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IB Business > 3 - Finance And Accounts > Flashcards

3 - Finance And Accounts Flashcards

1
Q

Capital expenditure

A

Spending of a firms fixed assets

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2
Q

Fixed assets

A

Something a firm plan me to keep for longer than a year

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3
Q

Revenue expenditure

A

spending on a firms general operational costs

Examples:

  • paying wages and salaries of workers
  • paying suppliers
  • utility bills
  • repaying debts
  • settling tax bills
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4
Q

Internal sources of finance

A
  1. Personal funds
  2. Retained profit - profit kept in the company rather than paid out to shareholders as dividends, money left over after expenses are paid
  3. Sale of assets - selling resources owned by the company which have economic value expressed in dollars.
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5
Q

External sources of finance

A
  1. Share capital - part of the capital that comes from the issuing or selling of shares
  2. Loan capital - money raised from loans but interest needs to be paid
  3. Overdrafts - when you can make a withdrawn for a greater amount then what’s in your bank account, a predetermined agreement
  4. Trade credit - the credit extended by supplies so you can buy now and pay later
  5. Grants - A financial reward given by the government that does not need to be paid back . It’s given to charitable organizations
  6. Subsides - a sum of something granted by the state to help an industry or business keep their price of a commodity or service low
  7. Debt factoring - when a company sells their debts / invoices to a factoring company for a reduced rate
  8. Leasing - a way of renting an asset that the business requires
  9. Venture capital - when companies invests in the business to receiver part ownership of the business to receive dividends
  10. Business angels - private individuals who invest their money into the business in return for ownership and dividends payments
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6
Q

Venture capital

A

when companies invests in the business to receiver part ownership of the business to receive dividends

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7
Q

Business angels

A

private individuals who invest their money into the business in return for ownership and dividends payments

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8
Q

Short term finance

A

Finance than is paid within 12 months

  • trade credit
  • debt factoring
  • leasing
  • subsides
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9
Q

Medium term finance

A

Finance that lasts longer than 1 year but shorter than 5

  • loan capital
  • leasing
  • subsidies
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10
Q

Long term finance

A

Longer than 5 years

  • grants
  • share capital
  • loan capital
  • business angles
  • venture capital
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11
Q

Internal source of finance

A

Money that is raised from the business’s existing assets

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12
Q

External sources of finance

A

Finance that comes from outside the business

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13
Q

Types of costs

A
  1. Fixed - costs does not change in relation to output
  • salaries of staff
  • insurance
  • rent payments
  1. Variable - cost changes in direct relation to output
  • materials
  • packaging
  • piece rate
  1. Semi variable - a cost composed of both fixed and variable costs
    - Mobile phone bills
  2. Direct - those only associated with a single part
  • running costa of a single store
  • staffing costs of a particular section
  1. Indirect / overhead - costs not directly accountable to a object, can be either fixed o variable
  • national advertising campaigns
  • salaries of the board of directors
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14
Q

Revenue

Calculation

A

Income from selling goods and services

Revenue = selling price x output

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15
Q

Revenue streams

A

All the different ways in which a business can generate sales

Movie revenue streams

  1. Food
  2. Tickets
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16
Q

Total contribution

A

How much the whole production line c tribute to covering fixed costs

£5 dollars to make the business and sells it for £7 = £2 contribution

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17
Q

Contribution per unit

A

How much a product contributes to covering fixed costs of a business

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18
Q

Break even chart

A

A business toll that is used to determine how many sales are needed to cover their total costs

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19
Q

Break even quantity

A

The level of output that generate sufficient revenue streams to cover total costs without any profit left

The amount of products a business has to sell to break even

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20
Q

Margin of safety

A

The difference between the break even point and the current level of output.

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21
Q

Break even formula

A

Fixed costs / contribution per unit

  • lowest figure is desirable
  • round up
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22
Q

Contribution per unit formula

A

Selling price - variable cost per unit

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23
Q

Total contribution formula

A

Contribution per unit x output

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24
Q

Margin of safety formula

A

Current level of output - break even point

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25
Q

Predicted profit formula

A

(Output x contribution per unit) - fixed costs

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26
Q

Advantages and Disadvantages of break even analysis

A

Benefits:

  • quick and easy visual
  • banks can ask for it to get loans
  • strategic decision making tool
  • allows companies to set targets
  • calculate what is needed

Limitations:

  • time consuming and each product needs a new graph
  • it’s an assumption not 100% reliable
  • assumes sales revenue is linear
  • assumes all conditions remain the same
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27
Q

Internal stakeholders

A
  • management
  • shareholders and owners
  • employees
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28
Q

