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Business Studies Flashcards > 5. Financial information and decisions > Flashcards

5. Financial information and decisions Flashcards

1
Q

Hire Purchase.

A

Buying specific goods with a loan, often provided by a finance house.

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2
Q

Leasing.

A

Renting or hiring equipment or property.

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3
Q

Retained Profit.

A

The profit held by a business rather than returning it to the owners.

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4
Q

Short-Term Finance.

A

Money borrowed for one year or less.

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5
Q

Debenture.

A

A long-term loan to a business.

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6
Q

Gearing.

A

The amount of capital raised from loans in relation to the amount raised from the sales of shares.

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7
Q

Long-Term Finance.

A

Money borrowed for more than one year.

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8
Q

Mortgage.

A

Long-term loan secured with property.

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9
Q

Share Capital.

A

Money raised from the sale of shares in a limited company.

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10
Q

Venture Capitalists.

A

Specialists (individuals or financial institutions), which provide funds for businesses, usually in exchange for an equity stake.

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11
Q

Working Capital Cycle.

A

The flow of liquid resources into and out of a business.

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12
Q

Cash Outflows.

A

The flow of money out of a business.

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13
Q

Working Capital.

A

The funds left over to meet day-to- day expenses after current debts have been paid. It is calculated by current assets minus current liabilities.

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14
Q

Budget.

A

A plan that shows how much money a business expects to spend or receive in a specified period.

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15
Q

Cash Flow.

A

the flow of money into and out of a business.

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16
Q

Cash Flow Forecast.

A

The prediction of all expected receipts and expenses of a business over a future time period which shows the expected cash balance at the end of each month.

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17
Q

Cash Inflows.

A

The flow of money into a business.

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18
Q

Liquid Asset.

A

An asset, which is easily changed into cash.

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19
Q

Net Cash Flow.

A

The difference between the cash flowing in and the cash flowing out of a business in a given time period.

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20
Q

Costs.

A

Expenses that must be met when setting up and running a business.

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21
Q

Direct Cost.

A

A cost which can be clearly identified with a particular unit of output.

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22
Q

Fixed Costs.

A

Costs that do not vary with the level of output.

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23
Q

Indirect Cost or Overhead.

A

A cost, which cannot be identified with a particular unit of output. It is incurred by the whole organisation or department.

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24
Q

Total Costs.

A

Fixed cost and variable cost added together.

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25
Q

Total Revenue.

A

The money generated from the sale of output. It is price multiplied by quantity.

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26
Q

Variable Costs.

A

Costs, which rise as output levels are increased.

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27
Q

Break Even.

A

The level of output where total costs & total revenue are exactly the same. Neither a profit nor a loss is made.

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28
Q

Break-Even Chart.

A

A graph, which shows total cost and total revenue. The break-even pint is where total cost and total revenue intersect.

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29
Q

Margin of Safety.

A

The amount of output available to be sold above the break-even point where the business makes a profit.

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30
Q

Distributed Profit.

A

Profit that is returned to the owners of a business.

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31
Q

Dividend.

A

Money paid to shareholders (owners of the business) when profit is distributed.

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32
Q

Gross Profit.

A

Sales revenue less cost of sales.

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33
Q

Net profit.

A

Gross profit less expenses.

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34
Q

Profit.

A

The money left over after all costs have been subtracted from revenue.

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35
Q

Profit and Loss Account or Income Statement.

A

A financial document showing a firm’s income and expenditure in a particular time period.

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36
Q

Profit and Loss Account.

A

Shows how net profit is calculated by subtracting expenses from gross profit.

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37
Q

Profit and Loss Appropriation Account.

A

Shows how the profit after tax is distributed between owners and the business.

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38
Q

Retained Profit.

A

Profit that is kept by the business and may be used in the future.

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39
Q

Trading Account.

A

Shows how gross profit is calculated by subtracting cost of sales from turnover.

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40
Q

Assets.

A

Resources used or owned by the business in production.

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41
Q

Balance Sheet.

A

A summary at a point in time of business assets, liabilities and capital.

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42
Q

Capital.

A

A source of funds provided by the owners of the business used to buy assets.

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43
Q

Current Assets.

A

Assets likely to be changed into cash within a year.

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44
Q

Current Liabilities.

A

Debts that have to be repaid within a year.

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45
Q

Current Liabilities.

A

Debts that have to be repaid within a year.

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46
Q

Drawings.

A

The money taken from the business by the owner for personal use.

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47
Q

Fixed Assets.

A

Assets with a life span of more than one year.

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48
Q

Liabilities.

A

The debts of the business, which provide a source of funds.

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49
Q

Long-Term Liabilities.

A

Debts that are payable after 12 months.

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50
Q

Net Assets.

A

The total at the bottom of the first part of the balance sheet. It is the value of all assets less the value of all liabilities.

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51
Q

Net Current Assets.

A

Current assets minus current liabilities. Also, known as working capital.

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52
Q

Auditing.

A

An accounting procedure, which checks thoroughly the accuracy of a company’s accounts.

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53
Q

Acid Test Ratio.

A

Similar to the current ratio but excludes sticks from current assets. Sometimes called the quick ratio.

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54
Q

Current Ratio.

A

Assesses the firm’s liquidity by dividing current liabilities into current assets.

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55
Q

Gross Profit Margin or Mark-Up.

A

Grossed profit expressed as a percentage of turnover.

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56
Q

Return on Capital Employed (ROCE).

A

The profit of a business as a percentage of the total amount of money used to generate it.

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57
Q

Net Profit Margin.

A

Net profit expressed as a percentage of turnover.

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58
Q

Ratio Analysis.

A

A numerical approach to investigating accounts by comparing two related figures.

