5 Financial Information and Decisions Flashcards
1
Q
What is working capital?
A
the finance needed by a business to pay its day-to-day costs?
2
Q
What is capital expenditure?
A
money spent on non-current/fixed assets which last for more than one year.
3
Q
What is revenue expenditure?
A
money spent on day-to-day expenses which are spent in less than one year.
4
Q
What is internal finance?
A
finance obtained from within the business itself.
5
Q
What are some sources of internal finance?
A
- Retained profit: the remaining money in the business after all costs have been deducted from the sales revenue.
- Sale of existing assets: selling off assets that are no longer useful for the business, usually non current assets.
- Sale of inventory to reduce inventory levels.
- Owners’ savings: in sole trader and partnership, the owners can reinvest more capital in the business.
6
Q
What is external finance?
A
finance obtained from sources outside of/ separate from the business.
7
Q
What are examples of external finance?
A
- Issue of Shares: selling a part of the company to investors, only works in limited companies.
- Bank loans: money borrowed from a bank.
- Selling debentures: a very long term loan from other companies/ individuals.
- Factoring of debts: selling account receivables to debt factoring companies.
Grants and subsidies: a sum of money given to a business that does not have to be repaid but to be used for a specific purpose.
8
Q
What is micro-finance?
A
providing financial services (including small loans) to poor people.
9
Q
What is crowdfunding?
A
funding a project/ venture by raising money from a large number of people.
10
Q
What are examples of short-term finance?
A
- Overdrafts: short term of finance given by a bank.
- Trade credit: delaying payment made to suppliers so the business will have more money.
- Factoring of debts
10
Q
What are examples of long-term finance?
A
- Bank loans
- Hire purchase: paying for a non-current asset in installments.
- Leasing: renting an asset.
- Issue of shares
- Long term loans or debt finance
- Debentures
11
Q
How do businesses make the choice of which source of finance to use?
A
- purpose and time period
- amount needed
- legal form and size
- control
- risk and gearing
12
Q
What can improve the chances of banks lending to businesses?
A
- cashflow forecast
- income statement
- details of existing loans/ other sources of finance used
- clear explanation of business plans
13
Q
What can improve the chances of shareholders investing into businesses?
A
- company share price increases
- high dividends
- other companies aren’t good investments
- good reputation
14
Q
What is cash flow?
A
the cash inflows and outflows over a period of time.
14
Q
What are cash inflows?
A
the sums of money received by a business during a period of time.
15
Q
What are cash outflows?
A
the sums of money paid out by a business during a period of time.
16
Q
What is a cash flow cycle?
A
shows the stages between paying out cash and receiving cash.
17
Q
What is profit?
A
the surplus after the total costs have been subtracted from revenue.
18
Q
What is a cash flow forecast?
A
an estimate of future cash inflows and outflows of a business usually on a monthly basis.
19
Q
What are the uses of cash flow forecasts?
A
- Starting up a business: ensure that their outflow is not greater than their inflow.
- Running an existing business: to show the bank manager and arrange bank loans/overdrafts ahead of time so the business can get cheap interest rates.
- Keeping the bank manager informed: to see how much is needed and for how long before they give out loans.
- Managing cash flow: if the bank balance is too high or too low, the business can plan out their next course of action.
19
Q
What is closing balance?
A
the amount of cash held by the business at the end of each month and become next month’s opening balance.
19
Q
What is net cash flow?
A
cash inflow - cash outflow
19
Q
What is opening balance?
A
the amount of cash held by the business at the start of the month.
20
What are accountants?
the professionally qualified people who are responsible for keeping accurate accounts and producing the final account.
20
What is working capital?
the capital available to a business in the short term to pay for day-to-day expenses (the lifeblood of a business)
current assets - current liabilities
21
What are accounts?
the financial records of a firm's transactions.
22
What are final accounts?
produced at the end of the financial year and give details of the profit/ loss made over the year and the worth of the business.
23
How do you calculate profit?
revenue - cost of making products = profit
24
How can profit be increased?
