accounting and finance Flashcards
why is it important to have business and finance objectives
new business- objective be to survive- ensuring sufficient funds to stay in business
ensure business sufficient working capital- enough cash to keep business operating
fundamental way to measure business performance
allows business to see where main problems may be.
help assess if business met target within given period
used to compare business over time
what is it important to consider when setting financial objectives
legal status and size of business. level of profit set for business, different to stakeholder.
other department objectives
A budget will have to be set and one which ought to ‘fit’ with any financial targets.
state of economy. make easier achieve financial target
level of competition in the market, a highly competitive marker may mean prices have to be lower in order to compete.
Government, it may encourage or discourage business as part of its political agenda
legislation can also affect financial target set.
From financial objectives and data, a stakeholder can ascertain a wealth of information which is useful for what reasons
Managers can use information to make important decisions and plan for the future.
Prospective shareholders/ investors, decide whether they want to invest.
banks check if business afford repayment of borrow money
suppliers can assess whether safe to trade with.
managers use accounts as measure of success or failure in term of how profitable.
financial information look at cash flow, fix any cash flow problems.
accounts can be used by other business in industry as ‘benchmark’.
Setting clear financial objectives allows the business/ stakeholders to:
- Aim for targets.
- Monitor progress of business.
- ensure departments in business understand the financial constraints may face.
- provide employees and trade unions with financial objectives and they will have a better understanding of what the business is trying to achieve.
- Formulate own department objectives in light of financial situation. Marketing department can plan its strategy.
- Asses business in terms of its liquidity
what are the problems with accounts used
as they are used by many stakeholders may be portrayed in a favourable light. window dressing.
why may window dressing occur
- Encourage shareholders to continue to hold or purchase more sales.
- Encourage potential shareholders to buy its shares, enhancing the value of the shares.
- Suggests business is able to borrow money.
- Indicate the business is able to repay loans.
- Prevent employees worrying about long term security of employment
what is short term finance
is needed for the day-to-day running of a business and is usually for a period of up to three years.
what is cashflow
a business needs sufficient inflows of cash to finance its day-to-day outgoings (e.g wages and interest repayments); if cash receipts are insufficient, the business is said to have a cashflow problem.
what is an overdraft
a bank allows a firm to take out more money than it has in its bank account,
interest rates are typically higher than loans.
how does an overdraft work
no money is actually credited to the current account, but the business is allowed to run the account down to zero and then a further pre-arranged amount can be withdrawn.
It is usual for a bank to permit a certain level of overdraft when a current account is opened
what are the two types of bank accounts
deposits accounts (also known as saving accounts), in which money deposits interests.
current accounts, which are used to make and receive payments. a debit card is used with it
name something about a deposit account
account usually requires a period of notice before funds can be withdrawn, and is therefore not suitable for a business to use to make payments.
name something about a current account
funds can be drawn’ (ie. taken out) whenever it is necessary. These tend to learn less interests than saving accounts and some pay none at all.
what are interests like on an overdraft
overdraft is only paid on the amount actually overdrawn.
If the overdraft that has been granted by the bank is for £2,000 and the business only uses £1,500 of it, the interest is only charged on this lower amount and not on the full amount of the overdraft. If a business quickly returns its current account to a credit balance, it will not have to pay much interest.
what shouldn’t an overdraft be used for
it should not be used for the purchase of capital items such as computers or photocopiers.
what is a loan
Loans from a bank (or from family and friends). Usually paid with interest. Interest rates could be fixed or variable rate.
how does a short term loan work
A separate account (for the amount of the loan) is opened and the full amount is credited to the business’s current account. When repayments are made, they are taken from the business’s current account and paid into the loan account. This reduces the amount of the loan that is outstanding, and this continues until the balance owing on the loan account falls to zero (i.e. the loan is repaid).
what should a loan be used for
to buy specific pieces of equipment or to purchase specific pieces of equipment or to purchase a particular consignment of raw materials in order to fulfil a contract.
what is the difference between a loan and an overdraft
with an overdraft- if a business exceeds the overdraft limit, the bank has the right to demand the whole amount back at once. the loan is for a particular period & only demanded back by the bank if business fail to Pay interest due.