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59
Q

Reasons why business need finance

A

Starting up a business
Additional working capital
Expansion of an existing business

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60
Q

Types of sources of finance

A

Internal finance - when the finance is obtained inside a business
External finance - when the finance is obtained outside the business
Long term of finance - finance that is available for more than one year usually used to purchase long term fixed assets
Short term of finance - provides the working capital for the business for its day to day operations

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61
Q

Retained profit definition and advantages/disadvantages

A

Internal source of finance

A share of profit that is reinvested back into the business

does not have to be repaid
no interest needs to be paid
new business wont have retained profits
reinvesting the profits may leave less for the owners

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62
Q

Sales of existing assets

A

Assets that are no longer needed in the business is sold

better use of tied up capital in the business
does not increase debts for the business
takes time to sell
new business don’t have assets to sell

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63
Q

Owners savings

A

Internal source of finance

When the owner invests his/her own money in the business

It should be available to the firm quickly
No interest is paid

Savings may be too low
Risky if the business has unlimited liability

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64
Q

Bank loans

A

External finance, long term finance

A sum of money obtained by the bank which must be repaid and on which interest is payable

Quick to arrange
Can be varying time lengths
Large companies get charge lower interest rates
Bank loan must be repaid eventually + interest
Security or collateral is usually required (if the bank loan is not paid then they can take your assets)
Which is bad for new business as they have to use personal possessions

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65
Q

Factoring debts

A

External finance , short term finance

When an outside business collects your debtors debts immediately and take a small percentage of it

immediate cash is available to the business
the business does not receive 100 percent of the debts

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66
Q

Crowd funding

A

Short term finance, external finance

When people invest/fund a small amount of money via the internet to your business

allows to public reaction to the new business (if people are not prepared to invest then it may not be a good idea)
fast way
easy for new businesses to get some finance
media and interest and publicity need to be generated to increase the chance of success
publicising the new idea may cause others to steal it

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67
Q

Overdraft

A

Short term finance, external finance

When a business has the right to overdraw its bank account and needs to be repaid with interest

interest will be paid only on the amount overdrawn
usually cheaper than the short term loans
interest are variables (not fixed like bank loans)
bank may want the money to be repaid at a very short notice

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68
Q

Trade credit

A

Short term finance,

When a business delays paying its suppliers which leaves the business in a better cash position

almost like an interest free loan to the business
supplier may refuse to supply you if payments aren’t made quickly

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69
Q

Leasing

A

Long term finance,

When the business can use an asset without purchasing for it and pay for it monthly

the business does not have to find a large cash sum to purchase the asset to start with
the care and maintenance is handled by the leasing company
the total costs of leasing charges will be higher than purchasing it

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70
Q

Alternative sources of capital

A

Microfinance
- providing financial services including small loans to poor people not served by traditional banks as they don’t profit over such small loans and they don’t have assets to act as a “security” for the loans

Crowdfunding
- the funding of a projects from lots of people donating small amounts of money to your venture typical via the internet, this method is often used if the traditional methods are not accessible

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71
Q

Why is cash important to a business

A

used to pay workers
production of goods/services will stop
the business may be forced into liquidation
used to pay suppliers (if don’t then suppliers might not sell to you)
## used to pay dividends for public shareholders

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72
Q

What is cash flow

A

The motion of cash through a business over a period of time (inflows and outflows)

Inflows - cash going into the business over a period of time eg: a bank loan
Outflows - the sums of money paid out by a business over a period of time eg: salaries

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73
Q

Profit definitions and equation

A

Profit is the surplus after total costs have been subtracted from revenue

Revenue - total costs

Remember: cash flow is not the same as profit! Profitable business can still run out of cash

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74
Q

Cash flow forecasts definition

A

An estimate of the future cash inflows and outflows in a business showing the excepted cash balance at the end of each month

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75
Q

Cash flow forecasts (definitions of opening/closing balance and net cash flow)

A

Net cash flow - the difference between the inflows and outflows at the end of each month
Closing balance - the amount of cash held by the business at the end of each month (it becomes the opening balance the next month)
Opening balance - the amount of cash held by the business at the start of each month

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76
Q

Importance of cash flow forecasts

A

shows how much cash is available to paying bills
helps predict cash for starting a new business
whether the business is holding to much cash which could be used for a profitable use

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77
Q

Equations used in cash flow forecast

A

Net cash flow + closing balance = opening balance
Inflows - out flows = net cash flows

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78
Q

Working capital definition and equation

A

The capital available to a business in short term to pay for day to day expenses

Working capital = current assets - current liabilities

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79
Q

Methods to overcome a cash flow product

A

Increasing bank loans,
Delaying payments to suppliers
Asking debtors to pay faster
Delay or cancel purchases of capital equipment

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80
Q

Name the sources of short-term finance.

A

Overdrafts
Trade credit
Factoring of debts

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81
Q

What are overdrafts?

A

when the bank allows you to spend more money than is in your account

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82
Q

Advantages + disadvantages of overdrafts

A

ads:
interest will be paid only on the amount overdrawn

disads:
interest rates are variable

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83
Q

What is trade credit?

A

A business delays payment to suppliers

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84
Q

Advantages + disadvantages of trade credit.

A

ads:
Almost an interest free loan

disads:
The supplier may refuse discounts

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85
Q

What is factoring of debts?

A

A specialist agent buys the claims on debtors (people who owe the business money) giving the business immediate cash

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86
Q

Advantages + disadvantages of

A

ads:
The collection of debt becomes the problem of the factor and not the business

disads:
The firm does not receive 100% of the value of its debts

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87
Q

Name the sources of long-term finance.

A

bank loans
hire purchase
leasing
issue of shares
long-term loans or debt finance
debentures

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88
Q

What are bank loans?

A

Loan that is payable to the bank over a fixed period of time

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89
Q

Advantages + disadvantages of bank loans

A

ads:
Quick to arrange

disads:
Security or collateral is usually required
Interest must be paid (Revenue -> working capital)

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90
Q

What is hire purchasing? How is it different to leasing?

A

Buying a fixed asset immediately but paying for it over a period of time with interest
Different to Leasing - the property belongs to the company after paying for the last payment

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91
Q

Advantages + disadvantages of hire purchase

A

ads:
The firm doesn’t need large sums of cash to purchase the asset

disads:
High interest payments

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92
Q

What is leasing? How is it different to hire purchase?

A

Using an asset without purchasing it, just paying a monthly sum to use it
Different to Hire Purchase - the company can never own the asset

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92
Q

Advantages + disadvantages of hire purchase.

A

ads:
The care and maintenance of the asset is carried out by the leasing company

disads:
Total cost of leasing is higher than purchase

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92
Q

What is issue of shares?

A

Equity finance for limited companies only (shares are part ownership of the business)

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93
Q

Advantages + disadvantages of issue of shares.

A

ads:
No interest has to be paid

disads:
Dividends will be expected (Dividend is a share of the profit made by the business)

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94
Q

What are long-term loans or debt finance?

A

Borrowing large sums of money that has to be paid over a long period of time

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95
Q

Advantages + disadvantages of long-term loans or debt finance.

A

ads:
Can be used to raise very long term finance, up to 25 years

disads:
Interest must be paid
(the longer the term of finance, the more interest you have to pay)

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96
Q

What are debentures?

A

Long term loan certificates issued by limited companies

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97
Q

Advantages + disadvantages of debentures.

A

ads:
Can be used to raise very long term finance, up to 25 years

disads:
Interest must be paid

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98
Q

Name the internal sources of finance.

