topic 3 finance Flashcards

Question

external (sources of) finance

Answer 1

**funds** provided by sources **outside bus (banks, FIs, gvt, suppliers)** * DEBT (funds borrowed from outside bus) * risk due to interest & other charges but AUS tax system encourages via tax deductions for interest payments or EQUITY (raise capital by selling shares to new owners) [internal when funds by existing owners] * through **creditors/lenders is debt finance** * make **regular repayments on borrowings** so firms **must** **generate sufficient earnings** * **^ risk using debt** as **interest** & bank & gvt charges must be **paid on top of principal borrowed** * **S< borrow**ing * bus' use combo od debt & equity to finance operational & tactical plans to achieve strategic objs

Answer 2

borrowings from outside sources where interests regularly paid on top of principle *(by banks & FIs to provide WC for temporary cash flow shortages due to lower inflows/higher outflows POT) * funds repaid within 12 months * recorded as CURRENT LIABILITIES on balance sheet 1. (bank) overdrafts 2. commercial bills 3. factoring

Answer 3

**bank** allows bus to **overdraw acc** up to **agreed limit** for **specified time** to **overcome temp cash shortfall** * able to operate w/ neg balance & withdraw moeny up to limit * assist **ST cash flow/liquidity problems** eg. **seasonal** decrease in **sales** * **lower IRs** than other borrowing but interest charged daily when balance neg (money not repaid) * more flexible than loans * **IRs variable** so **interest paid on daily outstanding balance (moeny not yet repaid) of acc [as u pay off the overdraft (reduce the amount you owe), the amt of interest have to pay will also decrease bc calculated on remaining amt owed, ]** * banks require agreed limits to ovedrraft maintained at high lvl and **un/secured by assets** * **repayable on demand (not common)** * **no regular repayment** schedule, owners can **pay** money back **when able** * most common source of funds for **small bus**

Answer 4

ST loans **issued by FIs** (not banks) for **larger amts (>$100 000)** betw **30-180 days** * more suitable for larger bus * **usually secured against bus assets** * repiad w/ interest at end of term * **borrower** **receive**d sum **immediately** & bill **(promise)**s to **repay moeny w/ interest in future** (?) * **full amt borrwed doesnt have to be repaid until end of term** (flexible?)

Answer 5

**raise cash immediately by selling accs receivable at discount to factoring company** * factoring company pays **90% of amt of receivables w/n 48hrs** of **submitting its invoices** & takes **responsibility chasing debts** * for **profitable bus** w/ CF issues, * adv **boost CF immediate inject cash**, disadv **give up 10% owed to get sooner & save burden chasing unpaid accs** * **improves liquidity [+cash flow & gearing]** (even when **current ratio worse** since **receiebavles fall mroe than cash ^**) **than waiting 30-60 days, chasing** * **w/o recourse (factoring company assumes risk** of **debts** remaining **unpaid** --> more adv to bus using factoring company's services) * **w/ recourse (bus agrees to buy back any bad debts from factoring company)** * last resort but more common & accepted now ? * **greater risk** than other **ST borrowing** bc **likelihood**of **unpaid debts** * relatively **expensive** source of finance bc bus **responsible for unpaid debts & commission is paid on debt** * appealing to **construction, manuf, agr & mining, transport & storage**, due to **longer payment cycles to clients**

Answer 6

ID ST bus uses accs receievable as collateral to borrow money, offer to **established companies** w/ **high turnover rate** (bank) * **bus**, NOT LENDER, **collects payments from customers** --> wont be aware they took cash flow finance * **finance company pays 80-90% total invoice amt upfront** (improve cash flow & WC) but bus collect payments & **repay lender w/ fees & itnerest charges** * maintain standards of **customer service** & keep **direct relation w/ debtors**

Answer 7

funds borrowed >12 months * purchase major assets (buildings, equip, plant usually security on loan) * non-current liabilities on balance sheet (except leasing --> recorded as expense on income statement) 1. mortgage 2. debenture 3. unsecured notes 4. leasing

Answer 8

**loan secured by property of borrower** (bus) * **property cant be sold/used as security** for **further borrowing until mortgage repaid** * finance purchasing property eg. **new premises, factory, office** which become security for loan (bank can repossess asset if borrower default on repayments.) * **repaid w/ interest through regular repayments** over **agreed PoT** often 15-20 yrs for large purchase * diff is **OWNERSHIP**: borrower **owns property during fixed schedule** but leasing is after fixed schedule

Answer 9

**loan****issued by large bus** to investors to raise capital for **fixed IR** for **fixed PIT**, **secured against bus assets** (ext source LT debt finance issued by company at fixed IR for fixed POT) * provide to **raise funds from investors > FIs** * **investor lends money** & in return, **company pays** with **regular fixed interest payments** for **fixed term & repay loan fully upon maturity** of debenture, (12 months-10 yrs) * as creditors, holders one of first to recover investment if bus insolvent bc secured against company's assets * **need prospectus, tell investors abt company, how they'll use funds & terms of investment** (return **compensate for risks)** (?) * finance companies raise funds **debenture issues to prublic**, they're basically bonds

Answer 10

**loan from investors/sold by bus**(usually finance companies) to** raise capital** for set **PIT, not secured against** bus **assets** (unlike commercial bill/debenture) * **higher IR bc unsecured loan**, msot risk to investors/lenders * usually **3 months-3yrs at fixed IR** (can be ST debt)

Answer 11

**payment** of money **to use equip owned by another** party (plant, vechile, machinery) * lessee uses equip & lessor owns & leases equip for agreed PIT * can **borrow funds & use equip w/o large capital outlay** required * **costs & benefits** of financial **asset** **transferred** from lessor **to lessee** * usually used by finance companies * corporations required by law to reveal sig leases in published financial statements * bus choose equip, arrenge for finance company to purchase it & lease from finance company, **retaining ownership for lease period**!! 1. **operating** * assets leased for short periods (**shorter than life of asset)** & returned * **lessee doesnt gain ownership of asset at end of lease** * **owner** carries **maintenance on asset** * can be **cancelled** often **w/o penalty** (?) 2. **financial** * **lessor purchases asset on behalf of lessee** * often for **life of asset** * lessee's **payment** covers **interest** and eventual **purchase of asset** * **lease repayments fixed** for life of asset **3-5 yrs**, cover interest & eventual asset purchase * **plant, vehicle, equip, furniture**

Answer 12

leased as **OPERATING** lease * **leasing** firm **responsible** for **repairs** to vehicle * if vehicle **returned < 2 weeks, adjust** lease **payment** * if leased for **3 yrs, FINANCIAL** lease * firm leasing vehicel **responsible** for **insurance & maintenance** of vehicle * term close to life of vehicle

Answer 13

lessor GRANTS lease to someone else, owns asset leased under agreement to lessee lessee makes one time payment/series periodic payments to lessor for using asset

