories of activities involved in internal controls? PARIS V

Answer 81

Internal control activities include approval, authorization, verification, reconciliation, business performance reviews, and segregation of duties.PARIS V

Question 82

What are the five components of effective internal control according to COSO? CRIME

Answer 82

The five components are control environment, risk management, control activities, information and communication, and monitoring activities.

Question 83

What is the FRC definition of risk management and internal control systems?

Answer 83

The FRC defines risk management and internal control systems as a system encompassing the policies, culture, organization, behaviors, processes, systems, and other aspects of a company.

Question 84

What are the key objectives of risk management and internal control as defined by the FRC? 4

Answer 84

Objectives include assessing and responding to risks, safeguarding assets, reducing poor decision-making and excessive risk-taking, ensuring quality of reporting, ensuring compliance with laws and internal policies.