A

retained profit
sale of existing assets
sale of inventories to reduce inventory levels
owners retained savings

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99
Q

What is retained profit?

A

the profit kept in the business after the owners and shareholders have taken their share

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100
Q

Advantages + disadvantages of retained profit

A

ads:
Does not have to be repaid
No interest to pay

disads:
New business have no retained profits
Profits might be too low to finance the expansion
Keeping profits reduce payments to owners

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101
Q

What is sale of existing assets?

A

items of value that are no longer required by business

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102
Q

Advantages + disadvantages of sale of existing assets

A

ads:
Makes use of capital tied up
Does not increase debts

disads:
Take time to sell => amount not certain
Not available for new businesses

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103
Q

What is sale of inventories to reduce inventory levels?

A

inventories can be sold to reduce levels

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104
Q

Advantages + disadvantages of sale of inventories to reduce inventory levels

A

ads:
Reduce opportunity cost and storage cost

disads:
Done carefully to avoid not satisfying demand

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105
Q

What are owners’ retained savings?

A

a sole trader or partnership member can put own savings into business

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106
Q

Advantages + disadvantages of owners retained savings

A

ads:
Should be available to firm quickly
No interest paid

disads:
Savings may be too low
Increases risk taken by owners

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107
Q

Name the external sources of finance.

A

issue of shares
bank loans
selling debentures
factoring debts
grants and subsidies
micro-finance

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108
Q

What is issue of shares?

A

Shares can be issued by limited companies

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109
Q

Advantages + disadvantages of issue of shares

A

ads:
No interest paid
Permanent source of capital => not repaid

disads:
Dividends expected by shareholders
Ownership of company could change

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110
Q

What are bank loans?

A

Money borrowed from banks

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111
Q

Advantages + disadvantages of bank loans

A

ads:
Quick to arrange
Large companies often offered low rates of interests

disads:
Bank loan repaid + interest

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112
Q

What is selling debentures?

A

Long-term loan certificates issued by limited companies

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113
Q

Advantages + disadvantages of selling debentures

A

ads:
Can be used to raise very long-term finance

disads:
Must be repaid with interest

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114
Q

What is factoring debts?

A

Specialist agencies (debt factors) buy business debts - this gives the business immediate cash

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115
Q

Advantages + disadvantages of factoring debts

A

ads:
Immediate cash is available to business
Risk of collecting debt becomes factors

disads:
Firm does not receive 100% of its value + debts

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116
Q

What are grants and subsidies?

A

Outside agencies may lend the business money

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117
Q

What is micro-finance?

A

the lending of small amounts of money at low interest to new businesses

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118
Q

Advantages + disadvantages of grants and subsidies

A

ads:
Grants don’t have to be repaid

disads:
Often given with “strings attached”

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118
Q

Advantages + disadvantages of grants and subsidies

A

ads:
Grants don’t have to be repaid

disads:
Often given with “strings attached”

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119
Q

Advantages + disadvantages of micro-finance

A

ads:
Available to meet needs of poor people/ entrepreneur

disads:
Lending conditions are limited (potential high demand)

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120
Q

What is finance?

A

a sum of money for use in a business, which is set aside for a particular reason.

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121
Q

Why do businesses need finance?

A

Setting up the business
Running up the business on a day-to-day basis
Expanding the business.

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122
Q

What is a cash-flow forecast?

A

An estimate of the future cash inflows and outflows of a business

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123
Q

Why is cash important?

A

because it needs to be able to make payments to suppliers, production process, rent, wages etc.

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124
Q

How to calculate net cash flow?

A

inflows - outflows

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125
Q

How to calculate closing balance?

A

opening balance + net cash flow

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126
Q

How to overcome short-term cash-flow problems?

A

Ask trade receivables to pay for more goods more quickly by offering discounts to customers
Negotiate longer credit terms with suppliers
Delay the purchase of non-current assets until the cash flow improves
Find other sources of finance for the purchase of non-current assets

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127
Q

What is working capital?

A

measure the liquidity of the business
-> liquidity is the ability of a business to pay its short term debts.

Working capital is important for day-to-day expenses such as wages, buying raw materials etc.

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128
Q

What does the length of the capital cycle depend on?

A

The level of inventories held by a business and how quickly suppliers are paid
How long it takes to produce goods for sale
How quickly business finds buyers for its products
Length of credit sales

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129
Q

What is profit?

A

a reward to business owners for the risk they take in investing their capital into the business

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130
Q

What are profits used to?

A

Measure success of a business
Measure performance of managers
Decide whether or not to continue making or selling a product
Finance purchase of non-current assets, expand business etc.
Attract investors who will provide additional funds for business

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131
Q

Gross profit?

A

Revenue - cost of sales

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132
Q

Profit?

A

Revenue - total sales

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133
Q

Retained profit?

A

Profit after expenses, taxes and dividends have been paid. Profit that is ploughed back into the business

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134
Q

Revenue

A

selling price * quantity sold

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135
Q

What are the differences between profit and cash?

A

Money invested in businesses increases cash but not profit
Capital expenditure decreases cash but does not decrease profit

Cash is important for the business at all times
Profit is more important for the long-term success of the business

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136
Q

What is an ‘income statement’?

A

Financial record of the business’s profits, costs and revenue over a given period of time

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137
Q

Shareholders/owners

A

Profit after tax belongs to the owner/shareholders

→ see how much they earned for their investment in business

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138
Q

Employees

A

High profit increases job security
Employees might expect to receive a good pay rise if a business is making good levels of profit
Some businesses have profit-sharing schemes, so high profits means high shares of profits for employees

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139
Q

Lenders

A

They want to be sure that profit is enough to pay interest on loans
Is business earning enough profit to be able to repay loans when due?

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140
Q

Government

A

Higher the profit, the more tax the government will receive

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141
Q

Suppliers

A

A firm that is profitable will continue to purchase raw materials and other supplies, which helps supplier earn profit

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142
Q

Managers

A

They can compare profit from one year to next or with competitor’s profits to measure performance of business
Retained profit is an important source of finance for businesses

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143
Q

Shareholders

A

Usually higher the profit higher the dividend payment

Market value of shares will often rise or fall depending on high or low profits earned

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144
Q

What are ‘shareholder’s funds’?

A

Funds/money invested into the business by the owners

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145
Q

What is a ‘balance sheet’?

A

an accounting statement that records owner’s equity, assets and liabilities of a business at a particular date

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146
Q

What are ‘assets’?

A

resources owned by the business

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147
Q

What are ‘liabilities’?

A

debts and payments that will have to be paid in the future

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148
Q

What are ‘current assets’?

