ACC investiation 1 theory

missing sources of finanance and investments

external reports

enables users to assess the performance, position and liquidity of an entity

external reports users

anyone outside the entity who will use the information to make decisons about the business eg. investors, creditors

external report regulation

controlled by legal, statutory, and external obligations to organisations such as ASX, ASIC, AASB, and the corporations act 2001

external REPORTS

prepared annually and subject to audit. must be sent to shareholders and ASIX. publically listed companies on the axs must submit reports to the exchange. consist of - statement of cash flow, comprehensive income, financial position, changes in equity

internal reports

support managerial decision making and are important in enabling a business to assess and improve performance and reach its organisational goals

management accounting

the preparation of accounting reports and provision of financial information to internal users which is useful in decision making and may be used in the day to day management and operations of the business

management accounting regulation

no accounting standards or external obligations imposed, purpose is to meet the needs of users

financial accounting

the preparation of general purpose financial reports to assist external users when making economic decisions about an entities performance and position

financial accounting regulation

must comply with australian accounting standards and other legal, statutory and external obligations to organisations such as ASIX, ASX and the corporations act 2001

role of the accountant in an organisation

to provide financial information to entities various stakeholders

roles in organisation

deal with budgeting, payroll, performing internal audits, producing financial reports to internal and external users

role of accounting in firm

they are hired as an agent or contract to perform a specific task for an individual or other organisation

roles in firm

taxation affairs, financial planning and advice, insolvency and administration services

auditing

the checking of a businesses accounting reports to ensure they are correct and complete and/or the the operating systems and policies of the business are efficient

external audit

an independent review of the companys systems and records to ensure they have been properly maintained and accurately represented the businesss performance and position for the financial period by an accountant(s) who is not in the organisation

reason for external auditing

external audits are typically carried out on publicly listed companies that are controlled by the corporations act which required entities to get their accounts checked. the auditor prepares a formal report that expresses an opinion as to whether or not the financial reports of a company - Give a true and fair representation of the company, Comply with the AASB Accounting Standards. External auditors must inform ASIC of any breaches of the Corporations Act or AASB standards 

internal auditing

the process whereby a company conducts an independent and objective review of its systems, procedures, and policies to ensure they are adhered to and working effectively and efficiently. Internal audits monitor, examine and test the effectiveness of internal controls and their purpose is to detect and correct errors and identify deficiencies in business operations so improvements can be made.

purpose for internal audits

• protect business assets

• ensure accuracy in documentation

• encourage efficiency

• guarantee compliance with rules and laws

conflict of interest

Situations where a business owner or employees personal interest, relationships or activities could improperly influence their decisions or actions in their professional role eg. having owner interest in a competitor

misrepresentation of financial data

The deliberate or careless reporting of incorrect, misleading or incomplete financial information which gives a false impression of a business financial position or performance 

return

consideration is given as to whether the expected return is consistent with the risk being taken

risk

the consideration given to the safety of an investment, whether a firm will be able to meet its payments as and when they fall due and in the event the business fails, how easily the funds may be recovered

risk factors

• History, a financial incision will examine the borrowers past record of borrowing and repayments activities as well as their employment to assess their ability to make regular repayment 

• Collateral: an asset or assets that can be seized by the financial institution if the client is unable to repay the loan 

• Liquidity: an assessment of whether the borrower has adequate cash flow to make repayments on the debt as they fall due 

• Guarantors: a person or entity that agrees to be legally responsible for te debt if the borrower fails to meet their obligations 

short term financing debt

Bank overdraft- when a bank withdraws more money than it has its their account resulting in temporary negative cash balance. it can incur high interest fees however can be good for solving short term liquidity problems

Supplier credit: an agreement which enables a business to delay payment for their purchases

Factoring of debtors: where a business sells its accounting receivable to a factoring company to receive a discounted cash sum quickly.

long and short term debt

lease- an agreement to rent a particular item for a fixed period. two types are financial/hire-purchase - the ownership of the item transfers to the lessee at the end of the lease agreement. operating lease - the business uses the item for the length of the lease agreement then returns the item back

long term financing equity

capital - contributions from owners to the company

retained earings - the retention of undistributed profits to reinvest in the business or pay down debt.

