BEC Revision Questions PDF

# BEC Revision Questions ## Chp 14 ### Fundamental Principles/Concepts in Financial Decision-Making: 1. **Risk-Return Principle:** This concept states that higher potential returns are generally associated with higher levels of risk. Financial managers must balance the desire for high returns wi...

# BEC Revision Questions ## Chp 14 ### Fundamental Principles/Concepts in Financial Decision-Making: 1. **Risk-Return Principle:** This concept states that higher potential returns are generally associated with higher levels of risk. Financial managers must balance the desire for high returns with the organization's risk tolerance when making investment decisions. 2. **Cost-Benefit Principle:** This involves comparing the costs and benefits of financial decisions to determine their feasibility and potential profitability. Projects or investments are considered worthwhile if the expected benefits outweigh the costs, helping organizations prioritize and allocate resources effectively. 3. **Time Value of Money (TVM):** This principle recognizes that money has greater value now than in the future due to its potential earning capacity. Financial managers use techniques like present value and future value calculations to assess the worth of cash flows over time, ensuring decisions account for the opportunity cost of capital. ### Here are 5 Important Financial Ratios with their Formulas: 1. **Current Ratio:** Measures a company's ability to pay short-term obligations. Formula: Current Ratio = Current Assets / Current Liabilities 2. **Acid-Test Ratio:** Provides a stricter assessment of liquidity by excluding inventory. Formula: Acid-Test Ratio = (Current Assets - Inventory) / Current Liabilities 3. **Debt Ratio:** Indicates the proportion of a company's assets financed by debt. Formula: Debt Ratio = Total Liabilities / Total Assets 4. **Gross Profit Margin:** Assesses profitability by showing the percentage of revenue exceeding cost of goods sold. Formula: Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue 5. **Return on Equity (ROE):** Measures profitability in relation to shareholders' equity. Formula: ROE = Net Income / Shareholders' Equity ## Ratios Profitability on Chp 14 Tut Test ## Here are four common forms of short-term financing for Businesses: 1. **Trade credit** is an important form of short-term financing where suppliers allow businesses to purchase goods or services and pay later, typically within 30-90 days. This helps businesses manage cash flow by providing time to sell products before payment is due. 2. **Bank overdrafts** allow businesses to withdraw more money than they have in their account, up to a certain limit. This provides immediate access to funds for short-term needs, with interest charged on the overdrawn amount. 3. **Accruals** are a source of spontaneous short-term financing, including accrued wages and taxes. Employees and tax authorities essentially provide short-term financing by waiting to be paid rather than requiring immediate payment. 4. **Factoring** involves selling accounts receivable (debtors) to a financing company in exchange for immediate cash. This converts credit sales to cash sales, providing a quick cash injection by releasing funds tied up in working capital. ## 2 Types of Budgets 1. **Operating budgets:** Involve cost and operation of the business - Profit plan by top managers - Costs are divided into manufacturing costs which are production and discretionary which is admin and research 2. **Financial budgets:** - Cash budgets how much is expected to come in and financial budgets which is how much capital is needed to cover shortfalls in the budgets - Budget statement of financial income; bring together all other budgets to show the firm's financial position at the end of the budget period. ## Holding Too Much and Too Little Inventory in an Organization - Holding too much inventory can lead to: - Increased carrying costs, including storage expenses, insurance premiums, and potential obsolescence - Holding too little inventory risks stockouts, leading to lost sales and customer dissatisfaction. It may also result in production interruptions and higher reorder costs due to frequent small orders. ## Chp 15 ### The Assessment of Purchasing and Supply Activities Involves Evaluating the Effectiveness of the Purchasing Function Using Several Key Criteria: - **Price proficiency:** comparing actual prices with planned or market prices, evaluating negotiated discounts, and analyzing purchasing costs as a percentage of turnover. - **Supplier performance:** tracking rejected orders, late deliveries, and expedited processes. - **Timeliness:** monitoring urgent orders and operations interrupted due to shortages. - **Cost-saving:** comparing costs with previous periods. - **Workload:** examining the number of orders and requisitions. - **Purchasing costs:** expressing administrative costs as a percentage of purchase value. - **Inventory-holding:** calculating inventory turnover and investigating losses and obsolescence. - **Relationship performance with suppliers:** conducting surveys and analyzing supplier turnover. - **Relationship with other functional areas:** monitoring\_ cross-functional team contributions ### The 9 Step Purchasing and Supply Process Activities Include: 1. **Development and description of need:** Users write their requirements a specification lists using a requisition or order card. Buyers must carefully analyze these to ensure the right products are purchased. 