- increasing revenue more than costs
- reducing costs
- combination of the two
25
Why is profit important?
- reward for enterprise
- reward for risk taking
- source of finance
- indicator of success
25
What is an income statement?
a financial statement that records the income and costs of a business.
26
What is revenue?
the income to a business during a period of time from the sale of goods/ services.
27
What are the cost of sales?
cost of producing goods.
28
What is gross profit?
revenue - cost of sales
29
What is a trading account?
shows how the gross profit of a business is calculated.
30
What is net profit?
gross profit - expenses
31
What is depriciation?
the fall in value of a fixed asset over time.
32
What is retained profit?
net cash flow - tax - dividends
33
What is the statement of financial position?
shows the value of a business's assets and liabilities at a particular time.
34
What are assets?
items of value which are owned by the business.
35
What are liabilities?
debts owed by the business.
36
What are current assets?
items owned by a business and used within one year.
36
What are non-current assets?
items owned by the business for more than one year.
37
What are non-current liabilities?
long-term debts owed by the business and repaid over more than one year.
38
What are current liabilities?
short-term debts owed by the business and repaid in less than one year.
39
How do you calculate assets?
Total Liability + Total Capital = Total Assets
40
What's the use of a statement of financial position?
- Shareholders can see if their stake in the business has increased or fallen in value over the 12 months by looking at the total equity figures for two years.
- Shareholders can analyze how expansion of the business has been paid for
- Working capital can be calculated, which shows the financial strength of the business
- Capital employed can be calculated
41
What is capital employed?
shareholder's equity, non current liabilities and capital invested in a business.
42
How do you calculate capital employed?
Total Equity + Non-current Liabilities = Capital Employed
Total Assets - Current Liabilities = Capital Employed
43
What is liquidity?
the ability of a business to pay back its short-term debts.
44
What is profitability?
the measurement of profit made relative to either value of sales achieved or capital invested into the business.
44
How do you calculate Return On Capital Employed (ROCE)?
(Net Profit / Capital Employed) x100
44
How do you calculate Net Profit Margin?
(Net Profit / Revenue) x100
44
What can the ratios of profitability tell you?
Gross Profit margin: if it has gotten better, that either means the business has increased added value (either costs decreased, price stayed the same or price increased and costs stayed the same).
Net Profit Margin: overheads/fixed costs of the business (and maybe other incomes) like the rent has increased significantly and therefore the net profit margin has fallen.
ROCE: the efficiency of the non current assets in the business. If ROCE has fallen, it either means that net profit has fallen or capital employed has increased. IF capital employed increased, this could mean that the managers of the business have invested more, hoping to make higher profits in the future.
45
How do you calculate Gross Profit Margin?
(Gross Profit / Revenue) x100
46
What does it mean to be illiquid?
the assets are not easily convertible into cash.
47
How do you calculate current ratio?
current asset / current liability
48
How do you calculate acid test ratio?
(current asset - inventory) / current liability
48
What do liquidity ratios tell us?
- How well a business can pay off their short term liabilities.
- Ideal ratio for current ratio is between 1.5 - 2
- Ideal acid test ratio, it’s 1 - 2
48
How do managers use these accounts?
- Make decisions
- Keep control
- Identify which parts of the business are doing poorly
- Compare profit and liquidity with itself and other businesses within the industry
49
How do creditors use these accounts?
- see whether business can pay off debts
50
How do shareholders use these accounts?
- see the income statement to see profit and loss, and profitability ratios compared to last year’s
- see SOFP to see if the value of the business has increased
- use liquidity ratios as they do not want to invest in businesses with liquidity issues
51
How do banks use these accounts?
- see whether business can pay off debts
52
How does the government use these accounts?
- calculate tax that needs to be payed
53
How do workers and trade unions use these accounts?
- asses whether or not company is secure
54
How do other businesses use these accounts?
- compare profits
55
What are the limits of ratio analysis?
- Outsiders can use this data as well
- Ratio is based on past accounting data and isn’t a clear indicator of the future
- Accounting data can be affected by inflation
- Different companies can use different accounting methods
