Assessment 1Part A – Written or Oral Questions

1.a. What is financial risk? (1 mark)

refers to the danger or chance to lose money. The people involve in share
market, investors, stakeholders are vulnerable to get financial risk.

b. What factors may affect the type and extent of an organization’s

exposure to financial risks? (3 marks)

all depends of the nature of business borrows and its underlying business.
Usually the business trying to plan strategies to reduce the financial risk but the
most common are:

 credit risk
 liquidity risk
 operational risk

c. List and describe THREE possible financial risks an organization may

face. (9 marks)

 Funding risk: this have a large volume of borrowers who issue debt
securities. To maintain the prices, and also when the people see it volatile
can be dangerous for investors and others for the impact in cash flows.
 Commodity price risk: a possibility of change the price is high and it can
affect the business depending the financial performance. All depends on
how the commodity prices play in the market.
 Business or operating risk: is affected by internal or external systems that
can be monitored and all depends of the natured of the risk because it can
be natural disaster, human errors, general failure.

2.a. What is liquidity risk? (1 marks)

it is when the business wont has sufficient funds available to pay creditors and
others debts. For other side it can be because the bank terminated borrows with
the business.
 b. List and explain ONE method you may use to measure the
organization’s exposure to liquidity risk. (3 marks)

the directors and managers will need to put all their efforts and take the best
action to maintain their assets and trying to keep the business running to to cover
the business operation and it can able the business to pay their liabilities.

 Safeguard assets: all the business needs to protect their assets to cover
their liabilities.

c. Describe ONE method you may use to manage the liquidity risk. (4
marks)

monitoring controls: can be a good option for the business to identify any risk and
it will allow auditors to monitor the financial operational and how the business is
following the policies and if the business is running efficiently. Might an internal
auditor need to determine if the business is following legal requirements.

3.List and describe THREE ratios you may use to determine effects on liquidity.
(9 marks)
Cash or current ratio: it helps for business to identify assets that are already liquid and
exclude receivables and inventory. It helps the business to understand the way
business can pay off current liabilities.
Current ratio = current assets / current liabilities
Quick ratio: measures the ability of a company to pay their current liabilities, quick ratio
refers to current assets that can be converted in cash before 90 days. Its very important
ratio because can help the business to identify new ways to show quick assets than
liabilities.
Accounts receivables turnover ratio: measures the liability to collect cash from credit
customers. The higher the ratio the faster the cash has been collected for the company.

Accounts receivables turnover ratio= net credit sales/ average net account receivable.

4.The days in inventory ratio and days’ sales in receivables for XYZ Pty Ltd is
 calculated and provided as below:

XYZ Pty Ltd’s ratios Industry average

Days in inventory 72 days 15 days

Days’ sales in receivables 40 days 20 days

Assume that you are the director of XYZ Pty Ltd, what will the above ratios tell
you in regards to magnitude and volatility of organizational risks to determine
extent of risk exposure? What actions may you take to reduce the organization’s
exposure to risk? (6 marks)

Answer

The information before showing that XYZ has a deficit in inventories compared
with the industry overage this can be negative for the business because it means
there are not control of inventory and management will need to implement new
strategies to develop new process to be more effective so the business will offer
better service to their costumers. Also the days for receivables are double that
the industry average and is worse because the business is not collecting cash
and the business cash flow can be affected severely affecting other process of
the business and also it stops the business to pay off their liabilities.

5.There are several ways organizations store, record and update financial
information and data. They include manual systems (hard copy) and
computer-based (electronic) systems. How do computer and manual
systems operate? (6 marks)

Computers produce accurate records and enhance operational efficiency also

with computers business have advantage of operation more fast and secure
decreasing time and costs that help the business to be more efficient in the
process and to get information faster able to be fix in case of something wrong,
automatically tallies amounts, different accounting programs to facilitate process,
record information and set up a secure electronic backup system to secure
records safety. Meanwhile manual systems have a lot of problems starting for the
review the information and fixing data, also secure space for all the manual
 information, record all transactions dates and payment amounts, sort and store
all paperwork monthly.

6.Why is it important for an organization to have an effective internal control in

relation to financial risk measurement and management? (5 marks)

Internal control is very important for the business and more when management is
100 % involve because to optimize production and improve service is reducing
financial risk and controlling everything that might can affect the business that is
why internal control is important just because try to minimize risk in all aspects.
There are some accomplish to follow:

 Safeguard assets to protect liquid from risk to have opportunities to pay off
liabilities.
 Encourage employees to follow organizations policy so everyone will feel
motivate to follow the same goals with the business
 Promote operational efficiency because in most of the cases some
operation can generate waste resources so it is very important for the
business to reduce costs and use the actual resources the best way as
possible and increase business profits.
 Ensure accurate, reliable accounting records: as management needs to
have essential records of all operational moves in the business because
this information will determine the success of the business and how
management can take action to improve and prevent risk.

Steps to follow to achieve internal control objectives

 Monitoring control
 Information system
 Control procedures
 Control environment
 Risk assessment

7.What is working capital? What does the management of working capital

involves? Why is it important for an organization to have an effective and
efficient working capital management? (6 marks)
Working capital can be see as measure of a company liquidity, operational efficiency, it
means when then company has a strong working capital can be a potential to invest
and grow. Working capital is the difference between the current assets and current
liabilities.

