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HSC business studies > Finance - Processes > Flashcards

Finance - Processes Flashcards

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1
Q

what does the planning and implementing cycle involve

A
  • determining financial needs
  • developing budgets
  • maintaining record systems
  • identifying financial risks
  • establishing financial control
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2
Q

why is financial information important?

A

financial information includes: balance sheets, income statements, cash flow statements, cash flow analysis, sales and price forecasts, budgets, bank statements and reports from financial ration analysis and interpretation

it is important as it will help guide a businesses management plans and decisions so that they can efficiently use their resources
this information is also used to create a business plan which might be used when seeking finance or support from a bank or other financial institution - who need a guarantee that their financial commitment to a business will be successful

  • financial info is needed to show that the business can generate an acceptable return for the investment being sought
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3
Q

what is a budget

A

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

there are different types of budgets
- operating budgets - relate to the main activities of a business eg. sales, production, raw materials, direct labour, expenses
project budgets - relate to capital expenditure and r&d
financial budgets relate to the financial data of a business

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4
Q

why are budgets important for a business

A

important business decisions should be based off budgets such as whether to increase mktg, cut expenses or puchase new assets

  • reflect the strategic planning decisions and help management allocate resources evaluate performance and evaluate plans –> provide financial info for a businesses specific goals
  • enable a constant monitoring of objectives and provide a basis for administrative control, direction of sales effort, production planning, price setting, control of expenses and of production costs
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5
Q

what are record systems for a business and why are they important

A

record systems are the mechanisms employed by a business to ensure that data are recorded and the information provided is accurate, reliable, efficient and accessible

  • records help businesses better understand how the business if performing and where improvements need to be made
  • also helps them demonstrate their financial position to investors or financial institutions
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6
Q

what are financial risks

A

refers to the possibility of financial loss to businesses

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7
Q

what are the 4 types of financial risks

A

credit risk
- danger associated with borrowing money

market risk
- involves the risk of changing conditions in the specific marketplace in which a company competes for business

liquidity risk
- refers to a business cash flow and whether the business has sufficient funds to meet their financial obligations

operational risk
- refers to the various dangers faced during the day to day management of a business

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8
Q

what is financial control

A

the procedures, policies and means by which a business monitors and controls the
allocation and usage of its resources eg.
- control of cash
- control of credit procedures
- clear authorisation and responsibility for tasks in the business
- placing qualification restrictions
- asset protection

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9
Q

what is debt finance

A

relates to liabilities or short term and long term borrowing from external sources by a business

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10
Q

what is equity finance

A

relates to the internal sources of finance in the business

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11
Q

what are the advantages of debt finance

A
  • funds are readily available and can be acquired at short notice
  • increased funds should lead to increased earnings and profits
  • interest payments are tax deductible
  • flexible payment periods and types of debt are available
  • won’t dilute current ownership of the business
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12
Q

what are the disadvantages of debt finance

A
  • there is an increased risk if debt comes from financial institutions because interest, bank charges and govt charges may increase
  • security required by the business
  • regular repayments have to made
  • lenders have first claim on any money if the business ends in bankruptcy
  • debt can be expensive eg. interest must be paid
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13
Q

what are the advantages of equity finance

A
  • doesn’t have to be repaid unless the owner leaves the business
  • cheaper than other sources of finance as there are no interest payments
  • the owners who have contributed the equity retain control over how that finance is used
  • low gearing (uses resources of the owner and not external sources of finance)
  • less risk for business
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14
Q

what is matching the terms and source of finance to business purpose and why is it important

A

the terms of finance must be suitable for the purpose for which the funds are required - long term funds shouldn’t be used to fund short term assets and vice versa
- therefore finance managers should match the length or term of the loan with the economic lifetime of the asset

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15
Q

what are the disadvantages of equity finance

A
  • lower profits and returns for owner
  • the expectation that the owner will have about the same on ROI
  • long, expensive process to obtain funds
  • ownership is diluted
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16
Q

what are the main financial controls used by a business

A

cash flow statements, income statements and balance sheets

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17
Q

what is a cash flow statement and what does it measure

A

a financial statement that indicates the movement of cash receipts and cash payments resulting from transactions over a period of time

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18
Q

what are the three general categories of a cash flow statement

A

operating
- cash inflows and outflows relating to the main activity of the business — that is, the
provision of goods and services. Income from sales (cash and credit) make up the main operating inflows plus
dividends and interest received
and outflows include payments to suppliers, employees and other operating expenses eg. insurance, rent

investing
- are the cash inflows and outflows relating to the purchase and sale of non-current assets and investments eg. selling of old motor vehicle, purchasing of new plant and equipment or purchasing property

financing
cash inflows and outflows relating to the borrowing activities of the business.
Borrowing inflows can relate to equity (issue of shares or capital contribution from owner) or debt (loans from financial institutions). Cash outflows relate to the repayments of debt and cash drawings of the owner or payments of dividends to shareholders.