The amount of interest payable on an overdraft will be higher than the amount charged on a loan.
what factors influence a banks decision to lend
what the finance is used for
company past trading records
type of product being sold, is it luxury purchase or one that consumers will always require?
business current financial position. including existing debt.
The nature of the market and forecasts of sales.
The role and experience of business manager.
what is a trade credit
where suppliers deliver goods now and are willing to wait for a number of days before payment. This does not incur interest so can benefit cash flow.
how does a trade credit work
doesnt have to be paid immediately, means it can wait until payment from customers, so can make other purchases in meantime.
no interest charges
Suppliers may choose to offer this sort of credit, due to the fact it is a common business practice, and any business not offering trade credit and insisting on immediate payment will find itself at a disadvantage.
what is factoring
Selling of debts to a factoring company, who will offer a percentage of the debt to the business and will take legal ownership of the debt.
how does factoring work
means the business sells debts to raise finance.* This debt usually takes the form of an ‘IOU’. This can be sold to factoring countries.
Specialist companies exist for this, although banks offer factoring services.
The factoring company will offer a certain percentage of the debt to the business that needs the funds immediately and will now legally own the debt. factor collects debt and not original company.
what is hire purchase
Hire purchase where monthly payments are made for use of equipment such as a car. Hired equipment is owned by the firm after the final payment.
how does hire purchase work
hire-purchase has the advantage that a large sum of money does not have to be found all at once, and the repayments can be spread over a period of time.
This can help improve cash flow, but it means that at the end of the contract, more money will have been paid out than if the business had paid cash in the first place.
what is medium term finance
Usually of a period of between three and ten years.
why would a business use medium term finance
Replace expensive pieces of equipment that have broken down or become out of date.
expand; if a business decides on the objective of growth, it will need larger premises, equipment or more modern machinery.
convert a business’s persistent overdraft into a formal medium-term loan
what is a medium term loan
An agreed amount is credited to the business’s current account.
For a medium-term loan (and indeed a long-term loan), the rate of interest charged by the bank is particularly important.
The amount of interest payable on a medium-term loan depends on several factors, what are they
o how much is borrowed.
o How long the money is wanted for.
o The security that is provided.
what is a variable rate loan
the amount of interest which the business pays vary, according to the bank of England’s decision on interest rates.
what is a fixed rate loan
then those running the business will know what the repayment costs are going to be. Make financial planning easier. The business will not be financially disrupted by a rise in interest rates.
what are the disadvantages of a fixed rate loan
if rates fall, the business still has to pay the rate that it has agreed. It will therefore be paying more than if it were on a variable loan rate.
what is leasing
Allows for payment of an item in instalments however the item is never owned and remains the property of the leasing company so they are responsible for any maintenance or repair.
However, this does mean that the total amount eventually paid will be in excess of the cash price.
how does leasing and hire purchase differ
Leasing is basically the same as renting. This means the business never actually owns it, unless the leasing company offers to sell it to the business when the agreement comes to an end.
can lease for set period of time.
Payments are made monthly, but unlike hire purchasing the item leased does not become the property at the end.
,the equipment is leased and not owned, it if breaks down, the leasing company must fix it at its own expenses.
what is long term finance
Usually for a period of time in excess of 10 years. The finance is for securing the resources for the long-term growth.
what are long term loans
used for expensive pieces of machinery, the cost of which needs to be spread over a lengthy period of time.
what are loans for buildings called
mortgages. possible to have variable or fixed rate.
however fixed is not for the whole length of loan.
what is a debenture
are only available to a public limited company. Debentures are sold to investors in order to raise finance and the company pays a fixed rate of interest to the debenture holders.
what are debentures
difference to other type of loans- the company does not borrow money from a bank in the usual way but sells debentures to investors in order to raise finance.
carry a fixed rate of interest, which the company must pay to the debenture holders every year.
can be resold to someone else if the investor needs his or her money back before the debenture matures (is paid back).
what is issue of shares
Share capital is the money invested in a company by the shareholders. Share capital is a long-term source of finance. In return for their investment, shareholders gain a share of any profits.
only available to companies
what is another name for issue of shares
equity finance
what is sales and leaseback
business can raise finance by selling off an asset such as building or a piece of land.
