COMM1140 Final Exam - Vocabulary Flashcards

Introduction to Financial Management

• Definition: planning, organising, controlling and monitoring financial resources to achieve company goals.
• Primary objective: maximise shareholder value through appropriate resource utilisation and decision making.

Accounting

• Accounting helps reveal a business’s vital signs: profitability, cash flow, sustainability, value, debt, ROI, financial security and integrity.
• Accounting is the language of business.
• Types of accounting:
  1) Long Term (Strategic): informs long-term growth decisions
  2) Short Term (Operational): informs day-to-day performance improvements
  3) Commercial: evaluates deals for value impact

Finance

• Finance values a business and guides investment decisions using accounting information.
• Two main types:
  1) Investment/Asset Pricing: asset/securities worth, risk, portfolios, valuation approaches
  2) Corporate Finance: project choices, financing, earnings payout; Free Cash Flow estimation falls here
• Key formula/concepts:
  • Enterprise Value: $EV = ext{Debt} + ext{Equity} - ext{Cash}$
  • Equity valuation vs. firm valuation concepts (market value of equity, EV)

Tax

• Tax is a regulatory guidebook for financial responsibility and compliance; minimises tax liabilities where possible.
• Types: Direct taxes (income, property) and Indirect taxes (GST/VAT, payroll, stamp duty).
• Tax consequences: tax payable vs assessable income, deductions, offsets, and the possibility of tax losses carried forward.

Types of Accounting Information

• Financial Accounting: external users; financial statements; assesses profitability, liquidity, solvency.
• Management Accounting: internal users; budgeting, planning, performance evaluation; cost accounting subset.
• Audit & Internal Control: ensure integrity of financial statements and reliability of controls.
• Social & Environmental Accounting (sustainability): non-financial information for external users.

Revenues and Expenses

• Revenues: increases to wealth from cash or receivables; types include Sales Revenue, Interest Income, Dividends.
• Expenses: decreases to wealth; must be incurred to generate revenue. Withdrawals/dividends are not expenses.

Cash vs Accrual Accounting

• Cash Accounting: recognise when cash is received/paid; limitations include ignoring credit sales, payables, and accrued items.
• Accrual Accounting: recognise revenues/expenses when earned/incurred; does not require cash receipt; depreciation is recognised here, not in cash accounting.
• Default stance: assume accrual accounting unless stated otherwise.

Financial Statements (Overview)

• Balance Sheet: financial position at a point in time; assets, liabilities, equity.
• Income Statement: financial performance over a period; accrual-based; revenues increase equity, expenses decrease.
• Cash Flow Statement: cash inflows/outflows over a period; operating, investing, financing activities.
• Relationship: profits can be retained in the business or distributed as dividends.
  • Retained Profits formula: $OPENING\;RETAINED\;PROFITS + NET\;PROFITS - DISTRIBUTIONS = CLOSING\;RETAINED\;PROFITS$
• Dividends: appear on the statement of shareholders’ equity, not on the income statement.

Balance Sheet: Assets, Liabilities & Equity

• Asset Classification:
  • Current (short-term): cash, receivables, inventory, prepayments
  • Non-current (long-term): property, plant & equipment, intangibles, long-term investments
• Liabilities Classification:
  • Current (short-term): payables, short-term loans, unearned revenues
  • Non-current (long-term): long-term loans
• Equity components:
  • Share Capital (contributed equity)
  • Retained Profits
• Accounting Equation: $ASSETS = LIABILITIES + EQUITY$
• Liquidity & Solvency measures: current ratio, quick ratio, debt-to-equity, etc.

Income Statement ( accrual )

• Revenues increase shareholders’ equity; expenses decrease it.
• Key items: revenues, COGS, gross profit, operating expenses, net profit.
• Depreciation is an expense on the income statement (accumulated depreciation is a balance sheet counter).
• Gross profit: $Gross\ Profit = Sales\ Revenue - COGS$

Cash Flow Statement

• Categorised into:
  • Operating Activities: cash from core business
  • Investing Activities: long-term asset purchases/sales
  • Financing Activities: debt/equity transactions and dividends
• Dividends are not an income/expense; appear in financing/cunding section, not on the income statement.

Link Between IS and BS

• Retained profits link: $OPENING\ RETAINED\ PROFITS + NET\ PROFITS - DIVIDENDS = CLOSING\ RETAINED\ PROFITS$

Asset & Liabilities Classification (detailed)

• Expenses recognition relates to matching with period of benefit; some items are prepaid or accrued.

Accrual Adjustments & Depreciation (Week 3)

• Accrual adjustments types:
  1) Unearned/Deferred Revenues (liability becomes revenue when earned)
  2) Prepayments (customer perspective: payments made before expense)
  3) Accrued Revenues (receivables): revenue earned but cash not yet received
  4) Accrued Expenses (payables): expenses incurred but cash not yet paid
• Depreciation:
  • Accumulated Depreciation (balance sheet)
  • Depreciation Expense (income statement)
  • Example: asset cost $10,000 life 4 years → $2,500 per year; accumulated depreciation after 3 years = $7,500
  • Note: depreciation is non-cash; depreciation expense reduces profit; accumulated depreciation is a contra-asset account.