External stakeholders

A
  • government
  • competitors
  • suppliers
  • media
  • financiers
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29
Q

Principles of ethics of accounting practice

A
  • ethics
  • integrity
  • objectivity
  • professional behavior
  • confidentiality
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30
Q

Parts of a profit and loss account

A
  • a financial statement of a business’s financial activity usually over a year
  1. The trading account
  2. Profit and loss account
  3. Appropriation account
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31
Q

Explain the part 1 - Trading account

A

Sales revenue
Opening stock
Purchases

Closing stock
Cost of Good Sold (COGS)
Gross profit

Calculations
- COGS = purchases + opening stock - closing stock

  • Gross profit = sales revenue - COGS
  • Revenue = price x quantity
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32
Q

Gross profit

A

Profit made by a company after deducing COGS

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33
Q

COGS formula

A

Opening stock + purchases - closing stock

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34
Q

Gross profit formula

A

Sales revenue - COGS

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35
Q

Revenue formula

A

Price x quantity

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36
Q

Price elastic demand

A

A change in price greatly affects demand. A rise in price for this product decreases demand as its not essential.

  • goods not necessaries
37
Q

Price inelastic demand

A

Change in price does not affect demand as it’s an essential product

38
Q

Ways to increase gross product

A
  • negotiate lower prices from suppliers

- increase promotion

39
Q

Net profit

A

The positive difference between a companies gross profit and its expenses

40
Q

Net profit formula

A

Gross profit - expenses

41
Q

Strategies to increase net profit

A
  • rentals
  • administrative staff salaries
  • utilities
  • office expenses
42
Q

Part 2 - explain a profit and loss account

A

Sales revenue
Cost of goods sold
Gross profit

Less expenses

Net profit before tax

  • interest
  • net profit before tax
  • less tax

Net profit after interest and tax

43
Q

Part 3 - explain an appropriation account

A

Final part of an income statement showing how profits are distributed

Dividends and Retained profit are added under “net profit after interest and tax”

44
Q

Retained profit

A

Profits not paid out as dividends but left in the reserve usually to be reinvested

45
Q

Balance sheets

A

Statement showing the financial income of a business in term of assets, liabilities and owners equity at a particular point in time

It’s made up of three parts:

  1. Assets (what a business owns)
  2. Liabilities ( what a business owes)
  3. Owners equity (capital invested into the business)
46
Q

Assets equation

A

Assets = liabilities + owners equity

47
Q

Assets

A

Items owned by a firm, such as cash or buildings

48
Q

Liabilities

A

Funds owned by a company to other institutions such as banks or suppliers

49
Q

Equity

A

Funds invested in a business by the shareholders plus retained profits

50
Q

Current assets

Fixed assets

A

Current assets - things that can be inverted into cash within 12 months

Examples:

  • cash
  • debtors
  • stock
  • liquid assets

Fixed assets - long term Ireland owned by a company that are not purchased for resale but to contribute to the operations of a business and have a lifespan over 12 months or are not sold within 12 months.

Examples:

  • machinery
  • equipment
  • vehicles
  • illiquid asset
51
Q

Accumulated depreciation

A

Refers to a loss in value of fixed assets over time

52
Q

Debtors

A

Individuals or institutions that owe money to a business

  • assets
53
Q

Stock or inventory

A

Unsold goods, raw materials that the company has at hand at the end of the trading period

54
Q

Current liabilities

A

Funds a company owes to someone that should be paid within 12 months

55
Q

Long term liabilities

A

Funds a company owes individuals that are paid over 12 months

56
Q

Creditors

A

Individuals or organizations a business owes money to

  • liability
57
Q

Net current assets ( working capital) Formula

A

Current assets - current liabilities

58
Q

Draw a balance sheet

A
  1. Company name
  2. Say it’s a balance sheet
  3. Date

Assets
Fixed assets
-
-

Less accumulated depression
Net fixed assets 
Current assets 
- Cash 
- Debtors 
- stock 
Total current assets

-
Total current liabilities

Net current assets ( working capital)

Long term liabilities

Finances by:

59
Q

Intangible assets

A

Non physical items of value owners by a firm that has a life span for over a year

60
Q

Types of intangible assets

A
  1. Patents - legal protection given to an inventor of a product for a number of years
  2. Copyright - legal production given to producers of literacy and artistic such as music and books
  3. Brand - a distinguishable mark
  4. Registered trademark - distinctive mark that a company uses to identify itself
  5. Goodwill - Intangible value of a company derived from its “good nature” in business
61
Q

