LT/ST goals--2--10yrs. Planning-setting of goals/objectives, determining
strategies to acheive g/o,identifying and evaluating alternatives couse of
action/choosing best alternative for bs.
Comparative ratio analysis
Over different time periods
Against standards or benchmarks
With similar bs
Limitations of
financial reports
Normalised earning
Capitalising expenses
Valuing assets-discounted cash flow method/guideline company method
Timing issues
Debt repayment
Notes on financial statement
Ethical issues related to financial reports
MUST:act in good faith,
exercise power for proper
purpose, exercise discretion
reasonably and properly,
avoid conflicts of interest.
AUDITED ACCOUNTS-independence
check of accuracy of financial records/acc
procedures. Used to examine financial
affairs-internal/management-->External
audits. Assist in improving efficiencies and
help guard misuse of funds, fraud and
theft.
RECORD KEEPING-accounting
processes depend on how
accur/honestly data recorded in financial
reports. ATO regular monitors so no tax
reduction.
GOODS AND SERVICES TAX
OBLIGATIONS-ethical/legal obligation
to comply with GST reporting
requirements. Firms obligated bs to
complete bs activity statement quarterly,
pay any GST collected, claim input tax
credits.
REPORTING
PRACTICES-accurate fin reports
necessary for both taxation
purposes, also stakeholders
entitled to receive fin reports
annually.
Planning and implementing
Determining financial need
Bs heading, how it got there, needs. F
information collected for future use->balance
shet, revenue statement, F ratio analysis,
interpretation. Determined by:size of bs,
current phase of bs cycle, future plans for
growth/development, capacity to soruce
finance, managment skills for assessing F
needs/planning.
Establishing finanical controls
Prevent bs from ach goals, caused by both
management and employees. Common
causes problems-theft, fraud, damage/loss
of assets, errors in record systems. Fin
controls-polciies/procedures ensure plans
of bs will ach in efficent ways. important to
deal with assets-accounts rec, inventory,
cash. Common policies/procedures whhich
promote control-clear
authorisation/respon,seperation/rotation of
duties,cnotrol of cash, protection of assets,
control of credit procedures.
Developing budgets
Budgets-info in quan terms to achieve
goal. Reflect strategic planning decisions
regarding resource use, provide finanical
info for bs goals. Drawn to show:cash
required for planned outlays, cost of capital
expenditure, estiamted use/cost of raw
materials/inventory, no and cost of labour
hrs required for production.
B provide-facts and figures for planning/decision
making, mointoring of progress. Planned
performance measured from actual performance.
Factors-review past figures/trends, portential
market or market share, trends, seasonal
fluctuations in market, proposed expansion or
discontinuation of projects, alter price/quality of
product, current order and plant capacity, external
enviro.
Prepared to predict range of act-ST/LT plans and
activities-OPERATING B-main activities of bs including
sales, production, expenses, raw mat, labour. Indo use in
prep of budgeted fin statments. PROJECT-cap expenditure
and R&D. Info about purpose of assets, life span, potenital
revenue generated from use. Info included in budgeted
financial statements. FINANCIAL-fin data of bs, using info
from operating/project budgets to create budgeted income
statements, bal sheets, cash flows. Income/balance reflect
results of operating act while cash flow statements shows
liquidity of bs.
Maintaining record system
Mechanisms employed by bs to ensure
that data recorded and info provided
accurate, reliable, efficient, accessible.
Maintaining record systems requires
minimisation of errors in recording
process, and production of accruate,
reliable financial statements.
Identifying finanical risk
Risk to bs being unable to cover finanical
obligations->debts incurred through borrowing. If bs is
unable to reach F obligations, becomes insolvent. If bs
is financed from borrowings there is greater risk, greater
expectation of profit and dividends. Minimise risk-bs
must consider amount of profit that generated, must be
sufficient to cover cost of debt while also increasing
profits. Bs must consider liquidity of assets, which may
be needed to cover repayments of ST debts.
Debt and equity finance
Debt finance-can be attractice to bs funds readily
avaible, interest payments are tax deductible,
reducing cost of debt. Must consider risk and
return. ADVS-readily abail, increased funds
increased earning/profits. DIS-increased risk if
devt comes rom fin institution, security is
required, regualr repayments, lenders first claim if
bankrupt.
Equity-important remains in bs for
indefinite time. Requires suff profits
to be made in order for bs to
continue operating. Provide
confidence to creditors and
lenders, more willing to lend.