Answer 14

* assists cash flow bc **cash outflows/payments** **spread over several years saving** burden of **one-off large cash payment (large capital outlay)** * (lower costs) easier to establish than large loan (also reduce bus' lvl feating/debt to equity ratio) * **LT** **financing** **w/o reducing control of ownership** * lease payments are a tax deduction * **fixed repayments for period** so **cash flow** **easily monitored** (dont fluctuate like IRs on loans) * upgrades to new equip simpler & more cost-effective * when only need ST/LT but constantly need updating (dont wanna buy & have new model, new one released & lease it instead) * dont increase debt to equity/^ insolvency, can borrow more in future * if IRs super high during life of loan, asset needs to earn relatively more revenue to make repayments --> leasing avoid exposure to rising IRs

Answer 15

IR charges can be higher than other forms of borrowing

Answer 16

raise finance by issuing ordinary shares/private equity (**inviting NEW owners**) * disadv: ^no. owners dilute og owners' share of bus --> smaller share profits & reduce control over decision-making * **issue shares to public via ASX** (?) * fewer risks than debt finance includes: * **ordinary** **shares (new issue)** * **private equity** **funds contributed by bus owners** eg. **capital/reinvest net profit back into bus aka retained profits**

Answer 17

innovative type of fundraising allows **many individuals** to **make small financial investments ≤ $10 000** in **exchange for equity stake in company** * similar to other forms of crowdfunding, enables companies to **raise funds through online portal** * can raise **≤ $ 5 mill/y**r

Answer 18

**msot commonly traded shares in AUS** * usual way investors buy part ownership of public company (listed on ASX) SH **entitled to vote at general meetings** & receieve **dividends from distributed profits** * **voting rights** according to **no. shares** they have * when **SH purchases** company shares (FROM company not existing shares from other SHs in 2ndary market) , provide**source of equity finance** for bus * **value of share** determiend by **company's current/future perf** (?) * issued 4 ways 1. new issues 2. rights issues 3. placements 4. share purchase plans

Answer 19

**1. new issue** * **shares issued & sold for 1st time on public market (ASX by public company)** * available to **existing SHs & new investors** * company **floats on ASX** (become public comp), 1st share issues are **IPOs** to raise funds by selling shares to public * must **issue prospectus** (doc w/ **company details** so investors make **informed decisions**) hoping shares rise over time**

Answer 20

**offer existing SHs** to **purchase more, new shares** in **same company** * give **existing shareholders securities called 'rights' to purchase new shares at discount to market price on future date**, maintain their prop of company ownership if purchase more shares * rights issued via predetermined ratio based on SH's current prop ownership * **until set date** new shares can be purchased, **SH** can **trade rights on market as if trading ordinary shares** (?) * usually discount to current market price * **rights** **gives SH right NOT OBLIGATION**

Answer 21

issue shares directly form company to **outside investors w/o making public offering (acquire funds quick)** **at **discount** to **current market price** * usually to **takeover** another bus**/expand** existing company**/improve gearing** (^equity relative to debt) * to **protect existing SHs** (placements **dilute SH ownership** share & **reduce share price ST since each share now smaller prop ownership)** limited to raising **15% of their total market value** w/o seeking approval of existing SHs/issuing prospectus(?)** --> **quicker, cheaper** (reduced regulatory requirements) * but effectively using capital raised can **^dividend**s & **share price/ensure survival LT**

Answer 22

**offer exisitng SH** in listed company to issue up to 30k in new shares **w/o issuing prospectus/paying brokerage fees** * usually offered at **discount to current market price** **--> raise capital quick & cheap** * SPPs must be **registered with ASIC**

Answer 23

money invested in private company not listed on ASX * like public listed companies who sell ordinary shares, can raise cpaital to financa expansion/investment of business usually by inviting new partner to purchase shares in bus & become part owner of company STRATS * LBO (leveraged buyout): private equity company buys majority control of bus using borrowed funds, convinced that bus will ^value & generate return * venture capital: financial support provided to risky bus projects w/ potentially high returns. maybe loan but common for venture capitalist to become SH * growth capital: not like VC bc usually sought by mature bus who's expanding. bus profitable but not generate enough to fund expansion so part of bus sold to private investors who entitled to share of profits & can gain seat on the board

Answer 24

* FMs source ext funds for est, growth, operations of bus w/ intermediaries accept deposits to make loans/investment in bus * RBA &fed gvt incentives to encourage FIs ^amt credit supplied esp to SMEs ensure survival * banks (comm, westpac, NAB, ANZ) * investment banks * finance companies * **superfunds** * **insurance companies** * **unit trusts (aka mutual funds)** * **ASX(?)**

Answer 25

**main** providers of **finance** to bus' (but **dec due to financial dereg, ease** AUS **laws** governing **FMs --> ^comp** by allowing **foreign banks & FIs** **participate** in **AUS FMs)** * wide range of **financial prod & services** (**credit cards, insurance, overdrafts, investment & savings accs)** & **lend money** via...eugenia * [**receive savings as deposits from ind, bus & gvt and make investments & loans to borrowers** * bus wants to make profit **accepting money as savings (Deposits) at LOWER IR and lends at HIGHER IR, differential is profit**]

Answer 26

FIs **specialise** in **financial services (create capital)** helping med-large bus **grow, raise funds** (**borrowing & lending**), **manage financial risks**. * **provide finance**, bus **make investments, advice** on **forex**(overseas finance) & **M&A's** * [customise loans (eugenia) * may impose conditions eg. require some equity in bus borrowing funds * provide **working capital**]

Answer 27

**NBFI specialise** OR make loans to bus, provide lease finance, some specialise in factoring * provide mainly **ST & medium term loans to bus** * can provide quicker access to funds * less strict criteria than other creditors but usually charge higher IRs * **raise money through share issues** **(debentures)** * ]**lenders **have **security over firms assets** **during liquidation** * finance company **entitled** to **sell bus assets to recover** initial **loan** if bus fails] * provide **quick access to funds but IRs higher** * loans, credit cards, leasing, factoring

Answer 28

**NBFIs** provide cover & **lump sum payment** occurs OR provide cover for damages/losses in return for payment of premiums * to spread their exposure to risk, receipts of insurance premiums invest in other bus'/financial assets * policy holders **apy regular premiums** & **insurer guarantees** to pay **sum of money upon death** of insured person **specified in contract** * equity capital, LT loans

Answer 29

scheme set by **fed gvt** requiring **employers** to make **financial contribution** to a fund for **emp when they retire** * invest member contributions in shares & loans --> provide large amt finance for bus' * LT nature --> invest LT securities --> provide sources LT finance for bus' * equity capital, LT loans * [employees **18-69 paid $450+ before tax every month** * contributions for ppl **under 18 who work 30+ hrs/week and still earn more than 450**.... * must pay **9.5% of employees salary into superfund acc on top of emp salary/wages** * **invest money into company shares, property & managed funds** so members earn investment **returns **on money * takes **pressure off age pension, most expensive welfare measures** due to **^ life expectancy**, wanna increase from **11.5% to 12% 2025** * **have to if self-employed**]

Answer 30

**regulatory body** oversees AUS**FIs**. * ensure stability, safety, and soundness of the **financial system** by regulating and supervising **banks, credit unions, insurance companies, super**annuation **funds** * protect lenders & depositers * **funded** largely **by industries it supervises**,

