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A2 Business Specification Cards > 5 - Accounting and finance > Flashcards

5 - Accounting and finance Flashcards

1
Q

sources of short term finance

A
  • overdraft
  • loan
  • trade credit
  • factoring
  • hire purchase
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2
Q

sources of medium term finance

A
  • medium term loan

- leasing

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3
Q

sources of long term finance

A
  • long term loan
  • mortgage
  • share issues
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4
Q

overdraft

A

when money is withdrawn from the bank and the available balance goes below zero, the account is overdrawn. an overdraft is a pre arranged amount that can be withdrawn. interest is only paid on the actual amount overdrawn. ‘safety net’ for businesses

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5
Q

loan

A

loan is granted for a period of time and can be demanded back from the bank if interest payments are not made

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6
Q

trade credit

A

deferring payments to a supplier (wait for the debtors to pay)

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7
Q

factoring

A

sells its debts to pay for things and raise finance

often sold to a factoring company (offer a % of the debt and then own that debt)

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8
Q

hire purchase

A

method of paying for an item in instalments over a period of time, not purchased until the final payment, simply hired
more money will be paid over the period than buying it outright

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9
Q

medium term loan

A

similar to short term loans. interest is determined by, how much is borrowed, how long for etc

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10
Q

leasing

A

payments made in instalments but the business never owns it… only if the owner wishes to sell it
if it breaks down, leasing company must deal with it

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11
Q

long term loan/mortgage

A

amounts of finance are large and the banks require title deeds for security. can adopt a variable or fixed rate mortgage

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12
Q

share issues

A

where a company issues new shares to shareholders ..

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13
Q

fixed costs..

A

costs do not vary with the level of output

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14
Q

variable costs..

A

costs that change with the level of output

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15
Q

direct costs..

A

costs which go directly into the making of a product

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16
Q

indirect costs.. (overheads)

A

costs which do not directly go into the making of a product

tax, wages, electricity, heating

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17
Q

stepped fixed costs..

A

fixed in short term but if production increases may need to purchase another machine - costs have increased

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18
Q

unit costs..

A

cost of producing one unit

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19
Q

unit cost =

A

total cost / output

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20
Q

total cost =

A

fixed costs + variable costs

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21
Q

marginal cost..

A

cost of producing one extra unit

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22
Q

opportunity cost..

A

the loss of other alternatives when one thing is chosen

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23
Q

what are forecasts?

A

estimates of the likely inflows and outflows of cash in a business

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24
Q

what are statements?

A

the actual figures produced once transactions have occurred

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25
Q

reasons for making forecasts?

A
  • valuable for planning
  • helps set prices
  • payment terms can be assessed
  • managers can monitor and act accordingly
  • suppliers and investors can asses the business
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26
Q

limitations of forecasts?

A
  • estimates based on assumption which means they lack accuracy
  • seasonal demand variations
  • competitor behaviour may change
  • changes in; interest rates, economy, technology
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27
Q

liquidity ratios can be used for what?

A

asses the level of cash in a business

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28
Q

what does too little cash mean for a business?

A
  • inability to meet creditor deadlines
  • difficult to buy stock
  • additional loans needed, which leads to more interest
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29
Q

what does too much cash mean for a business?

A
  • wasted opportunity to get stock
  • borrowing costs are unnecessary
  • loss of interest if not invested into the bank
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30
Q

what is ratio analysis?

A

method of measuring business performance

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31
Q

liquidity?

A

ability to convert assets to cash (pay off the short term debts)

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32
Q

current ratio =

def

A

current assets / current liabilities

considers the level of liabilities in relation to assets to see if theres enough cash

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33
Q

acid test ratio =

def

A

current assets - stock / current liabilities

business cannot be certain it will sell all stock therefore this is more reliable

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34
Q

gearing =

def

A

non current liabilities / capital employed x 100

considers risk by comparing levels of debt with equity

> 50% suggests potential problems

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35
Q

interest cover =

def

A

operating profit / interest

used to help decide if a business can afford to repay a loan - higher the better

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36
Q

profitability?

A

level of profits measured against the business

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37
Q

gross profit =

A

total revenue - cost of sales

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38
Q

net profit =

A

gross profit - expenses

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39
Q

gross profit margin =

def

A

gross profit / revenue x 100]

how much of each £1 of sales you keep as gross profit
considers only direct costs

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40
Q

net profit margin =

def

A

net profit / revenue x 100

how much of each £1 of sales is kept as net profit
considers both direct and indirect costs

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41
Q

ROCE =

def

A

operating profit / capital employed x 100

net profit as a % of the capital employed

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42
Q

ROE =

def

A

profit for the year / equity

measures the ability of a business to generate profits from its investments

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43
Q

what is the difference between ROCE and ROE?

A

ROE considers the amount of profit generated from quit y whereas ROCE is better as it takes into account shareholders funds and loans

44
Q

how do you work out capital employed?

A

shares (equity) + non current liabilities

45
Q

what is operating profit?

A

profit before tax and interest

46
Q

efficiency?