A

resources that a business expects to turn to cash before the date of the next balance sheet

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149
Q

What are ‘non-current assets’?

A

resources that a business does not expect to turn into cash within a year

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150
Q

What are ‘current liabilities’?

A

debts and payments a business expects to pay before the date of the next balance sheet

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151
Q

What are ‘non-current liabilities’?

A

debts and payments business expects to pay after more than a year

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152
Q

What is ‘owner’s equity’?

A

money a business owes to its investors which includes capital and retained profit

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153
Q

start-up capital

A

the capital needed by an entrepreneur when first starting a business

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154
Q

working capital

A

the capital needed to finance day-to-day running expenses and pay the short-term debts of a business

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155
Q

non-current (fixed) assets

A

resources owned by a business which will be used for a period longer than one year, for example buildings or machinery

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156
Q

capital expenditure

A

spending by a business on non-current assets such as machinery and buildings

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157
Q

long-term finance

A

debt or equity used to finance the purchase of non-current assets or finance expansion plans. long-term debt is borrowing a business does not expect to repay in less than five years

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158
Q

short-term finance

A

loans or debts that a business expects to pay back within one year

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159
Q

retained profit

A

profit remaining after all expenses, tax, and dividends have been paid and which is ploughed back into the business

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160
Q

overdraft

A

an agreement with the bank which allows a business to spend more money than it has in its account up to an agreed limit. the loan has to be repaid within 12 months

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161
Q

trade receivables

A

amount owed to a business by its customers who bought goods on credit

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162
Q

debt factoring

A

selling trade receivables to improve business liquidity

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163
Q

bank loan

A

provision of finance by a bank which the business will repay with interest over an agreed period of time

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164
Q

leasing

A

obtaining the use of a non-current asset by paying a fixed amount per time period or a fixed period of time. ownership remains with the leasing company

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165
Q

hire purchase

A

the purchase of an asset by paying a fixed repayment amount per time period over an agreed period of time. the asset is owned by the purchasing company on completion of the final repayment

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166
Q

mortgage

A

a long-term loan used for the purchase of land or buildings

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167
Q

debenture

A

a bond issued by a company to raise long-term finance usually at a fixed rate of interest

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168
Q

share issue

A

a source of permanent capital available to limited liability companies

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169
Q

equity finance

A

permanent finance provided by the owners of a limited company

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170
Q

micro-finance

A

small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain. these loans are usually repaid after a relatively short period of time

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171
Q

crowd-funding

A

financing a business idea by obtaining small amounts of capital from a large number of people, most often using the internet and social media networks

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172
Q

cash-flow forecast

A

an estimate of the future cash inflows and outflows of a business

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173
Q

net cash flow

A

cash inflow minus cash outflow

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174
Q

liquidity

A

the ability of a business to pay its short-term debts

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175
Q

credit sales

A

goods sold to customers who will pay for these at an agreed date in the future

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176
Q

gross profit

A

the difference between revenue and cost of sales

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177
Q

profit

A

the difference bewteen revenue and total costs

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178
Q

total costs

A

cost of sales plus expenses

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179
Q

revenue

A

the amount earned from the sale of products

180
Q

cost of sales

A

the cost of purchasing the goods used to make the products sold

181
Q

expenses

A

day-to-day operating expenses of a business

182
Q

income statement

A

a financial statement which records the reveneue, costs, and profits of a business for a given period of time

183
Q

income statement

A

a financial statement which records the reveneue, costs, and profits of a business for a given period of time

184
Q

statement of financial position

A

an accounting statement that records the assets, liabilities, and owners’ equity of a business at a particular date

185
Q

assets

A

resources that are owned by a business

186
Q

liabilities

A

debts of the business that will have to be paid sometime in the future

187
Q

non-current (fixed) assets

A

resources that a business owns and expects to use for more than one year

188
Q

current asset

A

resources that the business owns and expects to convert into cash before the date of the next statement of financial position

189
Q

trade receivables

A

the amount of money owed to the business by customers who have been sold goods on credit

190
Q

current liabilities

A

debts of the business which it expects to pay before the date of the next statement of financial position

191
Q

trade payables

A

the amount a business owes to its suppliers for goods bought on credit

192
Q

non-current liabilities

A

debts of the business which will be payable after more than one year

193
Q

owner’s equity

A

the amount owned by the business to its owners; includes capital and retained profits

194
Q

shareholder’s equity (funds)

A

alternative term for owner’s equity, but can only be used in limited liability companies

195
Q

gross profit margin %

A

ratio between gross profit and revenue

196
Q

profit margin %

A

ratio between profit before tax and revenue

197
Q

profit margin %

A

ratio between profit before tax and revenue

198
Q

adding value

A

selling a product for more than it costs to produce it

199
Q

return on capital employed (ROCE)

A

ratio between profit before tax and capital employed

200
Q

liquidity

A

the ability of a business to pay its short-term debts

201
Q

current ratio

A

ratio between current assets and current liabilities

202
Q

acid test ratio

A

ratio between liquid assets and current liabilities

203
Q

quantative factors

A

financial factors and numerical outcomes

204
Q

qualitative factors

A

non-financial factors and looking beyond numerical outcomes of the business and to assets etc.

205
Q

examples of quantitative factors

A

cost of site
transport costs
market potential
government incentives

206
Q

examples of qualitative factors

A

size of available site
legal restrictions
quality of local infrastructure
ethical issues and concerns

207
Q

overdraft

A

an agreement with the bank which allows a business to spend more money than they have in its account up to an agreed limit. the loan has to be repaid within 12 months

208
Q

trade credit

A

a business does not always have to pay their bills as soon as they recieve them but they are given period of credit, normally around 30-60 days.

209
Q

personal savings / owners capital

A

this involves using the owner’s savings. this is good because they do not have to pay any interest. however, there is an opportunity cost with this option.

210
Q

venture capital

A

money invested into the business in exchange for part ownership of the business. the person investing tends to be a successful entrepreneur.

211
Q

share capital

A

money invested into the business by selling shares either on the stock exchange or to friends and family.

212
Q

loans

A

money borrowed from the bank in the long term. the business will have to pay back interest on top of the money they have borrowed.

213
Q

retained profit

A

profit remaining after all expenses, tax and dividends have been paid. profit which is ploughed back into the business

214
Q

crowd funding

A

this is when a large number of people each pay a small amount of money to the business.