Answer 31

**collective investment scheme pools money from many investors to invest in a diversified portfolio of assets**, like superfund (stocks, bonds, real estate). * investors earn larger returns than acting independently * [managed by **professional fund managers**, make **investment decisions on behalf** of the investors. * invest in mixture of **cash, aus/international shares, fixed interest securities (eg. gvt bonds), property** * recently invest in gold, silver, oil, gas * main adv **diversification** bc invests in variety of assets, individual investors **reduce exposure** to the risks with any one investment.] * mortgage, share market funds

Answer 32

imp source of funds for public companies created by merger of ASX & Sydney Futures Exchange 2006, (not direct investor in/lender to bus) * AUS primary stock exchange market where shares bought & sold * most imp role as PRIMARY market enable company raise new capital by issuing shares (securities) --> investors who purchase become part owners --> raise equity to grow, expand & improve liquidity & LT stability (solvency) * companies can raise cpaital by selling shares publicly 1st time via IPO/float encourage EG, emp, create wealth by facilitating flow funds from investors (AUS & overseas) to companies * also 2ndary market where existing shares traded/exchanged betw buyers & sellers, not directly generate funds for bus (SH sell own shares than bus selling new shares), demand for shares determine share price * high demand ^price --> new shares sold by bus raise greater amt equity finance * [oversees compliance with rules & promotes standards of corporate governance among AUS' listed companies.] offers products/services: * shares, futures, exchange traded options, IR securities,

Answer 33

1. 'Big Four' banks (ANZ, NAB, Westpac, Comm) 2. BHP Group (resources) 3. Macquaries Group (investment banking) 4. Wesfarmers (retail, chemicals, resources) 5. Woolworths 6. Telstra

Answer 34

**public company raise** new **capital** by **issuing new ordinary shares** **2nd hand securities** from existing company eg. shares traded betw investors (ind, bus, gvt, FI) * transactions **dont increase total amt financial assets** but **increases LIQUIDITY of ifnancial assets**, which influences primary market for securities

Answer 35

on the share market using a **full service broker, online trading acc**, company itself when offers shares through public float * online broking service allows investors to make investment decisions for lower fees * full service broker charges more but gives advice on what to buy & sell

Answer 36

* roles of **gvt bodies** responsible for monitoring & admin (**ASIC** * restrictions on **imports & exports**, --> **prod costs, int competitiveness --> profitability** * ECO POLICIES **MP --> IRs** -->cost of borrowing money by changing **cash rate** * **FP** (gvt spending & revenue) --> incoem for gvt bus & amt tax bus pay * power to make laws for corps (incorp bus, impact choice legal structure bc diff obligations imposed for diff types bus) & AUS FMs & gvt agencies monitor financial sector 2 of most imp gvt influences on FM of bus in AUS: ASIC & company tax

Answer 37

**independent** (aus) **gvt org regulates** OR main gvt agency monitors **AUS financial sector** . independent AUS gvt org (fed gvt) * role enforces & administers the **Corporations Act 2001** * **protects consumers**, **investors, creditors** (bus provide **financial services)** in **investment, insurance**, **super, banking (exccept lending)** * aim: **reduce fraud & unfair practices in FMs and products** * **issue licences** to **bus** operate in **FMs** & ensure **companeis adhere to law,** **collects info** abt em and **publicises** it eg. financial info must disclose in **annual reports** * if **bus breaches law, investigate & determine remedies based on seriousness of misconduct (monetary penalties, imprisonment --> failure to comply= neg publicity)** * AUS' **corporate, FMs & services regulator** contribute AUS eco reputation & wellbeing by ensuring AUS **FMs fair, transparent**, supported by **confidence, informed investors & consumers** * ASIC 2001 (cwlth)

Answer 38

gvt influence by imposing taxes (sole traders & partnerships owners taxed at ind income progressive tax rate) **all incorporated** bus **(private & public companies**) need to **pay** CT on **net profits before** they're **distributed to shareholders** as **dividencds** **levied at flat rate (prop)** 30% but **25% turnover <$50 mill** * relative tax rates can influence choice legal structure & others affect bus financial decisions (depending on which options better for tax purposes?) * un/incorp, need adequate financial management to ensure adequate financial resources available when tax obligations due eg. GST bus collect from consumers behalf of fed gvt * AUS tax laws callow companies deduct losses from previous yrs from taxable income (current profits) * tax reform (dec CT rate successive gvts) improve AUS international competitiveness, more attractive to invest funds for LT eco growth & ^SOL * OECD AUS marginal company tax rate one of highest (3rd 2020)

Answer 39

1. (global & domestic(?) eco outlook 2. availability of funds 3. IRs * influences beyond bus control, ext** bus enviro, but financial management strats minimise neg effects * **GLOBALISATION** sig influence ^interdependence betw ecos diff c's ^movement g&s (trade), capital (investors not constrained by national borders), crises quickly spread --> global eco recession & halt strong EG

Answer 40

**projected fluctuations to lvl EG global BC (lvl EG)** * AUS' bus' (esp **export** g&s) strongly influenced by **global eco projections** bc **globalisation** & eco interdependence of c's --> **financial decisions** of bus if **positive** (world eco growth **upswing,** usually **early** **stages** of '**boom**' in BC), bus expect:, * **^ DEMAND for G&S**: bus need to**^ production to meet demand** & **raise finance** to **expand, purchase new plant & equip, employ/train staff** **(FOP)** * more **FAVOURABLE** conditions for **BORROWING FUNDS/RAISING EQUITY:** likelier borrow funds to ^output & **FIs & investors likelier provide** funds **anticipating ^revenues** **neg** outlook (global EG decline during **early stages 'bust'** in BC), bus expect: * **decrease DEMAND** for G&S: try decrease **production** & **reduce costs**, **anticipate lower** demand & **revenue -->** finance identify possible cost savings (**employees redundant, some plant & equip sold/shut down)** * **less favourable** conditions for **borrowing funds/raising equity:** seeking to borrow funds to cover expenses during falling revenues find **FIs & investors reluctan**t to provide funds due to **^risk & IRs^**

Answer 41

**ease** bus can **access funds for borrowing** on **international (&domestic) FMs** * FMs made up of **FIs, companies, gvts** who **lend money to ind, comp, gvts** who need to **raise capital** conditions & rates based primarily on: * **risk, demand & supply, domestic eco conditions**

Answer 42

1970s and 1980s * barriers to cross-border financial flows dismantled, aus eco more integrated with GF system * aus can borrow & invest in financial assets overseas * foreigners too, increase availability of funds

Answer 43

**cost of borrowing money**: amt charged expressed as % of amt borrowed by lenders (creditors) to borrowers (Debtors) * lower IR --> lower repayments --> attractive to borrow funds * **higher**lvl **risk** in **lending to bus, higher interest charged** (good credit rating so lenders charge lower IR) * high IRs maybe limited availability of funds for lending in eco * **aus IRs usually > other (developed) c's**, aus bus **borrow finance from overseas source** to take adv of lower borrowing cost (not recent tho bc record low now inflation * BUT **unpredictable ER movements** **risk** **adverse currency fluctuation** (depreciate AUD relative to lender's currency) --> pay more in debt repayments & eliminate adv cheaper overseas IRs so **LT may cost more**