ADV-not repaid, cheaper, low
gearing, less risk. DIS-lower
profits/lower returns, expectation
owner will have return of
investment,
Comparison of debt/equity-bs must take
into account purpose of finance.
DEBT-liquidation, repaid periodic
repayments, interest payments
deductible, lenders lower rate of return,
payments fixed, debt provider no voting
rights. EQUITY-shareholders residual
claim, no maturity date, dividends not tax
deduc, shareholders require higher
return, voting rights.
Matching the terms and
sources of finance to bs
purpose
Bs identifies/plans to meet fin objectives. Must find
appro-terms of finance:suitable structure of
bs/purpose for which funds required(st), cost of each
source of funding:required rate of return bal against
costs of each source, structure of bs:small bs fewer
opportunities for equity fin compared larger bs that
may raise equity by issuing shares, costs:setup
costs/intrerest rates must be considered, Flex-bs
require flex sources of fin to vary condition
change(overdraft more flexble than deb/fact.Availability
of funds:dependence small no of investors risky may
pull out, availability by bs credit rating. Level of
control-lender requires security over asset.
Monitoring and Controlling
Cash flow statements-indicates movement of cash
rec/payment resulting from transactions over period of time.
Gives info regarding firm's ability to pay debts on time, identify
trends or predict change. Cash flow-better predictor of bs
status, shows whether firm:generate fav cash flow, pay fin
commitments, suff funds for future expansion, obtain finance
from ex sources, pay drawings to owners, dividends to
shareholders. OPERATING act-cash inflows/outflows relate
m,ain act of bs, INVESTING-in/out purchase and sale of
non-current assets/investments, used to generate income,
FINANCING-in/out relating to borrowing act of bs.
Income statement-operating eff or results for period.
Shows revenue earned/expenses or results for period.
Shows rev earned/expenses incurred over accounting
period, resultant in profit/loss. Operating incomes, cost of
goods sold, operating expenses-->selling/distribution
expenses, general/admin expenses(rent, wages),
financial expenses(interest, debts, discounts allowed).
Balance sheet-represents bs assets/liabilities
at particular point in time, rep net worth(equity)
of bs. Shows level of current/non-current
assets, current and current-liabilities(+OE)
Assets-CA turned cash 12 months. NCA-not
expected to be turned into cash within 12 months.
Liabilities-claims by ppl other than owners against
assets, rep owed by bs. CL-repaid 12 months,
NCL-after 12 months. OE-rep owner's fin interest in
bs. Includes cap/retained profits. Accounting
eq-A=OE+L. Revenue statement shows-resulting
profit from rev,less expenses, figure transferred to bal
sheet as cap in OE.
Financial ratio
Analysis-involves comparing similar terms in
revenue statements and balance sheet, calculations
of figures, percentages, ratios. VERTICAL-compares
fig within 1 yr, HORIZONTAL-diff F yrs,
TREND-figures periods 3-5 yrs.
Liquidity-extent which bs meets ST
objectives. Assessing liq-determine
whether cash, assets, inventory converted
cash quickly enough to pay debt. CA and
CL determine liq of bs. MUST ensure
enough CA to generate cash but not too
many resources not used. 2:1
acceptable->but depends on type of firm,
industry and external factors.
Gearing-firm fin in operations, measuring
relo debt/equity. Determines solvency(LT).
More high geared, more risk and potential
for profit. Bs level of gearing important
dec:risk/return on investments, degree of
control, size and stability, liq of bs assets,
purpose of ST debts. Higher ratio less
solvent firm->higher risk.
Profitability-earning performance of bs and
indicates cap to se resources to maximise
profits. Amount of profit determined by no of
factors-vol of sales, mark up on purchases,
level of expenses. Income statement used to
measure profit. Gross P-total amount of sales,
represents % of sales revenue. NP-profit or
return to the owners, how much of each follar
earned by firm is translated into profits.
ROE-how effective funds contributed by
owners gen profits.profit with amount
shareholders invested.
Efficiency-ability of firm to use resources
effectively in production/ provisions of G/S
ensuring fin stability and profitability.
Expense R-compares total expenses,
indicating day-2-day eff.. A/Rec-firms credit
policy, eff collects debts, average length of
time takes to convert balance into cash.
High R-bs eff in debt collection, signal for
firms to loosen up thir credit policies may
be limited.