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Business studies > Accounting And Finance > Flashcards

Accounting And Finance Flashcards

1
Q

Explain sources of finance

A

How a business raises finance to buy things for the business such as machinery

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2
Q

Exalting internal sources of finance

A

Money that comes from the business and its owners

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3
Q

Explain external sources of finance

A

Financing options that come from outside the business

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4
Q

Distinguish between short term and long term sources of finance

A

Short term is a year or less and long term is any longer

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5
Q

Explain a bank loan

A

Getting a loan from the bank for a set period of time and at a certain rate of interest

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6
Q

Explain benefits of a bank loan

A

Greater certainty of funding
Lower interest than an overdraft
Appropriate financing methods

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7
Q

Explain drawbacks of a bank loan

A

Requires security
Interest paid on full amount outstanding
Harder to arrange
Small businesses often excluded

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8
Q

Explain leasing

A

A form of renting an asset, giving beneficial use of the asset without owning it

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9
Q

Explain benefits of leasing

A

Predictable cash flow
Asset owner carries the risk
Lower interest than a bank loan
Less security required
Widely available

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10
Q

Explain drawbacks of leasing

A

You don’t own the asset
More expensive than buying it outright
Difficult to cancel the lease

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11
Q

Explain retained profits

A

Earnings from profitable trading that can be kept in the business or paid out as dividends

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12
Q

Explain benefits of retained profits

A

Flexibility
Business owner is in control
Low cost
Can be substantial

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13
Q

Explain drawbacks of retained profits

A

A drain on financing if loss making
Danger of hoarding profits
Opportunity cost for shareholders

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14
Q

Explain debentures

A

Type of long term loan that only available to PLC’s

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15
Q

What are the two types of debentures

A

1) the business sells debentures to investors in order to raise finance
2) the debentures can be re-sold to someone else if the investors need their money back

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16
Q

Explain overdraft

A

A line of credit that lets you have more cash flow to fund capital

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17
Q

Explain the advantages of an overdraft

A

Useful in an emergency
Quick to take out

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18
Q

Explain disadvantages of an overdraft

A

Fees can add up quickly
Can damage your credit rating

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19
Q

Explain trade credit

A

The amount owed to suppliers of a business

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20
Q

Explain hire purchase

A

A method of paying for an item in instalments

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21
Q

Explain advantages of hire purchase

A

Cash flow
Fixed interest rate
Immediate access to the money

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22
Q

Explain the drawbacks of hire purchase

A

Asset depreciation
Ongoing fixed payments

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23
Q

Explain venture capitalists/business angels

A

Individuals or firms who lend money to the business

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24
Q

Explain the advantages of venture capitalists/business angels

A

No security necessary
Offers a chance for expansion

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25
Q

Explain the drawbacks of venture capitalists/business angels

A

Takes a long time to make the decision
The ownership stake is reduced

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26
Q

Explain debt

A

Finance provided to the business by external parties

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27
Q

Explain equity

A

Amount invested by the owners of the business

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28
Q

Reasons business have a high amount of debt

A

Struggle to raise capital
Less equity in the business
Lower interest rates
Strong regular cash flow to pay it back easier

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29
Q

Reasons businesses have a high amount of equity

A

Harder for the sole trader to obtain a loan
Where there’s greater business risk
Where more flexibility is required

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30
Q

Factors determining a businesses choice of finance

A

Time - equipment may take several years to pay back
Legal structure
Quantitative factors - have several loans already been applied for
Qualititative factors - taking on a partner increases capital but reduces control
External factors - the economy
Security - less of it lowers the chance of obtaining a loan
Current methods being used to raise finance

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31
Q

Explain fixed costs

A

Those that don’t change in relation to output

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32
Q

Explain variable costs

A

A cost which changes as output changes

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33
Q

Explain marginal costs

A

The additional cost of producing one more unit

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34
Q

Explain average unit cost

A

The per unit cost of production

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35
Q

Explain revenue

A

The cash that flows into a business from the sales of goods and services

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36
Q

Explain how to increase revenue

A

Increase the amount you sell
Achieve a higher selling price

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37
Q

Explain profit

A

The financial return or reward that entrepreneurs aim to achieve to reflect the risk they take

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38
Q

Explain standard costing

A

The cost the business expects the production of a product or service to be

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39
Q

Explain actual cost

A

How much it actually costs and the difference is the variable

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40
Q

Explain cost centres

A

A specific part of the business where costs can be identified and allocated

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41
Q

How are cost centres allocated

A

The different products a business produces
Individual departments
Location of different sites
Capital equipment used in different departments
Physical size of the department