Financial Statement Analysis (Week 4)

• Four types:
  1) Percentage Change (unsophisticated): year-over-year percentage changes
  2) Horizontal Analysis (unsophisticated): compare against base year
  3) Vertical Analysis (less sophisticated): express line items as % of a base (e.g., % of total assets or sales)
  4) Ratio Analysis (sophisticated): metrics like profitability, liquidity, activity, solvency, DuPont linkage
• Five ratio categories:
  1) Profitability: gross margin, profit margin, ROE, ROA; NOPAT vs Net Income for comparability
  2) Liquidity: working capital management; current ratio, quick ratio, cash ratio; net working capital = $Current\ Assets - Current\ Liabilities$
  3) Activity (Turnover) Ratios: asset turnover, inventory turnover, days in inventory, receivables turnover, days in receivables, payables turnover, days payable
  4) Cash Conversion Cycle: $CCC = DAYS\ IN\ INVENTORY + DAYS\ IN\ DEBTORS - DAYS\ PAYABLES\ OUTSTANDING$
  5) Financial Structure/Solvency: debt-to-asset, debt-to-equity, leverage
• DuPont analysis: links ROE to operating efficiency, asset use efficiency, and financial leverage
• Limitations: comparability issues, missing line items, potential fraud, one-time effects, no single “correct” answer; context matters

Company Valuation (Week 5)

• Two views of value:
  • Market Valuation (MVE): market price per share × shares outstanding
  • Enterprise Value (EV): $EV = Debt + Equity - Cash$
• Per-share metrics:
  • EPS (earnings per share), Dividends per share
• Valuation multiples:
  • Equity multiples: $P/E = \frac{Share\ Price}{Earnings\ per\ share},\ P/B,\ P/S$
  • Firm multiples: $EV/EBITDA,\ EV/EBIT,\ EV/Sales$
• Valuation methods:
  • Comparable Company Analysis (CCA) / Multiples (relative valuation)
  • Intrinsic Valuation (discounted cash flows; present value of future cash flows)
• Steps in CCA:
  1) Identify peer firms
  2) Choose appropriate multiple
  3) Apply to target using multiples to estimate implied value
• Key relation: base denominators depend on the metric used (per-share vs market cap)

Free Cash Flow Estimation (Week 7)

• Free Cash Flows (to the firm): measure of value-generating potential for both equity and debt holders
• Core idea: future cash available to providers after reinvestment
• Common formula (to firm):
  $FCF = EBIT\,(1 - T) +\text{Depreciation} - \text{Capex} - \Delta\text{NWC}$
  where Capex = change in long-term assets; NWC = operating current assets − operating current liabilities
• Terminal FCF: value at horizon used in enterprise valuation; use firm multiples (not equity multiples)

Business Taxation (Week 8)

• Tax concepts:
  • Tax is a compulsory contribution to government to fund public goods/services; can be leveraged legally or illicitly.
  • Good tax system traits: simplicity, equity (vertical and horizontal), efficiency, sustainability, consistency.
• Australian tax sources: Statute/Legislation, Case Law, ATO practice (de facto sources)
• Taxpayers: Individuals, Sole Traders, Partnerships, Trusts, Companies
• Direct vs Indirect Taxes
• Tax calculation concepts:
  • Assessable Income = Ordinary Income + Statutory Income
  • Deductions = Specific + General deductions
  • Taxable Income = Assessable Income − Deductions
  • Tax Payable = (Taxable Income × Tax Rate) − Tax Offsets
  • Base Rate Entity: turnover < $50m and >20% of assessable income from active business
• Tax losses: can be carried forward indefinitely under Continuity of Ownership Test or Similar Business Test; requires conditions to be met
• Permanent vs Temporary differences: permanent differences do not reverse (e.g., penalties), temporary differences reverse over time (e.g., timing of depreciation deductions)

Audit & Internal Controls (Week 9)

• Internal control: safeguards to achieve objectives in operations, reporting, compliance; prevent errors, fraud, misuse
• Five components:
  1) Control Environment
  2) Risk Assessment
  3) Control Activities (e.g., segregation of duties)
  4) Information & Communication
  5) Monitoring (internal audit)
• Limitations: not absolute; errors, collusion, cost-benefit issues, fraud risk
• Internal audit: evaluates processes and systems for effectiveness
• Audit opinions:
  • Unmodified/Unqualified: true fair view per accounting standards
  • Qualified: material issue but rest is fair
  • Adverse: pervasive misstatements, not a fair view
  • Disclaimer: unable to form opinion due to limitations
• Auditor independence threats: Self-Interest, Intimidation, Self-Review, Familiarity, Advocacy

Quick Reference Formulas (core recall)

• Accounting equation: $A = L + SE$
• Retained profits: $OPENING\ RETAINED\ PROFITS + NET\ PROFITS - DISTRIBUTIONS = CLOSING\ RETAINED\ PROFITS$
• Net Working Capital: $NWC = \text{Current Assets} - \text{Current Liabilities}$
• Cash Conversion Cycle: $CCC = DAYS\ IN\ INVENTORY + DAYS\ IN\ DEBTORS - DAYS\ PAYABLES\ OUTSTANDING$
• Gross Profit: $Gross\ Profit = Sales\ Revenue - COGS$
• EV: $EV = \text{Debt} + \text{Equity} - \text{Cash}$
• P/E: $\text{P/E} = \frac{\text{Share Price}}{\text{Earnings per share}}$
• DuPont ROE decomposition: ROE = Profit\ Margin × Asset\ Turnover × Financial\ Leverage
• Tax payable: $Tax\ payable = (Taxable\ Income × Rate) - Tax\ Offsets$
• Taxable vs Assessable: $AS = ORDINARY\ INCOME + STATUTORY\ INCOME$
• FCF (to firm): $FCF = EBIT\,(1 - T) + \text{Depreciation} - \text{Capex} - \Delta NWC$