Depreciation

Causes

A

The loss of value of fixed assets over time

Causes:

  • wear and tear (damage)
  • obsolescence (new versions)
62
Q

Calculating depreciation = straight line method

A
  • the assets will depreciate over a constant rate in its lifetime
  • linear decrease

Formula:

Annual provision of depreciation = purchase price - residual value / estimates useful lifespan

Advantages:
- easy to calculate and apply

Disadvantages
- not accurate

63
Q

Calculating depreciation = reducing / declining method

A
  • fixed asset will decrease by the same percentage each year
  • linear decreasing curve

“Decreases by 20% each time”

Advantages

  • easy to apply and understand
  • more realistic

Disadvantages
- subjective

64
Q

Profitability and performance ratios

A
  • gross profit margin - given formula
  • net profit margin - given formula
  • ROCE - half formula given
65
Q

Gross profit margin

Formula given

A

Shows gross profit as a percentage of sales revenue. It indicates the profitability of the business’ core activities

Formula:
GPM = Gross profit margin / sales revenue x 100

66
Q

Net profit margin

Formula given

A

Shows net profit as a percentage of sales revenue. Important ratio as it shows how well managers can control overhead expenses

NPM = net profit before tax and interest / sales revenue x 100

67
Q

ROCE

Formula - half given, learn capital employed

A

Measures the efficient a form can return the money that was invested

ROCE = net profit before interest and tax / capital employed x 100

Capital employed = long term liabilities + share capital + retained profit

68
Q

Capital employed formula

A

Capital employed = long term liabilities + share capital + retained profits

69
Q

Liquidity ratios

Both formulas given

A

The firms ability to convert short term assets into cash

  • current ratio
  • Acid test ratio

Both formulas given

70
Q

Current ratio

Formula given

A

Firms ability to pay off its short term debts using current assets

Current ratio = current assets / current liabilities

71
Q

Acid test ratio

Formula given

A

Immediate indicator of a firms ability to pay its short term debts

Acid test ratio = current assets - stock / current liabilities

72
Q

Efficiency ratios

Formulas given

A
  • inventory / stock turnover - firms sells stock
  • debtors days - number of days to collect the money
  • creditor days - number of days to settle debts
  • gearing ratio - how much of the business funding comes rom borrowed methods
73
Q

Profit formula

A

Sales revenue - total costs

74
Q

Net cash flow formula

Reasons for bad cash flow

A

Cash inflow - cash outflow

  • poor pricing strategy
  • low sales
  • seasonal demand
  • high expenses
  • overstocking
  • long credit collection
75
Q

The working capital cycle

Formula

A

Is the time from the firms purchase of the stock to the production and sale of good and services and finally reviewing cash payment

Working capital = current assets - current liability

76
Q

Working capital

A
  • money to pay day to day expenses
77
Q

A cash flow forecast

A

Is the prediction of future cash inflows, outflows and net cash flows for a specific period of time

78
Q

Construct a cash flow forecast

A
  • opening balance
  • cash inflows
  • total cash inflows
  • cash outflows
  • total cash outflows
  • net cash flow
  • closing balance
79
Q

Strategies to deal with cash flow problems

A
  • reducing cash outflow
  • improving cash flows
  • looking for additional finances
80
Q

Investment

A

Purchasing assets that potentially yield future financial rewards

81
Q

Investment opportunities

A
  • payback period

- Average rate of return

82
Q

Payback period

Formula

A

Calculates the length of time it takes for capital investment to pay for itself

  1. Payback period = Amount left to pay / net flow in that year x 12

(Net cash flow = cash inflows - cash outflows

83
Q

The average rate of return (ARR)

A

Indicates the annual net return of an investment as a percentage of its capital lost

(Total returns- capital lost) / years of use / capital cost x 100 = _%

84
Q

Net present value

A

Calculates the current value of a projects future cash flow

NPV = sum of present values - cost of investments

85
Q

Budget

A

A tool to help financial planning and is used to set out plans for spending over a period of time

86
Q

A profit center

A

Is a part of a business that contributes to its overall revenue

87
Q

A cost center

A

Is a part of a business that incurs cost but does not contribute to its overall revenue

88
Q

Variances

3 types
Formula

A

A tool used to compare business planned budget expenditure with the actual expenditure over a period of time

Favorable variance - things are better than expected

Adverse variance - things turned out worse than planned

No variance - thing turned out as planned

Variance = actual figure - budget figure

89
Q

Benefits of budgeting

A
  • planning
  • motivation
  • measuring performance
  • communication
  • coordination
  • control

IB Business (6 decks)

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