the key terminology

Question 1

liquidity ratio

Answer 1

• Current/liquidity/working capital ratio
  o ( current assets/current liabilities)
  o 1.12:1
  o 1.54:1
  o $1 in current liabilities…. In current assets
  o Short term financial obligations
• Importance in liquidity :
  o Creditworthiness
  o Stability
  o Good signal to creditors

Question 2

solvency ratio

Answer 2

o (total liabilities/total equity)
o 2.41:1
o 2.74:1
o $1 owner’s equity… in total liabilities/borrowed funds
o Long term financial obligations

Question 3

GROSS profit ratio

Answer 3

o GP/sales x 100
o 38.34
o 37.82
o $1 sales, (100-GP) in COGS, ___ in GP
o High ratio = COGS low
o Obtain stock at lower price
o Raise sales; raise prices on products
o Compensate for lower profit margins

Question 4

net profit ratio

Answer 4

o NP/sales x 100
o 22.4%
o 21.2%
o $1 sales… ___ in NP
o Reduce expenses
o Increase sales

Question 5

returnon equity ratio

Answer 5

o NP/owner’s equity x 100
o 55.6c
o 61c
o $1 in equity, returns are ___
o Return on investments
o Effective funds contribution to profit
o Indication to potential shareholders
o Investments^

Question 6

expense ratio

Answer 6

o lower ratio =more efficient
o expenses/sales x 100
o control of expenses
o for every $1 in sales rev, ___ C was absorbed by expenses

Question 7

accs receivable turnover

Answer 7

1. Sales / Accounts Receivable = times
   o 2.365 / turnover times = turnover days
   o effectiveness of a business’s credit policy?
   o efficiently collect their debts?
   o Liquidity of debtors
   o Less days= more efficient in collecting debts
   o It takes about __ days to collect the accs receivable

Question 8

cash flow management (general)

Answer 8

• Coming in-out
• Movement of cash
• Basis of sustainable
• Breaking even effect
• Temporary downfall overdue feespotential business failure
• Monitoring n implementing corrective actions
• Eliminating needs for late fees

Question 9

cash flow statement

Answer 9

• Identifies cash shortages + surpluses

Question 10

distribution of payments

Answer 10

• Large bills – monthly payment system
• Less dramatic outflows
• Negotiating
• Don’t occur simultaneously

Question 11

discounts for early payments

Answer 11

• Offering 2 debtors accounts
• Cash flow

Question 12

factoring

Answer 12

• Sale of accounts receivable

Question 13

working cpaital management (general)

Answer 13

• Funds available
• Needed for day-day operations
• Vulnerable and insolvent – not liquid

Question 14

control of current assets (general)

Answer 14

• Optimal amount of current assets
• Costs/benefits w each asset

Question 15

cash - current asset

Answer 15

o Preparation of cash budget
o Detailed plan
o Cash inflows = customer demands
o Cash outflows= expenses
o Shortage of cash
o Overspending/borrow funds
o Cash lost, theft, fraud, mismanagement
o Appropriate reserve of cash

Question 16

accounts receivables -current assets

Answer 16

o Maintain adequate cash
o Need funds to meet own commitments
o Credit policy
 Extend credit – customers
 credit ratings of prospective customers
 reasonable repayment period
 charging fees 4 late
 credit collection policy

Question 17

inventories - current assets

Answer 17

o stored resources, raw materials
o holds stock = to meet consumer demand
o not enough stock= customer goes another competitor
o JIT system
o Inventory policy – checked against stock
o Rate of inventory turnover – calculate suitable management

Question 18

current liabilities- accounts payable

Answer 18

o Debts owed to suppliers
o Danger= damaging business credit rating
o incur late fees
o stretching acc payable = paying late, reduce damage for credit rating
o adv of discounts

Question 19

loans - current liabilities

Answer 19

o hold costs of variable interest rate
o investigating alternative sources of funds
o extremely costly
o comparing lenders
o negotiating lower interest
o reworking loan terms

Question 20

overdrafts

Answer 20

o overdraw agreed limit
o variable interest
o charge establishment fees & interest
o monitoring
o ensuring cash received promptly deposited

Question 21

strats (leasing)

Answer 21

o rent, fixed price
o borrowed
o depreciation, tax deductible , renovations are a no

Question 22

sales n leaseback (strat)

Answer 22

o owned assets to lessors
o fixed payments
o immediate funds
o depreciation, tax deductible
o may affect long term profitability, leasing expenses indefinitely

Question 23

profitabulity - cost control

Answer 23

o minimise costs, avoid unnecessary spending

Question 24

fixed costs

Answer 24

dont depend on level of operating activity

Question 25

variable costs

Answer 25

o depend on level of operating activity
o increase/decrease in proportion to production
 negotiating bulk production
 reduction in suppliers/cheaper supplier
 multiskilling staff
 self-service tech

Question 27

cost centres

Answer 27

o departments associated w cost
o budget
o monitor expenses – minimise waste & max use of resources
o take the total cost of making and supplying a good and calculate the percentage contribution of each cost centre.
o Comparison of costs- budgets, standards

Question 28

expense minimisation

Answer 28

o Reduce to min possible
o Expense budget
 List main activities
 Allocate amount
 Increase competitive position
 Guidelines/policies

Question 29

marketing objectives

Answer 29

o Fixed/variable costs
o Cost volume profit analysis
o Revenue sufficient – fixed/variable costs – break even?

Question 30

changes to sale mix

Answer 30

o Low profit margins
o Products generate largest revenue
o Eliminating
o market research

Question 31

pricing strategy

Answer 31

o cost based pricing
o calculating cost of product then adding a % mark up
o market share maintained

Question 32

normalised earnings

Answer 32

• removal of unusual influence (special circumstance)
• economic upswing/downswing
• BALANCE SHEET
• Provides more realistic assessment
• Earning performance
• Example : removal of a land sale, which would achieve a large capital gain but also distort the true earnings of the business.

Question 33

capitalising expenses

Answer 33

• Capital expense= asset
• True financial condition?
• Undervalue/understates expenses
• BALANCE SHEET
• Mislead shareholders/potential buyers

Question 34

valuing assets

Answer 34

• Estimate market value -assets
• Distorting accuracy – distorting worth of assets-depreciating
• Intangible assets-not recorded accurate

Question 35

timing issues

Answer 35

• Current position of business not accurate
• ASX required publish half year financial report
• Manipulation of timing of transactions
• for example, adding revenue of current reporting period into that of the previous or recording a current cost as being outside the financial year so it does not appear on the current reports.

Question 36

debt repayments

Answer 36

• no specifics
• debt finance on balance sheet as historic costs
• Debt finance not an expense on revenue
• Do not disclose specific info about nature of debt

Question 37

ethical issues

Answer 37

• Abide by legislation
• Stakeholders must feel assured
  o Misrepresentation of financial reports
  o Misuse of funds
  o Tax minimisation

Question 38

reducing unethical - auditing accs

Answer 38

• Independent check of accuracy
• Examine financial affairs
• Check control procedures – physical check assets

Question 39

reduce unethical - record keeping

Answer 39

o Source documents
o Request of aus gov – every transaction
o ATO regularly monitors
o 5 year of financial records
o Prosecution 4 tax evasions= harm reputation

Question 40

reporting practises

Answer 40

o Legally as well as ethically obliged
o Produce accurate reports
o ASX highlights importance