FIA FFM Foundations in Financial Management Flashcards
What is working capital, and how is it calculated?
Why does working capital need to be financed, and how does it differ from investment in non-current assets?
Why is good working capital management important? Explain the key trade-off.
Distinguish permanent and temporary working capital, and how each should be financed.
Describe the working capital (cash operating) cycle and its relationship to cash flows.
State the formula for the length of the working capital cycle.
A company has inventory $108,000; cost of sales $756,000; receivables $172,800; credit sales $864,000; payables $86,400; credit purchases $518,400 (365-day year). Calculate the working capital cycle.
State the two main liquidity ratios and what they measure.
State the three working capital efficiency (turnover) ratios.
List the main problems in using ratios to assess working capital.
Outline the relationship between inventory levels and sales, and why cycle length varies by sector.
Define over-trading and over-capitalisation.
What financial indicators point to over-trading, and what is the cure?
What financial indicators point to over-capitalisation?
What are the key considerations when developing an inventory ordering and storage policy?
How do ordering cost and holding cost behave as the order quantity increases?
Define work in progress (WIP).
Define the Economic Order Quantity (EOQ).
State the EOQ formula and define each term.
Demand is 30,000 units p.a.; ordering cost $32 per order; holding cost 10% × $30 = $3 per unit p.a. Calculate the EOQ.
How do you decide whether to take a quantity (bulk) discount in the EOQ model?
Explain the Just-in-Time (JIT) inventory system.
What conditions must be met for JIT to work, and what are its benefits and risks?
Explain the role of accounts payables (trade credit) in the working capital cycle.
Explain the role of accounts receivables in the working capital cycle.
Why is it important to monitor and control accounts payables?
What is meant by 'accounts payables control operations', and why does good payables management matter?
Describe the main methods of paying suppliers, and distinguish a standing order from a direct debit.
State the formula for converting a discount return over p days into an effective annual rate.
A supplier offers 2% discount for payment within 10 days; otherwise we pay in 30 days. Calculate the effective annual cost of refusing the discount.
The company takes 40 days credit; a 1.5% discount is available for payment within 15 days. Overdraft interest is 13%. Should it take the discount?
A company makes sales of $1.2m p.a. and offers a 2.5% discount for payment within 30 days (instead of 60). Calculate the effective annual cost of offering the discount.
What are the risks of taking increased credit or buying under extended credit terms?
Define cash, cash flow and funds.
Why is cash flow management so important? Why do profitable businesses fail?
Outline the main sources and applications of a company's cash (types of receipts and payments).
How do cash flow patterns differ between types of organisation?
Why is cash flow important for the sustainable growth of an organisation?
Define cash accounting and accruals accounting.
Explain the difference between cash accounting and accruals accounting, and why it matters.
Why do profit and net cash flow differ? List the main reconciling items.
What are the objectives of a cash budget?
How does inflation affect a cash budget?
Describe the structure (pro-forma) of a cash budget.
How is the timing of credit sales and credit purchases handled in a cash budget?
A business starts with $70,000 cash, makes a $70,000 profit over six months, yet needs a $150,000 overdraft mid-period. What does this illustrate?
How can a cash budget be used for monitoring and control, and what corrective actions can address a forecast deficit?
What is a cleared funds forecast and how does it differ from a normal cash budget?
How do you calculate an average annual growth rate from a series of past figures?
What is linear regression used for in cash forecasting, and what is the model?
What do the correlation coefficient (r) and the coefficient of determination (r²) tell you?
List the four elements of a time series.
How are moving averages used to find the trend and seasonal variation (quarterly data)?
Distinguish the additive and multiplicative models of seasonal variation.
What is sensitivity analysis applied to a cash budget or forecast?
What are the basic functions of the treasury department?
State the advantages of a centralised treasury function for a group.
State the disadvantages of centralised cash management/control.
What cash handling procedures reduce delays and risk in collecting cash?
What are the three motives for holding cash, and the trade-off in setting an optimal balance?
Outline the statutory and other regulations relating to the management of cash.
Describe the main types of bank and their functions.
What is a financial intermediary, and what problems does it solve? Give examples.
State the three key benefits of financial intermediation.
Describe the main short-term investments (money-market instruments) for surplus cash.
Describe the features of ordinary shares (equity).
Describe the features of preference shares.
Distinguish secured, unsecured, convertible loan notes and loan notes with a warrant.
What is a money market, and what instruments/markets does it contain?
How does a stock market operate? Distinguish the primary/secondary market and AIM/Main Market.
What are the main methods of obtaining a stock market listing?
State the advantages and disadvantages of obtaining a stock-market listing.