Management of working capital involves short term assets and short term liabilities. The
goals are to continues producing and keep operational manners and make sure the
business have sufficient ability to cover short debts and upcoming expenses. This is the
mean reason why management working capital is important for the business to
determine effectiveness of all the process and projects the company is taken on base of
all the information they have been collected and determine risk or no to make a decision
about new projects to help the business grow and the efficiency of this management
capital will determine the advantage of the business in the market and how the business
is reducing risk and grow up production for all of this mentioned before we need to
make sure business is taken part of inventories, accounts receivable and payable and
see the efficacy of the business to cover liabilities and have more possibilities to invest
in new projects.

8.In order to develop risk management strategies, it is very important to assess

financial risk exposure in the early stages of the process. What are the
factors that may affect the risk assessment? (6 marks) Part A total: 59
marks

Usually the business trying to find the way to reduce financial exposure and maximize
their profits. Risk management risk strategies will find or identify the magnitude and
volatility of organizational risk.

The facts that may affect the business or risk assessment can be credit risk
managements and how it can affect the business depending their use and
environmental factors including government rules. For other way other situation can be
market risk management and invest risk management and those can affect the business
depending of interest rate, commodities risk, equity risk, because they can fluctuate
depending of the market. In this case the business will need to check operational risk
management to fix performance and monitor and improve performance.
Part B – Case Study

Assess Financial Risk Exposure and Working Capital Management

Company A

You are given the financial statements of Company A as follow:

  Inventory turnover= costs sales/ average inventory
Average inventory = (inventory 2015 + inventory 2014)/ 2
Inventory turnover = 450000 / 115000 = 3.91
Days in inventory ratio= 365 Days / inventory turnover ratio
=365/3.91 = 93 Days

This information shows us that the other business working in the same industry are having
inventory in about 20 while the company A is taken 93 days to restock and check inventory. It
means the business has some deficient manner to review their products and they might not
how important it can be to be more competitive with other business.

 Account receivable turnover ratio= Net credit dales / average net account receivable
Average net account receivable = account receivable 2015 + 2014
= (150000+100000)/2 =125000
Account receivable turnover ratio = 940000/ 125000 = 7.52
Days sales in receivables = 365 / account receivables turnover ratio
= 365/ 7.52= 49

For the sales in receivables we can see a big difference because the data before show us
receivables turnover ratio of 49 days compare with 25 days’ industry average in the market. In
this order we can conclude that this business needs to improve the amount of days’ receivables
because for the business I n general its very important to have collect the money from the
customers. Its very important to incentive the costumers with new offers to incentive them to
pay faster and punctual

 Debt to equity ratio= total liabilities / total equity

=500000 / 450000 = 1.111

as we understand the equity ratio is the debt financing relative to equity financing is clear that
the lower the equity ratio the better for the business and in this case we see that the industry
average show equity of 2.00 while the company show ratio of 1.111 it means that the business
have control and the debt can be measure and pay off easily.

 Current ratio= current assists / current liabilities

=310000/ 150000 = 2.06

this is the ability to pay current liabilities with current assess and the higher the better for the
business. While the average industry has 2.90 the company show a current ratio of 2.06 it
means the business will need it implement new strategies to improve and control this financial
area so the business can obtain more profit.

 Times interest earned ratio = (profit before tax = interest expenses) / interest expense
(105000 + 50000) / 50000 = 3.1
the number of times profit can cover interest expenses and the higher the better results for the
business and compare with the average industry the business have develop and control this area
that help the business managing the financial periods to cover their liabilities and how it can be
positively affect the business for future investments.

Required:

1. Assume that cash and marketable securities are part of the firm’s operating current assets,
calculate the operating working net working capital for both 2015 and 2014 based on the
information above. (6 marks)
 Working capital management
Working capital= current assets- current liabilities

2014 2015
17753700- 8900000 20251000-9500000
=9553000 =10751000

1. Assume that the sales for 2015 and 2014 are $33,596,875 and $36,742,308 respectively,
calculate operating working capital turnover ratio for both years. (4 marks)

Working capital turnover= sales / operating working capital

2014 2015
36742308/ 9553000 33596875/ 10751000
=3.84 =3.12

3. You are also given the following ratios used in working capital management for Company B:

for I can understand with this information compare with the company This business has a big
problem with the days of inventory because the business supposes to move stock and replace for
new one to supply the costumers and at the same time it will generated more profits but if the
inventory have this deficit can be a poor management and the control of process in the business
can be in high risk to find cash flow. for the other side the day’s receivable is very good for the
business because the process is very effective to motivate people to pay on time and in a short
time, the problem we can see with this information is the days payable because it shows that the
company take too long to pay bills and other liabilities that can generate more interest. For the
same reason we mention before the turn over ratio in very low and it can be for poor
management with inventories. Everything compare with the company The company B will need
to restructure their management and see how the business can change and improve projects
otherwise the company will be in bankrupt. The business does not have a work capital
management and the business may be in crisis and cannot pay their liabilities.