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19
Q

who uses cash flow statements

A

creditors and lenders of finance - check that a business has had positive cash flow over a number of years

owners and shareholders
- can be a predictor of business status
- assess the ability of a business to manage its cash
- can also be a predictor of change
- measures liquidity

usually month by month

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20
Q

what is a statutory cash flow statement

A

for incorporated entities (private and public companies)

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21
Q

how to calculate the closing balance on a cash flow statement

A

CLOSING BALANCE = OPENING BALANCE + CASH INFLOWS - CASH OUTFLOWS

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22
Q

what is an income statement and what does it measure

A

An income statement is a summary of the income earned and the expenses incurred over a period of time trading - helps users see exactly how much money has come into the business as revenue, and how much has come out as expenditure and how much has been derived as profit

  • measures profitability
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23
Q

what does an income statement show

A

operating income
- earned from the main function of the business eg. sales of inventory, services and non operating revenue earned from other operations eg. interest, rent and commission

operating expenses
- eg. purchase on inventories, payment for services and other expenses incurred in the main operation of the business eg. advertising rent, telephone and insurance

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24
Q

whats the gross profit formula

A

GROSS PROFIT = REVENUE - COGS

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25
whats the net profit formula
NET PROFIT = GROSS PROFIT - EXPENSES
26
whats the COGS formula
COGS = OPENING STOCK + PURCHASES - CLOSING STOCK
27
what are the 3 ways expenses can be broken down on an income statement
selling expenses - costs related directory to the selling of the good or service; can be directly traced to the need for sales eg. commission, salaries, wages advertising, delivery expenses, electricity administrative expenses - costs directly relating to the general running of the business eg. stationery, office salaries, rent, rates, telephone, insurances, accountant fees finance expenses - costs associated the borrowing money from outside people or organisations and to minimising business risk eg. interest payments, lease payments, dividends, insurance payments
28
what is a balance sheet and what does it measure
A balance sheet is a summary of a businesses assets and liabilities at a particular point int time expressed in money terms; represents the net value of the business - measures solvency - shows how much of a businesses current assts are funded by debt and the proportion of equity
29
define assets
items of value owned by the business and can be divided into current (eg. cash, accounts receivable (debtors) and inventory) and non current (eg. land, machinery, equipment, buildings)
30
define liabilities
items of debt owned to outside parties and can be divided into: - current liabilities: debts which are expected to be repaid in less than 12 months eg. overdraft and accounts payable (creditors) - non current liabilities: long term items of debt eg. mortgage, debenture
31
define owners equity
the funds contributed by the owner(s) and represents the net worth of the business and can be comprised of: capital and retained profits
32
what is the balance sheet formula (the accounting equation)
ALOE ASSETS = LIABILITIES + OWNERS EQUITY
33
what are the main types of financial analysis
- vertical : compares figures within one financial year eg. expressing gross profit as a % of sales and comparing debt to equity - horizontal : compares figures from different financial years eg. comparing 2021 to 2020 - trend : comparing figures for 3 -5 years
34
define liquidity
refers to the extent to which a business can meet its financial commitments in the short term (less than 12 months)
35
what is the ratio used to measure liquidity
current ratio is used to measure liquidity - cash flow is also typically measured by the liquidity ratio
36
what is the current ratio
current assets/ current liabilities
37
what does the current ratio measure
the current ratio measures the extent to which a business can its current liabilities with current assets - the desired ratio is usually 2:1 NOTE: that an assessment of current assets will reveal the proportion that is held in stocks or receivables -> this is important as converting these to cash reduces the profitability that would have otherwise been generated converting assets into cash reduces profitability but increases cash flow
38
define gearing
gearing measures the relationships between debt and equity - the proportion of debt (external) and the proportion on equity (internal) that is used to finance the activities of a business
39
what is a good current ratio for a business
2:1 - a firm should have double the amount of current assets to cover its current liabilities
40
define solvency
defined in the corporations act as the ability for a business to meet its debt obligations as they fall --> both short term and long term - the more highly geared a business (those that have a higher proportion of debt to equity) is the greater the risk for the business but the greater potential for profit
41
differentiate between gearing and solvency
gearing is used to determine a firms solvency (ability to meet financial commitments in the longer term)
42
what is the gearing ratio
the debt to equity ratio = total liabilities/ total equity
43
what does the debt to equity ratio show
shows the extent to which the firm is relying on debt or outside sources to finance the business
44
what does a debt to equity ratio greater than 1 mean
the business has less equity than debt
45
what does a debt to equity ratio between 0 and 1 mean
the business has more equity than debt
46
how could a business improve their gearing
reducing their debt or increasing equity
47
define profitability
refers to the earning performance of a business and indicates its capacity to use its resources to maximise profits
48
what are the 3 ratios used to measure profitability
GROSS PROFIT RATIO NET PROFIT RATIO RETURN ON EQUITY RATIO (all profitability ratios are usually denoted in %)
49
what is the gross profit ratio
GPR = Gross profit/ sales - gives the % of sales revenue that results in gross profit - is the difference between sales revenue and the direct of COGS - represents the amount of sales that is available to meet expenses resulting in net profit
50
why can't a gross profit ratio be calculated for a service based business
because gross profit is the difference between sales revenue and the direct cost of goods sold - service based businesses don't sell goods
51
what is the net profit ratio
NPR = Net profit/ sales - shows the amount of sales revenue that results in net profit - represents the profit of return to the owners which is revenue less expenses - depending on the volume of sales, this may be as low as 3% (coles and woolworths) or may be much higher than 30%
52
what is the return of equity ratio
ROER = Net profit/ total equity - shows how effective the funds contributed by owners have been in generating profit and hence return on their investment - the higher the ratio/ percentage, the better the return
53
define efficiency
refers to the ability of a business to use its resources effectively on ensuring financial stability and profitability of the business all businesses aim to reduce costs. in doing so, they achieve 2 things: 1. the effective allocation of cost to achieve revenue 2. the minimisation of expenses
54
what are the ratios used to measure efficiency
EXPENSE RATIO ACCOUNTS RECIEVABLE TURNOVER RATIO
55
what is the expense ratio
total expenses/ sales - may be written as a % - should be low as possible - the expense ratio is the difference between the GPR and the NPR (GPR - NPR)
56
what is the accounts receivable turnover ratio
ARTR = sales/ accounts receivable - indicates the number of times per year that debtors are collected --> ideally should be 12 times (once every 30 days) - the higher rate, the better
57
what are the limitations of financial reports
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HSC business studies (17 decks)

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