Essential Knowledge of Financial Operations - Essay Example

? Finance Part B: Essential Knowledge Answer Terms Definitions Chart of accounts Chart of accounts is the list of accounts of the company which is incorporated by companies to classify the cost and revenue incurred under a particular item. The finance of an organization gets segregated into revenue, expenditure, liabilities and assets of the company. For eg: Balance sheet (Assets & Liabilities), Profit and Loss statement (Revenue accounts, Cost of Goods sold accounts, Expense accounts, etc) Revenue and expenses Revenue is the income generated from the business entity through the sale of goods and services to its customers whereas expenses are the cost that is incurred by the company for the production of the available goods and services. Thus the profit of the company is obtained after subtracting the expenses from the total revenue. For eg: The Profit and loss statement of an organization shows the revenue and expenses of the company. Through the process of financial statement analysis the real income and expenditure of an organization can be computed. Profit and Loss statement Profit and loss statement also known as the income statement of an organization is a summarization of the expenses, revenues and cost incurred during a specific time period. It helps the company and its stakeholders in detecting the item(s) for which the cost incurred has increased lowering the profit of the company.1 For eg: Profit and loss statement includes items like cost of goods sold, interest expense, tax expense and operating expenses; subtracting which from the total revenue, the net profit is obtained. Liabilities The obligation of on organization that arises out of the past transactions is known as the liability of the company. The liability of a company may be in cash or in kind which is repayable both in short and long time span. For eg: Accounts Payable, Interest Payable, Promissory notes payable, etc. are part of the liabilities of a company. Invoices An invoice is a form of bill which is paid to the seller by the buyer of the product or services. The invoice contains the details of the quantities, product and the price agreed upon by both the seller and the buyer of the product.2 For eg: An invoice is a sales invoice from the seller’s side while it becomes a purchase invoice from the buyer’s side. Ledgers A ledger is a book of accounts where the daily monetary transactions are recorded by debiting and crediting the accounts as per requirement. The entries made in the journal finally get transferred to a separate ledger account for the creation of the final accounts of a company. For eg: Sales Ledger, Purchase Ledger, General ledger, etc. Cash flow Cash flow is the movement of cash into or out of the business. Cash flow is used to compute the net present value, internal rate of return and the rate of return of a company. Thus the risk associated with the project can be determined with the help of cash flow of a company.3 For eg: Operational cash flow, investment cash flow and financing cash flow. Financial audit The financial audit is the verification of the financial statements of the company in tandem with the generally accepted accounting principles of the company. The purpose of financial audit of a firm is to increase the confidence of the stakeholders of the company who are intended to use the financial statements.4 For eg: The financial systems that are audited are the final accounts of the company which include the income statement, the cash flow and the balance sheet of the company. Answer 2 Answer 3 A manager ensures that legislative requirements for financial management are compiled with to the extent of achieving the budget targets agreed by the Australian Taxation Office whereby the costs are limited over which they have control. The manager of the organization verifies the information obtained is relevant, cost-effective and appropriate in the light of applicability of the information in unknown circumstances. The elements included by the manger of the organization are integration of the internal budget into the organizational planning of the organization, aligning the internal budget with organizational responsibilities and roles, integration of capital and organizational budgets, aligning external and internal budgets, harmonizing reporting and budgeting and even encouraging the stakeholders of the company in the internal budget of the company.5 Items that related to the financial management of the company that must be reported to the Australian Taxation Office are as follows6: a. Budgeted departmental statement of financial performance b. Details of Operation revenue and expenses c. Parameter of adjustments d. Application of increased efficiency dividend e. Information related to the assets and liabilities of the organization f. Cost of administering goods and services tax Answer 4 Procedural outline for team members that explains their duties and reporting responsibilities for each of the following: a) Invoicing clients: The duties related to the invoicing clients are processing of the bill by furnishing all the details of the product purchased along with its quantity. The team members would be responsible for maintaining the billing rate. They are also entitled with the task of performing various WIP reports and spreadsheets for the company. The members are also responsible in implementing, suggesting and administration of the routines that will effectively enhance the timely billing of the firm.7 b) Making purchases: The team member has to make all probable offers to the vendor before the purchase of the product for the company. This will help them strike at the best price, thus benefiting the company. The quality of the product being purchased has to be kept in mind though not at the cost of increased price. Proper information related to the stock of the company should be gathered regarding the stock level of the firm before making the purchase. Close coordination is to be maintained with the budgeting department of the company. c) Maintaining journals: The maintenance of