215
Q

internal funding

A

funds found within the business

216
Q

external funding

A

funds found from outside the business

217
Q

working capital

A

this is the amount of money available for the day to day running of the business, referred to as the difference between current assets and current liabilities

218
Q

debt factoring

A

selling trade receivables to improve business liquidity

219
Q

sale and leaseback

A

obtaining the use of a non-current asset by paying a fixed amount per time period for a fixed period of time. ownership remains with the leasing company

220
Q

debenture

A

bonds issued by companies to raise long term finance usually at a fixed rate of interest.

221
Q

debenture

A

bonds issued by companies to raise long term finance usually at a fixed rate of interest.

222
Q

hire purchase

A

the purchase of an asset by paying a fixed repayment amount per time period over an agreed period of time. the asset is owned by the purchasing company on completion of the final repayment.

223
Q

micro-finance

A

small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain. these loans are usually repaid after a relatively short period of time.

224
Q

micro-credit

A

the provision of small-scale loans to the poor for example by credit unions.

225
Q

micro-savings

A

for example, voluntary local savings clubs provided by charities

226
Q

micro-insurance

A

especially for people and businesses not traditionally served by commercial insurance
business - a safety net to prevent people from falling back into extreme poverty.

227
Q

remittance management

A

managing remittance payments sent from one country to another including, for example, transfer payments made through mobile phone solutions.

228
Q

Who usually performs better as clients of micro finance and why?

A

Women, their participation has more desirable long term development outcomes.

229
Q

start up capital definition

A

the capital needed by an entrepreneur when first setting up a business

230
Q

working capital definition

A

the capital needed to finance the day to day running expenses and pay short-term debts of the business

231
Q

non current fixed assets definition

A

resources owned by a business which will be used for a period longer than one year, for example buildings and machinery

232
Q

capital expenditure definition

A

spending by a business on non-current assets such as machinery or buildings

233
Q

why do businesses need finance

A

to set up the business
to pay day to day expenses like wages, suppliers and fuel.
to purchase buildings and other non-current fixed assets
to invest in the latest technology
to finance expansion
to finance R&D

234
Q

long term finance definition

A

debt or equity used to finance the purchase of non current assets or finance expansion plans. long term debt is borrowing a business does not expect to repay in less than five years

235
Q

short term finance definition

A

loans or debt that the business expects to pay back within one year

236
Q

why do sole traders and partnerships not use loans often

A

they are often considered by lenders to be too high risk

237
Q

how can business use some of their working capital to finance capital expenditure

A

using cash balances (keeping enough for the day to day running of the business)
reducing inventory levels (less warehouse costs)
reducing trade receivables

238
Q

what are the three types of short term external finance

A

overdraft
trade credit
debt factoring

239
Q

what are the six types of long term external finance

A

bank loan
hire purchase
leasing
mortgage
debenture
share issue

240
Q

what are the limitations of taking longer to pay the supplier in order to have more money available for longer

A

any early payment discount will be lost
the supplier may refuse further deliveries to the business until the outstanding payment has been made
if delayed payment occurs too often, then the supplier may demand payment before delivery.

241
Q

trade recievables definition

A

amount owed to a business by its customers who bought goods on credit

242
Q

bank loan definition

A

provision of finance by a bank which the business will repay with interest over an agreed period of time

243
Q

bank loans are offered with a _______ or ________ rate of interest

A

fixed or variable

244
Q

advantage of a fixed rate of interest as opposed to a variable rate

A

it will not change depending on economic factors

245
Q

mortgage definition

A

long term loans used for the purchase of land or buildings

246
Q

share issue definition

A

source of permanent capital available to limited liability companies

247
Q

equity finance definition

A

permanent finance provided by the owners of a limited company

248
Q

what type of companies can use share issue

A

public/private limited companiees

249
Q

a company can offer to sell shares up to a maximum number. this is called…

A

authorised share capital

250
Q

who can private limited companies sell shares to

A

existing shareholders or private investors (not to public)

251
Q

who can public limited companies offer shares to

A

the general public

252
Q

does the money raised through a share issue have to be repaid

A

no it becomes permenant capital

253
Q

benefit of debt financing for long term finance

A

does not change the ownership of the company. leaders have no say in the running of the company

254
Q

benefit of equity financing for long term finance

A

it never has to be repaid. there is no ongoing cost. if the business makes a loss it does not have to pau dividends to shareholders.

255
Q

limitation of debt financing for long term finance

A

interest is charged on the amount borrowed and this increases business costs. interest must be paid even of the business makes a loss. the amount borrowed must be repaid.

256
Q

limitation of equity financing for long term finance

A

the increase in shareholders ‘dilutes’ the ownership of the company. producing a prospectus to offer the shares for sale is expensive.

257
Q

factors influencing the choice of finance

A

size and legal form of business (e.g. sole traders and smaller businesses unlikely to get loans)
amount required (large = share issues or debenture, small = bank loans or leasing and hire purchase)
length of time (long term = debentures or share issues, short term = overdraft)
existing borrowing (if the business already has existing borrowing, then borrowing again will be harder.

258
Q

net cash flow

A

cash inflow minus cash outflow

259
Q

what is positive cash flow

A

when the cash inflow is greater than the cash outflow

260
Q

what is negative cash flow

A

when the cash inflow is less than the cash outflow

261
Q

why is having a greater cash inflow and smaller cash outflow better than having a small cash inflow and large cash outflow

A

any temporary cash shortage may cause problems for the business and result in an increase in borrowing costs

262
Q

what do businesses need to prevent a negative cash flow

A

an accurate forecast of the size and timing of cash inflows and outflows. this enables businesses to identify any future periods where cash shortages may occur

263
Q

what should a business do as a result of a negative cash flow

A

the managers need to increase the inflows or reduce the outflows

264
Q

how to finance a short term cash shortage

A

ask trade receivables to pay more for goods more quickly by offering discounts to customers who have been sold goods on credit.
negotiate longer credit terms with suppliers
delay the purchase of non - current assets until the cash flow improves.

265
Q

why do businesses need cash

A

to pay wages
to pay suppliers
for rent, heating, lighting and other costs

266
Q

cash flow forecast def

A

an estimate of the future cash inflows and outflows of the business

267
Q

net cash flow def

A

cash inflow - cash outflow

268
Q

what does a cash flow forecast aim to do

A

it enables businesses to identify any future time periods when cash shortages may occur.

269
Q

how can a business finance a short term cash shortage

A

ask trade receivables to pay more for goods more quickly by offering discounts
negotiate longer credit terms with suppliers
delay the purchase of non-current assets until the cash flow improves
find other sources of finance for the purchase of non-current assets

270
Q

liquidity def

A

the ability of a business to pay its short term debts

271
Q

a business which does not have enough working capital will be

A

illiquid

272
Q

what is the working capital cycle

A

the time it takes from buying raw materials, making these into goods for sale, finding buyers for finished goods, and then receiving payment from customers.