A

ability to manage assets and liabilities efficiently

47
Q

asset turnover =

def

A

turnover / non current assets

measures how effectively a business is able to use its non current assets to generate sales revenue

48
Q

stock turnover =

def

A

cost of sales / stock

measures how quickly stock is turned over - higher the better as lower suggests poor stock control

49
Q

debtor collection period =

def

A

debtors / revenue x 365

average time customers take to pay - looking for around 28/30 days

50
Q

how is stock turnover calculated if you want number of days?

A

stock / cost of sales x 365

51
Q

creditor payment period =

def

A

creditors / cost of sales x 365

higher is better - looking for a higher figure than debtor collection period

52
Q

dividend per share =

def

A

total dividends paid / number of shares

higher the better

53
Q

dividend yield =

def

A

dividend per share / share price x 100

look at this when deciding whether to invest in the first place - higher the better

54
Q

earnings per share =

def

A

profit after tax / number of ordinary shares

how much profit each share generates

55
Q

price earnings ratio =

def

A

share price / earnings per share

numer of times the share price can be divided by the EPS - higher the better

56
Q

standard costing?

A

the cost that a business would normally expect for the production of a product

57
Q

what are cost centres?

A

a specific part of the business where costs can be identified and allocated with ease

58
Q

what are profit centres?

A

similar to a cost centre however, profits are ascribed to different parts of the business. From this, the managers can judge which products are the most profitable part of the businesses operations

59
Q

absorption costing?

A

the indirect costs of a business are absorbed by different cost centres.

60
Q

contribution/ marginal costing?

A

a method whereby fixed costs or overheads are ignored and the business considers only the variable costs of production.

61
Q

consistency?

A

all accounts being produced in the same way so info is more accurate

62
Q

going concern?

A

assumes the business is acting ‘normally’

63
Q

objectivity?

A

accounts must be realistic and based on facts, not guesses or opinions

64
Q

materiality?

A

calculating realistic figures

only calculating the assets which are of value to the business

65
Q

prudence?

A

not over stating the businesses financial position

66
Q

realisation?

A

takes place when legal ownership changes hands, not when a payment is made

67
Q

matching?

A

recording a transaction when it occurs, not when payment is received

68
Q

accruel?

A

record when a transaction occurs

69
Q

economic entry assumption?

A

each transaction recorded individually

70
Q

monetary unit assumption?

A

all transactions are quantifiable

71
Q

full disclosure?

A

cannot hide anything

72
Q

time period?

A

usually the financial year/ could be calendar year

73
Q

cost principle?

A

recording the actual cost

74
Q

relevance/ reliability consistency?

A

data must be relevant and reliable

75
Q

conservatism?

A

understate rather than overstate

76
Q

revenue recognition assumption?

A

record when the transaction occurs

77
Q

dividend cover =

A

profit after tax / dividends

78
Q

ways to improve stock turnover?

A
  • sell off slow moving stock
  • lean production methods i.e. JIT
  • negotiate with suppliers
79
Q

what are some ways in which a business chooses to allocate its costs?

A

-

80
Q

ads and disads of cost centres?

A

-

81
Q

ads and disads of standard costing?

A

-

82
Q

ads and disads of profit centres?

A

-

83
Q

ads and disads of absorption costing?

A

-

84
Q

ads and disads of contribution/marginal costing?

A

-

85
Q

what are the 3 types of investment appraisal?

A

ARR average rate of return
Payback
Net present value

86
Q

ARR

A

-

87
Q

ARR

calc

A

average/accounting rate of return
calculates the total return for a project to see if it meets the target return
works out a % based on the initial cost of a good

(total net profit / num of years) / initial costs x 100

88
Q

ads of ARR?

A
  • looks at the whole profitability of a project
  • focuses on profitability
  • can provide a % return which can be compared with a target
89
Q

disads of ARR?

A
  • does not take into account cash flows
  • takes no account of the time value of money
  • treats profits arising late the same as those that arrive early
90
Q

Payback

A

how quickly the cost of an investment is paid back - the longer the payback time the higher the risk

91
Q

ads of payback?

A
  • quick and easy method

- risk of each investment can be compared

92
Q

disads of payback?

A
  • doesn’t measure the profit of investments

- doesn’t look at the changing value of money

93
Q

Net Present Value

A

takes into account the value of money and gives a more realistic measurement of an investment

94
Q

ads of NPV?

A
  • takes into account the value for money
  • more realistic and accurate
  • looks at the cashflow during the life of the project
95
Q

disads of NPV?

A
  • more complicated to measure which takes time and therefore can be more costly
  • only as reliable as the data used
  • doesn’t take into account external factors
96
Q

what is depreciation?

A

when a fixed asset looses its value over time

97
Q

depreciation =

A

initial cost - residual value / life of asset

98
Q

disads of depreciation?

A

-

99
Q

-

A

-

100
Q

what is a budget?

A

-

101
Q

zero bugeting?

A

-

102
Q

flexible budgeting?

A

-

103
Q

whats the point in budgeting?

A

-

104
Q

variance and how to work it out..

A

-

105
Q

income statements..

A

-

106
Q

contribution per unit =

A

price - variable cost per unit

107
Q

total contribution =

A

sales x contribution per unit

A2 Business Specification Cards (10 decks)

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