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42
Q

Explain advantages of cost centres

A

Allows you to monitor performance
Motivation of workforce
Look for new suppliers or better production techniques

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43
Q

Explain disadvantages of cost centres

A

Issues collecting data
Allocation of costs can impact performance
Some costs can be controlled
Could cause conflict because some departments may find it unfair

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44
Q

Explain absorption costing

A

All indirect costs or overheads are absorbed by different cost centres

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45
Q

explain the usefulness of costing methods to stakeholders

A

shareholders will look at the bottom line
employees will want to secure a well paid job
managers make business decisions based on costing methods
suppliers will be affected by how much a business is prepared to pay for its supplies

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46
Q

explain profit centres

A

a separate identifiable part of a business for which its possible to. identify revenues and costs

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47
Q

explain advantages of profit centres

A

provides insights into where profit is earned
supports budgetary control
can improve motivation
finance can be allocated more efficiently where it makes the best return

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48
Q

explain disadvantages of profit centres

A

can be time consuming
may lead to conflict and competition within a business potentially de-motivating if profit centres are to tough or unfair cost allocations are made
may pursue their own objectives rather than those of the broader business

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49
Q

explain depreciation

A

the fall in value of an asset over time

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50
Q

straight line depreciation formula

A

estimated useful life

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51
Q

reducing balance depreciation formula

A

net book value x depreciation rate

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52
Q

explain contribution

A

revenue received from selling a product minus the direct costs of producing that good

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53
Q

total contribution formula

A

total revenues - total variable costs

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54
Q

contribution per unit formula

A

selling price per unit - variable costs per unit

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55
Q

breakeven output formula

A

contribution per unit

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56
Q

explain breakeven analysis

A

a method of determining the level of sales at which the company will break even

57
Q

explain margin of safety

A

the difference between actual output and breakeven output

58
Q

explain strengths of breakeven

A

identifies of how long it will take before a start up reaches profitability
helps to understand the viability of a business proposition
helps to determine the margin of safety
shows the importance of controlling costs and setting the correct selling price

59
Q

explain limitation of breakeven

A

unrealistic assumptions - price and costs can change
most businesses sell more than one products
should be seen as a planning aid than a decision-making tool

60
Q

Explain investment appraisal

A

The process of analysing whether investment projects are worth while

61
Q

Explain payback period

A

The time it takes for a project to repay its initial investment

62
Q

Explain benefits of payback period

A

Simple calculation
Emphasises speed of return
Straight forward to compare projects

63
Q

Explain drawbacks of payback period

A

Ignored cash flow after the payback has been reached
Doesn’t take into account how those value of money changes
Encourages short-term thinking
Simplistic - especially if it’s a big complex investment

64
Q

Explain average rate of return (ARR)

A

Looks at the average return for a project to see if it meets the target return

65
Q

Explain advantages of ARR

A

Provides a percentage return which can be compared with a target return
Looks at the whole profitability of the project
Focuses on profitability

66
Q

Explain disadvantages of ARR

A

Doesn’t take into account cash flows
Takes no account of the time value of money
Threats profits arising late in the project in the same way as those which might arise early

67
Q

Explain net present value

A

Calculating the monetary value now of a projects future cash flow

68
Q

Explain advantages of net present value

A

Takes account of time value of money, placing emphasis on earlier cash flows
Looks at all the cash flows involved through the life of the project
Use of discounting reduces the impact of long-term less likely cash flows
Has a decision making mechanism

69
Q

Explain disadvantages of net present value

A

More complicated method - find it hard to use
Difficult to select the most appropriate discount rate
Doesn’t consider external factors

70
Q

Explain a businesses budget

A

A detailed plan for the future concerning the revenues and costs expected over a certain period of time

71
Q

State what managers use budgets for

A

Control income and expenditure
Establish priorities
Motivate staff
Improve efficiency
Monitor performance

72
Q

Explain variance analysis

A

Involves calculating and investigating the differences between actual results and the budget

73
Q

Explain causes of favourable variances

A

Stronger demand than expected
Selling price increases higher than budget
Cautious sales and cost assumptions
Better than expected productivity or efficiency

74
Q

Explain causes of adverse variances

A

Unexpected events lead to unbudgeted costs
Over-spends by budget holders
Sales forecasts prove over-optimistic
Market conditions means demand is lower than the budget