Answer 44

determined by: * bus **size** * **current stage business life cycle** (est, growth, maturity, post maturity) * **current stage of BC** (boom, recession, recovery..) * **future plans for growth** & development * **ability to source finance (debt, equity)**

Answer 45

* **situational analysis** of **current financial position --> forecast accurate sales, ops, marketing, HR expenses** * identify **current financial issues & trends** to develop **budgets, strats, controls** in planning cycle * obtain **from income & CF statements, BS**

Answer 46

* seeking **debt finance from bank/FI, equity** **finance from potential investors** * sets **goals & future direction** (where expects be at **end POT** & **strats** to) * identify **amt & sources of finance need** **evidence investment** will be **successful (current, past, prjected income & CF stat, BS)**

Answer 47

**financial doc**ument/plan **predicts revenue (from sales & investments) & expenses (of bus/deparments) over future PIT** * derived from strategic planning abt how resources used * financial info for bus goals in **strategic, tatical, operational planning** * provide **figures for planning & decision making to constantly monitor progress and weak areas** allocate resources for diff functions **hire staff,cut expenses, purchase new assets** * (**control: planned performance measure against actual, corrective action)**

Answer 48

1. review **past figures & trends, estimates** from **departments** 2. potential **market share**/actual, trends & **seasonal fluctations in market** 3. proposed **expansion/discontinuing projects** 4. proposals to **alter** **price/quality of products** 5. **current orders & plant capacity** 6. consider **ext enviro** eg. **financial trends, availability of materials, labour**

Answer 49

* funds needed for planned expenditure for period * cost of capital expenditure (&other expenses) against potential revenue * estimated use & cost of raw materials/inventory * amt & cost of labour required to ops * financial info for goals, used in strategic, tactical, operational planning * use as control measure, can constant monitor objs & compare planned vs actual perf --> corrective action (adjust marketing strats/prod lvls, control prod costs..)

Answer 50

OPERATING * day-to-day ops (sales, COGS, labour costs..) PROJECT **capital expenditure (strategic plan** includes **info** abt **purpose** of **purchasing an asset**, its **life span** and **revenue** it would **generate)** , **R&D** FINANCIAL * overall financial perf * incorp data fram operating & project budgets to produce income & CF stats, BS

Answer 51

processes & practices bus use to store **data** **and ensure info** rovided **accurate, reliable, accessible, efficient** (bc makes decisions on info) * **data: sales figs, expenses, assets, liabilities, info on customers suppliers, products** * w/ **large volumes data need** sophisticated **systems to manage** info --> **tech** adv range software * if effective, can **improve efficiency, monitor performance, timely produce financial reports, comply tax requirements, identify opps/issues & respond faster** (theft, fraud) *** minimising errors in recoridng process & producing accurate financial statements** * imp for **decision making** - w/o, owner has **restricted understanding** **performing** & where **improvements needed** * **maintaining accurate records time consuming** task but having **right systems & strats** can cut down & **simplify workload** significantly

Answer 52

**double entry accounting system** * financial **control measure** * **record all items 2x, entries balance & check errors quick** * eg. bus buys stock on credit --> record ^CA (inventory) & ^CL (accs payable)

Answer 53

paper-based **journals divied into separate sections** for **receipts, payments**, wages, super, inventory * managers record bus transactions **manually** in sections every **month** * **less expensive** to set up * **lower risk of losing data** electronic spreadsheet * more **efficient** way * pc programs allow managers easily generate orders, reports, invoices, financial statements, pay records * accounting programs allow users to email & send financial info to clients, suppliers, ATO * **less storage** space, **easier** to meet tax & legal obligations * must **ensure records** **secure**, create backup sstem to ensure records nt lose * must be familiar with accounting principles, may need training to udnerstand hwo software works

Answer 54

**financial risk:** risk unable cover financial obligations --> insolvency (debts through S< liabilities) **possibility of financial loss** (chance financial decision result in financial loss) * bus' take risks to achieve **financial objs of profit & growth** (greater risk, larger potential financial return but must minimise) * biggest is **inadequate cash flow** to meet financial **obligations**. debt finance --> repaid in future * higher bus debts related to equity, ^ risk * to minimsie risk debt, consider amt profit likely generate --> must be suff to cover debt cost & ^returns to owners &SHs to ustify risk * higher risk (/gearing), ^ expectation profits/dividends * consider liquidity: if bus ST debt, need adequate amt liquid assets (quick convert cash/cash) so ST liabilites covered * methods of risk minimisation: **hedging, derivatives, insurance, diversification** * **every bus** subject to, **not all risks can be controlled** eg. changesi n **IRs** 1. determine **financial needs** 2. develop **budgets** (see below) 3. **maintain** **record systems** 4. **minimise** financial **risks** 5. establish **financial controls** 1. **credit risk** (???_) * from **borrowing money**, need to ensure **sufficient funds to meet repayments** **when due** otherwise incur **severe penalties** * **risk** when **extending credit to customers** **unable to pay** for g/s * when borrow money, **risk movements in IRs** --> financial performance by **^ interest** expenses 2. **market risk** * risk **changing market conditions** where company **competes** for bus * increasing no. **consumers shop online/^ comp** * affect profitability 3. **lqiudity risk** * bus **cash flow**, whether **sufficient funds to meet ifnancial obligations** * how **easily** bus can **convert assets to cash** if **need funds** 4. **operational risk** * **day to day management** (when they have poor management) * **legal** problems, fraud, **HR issues**, bus model risk( **marketing/growht plans inadequate**

Answer 55

* lvl **debt acceptable** for expansion * **willingness owners/SHs contribute equity funds** * **hwo** **use** **excess funds** (**purchase assets**, invest other bus, **pay** existing **debts**, pay higher dividends) * **how fast expand w/o CF issues** * **future IR** movements (^ **cost existing loans & future borrowing)** * **ER fluctuations** (^ **cost imported inputs, exports less comp**, ^ **cost liabilities** denom in **foreign currencies**) * how can **protect** from risks (**insurance, hedging)**

Answer 56

procedures, policies to ensure goals met (efficiently) & prevent financial problems & loss 1. **financial statements**(???) 2. **financial ratios** 3. **comparative analysis** * eg. bugets, income CF stat, BS, policies & procedures followed by management & emps are financial controls * financial problems can be caused by management & emps, commonly theft & fraud (unnecessary stock purchases for personal use, misuse expense accs, false invoices, theft inventory/assets), damage/loss assets, errors record systems * **control** vry important in **assets** eg. **accs receivable, inventory, cash** * **budgets** (**estimate resource requirements** for **future** period) used eg. prepare **cash budget** enable bus to **predict cash shortages** **common policis** promote **control** w/n bus: * clear **authorisation & responsibility** for **tasks** in bus * double entry system of accounting * **separate duties** (one for ordering, one for receiving inventories) * **qualification restrictions** & **employing only qualified staff** for roles * **control cash** (cash registers, **card > cash payments)** * **protect assets** ( **regularly check inventory**) * **control credit procedures** (**follow up overdue accs** & consumer credit checsk)