273
Q

credit sales def

A

goods sold to customers who will pay for these at an agreed rate in the future

274
Q

what does the length of the working capital cycle depend on

A

level of inventories held by a business
how long production takes
how quickly buyers are found
the length of the credit period given to customers

275
Q

how can a business improve it’s working capital

A

reducing inventory levels
negotiating longer credit terms with suppliers
reducing the amount of time it takes to receive customer payments.

276
Q

gross profit def

A

the difference between revenue and cost of sales

277
Q

profit def

A

the difference between revenue and total costs

278
Q

total costs

A

costs of sales plus expenses

279
Q

revenue def

A

the amount earned from the sale of products

280
Q

profit =

A

revenue - total costs

281
Q

cost of sales def

A

the cost of purchasing the goods used to make the products sold

282
Q

expenses def

A

day-to-day operating expenses of the business

283
Q

gross profit =

A

revenue - cost of sales

284
Q

profit (2) =

A

gross profit - expenses

285
Q

revenue =

A

selling price x quantity sold

286
Q

the total cost of a business supplying its goods and services can be divided into

A

cost of sales and expenses

287
Q

what is profit used for

A

measuring sucess of a business
measuring success of a manager
decision-making on whether to continue a product or not
finance the purchase of non-current assets, expansion
attract investors who will provide the additional funds needed to finance business expansion

288
Q

give differences between cash and profit

A

money invested or borrowed increases cash but not profit
capital expenditure decreases cash but not profit
sales of goods on credit increases profit but cash does not increase until payment is received.

289
Q

which is more important for the business long term, cash or profit

A

profit

290
Q

which is more important for the business short term, cash or profit

A

cash

291
Q

income statement def

A

financial statement which records the revenue, costs and profits of a business for a given period of time

292
Q

when does an income statement have to be produced

A

legally once a year, but may be produced more for managerial use

293
Q

what is the most important figure on an income statement for stakeholder groups

A

profit

294
Q

use of income statements to owners/shareholders

A

profit after tax belongs to them.

295
Q

use of income statements to shareholders

A

usually the higher the profit the higher the dividends

the market value of shares may rise or fall

296
Q

use of income statements to employees

A

high profit increases job security
can evaluate salary as compared to profit
profit sharing schemes

297
Q

use of income statements to lenders

A

want to be sure that profit is enough to pay interest and the amount borrowed back

298
Q

use of income statements to the government

A

the higher the profit the higher the tax recieved by the government wil be

299
Q

use of income statements to suppliers

A

profitable firms will continue to purchase supplies

300
Q

use of income statements to managers

A

can compare profit with a past profit or with competitors

retained profit is an important source of finance.

301
Q

balance sheet def

A

an accounting sheet that records the assets, liabilites and owners’ equity of a business at a paticular date

302
Q

assets

A

resources that are owned by the business

303
Q

liabilities

A

debts of the business that wll have to be repaid sometimes in the future

304
Q

non-currerent (or fixed) assets

A

resources that a business owns and expects to use for more than one year

305
Q

examples of non-current (or fixed) assets

A

land, buildings, machinery, computers and motor vehicles

306
Q

current assets def

A

resources that the business owns and expects to convert into cash before the date of the next balance sheet

307
Q

trade recieveable

A

the amount of money owed to the business by customers who have been sold goods on credit

308
Q

current liabilities

A

debts of the business which it expects to pay before the date of the next balance sheet

309
Q

trade payable

A

the amount a business owes to its suppliers for goods bought on credit

310
Q

non-current liabilities

A

debts of the business which will be pauable after more than one year

311
Q

owner’s equity

A

the amount owed by the business to its owners; includes capital and retained profit

312
Q

shareholder’s equity (funds)

A

alternative term for owner’s equity, but can only be used by limited liability companies

313
Q

what does a balance sheet show

A

the assets the business owns
what the business is owed
what the business owes
how the business finances its activites.

314
Q

how often must a balance sheet produced

A

once a year

315
Q

how often must an income statement produced

A

once a year

316
Q

internal sources of finance

A

owners savings
retained profits
sale of non current fixed assets
use some of the business’’s working capital

317
Q

debt-factoring def

A

selling trade recievables to improve busines liquidity

318
Q

leasing def

A

obtaining the use of non-current asset by paying a fixed amount per time period of time. ownership remains with leasing company

319
Q

why should a business check its performance regularly

A

identify strengths and weaknesses
show whether the business is meeting its objectives
improve future business performance

320
Q

which ratios are used to measure a business’ profitability

A

gross profit margin
profit margin
return on capital employed

321
Q

gross profit margin % =

A

(gross profit / revenue) x 100

322
Q

what does gross profit % margin show

A

gross profit as a percentage of revenue

how much gross profit is earned per $1 of revenue

323
Q

gross profit margin def

A

ratio between gross profit and revenue

324
Q

gross profit def

A

difference between revenue and cost of sales (revenue - cost of sales)

325
Q

profit margin def

A

ratio between profit before tax and revenue

326
Q

profit margin % =

A

(profit/revenue) x 100

327
Q

how does a business improve its gross profit

A

increasing revenue without a similar cost in sales - increase in price
reducing cost of sales without similar reduce in revenue - achieved through buying cheaper supplies

328
Q

adding value def

A

selling a product for more than it cost to produce it

329
Q

what does gross profit ratio measure

A

the amount of profit made for every $1 of revenue

330
Q

what does profit ratio measure

A

the amount of profit made for every $1 revenue after allowing for expenses

331
Q

profit def

A

difference between revenue and total costs

= revenue - (cost of sales + expenses)

332
Q

capital employed

A

the amount invested in the business by the owners.

333
Q

return on capital employed =

A

(profit/capital employed) x 100

334
Q

what does it mean if the ROCE increases from one year to the next, or is higher than competitors

A

the business’s profitability has improved

335
Q

what does ROCE tell us

A

how much profit is earnt for every $1 invested in the business

336
Q

what is capital employed usually used to buy

A

profit earning assets such as buildings and machinery

337
Q

liquidity def

A

the ability of a business to pay its short term debts

338
Q

what does liquidity mean

A

a business’s access to cash

339
Q

how do you monitor a business’s liquidity

A

current ratio

acid test ratio

340
Q

what does the current ratio show

A

the ratio between current assets and current liabilities

341
Q

current ratio =

A

current assets / current liabilities

342
Q

what is the acid test ratio

A

ratio between liquid assets and current liabilities

343
Q

problems with the current ratio

A

some current assets are more difficult to turn into cash than others

344
Q

why are inventories the least liquid of the current assets

A

the finished goods inventories have to be sold

when they are sold on credit, the business has to wait for customers to pay.