issuing shares - can be done through public offering or private placement eg. ordinary shares, preference shares

factors when deciding between debt and equity

cost of finance - The cost of arranging the finance and any ongoing cost - dividends or interest

purpose of finance - whether the finance is used for long term assets or short term needs

need to repay finance - equity doesnt require repayment but debt does so the business must decide if they can generate sufficient cash to keep up with payments

effect on capital - whether the finance will lead to undercapitalisation or overcapitalisation

taxation effects - interest paid counts as an expense therefore reducing taxable income

management of non current assets - why its important

• They can be expensive, if not managed properly you may underinvest 

• They often require financing through long term debt or enquiry, therefore, the business must generate sufficient cash flow to meet loan repayments and enough profit to provide an acceptable return to owners.

• If the business has too many / large amount of non current assets it can mean the business isnt using its assets efficiently

ways to manage non current assets

• regular maintenance and asset care to prolong asset life

• depreciation management to spread the cost of an asset over its useful life and also plan for future replcaement

• sell of dispose of inefficient or idle assets

ways to manage cash

• Maintaining a minimum cash balance, Keep enough cash on hand for emergencies without holding excess idle cash. 

• Speeding up cash inflows through discounts, requiring deposits or upfront payment 

• Cost control, reducing unnecessary expenses to improve cash flow and preserve cash 

management of cash

• A business must have sufficient cash to meet its operational needs. 

• low cash can lead to liquidity issues

• its the most valuable asset and go go missing intentionally or unintentionally

management of accounts receivable

• large amount of accounts receivable can indicate the companys credit policy to too lenient and can lead to bad debts. Therefore, it is important that businesses vet customers credit histories and have procedures in place to ensure debtors are collected in an efficient manner. 

• Slow receipt of cash from debtors can also create liquidity problems for a business.

• if accounts receivable are too low, it may indicate that the businesses credit policy is too strict, which may mean loss of customers and sales.

ways to manage accounts receivable

• set clear credit policies, regarding credit limits, fees for late payment etc

• offer early payment incentives through discounts to promote faster payments

• credit checks on customers to ensure they have sufficient funds to meet repayments

ways to manage inventory

• Regular stock monitoring and control, Use stock counts and inventory software to avoid overstocking or stock-outs. 

• Focus tight control on high-value or fast-moving items. 

• Use sales data and trends to plan inventory levels more effectively.

management of short term loans

• inability to repay short term loans can leave the business insolvent

• can incur high interest rates

• paying back easier than necessary can lead to liquidity issues for the business however paying them back too late can ruin relationships with suppliers

ways to manage short term loans

• Matching debts with cash inflows, Ensure short-term loans are repaid using short-term cash flows. 

• Avoiding excessive short-term borrowing, Prevent liquidity problems by maintaining manageable debt levels. 

• Maintaining good supplier relationships, Timely communication helps in renegotiating terms during cash shortages.

management of short term debts

•  if a business fails to utilise debt financing, they may miss out on growth opportunities.

• Too much debt might restrict a company’s ability to raise additional capital if necessary.

• Typically used to fund the purchase of assets that are expected to generate revenue over a long period of time. Therefore, sufficient cash flow must be generated to ensure debts can be repaid and the assets are generating an adequate rate of return. 

ways to manage short term debts

• Choosing appropriate debt structures, Select fixed or variable interest rates based on risk tolerance and market conditions. 

• Regular review of debt levels, Monitor gearing ratios to avoid excessive financial risk. 

• Ensuring stable cash flows for repayments, Use long-term funding for long-term assets to match repayment schedules.

management of equity capital

• Undercapitalisation (too little equity) can cause a business to experience problems in terms of having insufficient capital to expand or invest.

• Overcapitalisation (too much equity) can also lead to lower returns for investors.

ways to manage long term loans

• Retaining profits for reinvestment, Use retained earnings to fund growth without increasing debt. 

• Careful issuance of new shares, Avoid excessive dilution of ownership and control. 

• Maintaining investor confidence, Provide transparent financial reporting and consistent dividend policies.