Answer 57

* **industry risk** * **projected income** * **cash fow** * if bus **struggling to survive**/able to **respond** to changes in **ext bus enviro**

Answer 58

S< borrowings from ext sources of bus. interest paid on top of principle through regular repayments * liability to bus * **funds usually readily avaialbel** & **interest payments tax deductible**, reduce cost * carefully consider **risk & return** when determining **debt/equity finance** * **^ risk when borrowing,** impact on **future profitability** & **financial stability** * if **high lvl** debt financ,e **risk > equity finance** * amt **risk** affected by **how much bus borrowed** when **loans** have to be **repaid** & **required lvl current assets** for bus * **higher risk investment, higher return**, determine **share prices** of **corporations** * **SMEs reluctant** to seek

Answer 59

ADV * **funds** often easier & quicker to obtain * **interest payments tax deductible** * profits not shared with lender * **wont dilute current ownership & CONTROL** in bus DISADV * loans est costs, ongoing fees & charges, interest repayments * IRs can ^ --> loan more expensive than anticipated * regularly make repayments, less flexibility than dividends * CF problems --> default loan & lose mortgaged assets * debt to equity (gearing) ratio ^ --> threaten solvency & LT stability * **requires security** by bus (??) * **lenders** have **1st claim on money if bus in bankruptcy**(??)

Answer 60

**finance raised by company by inviting new owners/SHs, diluting og owner's share of bus** funds contributed by owners (from int/ext sources) * eg. sell new shares, retain profits/sell assets * **most important** source of funds **for companies**,remain in bus for indefinite time, **dont have to be repaid at set date** * **safer than debt** but requires **sufficient profits** made so bus can **continue operating** * **confidence to creditors & lenders more willign to lend** if there are equity funds * **safety net** for **unexpected downturns/change** bus activities

Answer 61

ADV * dont have to be repaid w/n set time or w/ interest * flexibility in timing dividend payments * ^growth potential bc owners have interest in success * owners ^returns through dividends & ^share value * debt to equity (gearing) ratio decrease --> lower risk * **cheaper** than other sources (**no interest payments)** * **low gearing (uses owner's resources and not external** sources) (??) DISADV * ^no. owners --> reduce control decision making for existing owners, share profits, ^time to make decisions * can be more expensive than debt in LT, SHs pay dividends & expect higher returns on capital investment * often hard to obtain, longer to organise , high legal & admin costs * SH demands dividends can reduce lvl retained profits * vulnerable to takeovers if other inds/bus' acquire majority shareholding (51%)

Answer 62

new credit cards & bank overdrafts

Answer 63

entrepreneurs invest own money into bus w/o external source/credit aka bootstrapping

Answer 64

**larger equity capital** **more secure financial structure**, **likelier opp to borrow**] 1. * **suit PURPOSE** of requiring **funds** * **matching principle** dictates **term**of loan should **match eco life of asset** purchased w/ loan * ST assets should funded by ST finance eg. ST finance to fund LT assets financial problems bc **repayments due before LT** **assets have time to generate returns** * using LT finance to fund ST assets bus **reapyments still required after asset's productive life (no longer generate revenue to repay loan) (inventory w/ trade credit, equip w/ lease, land w/ mortgage) 2. **COST** of each SOURCE of funding * issue **shares --> share profits, loan --> est costs & interest repayments, retained profits --> lower dividends** * expected **return rate** balanced against cost 3. bus **STRUCTURE** *** small bus fewer opps** for **debt & equity **finance < large bus * equity must be raised by **private sources**/take another **partner**, large bus sell new shares * lenders **more willing lend bc lower risk** --> small bus ^reliance retained profits to expand ops * unincorp 4. **FLEXIBILITY** of SOURCE of finance * prefer flexible bc **requirements change w/ changes in bus enviro** * **flexible** loans --> **larger, more frequent repayments favourable eco conditions** when **excess funds**/^loans to fund expansion * bank **overdrafts & credit cards** ST flexibility (careful tho) 5. **AVAILABILITY** of finance * diff obtain debt finance if current **gearing high/credit rating** (record meeting financial commitments) poor * loans diff obtain due to circumstances **beyond bus control** (cautious lending **downturn)** * **depend too much on equity** finance from **few investors** vulnerable if 1 leaves & cant meet financial commitments 6. lvl **CONTROL** maintained by bus * lenders may need **security over asset --> reduce ability obtain finance in future** (mortgage asset cant be uased as security on another loan) * obtaining equity unds = reduce **control over decision making** * **use revenue asset generates to repay loan, if not generating enough** revenue from asset & **use cash from other sources to repay** but if dont have, **default** on loan & lender possess assets that are security on loan

Answer 65

agreement betw supplier & bus allows bus to delay payment for g&S already been delivered (manage cash flow) * ST debt

Answer 66

**inconsistent** methods of **review & systems of control** in finance immediately impact **viability** of bus, management must **monitor internal & ext factors financially impact operations** 1. **cash flow** statements 2. **incoem** statements 3. **balance sheets** * how **effectively finance resources used**, indicate bus has **sufficient funds** to meet **contingencies** (downturn, replace big capital equip)

Answer 67

financial statement **differences** **betw cash receipts** & **cash payments** from **transactions over PIT** * must have **positive CF** to **survive (consecutive** periods **neg** CF **not sustainable LT)** (problem if more money out/paid out before cash payments received) * **forecas** & record bus **monthly (quarterly/yrly)** cash in & outflows prepare response --> can **monitor & control** **spending** to meet **ST financial commits** & take **adv excess cash periods** for**growth & profitability** * cash flows **CAN** **better** **health indicator** than **profitability** * cash flow MANAGEMENT: strats to anticipate & prevent cash flow issues to ^liquidity * CASH INFLOWS (sales rev, receivables) * CASH OUTFLOWS (payments to **suppliers, wages, tax,** **loan repay,**) * **managers, lenders, creditors, owners, SHs, potential investors** see if **+CF over yrs (fluctuate = financial difficulties)** * prepared f**rom income istatement & balance sheet** (they **summarise transactions)** but **only CASH** ones included in cash flow statement

Answer 68

* temporary shortfalls in cash * only suitable & sustainable as CF strat when able quickly repay overdraft amts due to interest payments * shortfalls of cash over longer periods greater concern due to risk of insolvency

Answer 69

* consistently generate positive cash flow (inflow > outflow) * pay financial commitments when due (interest, repayment of borrowings, accounts payable) * sufficient funds for future expansion/change * obtain finance from ext source when needed * pay **drawings** to owners (funds by owners aka dividends for sole traders, partnerships, private companies)/dividends to SHs

Answer 70

1. each period begins w/ openingbalance 2. add cash inflows/receipts 3. subtract cash outflows/payments 4. resulting closing balance for period = opening balance next period