345
Q

acid test ratio =

A

(current assets - inventories) / current liabilities

346
Q

what does the acid test ratio do that the current asset ratio doesnt

A

it excludes inventories from current assets. this means it is a better measure of a business’s liquidity.

347
Q

how do owners/shareholders use accounts

A

Whether they are getting a good return on their investment.

348
Q

how do potential investors use accounts

A

Interested in the profits and return they might expect to recieve from their investment.

349
Q

how do managers use accounts

A

Responsible for runnning of business so will want to know if financial objectives have been achieved.

350
Q

how do employees use accounts

A

Interested in profitability and job security. Could use figures to support claims for higher wages.

351
Q

how do trade payables use accounts

A

Suppliers can ensure the business is able to pay them back. Interested in liquidity. Will help them to increase their own revenue and profits.

352
Q

how does the government use accounts

A

Companies have to pay tax, so the higher the progits the higher the tax revenue recieved by government. Expanding companies will also provide employment.

353
Q

how do customers use accounts

A

Want to know that business will continue supplying them with goods and services meeting their needs and wants.

354
Q

how do lenders use accounts

A

Banks and other lenders will want to know they will recieve interest on money loaned. Interested in profits and liquidity.

355
Q

revenue =

A

selling price x quantity sold

356
Q

profit =

A

gross profit - expenses

357
Q

net cash flow =

A

inflows - outflows

358
Q

closing balance =

A

net cash flow + opening balance

359
Q

break even units =

A

fixed costs/(selling price - variable costs)

360
Q

How is profit made

A

Profit = revenue - total costs

Therefore reducing costs and increasing revenue will increase profits

361
Q

What is an income statement

A

Is financial statement that records the income of business and all its costs over period of time

362
Q

Revenue definition and equation

A

Revenue is the income to business during a period of time from sales of goods and services

Price x quantity sold

363
Q

Cost of sales

A

Cost of sales also known as variable costs is the cost of production of goods services sold by the business which varies on how many goods and services you make and provided

364
Q

Gross profit definition and equation

A

Gross profit is the money you have left after paying for the things you sold to customers.

Revenue - costs of sales = gross profit

365
Q

Net profit

A

The profit made by a business after all costs have been deducted from the revenue

Gross profit - expenses = net profit

366
Q

Income statement

A

Revenue - 1250
Cost sales - 900

1250 - 900 = 350 = gross profit

Expenses - 155

350 - 155 = 195 = net profit

367
Q

GPM - gross profit margin definition and equation

A

A main profitability ratio it tells you what your business made after paying for the direct cost of doing business

Gross profit / revenue x 100 = (percentage)

368
Q

NPM - net profit margin

A

One of the main profitability ratios it measures how much net income or profit is generated as a percentage of revenue

Net profit/ revenue x 100 = net profit margin

369
Q

What is profitability

A

The measure of how quickly and efficient we can make profit we use profitability ratios to help us analyse the business performance and to compare it to other businesses

370
Q

Balance sheet

A

Shows the value of a business assets and liabilities at a particular time
It also shows what the company is financed by

371
Q

Assets definition and types

A

Assets - items of value which are owned by the business

Types
- non current/fixed assets
- current assets

372
Q

Fixed assets definition and examples

A

Items that are owned by the business for more than twelve months and are hard to turn into cash eg: machinery

373
Q

Current assets

A

Items that are held by the business for less than twelve months easier to turn into cash eg: products/goods

374
Q

Liabilities definition and examples

A

Debts owed by the business

current liabilities
long term liabilities

375
Q

Current liabilities

A

Short term debts owed by the business usually repaid in less than one year eg: creditors

376
Q

Long term liabilities

A

Long term debts owed by the business usually for more than one year eg: a bank loan

377
Q

Working capital equation and definition

A

Current assets - current liabilities

Remember working capital is money used on a day to day basis

378
Q

Creditors vs debtors

A

What customers owes to the business - debtors
What the company owes to their suppliers - creditors

379
Q

Net assets

A

Net assets = total assets (fixed asset + current assets) - total liabilities (long term liabilities + current liabilities)

380
Q

What is the business financed by

A

Retained profit - financed put back in the businesss
Share capital - amount invested by the shareholders
Total share holder funds/equity - share capital + retained profit

REMEMBER THE TOTAL SHARE HOLDER FUNDS = THE NET ASSETS (ALWAYS)

381
Q

Liquidity definition

A

How easy we can turn assets into cash to pay off its short term debts if the business is illiquid and can’t quickly turn assets into cash then the business cannot pay and they may be forced to take an overdraft or sell some of its assets

382
Q

Liquidity ratios definition and types

A

a type of financial ratio used to determine a company’s ability to pay its short-term debt obligations

current ratio
acid test ratio

383
Q

Current ratio

A

Current assets/current liabilities = current ratio (decimal)
Ideal figure is 1.5 - 2
If the answer is 1.5 then that means for every dollar that you owe you have $1:50 to pay off your debts

Too low you cant pay off your debts bad
Too high you have too much cash that you can use to expand your business
Exactly 1:1 is okay however it isn’t guaranteed that you can sell your stock (which is a current asset)

384
Q

Acid test ratio

A

A more accurate ratio as it doesn’t account for stock

Current assets - stock / current liabilities

The ideal figure is now 1 - as you are probably going to sell some stock so your actual figure may be 1.2 - 1.4

385
Q

ROCE - return on capital employed definition and equation

A

measures how good a business is at generating profits from capital

Net profit/ capital employed x 100

386
Q

Capital employed definition and equation

A

the total amount of funds used for expansion or for the acquisition of profits

Working capital + total share holder funds + long term loan

(All the long term finance)

387
Q

why do businesses need finance

A

start up capital
capital for expansion
working capital

388
Q

internal sources of finance examples

A

retained profits
sale of existing assets
sale of inventories
owners inventories

389
Q

retained profit advantages

A

not repaid
no interest to pay

390
Q

retained profit disadvantages

A

not suitable for new businesses
limited amount available
may reduce payment made to owners or return to shareholders

391
Q

sale of existing assets advantages

A

better use of assets
debts not increased

392
Q

sale of existing assets disadvantages

A

it takes time
may not have spare assets to sell

393
Q

sale of inventories advantages

A

reduces storage costs
less capital tied up in inventories

394
Q

sale of inventories disadvantages

A

if inventories are too low then customers are disappointed as demand is not quickly satisfied

