Processes of Financial Management Flashcards

Question

What are advantages of Equity Financing?

Answer 1

1. Does not have to be repaid 2. Cheaper because no interest payment 3. If business fails, funds do not have to be repaid to investors 4. Financial risk is low as there are no liabilities, hence solvency is not affected.

Answer 2

1. Must share profit in the form of dividends. Dividends are not tax deductible 2. Ownership will become diluted increasing the risk of conflict 3. Connecting with new investors is costly as being listed on the ASX requires a **prospectus** which is timely and costly 4. Expectation that the ROI will be statisfactory for shareholders

Answer 3

* Using long term finance to fund short term assets will result in paying for assets long after they have been sold, reducing profit and affecting cash flow * Using short term finance for long term assets will cause financial problems because the amount borrowed must be repaid before the assets generate any revenue

Answer 4

* Generate favourable cash flow * Pay its finanacial commitments as they fall due * Have suffcient funds for future expansion * Pay drawings to owners or dividends for shareholders

Answer 5

Show how **effectively finance is being used in a business** and show whether the business has enough funds to meet unforseen circumstances

Answer 6

Represents a business's assets and liabilities in a particular point in time and represents the net worth of a business.

Answer 7

How much money has come into the business as revenue, how much has gone out as expenditure and how much has been derived as profit.

Answer 8

Whether: * A business has enough assets to cover its debt * The interest and money borrowed can be repaid * The assets of the business are being used to maximise profits

Answer 9

1. Operating Activities 2. Investing Activities 3. Financing Activities

Answer 10

1. Selling Expenses 2. Administrative Expenses 3. Financial Expenses

Answer 11

Accounting method where a business records an expense as an assets on the balance sheet rather than an expense on the income statement **Problem** * Overstate profitability and understate expenses

Answer 12

Removing one off or unusual transactions which can affect profitability. There aim is to give a more accurate depiction of the true earnings of a company, allowing for better comparison. **Problem** * Not a true relflection of a company's complete performance

Answer 13

The process of estimating the market value of assets or liabilities, especially with intangible assets e.g. goodwill **Problem** * Limiting accuracy * Overstating assets, understating expenses

Answer 14

Businesses can make adjustments to the timing of activities to make profits seem higher or expenses seem lower ## Footnote E.g. recording purchase of new equipment in upcoming year and recording sale of cars in past year, even if bought at the same time.

Answer 15

Financial reports cannot disclose specific information about debt because **they only show who is owed and how much. **When its due, rate of interest and capacity of debtor to repay is not included. **Problem** * Companies can choose to project favourable overview of the business and not disclose debt repayment information.

Answer 16

Any additional information that is left out of the main report. Often they are included at the end but are NOT COMPULSORY. **Problem** * They are OPTIONAL to include ## Footnote E.g. summary of accounting methods, depreciating assets or how explanation of how assets have been valued

Answer 17

1. Misinterpretation of Funds 2. Misuse of funds (embezellment) 3. Tax Minimisation

Answer 18

1. Auditing Accounts 2. Record Keeping (helps prove transactions are valid and restricts tax evasion) 3. Reporting Practices (gotta share financial reports to shareholders)

Answer 19

1. Internal Audit e.g suprise stocktake 2. External Audit 3. Managment Audits

Processes of Financial Management Flashcards

(44 cards)