E-Finance CH1

Question 1

What is financial management

Answer 1

Management of financial resources and financial obligations in order to achieve firm’s goal.

Question 2

What are some of the firm’s contractual relationshps

Answer 2

suppliers, wholesalers, retailers….

Question 3

What are the different types of decisions and functions of a business

Answer 3

1. Investment decisions
   
   • Identify good investment projects to maximize the owner’s wealth
   • long term investments
2. Financing decisions
3. Dividened decisions
4. Working capital decisions
   - CA-CL
   - management of short term assets and lliabilities

Question 4

What is share capital and share premium

Answer 4

The capital stockholders invest in

Question 5

What is retained profits

Answer 5

Dividend that hasn’t been distributed

Question 6

What is stockholder’s equity

Answer 6

Total share capital, share premium and retained profits

Question 7

What are the profitability ratios

Answer 7

1. Gross profit ratio
2. Net profit ratio
3. Return on capital employed

Question 8

Formula of gross profit ratio

Answer 8

GP/Sales x100%

Question 9

Formula of net profit ratio

Answer 9

NP/Sales x100%

Question 10

Formula of ROCE

Answer 10

NP before profit and tax/ Avg capital employed x100%

Question 11

What are the different liquidity ratios

Answer 11

1. Current ratio
2. Quick ratio
   .
   .
   .
   -inventory turnover
   -trade receivables turnover
   -trade payables turnover

Question 12

Forumula of quick ratio & current ratio

Answer 12

Quick:
CA-I/CL :1

Current:
CA/CL :1

Question 13

What are the solvency ratios

Answer 13

1. gearinng ratio

Question 14

Formula of gearing ratio

Answer 14

Long term debt/ total long term capital

or

NCL + preference share capital/ NCL + shareholder’s fund

Question 15

What are the management efficiency ratios

Answer 15

1. Inventory turnover
2. Trade receivables turnover
3. Trade payables turnover
4. Total asset turnover

Question 16

Formula of inventory turnover

Answer 16

COGS/ AVG INV

Question 17

Formula of Trade receivable turnover

Answer 17

Credit sales/ avg trade receivable

Question 18

Formula of trade payable turnover

Answer 18

Credit purchaces/ avg trade payable

Question 19

Formula of total asset turnover

Answer 19

Sales/ total assets (NCA+CA)

Question 20

limitations of ratio analysis

Answer 20

1. Ratios can’t capture qualitative information about a firm
   - e.g external factors that affected the performance
2. Past data may not reflect a firm’s future financial condition
3. There are various accounting practices, it will make comparing them difficult
4. DIfficult to indentify industrial norms for firms with a unique mix of businesses
   - need cross sectional analysis
5. Ratio analysis only helps reveal the source of potential problems or success on the surface