75
Q

Explain zero budgeting

A

All budgets are set to zero and managers justify and requirements for funds
It helps to prevent a situation where the same money is given each year

76
Q

Explain flexible budgeting

A

Allows a business to make allowances for changes in the level of sales

77
Q

Explain accounting

A

A process of control on expenditure of a business, and it’s the vehicle for the publication of figures for profit, value and cash

78
Q

Explain financial accounting

A

Concentrates with assets, profits and levels of cash within the business, the information is issued in the annual report to satisfy external stakeholders

79
Q

Explain managerial accounting

A

Concentrates on internal records allowing the business to monitor and evaluate performance and set targets in order to achieve its objectives

80
Q

Explain factors affecting the level of working capital

A

Businesses with a lot of cash sales and few credit sales should have minimal trade debtors
Businesses that trade in completed products will only have finished goods in stock
Some perishable goods have to be sold in a certain time period
Larger businesses may be able to use their bargaining strength as customers to obtain more favourable, extended credit terms from suppliers
Some businesses will receive their monies at certain times of the year

81
Q

Explain income statements

A

Shows the profit or loss made by the business - which is the difference between the firms total income and its total costs

82
Q

Explain revenue

A

The amount of money generated from sales

83
Q

Explain costs of sales

A

The cost of making the goods or buying them

84
Q

Explain gross profit

A

Sales minimus direct costs of sales

85
Q

Explain overheads and expenses

A

Costs not directly involved in the production process - costs of premises and office costs

86
Q

Explain operating profit

A

Gross profit minus overheads

87
Q

Explain the usefulness of income statement

A

Progress can be monitored by management and the business can set targets and make decisions
Figures can be used to carry out ratio analysis
Provides other stakeholders with valuable information

88
Q

Explain a statement of financial position

A

A snapshot of the business assets and its liabilities on a particular day - usually on the last day of a financial period

89
Q

Explain assets

A

What a business owns

90
Q

Explain liabilities

A

What a business owes

91
Q

Using financial accounts to assess business performance

A

Comparing performance over time - looking at data over years to look for trends
Comparing performance against competitors- how has the business performed against the markets as a whole
Benchmarking against the best - comparison against others who aren’t direct competitors

92
Q

Explain ratio analysis

A

The comparison of financial data to gain insights into business performance

93
Q

What does ratio analysis do

A

Helps to see why one business is more profitable than other
What returns are being earned in investment in a business
If a business can pay off all its debts
How effectively a business is using its assets

94
Q

Interpreting gross profit margin

A

Look for changes from one year to another
A fall in the percentage could suggest higher costs from suppliers or selling at a lower price
A rise in the percentage could suggest better buying from suppliers or selling ar a higher price

95
Q

Why is return on capital employed (ROCE) useful

A

Evaluated the overall performance of the business
Provides a target return for individual projects
Benchmarks performance with competitors

96
Q

Evaluating ROCE

A

It varies between businesses
It’s based on a snapshot of a businesses balance sheet
Comparisons over time and with key competitors are most useful

97
Q

Explain liquidity ratios

A

Liquidity measures the ability to convert assets into cash
About having sufficient cash to keep the business working
Focuses on the ability of a business to have sufficient current liabilities

98
Q

Explain the current ratio

A

Measures whether the business can pay debts due within one year out of the current assets

99
Q

Evaluating current ratio

A

Ratio of 1.5 to 2 would suggest efficient management of working capital
Ratio below 1 indicates cash problems
High ratio may indicate too much working capital
Industry norms
Trends

100
Q

Explain the acid test ratio

A

It’s a more reliable equation because it takes away stock as it may not be turned into cash
>perishable goods have a short shelf life so may not always be sold and turned into cash

101
Q

Evaluating acid rest ratio

A

Interpreting results
>a better indicator of liquidity problems for businesses that usually hold inventories
>significantly less than 1 is bad
Less relevant for businesses with high stock turnover
Trend - significant deterioration in the ratio can indicate a liquidity problem

102
Q

Explain return on equity

A

Measures the ability of a business to generate profits from its shareholders investments into the business