Answer 71

1. **operating** activities * **cash inflows & outflows** for **main activities** (providing g&s) * **income from sales (cash & credit) main operating inflows + dividends & interest** * **outflows payments to suppliers, employees, operating expenses** (insurance, rent, ads) 2. **investing** activities * cahs inflows & outflows relating to **purchase & sale of NC assets & investments to generate income** eg. purchase new plant & equip/property 3.** financing** activities * cash inflows & outflows relating to **borrowing** * **borrowing inflows can relate to equity (issue shares/owner contirbutes capital)/debt (loans from FIs)** * cash **outflows debt repayments & cash drawn from owner/pay dividends to SHs**

Answer 72

summary of **income earned & expenses incurred** over **period of trading** usually 1 yr * info see **how much money** come **into** bus **as** **revenue** (even if not receieved yet), COGS, expenses (even if not paid yet) over period* & resulting profit/loss * compare w/ previous periods to identify & analyse trends --> decision making for all functions, identify sig change, why profits ^/dec, areas expenses too high, change suppliers, ^ prices, etc shows: * **operating income** earned from **main** function of bus (inventories sales, services & **non operating revenue** earned from other operations eg. rent, commission, interest) * **if income high enough to cover expenses** * if **mark-up** on purchases **sufficient** **SELLING expenses**: costs associated w/ selling (wages, ads) **ADMIN expenses**: costs general running (rent) **FINANCE expenses**: debt repayments & risk minimisation (interest, lease payments)

Answer 73

1. record income earnedby bus 2. record **COGS** (**money spent** on **purchasing raw materials/finished goods** for **resale** to calculate **gross profit** (revenue - COGS) 3. calculate **net profit** (**gross profit - operating expenses**)

Answer 74

1. **selling** **costs** related to selling g/s which can be **directly traced to need for sales** * **salaries, wages** * **advertising** * **delivery** * **electricity** 2.** admin**istration costs directly related to **general running of bus** * **rent** 3. **financial** costs w/ **borrowing** **money** from **outside ppl/orgs** & **minimising** bus **risk** * **interest** & **lease payments** * **dividends** * **insurance** payments

Answer 75

total value of all g/s sold aka sales/revenue operating income/sales/revenue - COGS opening stock + purchases - closing stock gross profit-expenses

Answer 76

bus' **S< assets & liabilities** at **PIT**, & **owner's equity** (funds contributed by owners) end FY June 30 * shows **LT financial stability** * shows **return on owners' investment**, **sources & extent of borrowings, lvl inventories** * prepare at **end of accounting period** * Assets = Liabilities + Owner's Equity (OE=A-L) 1. **ASSETS (left)** * **items of value owned by bus** * **CURRENT (turn over within 12 months**) eg. **cash, accs receivable** **(Debtors),** **inventory** (Stock) * **NON CURRENT (expect life > 12 months**) eg. land, buildings, machinery, furniture * **can** be **financed by owners/external parties** 2. **LIABILITIES (right)** * items of **debt owed to outside parties** * **CURRENT** (debts **expect to be repaid < 12 months**) eg. overdraft, accts payable **(creditors)** * **NON CURRENT (LT** items of **debt)** mortgage, debenture 3. **OWNER'S EQUITY** **(right)** * **funds ocntributed by owner/s, * **capital (funds by owners) and retained profits** * amt of money owner has left once assets used to cover liabilities --> net worth

Answer 77

* if it has **enough assets to meet ST debts (CL)** & continue **makign profits in LT** * how assets of bus financed (using debt/equity) * if owners good ROI (NP relation to capital) * financial stability --> ability borrow more funds (amt liabilities related to owner's equity) * how financial position changed from previous yrs by comparing w/ BS from previous yrs to find trends

Answer 78

* **financial info into meaningful forms** & highlighting **relations betw diff aspects** of bus * **compare similar** items in **income statement & balance sheet** * calculate **figures, %s, ratios** (R for **profits, solvency, efficiency, growth, liquidity)** * BUT w/o **INTERPRETATION** meaningless need to **make decisions** **using data from analysis** 1. VERTICAL * compares figures w/n 1 **financial** year * eg. gross profit as % sales, compare debt to equity 2. HORIZONTAL * compare figures from diff financial yrs eg. 2020 & 2021 3. TREND * compares figures for periods 3-5 yrs

Answer 79

* how effectively assets used in bus * why ^ advertising expenses havent generated more sales revenue than anticipated * why sales decreased over past 2 years * why overdrafts continue to increase

Answer 80

1. **ANALYSIS** important in **accounting, financial info** into mroe **meaningful forms** & **highlight relations** betw d**iff aspects** of bus * ratios: **calculations** **comaparing data** from bus **financial statements** to **assess liquidity, gearing/solvency, profitability, efficiency** * **main** tools to **analyse financial info** & examine & **evaluate perf**ormance to see if **meeting financial objs** 2. **INTERPRETATION**: make **judgements using data** (gathered) **from analysis** * analysis & interpret finacial stamtents using ratios help **identify & predict trends, future planning & implementing corrective strats**

Answer 81

* **compare figures, %s, ratios** for **departments**, diff **products** or against **industry** * **monitor trends** over **years/compare** items w/n **financial statement**, **expenses & sales**

Answer 82

**ability** to **meet CL/ST debt (financial commitments <12 months)** * aka current/WC ratio using BS info * CA÷CL * relation betw CA & CL --> liquidity position (how well liabilities covered by CA * **higher ratio more capable meeting ST obligations** * **2:1** (for every $1 CL, $2 CA) --> meet **ST debts w/o large amt idle cash in bank (inefficient bc no returns, invest in expansion/stock better**) * acceptable **depends on industry (1.5:1 if mainly cash, large bus <1:1)** how **other firms** in **industry** oerating, **ext enviro** * firms that **sell finished goods** & keep **large lvls inventories need higher ratio** than **firms selling on credit > cash** * large bus in food industry use lower ratio 0.6:1 * **service industries** eg. doctors **rely on cash payments for services dont need high ratio**

Answer 83

* **factoring** * **sell** unproductive **NC assets** to pay CL * **inject** more **equity into bus to pay off** liabilities * sell NC assets **reducing capacity to earn profits/borrow ST w/ higher interest payments** (**avoid < 1.5:1)**

Answer 84

**debt to equity ratio** * compares debt & equity lvls * **~80% high** depending on bus (every $1, **80c** total **liabilities**/debt) * high gearing ratio high **risk unable repay debts --> insolvent** * **total liabilities (current/NC)]/owner's equity** * **>100% (1:1) = debt >equity** * high gearing **too low below ~30% --> miss opps** to **expand using debt** (allow **growth** while **^risk LT stability)** * **idela** gearing ratio based on **size, circumstances, (ownership?) industry**, **IRs** many **small bus 50-60%**, * **industry w/ higher risk** but **likely generate large profits** eg. mining **higher debt: equity ratio (highly geared)** * manuf industries high debt (**highly geared = higher prop debt to equity = greater risk = greater potential for profit)** * debt affects **potential investors** bc **high risk** can **discourage investment (risk, return,** deg of control) * **no optimal lvl** but **rare** for **company** to have **no gearing**

