Role
What is the role of finance?
To manage the businesses funds to ensure short and long term profitability and stability
What are internal sources of finance?
1) Retained profits: Profits kept by the business rather than given out to the owners
2) Owners' equity: When the owners'/partners invest into the company with their own money
What is the process of planning and implementing?
1) Financial needs
2) Budgets
3) Record systems
4) Financial risks
5) Financial controls
Cash flow management is used to improve what?
Liquidity
What are the sub dot points under objectives of financial management?
Profitability, growth, efficiency, liquidity, solvency and short-term and long-term
What are the 5 financial objectives?
Profitability, liquidity, efficiency, growth, and solvency
What are the types of short term and long term debts?
Short term debts:
1) Commercial bill: A loan that is generally repaid as a lump sum and is over $100,000
2) Overdraft: When a bank account goes into a negative
3) Factoring: Selling account receivables to a factoring company at a discounted price. This can be with or without recourse (a refund)
Long term debts:
1) Mortgage: A loan for property. Usually is repaid over the course of 20-30 years.
2) Leasing: When firms pay for assets in instalments while using them (so basically renting the thing)
3) Debentures: A long-term loan backed by a collateral in case the borrower cannot repay the loan
4) Unsecured note: Basically, a debenture, but it is not tied to a collateral
A business borrows a loan for a shipment of pens. Identify the term and source of finance that matches with the businesses purpose.
They should use short term debt to avoid paying unnecessary interest. Equity is not used as paying for pens is not a risky investment.
What are 3 ways that firms can control their receivables?
Send payment reminders, check the credit rating of the customer, send electronic invoices so they are seen faster by customers.
Note: Any other correct answer will be awarded points
What are the global market influences?
Economic outlook, availability of funds, and interest rates
Explain the interdependence between finance and marketing.
Finance needs marketing to generate sales for cash flow and profit. Marketing needs finance for funds to pay for its marketing campaigns.
What are shares and distinguish between the different types of shares?
Shares: Selling a % of ownership of the business.
Types of shares:
1) New issue: When shares are sold for the first time on the ASX, which is called an 'initial public offering.' When shares are sold by preexisting public companies, it is called a 'secondary offering.'
2) Rights issue: If the company sells more shares, some of those shares are sold to preexisting shareholders to the % amount they had before. This is because their % ownership decreases if new shares are sold.
3) Placements: When shares are sold to non-existing shareholders at a discount to gain their specific skills.
4) Share purchase plan: It is basically a rights issue, but has no brokerage fees, prospectus (A document giving details for the investment), and firms can offer an amount of up to $30,000 in shares.
5) Private equity: When shares are sold without them being put on the ASX.
CrankyPhones sells 1000 phones at a price of $1200 per phone. They already have $100k worth of stock and purchase $200k worth of inventory. By the end of the trading period, they are left with inventory worth $150k. The expenses for CrankyPhones add up to $550k. Use the information provided to calculate this businesses net profit ratio and expense ratio.
COGS = $150k
Revenue = $1.2 million
Gross profit = $1.05 million
Net profit = $500k
Net profit ratio = 0.42
Expense ratio = 0.46
Note: +100 marks for not using a calculator (Jk)
Explain, with numbers, how fixed and variable costs can be used to achieve economies of scale.
More volume produced = More spread-out fixed costs are = EoS is achieved
Identify all the sub dot points under the financial ratio's dot point.
Liquidity: Current ratio (current assets ÷ current liabilities)
Gearing: Debt to equity ratio (total liabilities ÷ total equity)
Profitability: Gross profit ratio (gross profit ÷ sales); net profit ratio (net profit ÷ sales); return on equity ratio (net profit ÷ total equity)
Efficiency: Expense ratio (total expenses ÷ sales), accounts receivable turnover ratio (sales ÷ accounts receivable)
Comparative ratio analysis: Over different time periods, against standards, with similar businesses
Explain how some financial objectives may be incompatible with one another.
Some possible answers may include:
1) Liquidity vs. solvency
2) Growth vs. profitability
Note: If other conflicts are identified correctly, they will receive the points.
What are the 7 types of institutions?
1) Financial institutions: They sell debentures to banks/investment banks, conduct factoring, and provides quick, small loans with high interest rates.
2) Life insurance companies: They provide cover and a lump sum payment in the case of death and invest in shares.
3) ASX: It provides a forum for shares to be bought and sold.
4) Unit trusts: They take funds from a large number of small investors and invest in shares.
5) Banks: They provide loans, mortgages, overdrafts, bills, debentures, and unsecured notes.
6) Investment banks: They provide advice to firms to conduct new issues of shares or arrange a loan from overseas. They also purchase shares, debentures, and unsecured notes.
7) Superannuation funds: They take funds given from firms and invest it into shares.
Apple conducted which type of unethical behaviour that allowed them to pay only 2% of what they had to in taxes?
Profit shifting
Note: 200 extra points to those who mentioned that this glitch got patched in a G/20 summit
Explain the 4 methods of international payment.
1) Payment in advance: The importer pays for something, then the exporter sends the item
2) Letter of credit: The exporter ships the item to the importer, the bank sends the exporter the money, then the importer gives the bank the money
3) Clean payment: The exporter sends the item, then the importer pays for the item
4) Bill of exchange: The exporter sends a document to their bank, which sends it to the importers bank. The exporter ships the item, and the importer pays the bank for the document. Then, the importer can pick up the good as they hand in the document to the place it was transported
Exchange rates fall under which dot point?
Global financial management in financial management strategies
How much per year does Qantas spend on developing their staff?
$275 million
With reference to a company you have studied, what unethical activities conducted by firms can lead to the Australian securities and investment commission to penalise them.
Talk about the Commonwealth bank case study. ASIC prohibits fraud and unfair practices, providing false financial advice and falsely reporting finances. The penalties include a fine of $525 million and imprisonment of up to 15 years.
Goofy Glasses is doing the dodgy by categorizing their expenses as assets, such as a $300k mortgage and market research costs totalling $15k. What issue with the financial statement is Goofy Glasses practising and why may they be doing it?
The issue with the financial report is capitalising expenses. GoofyGlasses may be doing it to increase investment as they would seem more profitable to investors.
Note: Any other correct answer for the second part of the question will be accepted.
Explain how hedging and derivatives are used to minimise the risk of currency fluctuations.
Hedging:
1) Having imports and exports denominated in a specific currency
2) Using foreign profits to pay off expenses in offshore subsidiaries
3) Market the product so well, it sells despite whatever the exchange rate might be
Derivatives:
Which dot point directly links to marketing?
Revenue controls under profitability management in financial management strategies. The dot point directly mentions marketing objectives.