103
Q

Explain economies of scale

A

When unit costs fall as output rises

104
Q

Explain diseconomies of scale

A

When unit costs rise as output rises

105
Q

Explain why businesses grow

A

Greater profits
Increased market share
More chance of survival
Cost reduction

106
Q

Explain purchasing eos

A

Being able to buy in bulk and getting discounts from suppliers

107
Q

Explain financial eos

A

Larger businesses have better and more favourable access to sources of finance

108
Q

Explain managerial eos

A

Larger businesses can afford to employ the best and most efficient managers

109
Q

Explain technical eos

A

Bigger companies being able to acquire expensive technology - advanced machinery

110
Q

Explain marketing eos

A

A large firm can spread its advertising and marketing budget to buy it in bulk for cheaper

111
Q

Explain risk bearing eos

A

A business can spread risk in different products that a company can fall back on

112
Q

Explain reasons for diseconomies of scale

A

Poor communication - more levels in hierarchy or wider spans of control
Lack of motivation - workers can feel isolated
Loss of direction and co-ordination - more difficult for managers to supervise subordinates as they have a wide span of control

113
Q

Explain solutions to diseconomies of scale

A

Empowerment - delegation of decision making
Job enrichment - making jobs more interesting
Team working - splitting employees into teams

114
Q

Explain efficiency ratios

A

How well the business manages its assets and liabilities

115
Q

Explain trade receivables (debtors)

A

amounts owed to a business by customers

116
Q

Explain trade payables (creditors)

A

Amounts owed by a business to suppliers and others

117
Q

Explain receivables days

A

The average length of time taken by customers to pay amounts owed

118
Q

Explain payables days

A

The average length of time taken by a business to pay amounts it owes

119
Q

Explain asset turnover

A

Measures how efficiently a business is able to use its net assets to generate sales revenue
The higher the ratio the better as it implies the assets are being used in a more efficient manor to generate sales

120
Q

Evaluation of asset turnover

A

A capital intensive business will produce more sales revenue compared to one that doesn’t have any assets, so they’ll have a higher asset turnover
This is why the ratio may be misleading and judged using norms

121
Q

Explain stock turnover

A

Measure how quickly a business is turning stock into products that can be sold

122
Q

Evaluation of stock turnover

A

A higher number is better
Low numbers suggests problems with stock control
Holding more stock may improve customer service and ability to meet demand
Seasonal fluctuations
It’s irrelevant in some sectors

123
Q

Explain what the gearing ratio is about

A

How a business is financed and the relationship between the amount of finance provided by equity and debt

124
Q

Explain the capital stucture of a business

A

How the business is finances to enable it to operate over the long-term

125
Q

Explain equity

A

Amounts invested by the owners of a business - share capital and retained profits

126
Q

Explain debt

A

Finance provided to the business by external parties - bank loans

127
Q

Evaluation of the gearing ratio

A

50%+ is seen as high
Less than 20% is seen as low
Level of acceptable gearing depends on the business and the industry

128
Q

Explain benefits of high gearing

A

Less capital required to be invested by the shareholders
Debt can be a relatively cheap source of finance compared with dividends
Easy to pay interest if profits and cash flows are strong

129
Q

Explain benefits of low gearing

A

Less risk of defaulting on debts
Shareholders rather than debt providers ‘call the shots’
Business has the capacity to add debt if required

130
Q

Ways to reduce gearing

A

Focus on profit improvement
Repay on long-term loans
Retain profits rather than pay dividends
Convert loans into equity

131
Q

Ways to increase gearing

A

Focus on growth
Convert short-term debt into long-term loans
Buy back ordinary shares
Pay increased dividends out of retained earnings
Issue preference shares or debentures

132
Q

Explain interest cover

A

It measures the number of times in which a business can pay its interest charges using its operating profits

133
Q

Explain shareholders ratios

A

Measures the returns that shareholders gain from investment

134
Q

Explain dividend per share

A

How much dividend received per share

135
Q

Evaluation of dividend per share

A

A basic calculation of the return per share
Don’t know how much the shareholder paid for the shares
Don’t know how much profit per share was earned which might have been distributed as a dividend

136
Q

Explain dividend yields

A

Dividend per share as a % of the share price

137
Q

Evaluation of dividend yield

A

The yield can be compared with other companies in the same sector and rates of return on alternative investments
Shareholders can side dividend yield in deciding whether to invest in the first place
Unusually high yield might suggest an under-valued share price or a possible dividend cut
Dividend yield will change constantly s the share price changes

138
Q

Explain dividend cover

A

How many times dividends can be paid from the net profits

139
Q

Explain price earning ratios

A

A measure of confidence on what the share will earn

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