2. **Choice of suppliers:** This is a critical activity involving factors like new vs. repeat purchases and standard vs. specialized materials. Buyers use tools like supplier registers, price lists, and tender. 3. **Research on prices and availability:** For standard items, this involves checking price lists and quotations For specialized items, it may require tenders and negotiations. 4. **Placing the order:** Once a supplier is chosen, the order is placed using appropriate documentation like the order document or contract document. 5. **Expediting the order:** Buyers follow up to ensure timely delivery. Call or email. 6. **Receiving and inspecting:** Goods are checked against the order for quantity and quality. Using an inspection report 7. **Handling errors and discrepancies:** Buyers communicate with suppliers about issues while maintaining good relations, using an inspection invoice. 8. **Paying for the order:** Buyers authorize payment after verifying all documents, invoice. 9. **Closing the order:** All documents are filed for future reference and supplier evaluation. Receipt ## Importance of Purchasing and Supply Function in the Business **Greatest expenditure for the business** - Purchasing costs are a business's biggest expense, especially in businesses where final products are purchased, and little or no actual value is added to the product. **Inventory-holding** - Stock is held to prevent disruptions in the transformation process (production or operational) that would be caused by an interruption in the flow of materials to a business. **Contributions to the marketing of products** - By purchasing materials of the right quality and price at the right time, a manufacturer makes the right final products available, in the right quantities at a reasonable price at the right time to its customer. ## Chp 16 ### Three Basic Generic Strategies Firms Can Pursue Are - **Differentiation strategy:** Firms invest heavily in branding and quality control to create a perception of superior quality and uniqueness. This allows them to charge premium prices and build customer loyalty. - **Cost leadership strategies:** Aim to produce goods or services at significantly lower costs than competitors. This involves focusing on mass production, standardization, and strict cost control throughout the organization - **A focus strategy:** Targets a narrow market segment, aiming to dominate it through either differentiation or cost leadership. For example, Mont Blanc pens focus on the high-income luxury segment ### Strategic Management Process Consists of Several Interconnected Steps 1. It begins with determining **strategic direction**. 2. **Objectives**, which involves developing a vision and mission statement to guide the organization. 3. Next, **external environmental analyses**. 4. **Internal analysis** are conducted to identify opportunities, threats, strengths, and weaknesses. 5. **Strategic choice** based on these analyses are selected that align with the organization's goals and capabilities. 6. **Strategy implementation** through aligning business functions, leadership, culture, and processes. 7. Finally, **strategic control** mechanisms are put in place to monitor performance, gather intelligence, and provide feedback for adjusting strategies as needed. ## Difference Between Competitive and Business Intelligence and their Role in Strategic Control | **Competitive Intelligence** | **Business Intelligence** | | :-------------------------------------------------------------- | :------------------------------------------------------------------------------------------- | | Focuses on gathering and analyzing external information about competitors and market trends. | Involves analyzing internal data to improve organizational performance. | | Helps organizations scan the external environment to identify opportunities and threats | Systems integrate internal data from across the organization to provide structured, quantitative insights on performance | | Informing strategic decision-making and allowing companies to adapt to market changes | This allows companies to track strategy implementation, ensure alignment between different levels of strategy identify areas for improvement | | Often involves collecting unstructured data from various external sources | | ## Here are three key ways to effectively implement a business strategy: 1. **Clear communication and alignment:** Ensure the strategy is clearly communicated to all employees and stakeholders across the organization. Align individual roles and responsibilities with the overall strategic goals to foster a shared understanding at all levels. Maintain regular updates, and feedback mechanisms to keep everyone engaged and aligned. 2. **Strategic resource allocation:** Allocate financial, human, and technological resources to support strategy execution. Invest in training, tools, and systems that enable employees to effectively perform their tasks. Prioritize resource allocation based on strategic objectives to ensure critical areas receive sufficient support. 3. **Performance measurement and adaptation:** Establish key performance indicators (KPIs) to monitor progress toward strategic goals. Regularly assess performance against these metrics and be prepared to adapt the strategy as needed based on changing conditions. This iterative approach allows for continuous improvement and responsiveness.