Raise a considerable amount of finance and is a sensible action if asset is no longer needed.
It is where the asset is sold and but then leased back, usually for a long period of time.
what is a disadvantage of a leaseback
business no longer owns the asset it is leasing. When the lease expires, there is no guarantee that it will be renewed; the business that owns the sold asset may want to sell it.
what is retained profit
this is the cash that is generated by the business when it trades profitably, using the retained profit’s has an opportunity cost and shareholders/owners may not be pleased.
what does a government provide assistance for
o Tax incentives which lower the amount of tax a business has to pay.
o Sale of land or property to business at a discount rate.
o Lower than usual rents for buildings and factories.
what is venture capital
individuals or firms who lend money, known as venture capital, to small and medium-sized businesses that require finance for starting-up or expansion.
often gamble as business requiring funds likely refused by other lenders- high risk for hope of high reward
what can the venture capitalist gain if business goes well
large dividend payments and a substantial capital gain from the shares if it chooses to sell them.
what is a business angel
will require a financial return for its capital and time and may insist on become actively involved in the running of the business In order to safeguard its investment.
problem with business angels
conflict
what is internal finance
Internal sources include the funds available from the sale of any unwanted assets, from retained profit and from the use of trade credit. Internal sources are more likely to be available when a business is well-established.
what is external finance
is provided by people or institutions outside the business in the form of loans, overdrafts, shares and debentures. The use of external sources of funding creates a debt that will require payment.
what is selling unwanted assets
The business can sell assets (items it owns) that are no longer really needed to free up cash, a problem if the assets are needed in the future.
what is depreciation
An allowance for the falling value of assets as a result of wear and tear.
what are the main principles of accounting
consistency, going concern, accurals, materiality, objectivity, prudence, realisation
what is consistency
all accounts will be produced in the same way.
by having principal anyone using accounts can be confident the information within accounts more likely accurate.
what is going concern
Assumes that the business is operating as normal and that there is no reason not to expect it to operate as normal in the foreseeable future
what is accruals
The dates used to record financial transactions are those when the transaction occurred and NOT when the actual payment is made. This is more realistic.
cash flow statement, recording the date of the transactions and not the payment is more realistic for the level of liquidity at that moment.
what is materiality
Calculating the value of the business is required a realistic figure to be reached.
doesn’t include low value assets in the stock section of the accounting records- no real material difference to any financial accounts
what is objectivity
Based on the idea that the accounts must be realistic and therefore based on facts, not opinions or guesses.
no bias and being optimistic not appropriate.
what is prudence
be pessimistic. being realistic with valuation of assets, understand assets and consider depreciation.
what is realisation
record assets when legal ownership changes rather than payment date.
what is generally accepted accounting practice (GAAP)
framework of accounting rules or principles.
what are generally accepted accounting practices
economic entity assumption- separate record for each business entity.
accural basis accounting
monetary unit assumption- include only quantifiable transactions
full disclosure assumption- disclose all relevant information
time period analysis- usually set period of time
revenue recognition assumption- revenue recorded when earned
matching principle
cost principle- assets recorded at cost of acquisition
going concern principle
relevancy, reliability, consistency
conservatism- less optimistic approach
materiality
what is the definition of cost
amount incurred to make goods of services
what are fixed costs
Costs that do not change as output of sales changes. They have to be paid whether sales are 10 or 1,000.