Answer 85

bus LT financial stability * ability to meet all financial commitments

Answer 86

*reduce debt/^equity/both * reduce liabilities by selling non-essential assets to pay debts/loans renegotiated to spread repayments over longer period, lease assets > purchasing ( ^equity by retainined ^% profits, inject more equity funding into bus by selling new shares (if public comp)/inviting new owners * if funds unabailable to meet, & **accs arent paid,** **lenders & creditors** have **right to claim payment** from business

Answer 87

banks borrow large amts funds to loan large amts moeny * higher than 2:1 common in industry * other industries also high are capital-intensive eg. large manuf companies

Answer 88

**ability to make financial return from bus activities**(revenue-expenses) * 3 main ratios to determine based on factors influencing profit & ways profit generated * satisfy owners & SHs ST but also crucial for bus' LT sustainability * depends on **revenue** earned by bus & ability to **^ selling prices to cover costs** & other expenses incurred in earning income * **MOST IMPORTANT FINANCIAL OBJ** * **amt** determined by **volume of sales, mark-up on purchases, lvl expenses**

Answer 89

* owners & shareholders wanna know if firm earning acceptable ROI * **creditors** wanan know if they'll be paid & **should offer** credit in **future** * **lenders** wanna know if **principal on loan & interest will be repaid**, if **lend** to firm in **future** * management uses to decide policy adjustment

Answer 90

**income statement** 1. **gross profit** ratio **gross profit ÷ sales** 2. **net profit** ratio **net profit ÷ sales** 3. **return on equity** ratio **net profit ÷ total equity**

Answer 91

**gross profit/sales**(rev) * measures % sales rev ends up as gross profit, * whos mark-up on goods sold (diff betw whats paid for goods & whats sold) * must be high enough to cover expenses & still NP * no accepted but higher better * fall GPfall amt NP, amt decrease depends on price reductions due to specials/sales, mark-downs on out of date stock, changes in mark-up policies * **only** used by **bus** that **sell stock (not service** bus) who **purchase** goods **from suppliers & sell at higherp rice to customers** * **effectiveness of policies on pricing, sales, discounts, value of stock** * **low ratio** might need to **source cheaper suppliers**/raise prices * other **expenses** eg. **wage, electiricty, advertising deducted from GP** for NP, **NP ratio mroe accurate** to indicate profitability

Answer 92

**measures % of sales rev ends up as net profit** * NPR 30% = $0.3 net profit contributed by every $1 sales rev * for **soletraders & partnerships** represents **return on contribution** to bus * company usually **return part of NP to shareholders** as **dividends** and **retain** some for **future expansion** * no set figure for profit ratios * aim at higher G&NP ratio & **compare** w/ **past perf, competitors, industry avg**

Answer 93

super funds, **iron ore mining,** car sharing providers, electricity distributors

Answer 94

measure how (much owner's investment earning) **effective funds contributed by owners** been **generating profit (ROI)** * if ROE 10%, for every $1 contributed by owners, receive $0.1 in return * **net profit/total equity** * return for owners **must be better than return gained from alt investments** * if **ROE rises due to ^ debt**, carry **^ risk** * **owners** also **compare current yr's return w/ previous** yrs & against **industry avgs** * **compare return w/ alt investment** eg. interest earned via FI * **higher ratio/%, better return** for owner, consider expansion/diversification * if unfavourable return, owners consider selling bus * **most investors** want ≥ **10% return** bc **wont risk investing** when could get **same return** by **investing moeny in bank/gvt bonds**

Answer 95

**ability** of bus to **use resources** effectively to ensure **financial stability & profitability** * management in directing & maintaining goals & obj of firm, greater profits & financial stability * **expense+ accs receivable turnover ratio**

Answer 96

**expenses/sales**(rev) * measre **how much expenses** bus made making every **$1 sales rev** * expense ratio 30% = every $1 sales rev, $0.3 expenses * **amt sales allocated to ind expenses** eg. selling, admin, COGS, financial expenses * day to day efficiency * determine where **highest expenses from** & **why ratio inc/decreased** eg. inc maybe ad **costs not generated expected ^ sales/decline from lower IRs/less debt used** * **no ideal**, examine carefully by **comparing results w/ past perf & industry avgs** * **lower % better**, if **too high** then **need to monitor & control expenses**

Answer 97

measure **effectiveness** of firms **credit poliy** & how **efficient collects debts**, **credit sales/accs receivable** * **avg collection time: 365/turnover ratio** * if turnover ratio 10 = accs receievable turned over 10 times during financial yr (avg is 36.5 days, standard time to repay credit 14-30 days) * measure **how many times accs receivable balance converted into cash/how quickly debtors pay their accs** * measure how long to receive cash for its credit sales from debtors * **divide ratio 365 to determine avg length time** to **convert balance into cash** * if **credit policy shorter than accs receivable turnover**, need to **examine cash flow, credit policies, costs, credit colelction procedures** * if **not efficient** in **collecting accs receiavable, charge interest** on **overdue payments**, **offer discounts for early payments**, more **selective when granting credit**

Answer 98

1. comparing ratio of bus **over various periods** helps **identify trends** & **interpret results** 2. compare ratios against **industry standards** eg. **industry avgs** & **benchmarks** to assess bus' financial state 3. comparing ratios **with bus' in same industry** & same structure, insight into bus' **perf relative to competitors** * **figures, %s, ratios** **not complete** analysis, need **comparisons & benchmarks** * figures from **VHT** ratio analysis **mroe meaningful** * can include **budget figures** so **predicted** figures can be **compared against actual** over **short timr periods (month)**, info avaiable for **interested parties** **w/n firm > ext stakeholders**

Answer 99

**compare ratios** with **previous yrs**, w/ **similar bus**, against **common idnustry standards/benchmarks** * over **diff time periods,** * ensure **same things compared**, **finding comparable firms difficult** * **benchmarks merely guide** * aus bus mainly use aus standards but **globalisation** of bus, **world standards more commonly used for benchmarking** * inter-bus comparisons access relevant bus **statistics** from many sources eg. **ABS up to date & accurately reflect industry norms**

Answer 100

inconsistencies presented in financial report * **misleading info** impacts **decision making** and puts **risk** 1. **normalised earnings** 2. **capitalisign expenses** 3. **valuing assets** 4. **timing** issues 5. **debt repayments** 6. **notes** to financial **statements**

Answer 101

**earnings adjusted** to **account changes** in **eco cycle**/to **remove one-off items** **affecting profitability ** * **more accurate** **depiction** of bus **true earnings** --> **easier to compare profitability figures** for bus from a **year to next** & **against other** bus' * E.g. remove a land sale (large capital gain) substantial unrealistic profit for that year * many **one-off expenses (lawyer) or gains (sell asset**) & **affect bus ST cash flow,** **not** indicators of **LT performance** * normalised items arent totally ignored in financial reports (included in STATUTORY results but excluded from UNDERLYING results) * **diff bus' define earnings differently** --> **comparing difficult** * may **exclude items** may **reflect structural probls/opps**