395
Q

owner’s savings advantages

A

available quickly
no interest paid

396
Q

owner’s savings disadvantages

A

may not be sufficient

397
Q

short term external sources of finance examples

A

micro finance
overdraft
trade credit
factoring debt

398
Q

micro finance advantages

A

available to poorer groups in society
useful if nowhere else to borrow from
no security required

399
Q

micro finance disadvantages

A

interest needs to be paid
loans usually very small

400
Q

overdraft advantages

A

interest only paid on amount borrowed
flexible form of borrowing
cheaper than loans in short run

401
Q

overdraft disadvantages

A

interest rate higher than bank loan
more expensive than loans in long run
often asked to be repaid on demand

402
Q

trade credit advantages

A

no interest required

403
Q

trade credit disadvantages

A

needs to be paid or else goods not supplied

404
Q

factoring debt advantages

A

immediate cash
no risk of debt not being repaid

405
Q

factoring debt disadvantages

A

receive less than the full amount of debt

406
Q

long term external sources of finance examples

A

grants and subsidies
bank loans
issue of shares
leasing
crowdfunding
hire purchase
selling debentures

407
Q

grants and subsidies advantages

A

not repaid

408
Q

grants and subsidies disadvantages

A

may have certain conditions attached

409
Q

bank loans advantages

A

quick to arrange
varying repayment period
large companies pay a low rate of interest

410
Q

bank loans disadvantages

A

repaid with interest
security/collateral required

411
Q

issue of shares advantages

A

do not have to be repaid
no interest paid

412
Q

issue of shares disadvantages

A

dividends expected
ownership could change hands
can only be utilised by companies

413
Q

leasing advantages

A

large cash outlay not required to purchase asset
maintenance paid for by leasing company

414
Q

leasing disadvantages

A

total payment higher than purchase price of asset
you never get to own the asset

415
Q

crowdfunding advantages

A

uses internet to raise finance from many investors
fast and cost effective
good test of new business idea

416
Q

crowdfunding disadvantages

A

gives competitors detail of business idea
may not raise all finance required

417
Q

hire purchase advantages

A

large cash outlay not required to purchase asset

418
Q

hire purchase disadvantages

A

interest paid
asset not owned until last payment made
may require a deposit

419
Q

selling debentures advantages

A

raises long term finance

420
Q

factors affecting choice of source of finance

A

amount required
size of business organisation
type of business organisation
control over the business
risk and gearing (if it already has loans)
purpose of finance
period of time for which finance is required

421
Q

uses of cash

A

day to day costs
buying inventories

422
Q

cash inflow comes from

A

sale of products
sale of assets
borrowed money
investors’ money

423
Q

cash outflow goes from

A

purchasing goods/components/raw materials using cash
paying bills, rents, wages etc
purchasing non-current assets
repaying loans
paying creditors/accounts payable

424
Q

what is the cash flow cycle

A
424
Q

what is the cash flow cycle

A

cash needed to pay for —> materials, wages rent etc —> goods produced —> goods sold —> cash payment for goods sold

425
Q

problems of not having enough cash

A

cannot pay bills and workers
production will stop
forced into liquidation (selling everything it owns to pay its debts)

426
Q

importance of cash flow forecasts

A

starting a new business
obtaining a bank loan
managing cash flow to avoid running out of cash
reduce need for an overdraft
helping managers plan ahead

427
Q

short term solutions to cash flow problems

A

delay payments to suppliers
ask debtors/accounts receivable to pay more money
delay or cancel the payment of capital equipment
take out a bank loan/overdraft

428
Q

long term solutions to cash flow problems

A

(may increase short term costs)

attract new investors
cut costs
increase efficiency
develop new products to attract more sales
find more ways to increase revenue

429
Q

working capital

A

current assets - current liabilities

430
Q

importance of profit

A

rewards entrepreneur
rewards risk taking
retained profit is a source of finance
indicator of success
attracts investors

431
Q

income statement key facts

A

financial records are called accounts
companies are required by law to produce accounts
these accounts must be accurate and up to date

432
Q

features of income statement

A

revenue
cost of sales
gross profit
net profit
retained profit

433
Q

who uses income statements

A

business owners
business managers
potential investors
governments

434
Q

uses of income statements

A

compare with previous years to judge success of business
compare with competitors to judge success of business
judge if cost of sales has fallen or risen
judge if expenses need reducing
assess how much retained profit is available
assess how much profit is available for dividends/drawings

435
Q

lack of financial records

A

not knowing how much is owed by business and to whom it is owed
the business not meeting orders if it runs out of cash
not knowing if the business has made a profit or a loss

436
Q

gross profit formula

A

revenue - cost of sales

437
Q

net profit/profit

A

gross profit - expenses

438
Q

retained profit

A

profit left and reinvested back into the business after deduction of all payments

439
Q

cash vs. net profit

A

a business could have made a profit but have not been paid for the goods yet and therefore does not have any cash in the business

440
Q

contents of a statement of financial position

A

lists assets and liabilities
shareholder’s funds = total assets - total liabilities
capital employed = shareholder’s funds + long term liabilities
working capital = current assets - current liabilities

441
Q

uses of a statement of financial position

A

show if a value of a business has increased or decreased
show if a business has sufficient liquidity to pay all its short term debts
analyse how expansion has been paid for
analyse business performance using liquidity ratios

442
Q

how accounts are used

A

used by shareholders, governments and creditors to check on company performance
lenders decide whether or not to give the loan
managers use them for taking decisions and controlling the operations of a business
other companies use them for comparing performance

443
Q

limitations of accounts

A

not full details of accounts for external users
ratios based on past data
accounting data over time affected by inflation
different accounting methods used by different companies

444
Q

net profit margin formula & analysis

A

net profit/revenue x 100

using income statement:
- increase in net profit means gross profit was higher or expenses were lower
- compared with previous years or other companies

445
Q

gross profit margin formula & analysis

A

gross profit/revenue x 100

using income statement:
- increase in gross profit means increased prices or decreased cost of goods
- compared with previous years or other companies

446
Q

return on capital employed

A

net profit/capital employed x 100

using income statement and balance sheet:
- compare with previous years and other companies to see if business more efficient or not
- shows profit earned from capital used in business

447
Q

current ratio formula & analysis

A

current assets/current liabilities

result of 1+ means that business has sufficient current assets to pay current liabilities
<1 then illiquid
>2 then too much working capital

448
Q

Social cost (Calculation)

A

Social cost = external costs + private costs

449
Q

Social benet (Calculation)

A

Social benet = external benets + private benets

Business Studies Flashcards (6 decks)

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