journals is done by recording the financial transactions of the company on a chronological basis. The team members should check that all the transactions made by the company have been recorded in the journal of the company with reference to the ledger folio number.8 Answer 5 The initial step towards strategic communication is the identification of the primary and the secondary goals of the team. In order to solve problems related to budget shortfall the primary goal of the company should be to address the related concern to all the participants of the team before suggesting any recommendations. Departments and other groups working for long term should set the secondary goals of generating new products and services so that value of clarity in communication can well be understood. The time limit is also required to be included while the preparation of the budget is being done. The feedback required for this will be coordination between all the departments of the organization so that the information accepted and delivered by the budgeting department is accurate. This can be attained through effective communication of the team members. Answer 6 a) Difference between Gross profit and Net profit are9: GROSS PROFIT NET PROFIT 1. It is the excess of net sales over the cost of purchase or manufacturing expenses related to goods. It is obtained after subtracting all the indirect expenses from the gross profit of the company. 2. It does not project the actual profit of the entity. It projects the actual profit of the entity. 3. It is shown as a credit balance of the trading accounts of the company. The profit and loss statement of the company projects the net profit of the company as a credit balance. 4. The progress of a company can be analyzed by comparing the gross profit with the net sales of the company. The profitability of the company can be measured by the comparison of the net profit with the net sales of the company. b) It is very essential to have knowledge about the budget of the company because the income and the expenditure of the company are within the control of the company. The knowledge of the budget helps in keeping track of the expenses thus made by the company. Based on these expenditure budgetary plans has to be laid so that cost of the company can be curtailed to uplift the profit of the company in the long-run.10 c) Support that may help in the achievement of the budget is as follows: Documentation of the procedure Intranet-based information Training including, coaching, mentoring and shadowing Providing expert advice within the organization Information briefings d) Necessary planning need to be made in curtailing the cost of the company along with that the avoidable costs of the company should be reduced as much as possible. At the moment the budget with the allocation with unavoidable expenses coming to 105% of the allocation has to be proceeded with if no other option for reducing the cost is available. But the 15% of the other expenses need not be rendered to for the time being. Answer 7 a) Since the fund are tight the project undertaken has to be done under the budget made but some extra time can be borrowed for the same. At the same time the project should involve the most efficient and experienced employee who have prior experience of handling project under crises. b) The process undertaken to address the predictions of the cash flow of the company is by bifurcating the three heads of cash flow of the company. Then based on the net revenue, the expenditure and the capital invested by the company the CAGR (Compounded Annual Growth Rate) has to be found. This CAGR will be applied all through to arrive at the expected cash flow of the company. c) Contingency plan may include restructuring of the organization to reduce labor costs, adopting strategies for reducing costs, stock, wastage, etc., recycling and re-use, risk identification, management process and assessment and succession planning. The negotiations made should be at the reduction of the cost of the products being produced. More time span would be requested to increase as the budget is tight. Raw material of a similar quality but at a reduce price should be obtained. d) A thorough verification of the documentation of the labor hour rate has to be revised. The salaries thus being withdrawn are in strict tandem with the rules of the company or not also needs to be checked. If a sudden rise in the salary of the officials has increased that needs to be put under check. Further recruitment of employees should be stopped for the time being and the requirement of the employees should be verified. Answer 8 The required role that needs to be incorporated as a budget manager is the maintenance of records related to the transactions of the company. This would incorporate the hardware and software, human, financial or physical resources and record keeping electronic system. This would help monitor maintaining of the journal, ledger and other record keeping system. Bibliography “Australian Taxation Office”. Australian Government Budget 2005-2006. Accessed August 7, 2012. http://www.budget.gov.au/2005-06/pbs/download/ato.pdf. “Importance of Budgeting”. Score Correct. Accessed August 7, 2012. http://scorecorrect.com/assets/pdf/TheImportanceOfBudgeting.pdf. Albon Philip, Economy Peter & Nelson Bob. Consulting For Dummies. United States: John Wiley & Sons, 2011. Chorafas Dimitris N. Liabilities, Liquidity, and Cash Management: Balancing Financial Risks. United States: John Wiley & Sons, 2001. Loughran Maire. Intermediate Accounting For Dummies. United States: John Wiley & Sons, 2012. Miller Janice. “Understanding and Using Financial Management Systems to Make Decisions”. The Manager 8, no. 4 (2000): 1-34. Pickett K. H. Spencer. The Internal Auditing Handbook. United States: John Wiley & Sons, 2010. Plewa Franklin J., Jr. & Friedlob George T. Understanding Cash Flow. United States: John Wiley & Sons, 1995. T.R. Jain & O.P. Khanna. Business Economics. New Delhi: V. K. Publications, 2009. Tyson Eric & Schell Jim. Small Business for Dummies. United States: John Wiley & Sons, 2008. Read More