Answer 102

accounting method (**records** transaction an **expense on income statement as asset** on **balance sheet**) LIMITS: 1. **understate expenses** & **overstate profits** 2. ^ assets 3. improve BS (assets appear higher & inflate OE) * distort financial statements & misleading impression of perf & financial state * not accurately represent true financial position * **over multiple periods** --> **overstate profits ST** --> , **LT cash flow**, give **investors & stakeholders false security of solvency** 1. **expense** it * expense on **income statement** & **subtracted from bus revenue** to determine **profit** 2. **capitalise** it * **capital expenditures** * on **BS** as **asset** * **income statement** only feature **depreciation of asset**

Answer 103

**estimating value** of assets when **recording** them on **balance sheet** HISTORICAL COSTS: * if asset valued equal to price purchased, assumes value of AUD & ER remain unchanged throughout accounting period, **overstate/underestimate value**) * market fluctuations: **some NC assets (land) ^ value over time** but others (**vehicles, machinery) lose value (depreciate)** * **depreciation rate is estimate** & can give **false impression how much bus worth** * if asset valued at historical cost, not reflect true present value * other methods: current market value (value in terms future revenue will produce) VALUE of INTANGIBLE: * **intagible assets** (**goodwill, trademarks, intellectual property) diff** determine **real value** bc**no formula for calculation** * if F manager includes, **may overvalue** * esp **difficult to estimate** **NC assets** incorrectly value assets --> mislead financial position

Answer 104

**cost can be verified** BUT value may distort bus' **balance sheet**, not accurately represent **true worth of bus' assets** bc original cost of asset can be **diff from** **current makret value** also some assets very **diff to value** * intangible assets **items of value to bus but dont physically exist** **(trademarks, goodwill, brand name**) not includedo n balance sheet bc value **too diff to calculate (no formula)** & if include on BS, overvalue to make bus **appear more financially stable** than reality

Answer 105

estimate how much value they lose every year * use accounting standards so value of assets on balance sheet more accurate * can choose many methods but may mislead some investors

Answer 106

**financial reports** cover **activities** over **POT** (usually **1yr)** * if **shorter** POT (quarterly) not truly represent financial position bc **not account seasonal fluctuations** * **major items** occur **outside** dates of **financial period** (start end FY22 major sale not in profitability FY23 but huge loan in 366 days NCL, liquidity look worse) * finance employees know **financial statements** used to **evaluate perf** - urgent to **chase invoices for debtor payments end** financial **period --> accs receivable turnover ratio & CF statemtn dont** properly **reflect efficiency of managing accs receivable/CF position through yr** **matching principle** (**accrual accounting)**: **when revenue recorded in income statement, expenses directly relating to it must be recorded at same time** (accounting period?) * revenue earned will **match** costs incurred to earn that revenue, more **accurate** representation of **financial position** **cash accounting**: in **income statement, transaction only recorded when bus receieves cash**

Answer 107

can omit: * how long bus had debts * how long been recovering debts owed to bus * capacity debtors repay amts owed (maybe nearly insolvent & unable pay) * **effectiveness methods** for **recovering debts** --> determine how much of moeny owed to bus likely receieve * whether debt repayments delayed until next ifnancial period --> false impression of state * some use lowkey weird accounting practices (continue record bad debts as accs receievable/record debts due within 12 months as NCL) to disguise real financial position & create favourable view at that time

Answer 108

* include at end of financial reports (add details & info left out of main reports (BS, IS) * eg. explain individual items, valuign systems for assets, how valued intangible assets, accounting methods * mainly to make clearer & assist stakeholders analyse may affect **net profits** * influence** reported **profits/losses** affect overall **financial perf & returns investors expect form investment**, help stakeholders evaluate how calculated

Answer 109

**managers & accountants ethical & legal obligation** to ensure **financial records accurate** * misues financal resources --> impact survival & owners wellbeing, SHs, employees * financial management should reflect objs & interests of owners & SHs * legislation guard against unethical activity but often **time lag between recognising problem and implementing through law**

Answer 110

1. **inappropriate cut-off periods** * **manipulate timing of revenue & expenses** by **extending/shortening financial period** to **meet targets**, to **understate profits** to **avoid tax/overstate** to **attract investors** 2. **misuse debt funds** * can use debt to ^ profits but extensive use to finance bus activitieis ^ risk for SHs --> ethical issue **budget estimates** * commonly overestimate expenditures & underestimate revenues for unexpected events * managers can set budgets at easily achievable lvls to make perf better & qualify for bonuses 3. **fictitious revenues** * **record sales/rev hasn't occurred** to **inflate reported income** (stakeholders make decisions based on misleading info) 4. **hidden liabilities & expenses** * **omit/underreport** make **financial position apear stronger** than is **--> incorrect valuations** compromise accuracy 5. **improper disclosures** * fail to disclose financial info eg. omit figures for stakeholders to make informed decisions 6. **fraudulent asset valuation** (valuing assets) * eg. inventories, accs receivable overvaluation (make no provision for bad debts) --> unrealistic high WC --> better position than truly for ST financial stability vary **historical value**/reckless valuing of **intangible assets**

Answer 111

**audit independent check accuracy** of **financial records & accounting procedures** * include physical counts of assets eg. cash, inventory, accs receivable & NC assets --> control measure * all bus' required to adopt **international financial reporting standards IFRS** to improve **transparency & accountability to public**, **globally standardised accounting** hepled even TNCs * **info** can be **used by FIs, owners & SHs, potential investors** rely on auditor independent check **before makign decisions** * important part of **control** function

Answer 112

1. internal audits * conducted by employees to **check accounting procedures** & **accuracy** of **financial records** 2. **management** audits * review firm's **strategic plan** & determine if **changes** should be made (employees, management consultants) 3. external audits * bus financial reports investigated by **independent, specialised accountants/firms** to guarantee **authenticity**, required by law to do periodically, * under **Corporations Act 2001 (cwlth)**, when company becomes a large proprietorship must have **annual financial report audited** * **small bus**, external auditors only used **if bus is for sale/check fraud**

Answer 113

**waste, ineff use resources, misue of funds, fraud, theft** * **auditors check control procedures** of bus by **physically checking assets** eg. count cash, amt inventory, accs receivable, NC assets --> check records to see if **match** physical

Answer 114

**accounting processes depend on how accurately & honestly data recorded in financial reports** * documents must be created for **every transaction even cash** - if not, reduce stated profits for year -->**lower tax burden** * **ATO regularly monitors,** --> excessive fines & even jail time if found evading tax responsibilities --> * prosecutions for tax evasion can **harm reputation, alienate custoemrs who want honest & ethical bus** along with company tax/incoem tax if incorp, collect GST on behalf of Fed gvt to make more diff to avoid tax (taxed at each stage PP --> ethical & legal obligation comply GST reporting requirements) stakeholders entitled to financial reports * maybe bus try understate profits to avoid tax/exaggerate profits & value of assets to encourage investment from SHs/mislead potential buyer

Answer 115

* **understate profits illegal** attempt to **defraud ATO** --> severe potential **penalties** --> more **diff to persuade FIs/investors** to contribute **debt/equity finance** * **overstate profits & overvalue assets --> mislead** financial **state to FIs/potential investors --> audit** provide more **accurate** rport on state --> **dishonesty deter potential lenders & investors + damage reputation**

topic 3 finance Flashcards

(139 cards)