How can a company deal with a cash deficit? Compare an overdraft, a term loan and a capital injection.
Explain trade credit as short-term finance and the merits/limitations of short-term finance generally.
What are surplus funds, how do they arise, and what objectives govern investing them?
Explain the risk-return trade-off and distinguish systematic and unsystematic risk.
How does the Baumol cash management model work, and what are its limitations? (No calculations required.)
When is medium-term finance appropriate, and what are the main features of hire purchase and leasing?
Contrast hire purchase, instalment credit, leasing and sale & leaseback.
When is it appropriate to raise long-term finance, and what is the matching principle?
What is a rights issue, and how is the cash raised calculated?
What key factors decide the choice between debt and equity for long-term finance?
Define gearing and explain the gearing effect on profits available to shareholders.
A company needs $10m capital. Option 1: 10m ordinary shares. Option 2: 6m shares + $4m 10% debentures. If operating profit is $2m (tax 25%), compare EPS.
Why include debt in the capital structure, and what are the merits/limitations of long-term finance choices?
Discuss internally generated funds and government sources as long-term finance.
Describe the SME funding gap, maturity gap and the other barriers to SME finance.
Describe the main features of venture capital and what venture capitalists assess.
How can trade suppliers, hire purchase, factoring and a second-tier listing help ease SME financing problems?
Define the money supply and explain why it matters economically.
How can the money supply be influenced (the tools of monetary policy)?
State the relationship between the demand for money and interest rates, and list the causes of inflation.
State the formula linking the money (nominal), real and inflation rates, and apply it.
What are the consequences of high inflation for organisations and the economy?
Distinguish monetary and fiscal policy.
Distinguish simple and compound interest.
State the future value (compounding) formula and apply it.
Explain the time value of money. Why is $1 today worth more than $1 in the future?
Explain the concept of discounting, and state the present-value formula.
How are discount tables used to find a present value? Give an example choosing between timed receipts.
What is an annuity, and how is its present value found quickly?
What is a perpetuity, and how do you value one — including a delayed perpetuity?
How do you value a delayed annuity (flows starting after time 1)?
Why must capital investment be carefully planned and controlled?
Distinguish capital and revenue expenditure.
Compare investment in non-current assets versus working capital when capital is raised.
How is the payback period calculated? Machine $24,000; cash inflows Y1 $7,000, Y2 $8,000, Y3 $12,000.
State the advantages and disadvantages of the payback period, and what discounted payback adds.
Define the Accounting Rate of Return (ARR) and calculate it for: machine $24,000, scrap $4,000 after 4 years, total pre-depreciation earnings $35,000.
State the advantages and disadvantages of ARR.
What are relevant cash flows for NPV, and which items are not relevant?
State the advantages and disadvantages of NPV.
Explain Net Present Value (NPV) and calculate it: outlay $75,000; inflows $30,000, $50,000, $20,000 at times 1–3; discount rate 10%.
Define the Internal Rate of Return (IRR) and state the decision rule.
How do you estimate the IRR by interpolation? NPV is +$1,615 at 5% and −$585 at 15%.
How is the IRR of an annuity or perpetuity found directly?
Compare NPV and IRR: mutually exclusive projects and multiple yields.
Explain the superiority of DCF methods (NPV, IRR) over payback and ARR.
What are the essential elements of a valid contract?
Distinguish an offer from an invitation to treat, and list the ways an offer can be terminated.
State the key rules on acceptance and consideration.
Distinguish a contract condition from a warranty, and define misrepresentation.
What are the remedies for breach of contract?
What specific terms are commonly included in contracts with credit customers, and what is a retention of title clause?
What are the main data protection issues when handling accounts-receivable records?
Explain insolvency and bankruptcy/liquidation, and the basic legal procedures for collecting debts.
Why offer credit to customers, and what are the costs of doing so?
What does a credit policy cover?
What sources of information are used to assess a customer's credit-worthiness?
What is credit scoring, and what are common reasons for rejecting a credit application?
Which ratios help assess a customer's credit-worthiness from their financial statements, and what are the limitations?
How should accounts receivable be monitored? (statements, days of credit, aged analysis)
What internal and external sources can be used to monitor existing receivables?
How can customers be encouraged to pay promptly, and how are potential payment problems identified early?
Describe the techniques for collecting overdue debts, and the tension involved.
How does debt factoring work, and what is the difference between with recourse and without recourse?
What is invoice discounting, and how does it differ from factoring?
How is the cost of a settlement discount / change in credit policy estimated? (approximate method)
Using the more exact method, what is the annual cost of the 2.5%-for-1-month discount (customers previously took 3 months)?
Card 1 of 139. Question side.