The interest is a fixed amount that the business pays regularly (probably monthly) irrespective of level of production
what are two other names for fixed costs
overheads
indirect costs- however can vary
what are stepped fixed costs
Although these costs are referred to as fixed costs, it is more accurate to suggest that they are fixed in the short term.
what are variable costs also known as
direct costs
what are variable costs
are directly related to the level out output or sales. They increase when output increases and falls when output falls.
what is the formula for total costs
Total costs= fixed costs + variable costs
what is unit cost
is the cost of producing one product
how do you calculate unit costs
Unit cost= total cost/ output
how do you calculate average costs
Average cost= FC + VC (TC)/ output
what are marginal costs
costs of producing one extra good
what are social costs
The implications of a business decision are not always included in the business’s own costs. There might be a significant cost to other stakeholders or to the country as a whole.
what is an example of social costs
tobacco company producing cigarettes has to pay for the manufacturing process and the marketing and distribution of its cigarettes. However, it does not pay the negative costs of treating people who are diagnosed with cancer as a result of smoking.
what is opportunity cost
what a business could have spent money on.
next best alternative (money towards new seats) that had to be given up in order to spend money on its first choice (advertising campaign)- for example.
what is the definition of revenue
money made from selling goods or services
how do you calculate average revenue
total revenue/ number of sales
what is the impact of cost and revenue on a business
Costs influence both the price that a product may be sold for and the level of profit for the business.
what is standard costing
the cost that the business would normally expect for the production of a particular product, or activity. The setting of a standard cost is a target for the business to achieve.
This helps a business to monitor performance.
what are the advantages of standard costing
gives a business an idea of the target cost they should be aiming for.
Give employees a target to aim for and can alert them to problems.
Be used within the reward and motivation policy of the business so that bonuses could be offered when positive variances are achieved.
Encourage workers to look for better and more efficient ways of completing a job
what are disadvantages of standard costing
Collecting information to arrive at a standard cost may be time-consuming.
use of standard costing, especially when tied to bonuses for workers, may result in a situation where quality is sacrificed to keep costs of production down.
If the business is not careful in reassessing the figures used periodically, it may find that standard cost has become an inaccurate measure of the actual cost
what are cost centres
a specific part of the business where costs can be identified and allocated with reasonable ease.
what are the number of ways in which a business can choose to allocate costs to cost centres
The product being produced. The individual department: this might be appropriate for a larger business.
The location: a business based on different sites is likely to use each of its sites as an individual cost centre.
The capital equipment used in each department this may be used in businesses
The physical size of the department in terms of space.
what are the benefits of cost centres
information will help to highlight those departments that are performing well and those that are not, making it possible for management.
information gained can be used to help motivate the workforce.
availability of the information may encourage management to look for new suppliers or more efficient production techniques to bring costs down.
what are the disadvantages of cost centres
result in conflict and a lack of motivation.
act of collecting and separating information into different cost centres is likely to be expensive in terms of time and money.
way in which costs are allocated can have a significant effect on the performance of a particular cost centre.
Some of the costs for a business may be outside its control.
If the allocation of costs is felt to be unfair or unreasonable by some departments, this may lead to conflict between departments.
what are profit centres
the profits coming in are ascribed to different parts of the business. From this, management can judge which products, outlets or divisions are the most profitable parts of the firm’s operations. The firm may use the same criteria for dividing the business into cost and profit centres.
what is absorption costing
all the indirect costs or overheads of a business are absorbed by different cost centres. The methods used for allocating overheads to different cost centres will vary.
what are the benefits of absorption costing
that it ensures that all the overheads are covered somewhere in the business. Therefore means that a price exceeds the cost for each unit of the good or service, a profit will be achieved.
what are the disadvantages of absorption costing
time consuming and expensive to complete. Risk that information is old and does not represent current situation.
how do you calculate contribution
Contribution per unit (CPU)= price- variable costs per unit.
how do you calculate total contribution
sales X Contribution per unit
how is contribution different to profit
Contribution shouldn’t be confused with profit. Output making a positive contribution may increase profits, but not necessarily the case. Businesses most likely to consider contribution costing when considering accepting an order that will not increase their overheads.
what is contribution
the revenue received from selling a product minus the variable costs of producing that good. Assuming that the revenue is greater than the variable costs of making the good or providing the service, there is a contribution to the fixed costs.
if the fixed costs have already been paid for, any contribution will be making a profit.
