accounting and finance

Question 1

why is it important to have business and finance objectives

Answer 1

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

Question 2

what is it important to consider when setting financial objectives

Answer 2

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.

Question 3

From financial objectives and data, a stakeholder can ascertain a wealth of information which is useful for what reasons

Answer 3

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’.

Question 4

Setting clear financial objectives allows the business/ stakeholders to:

Answer 4

• 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

Question 5

what are the problems with accounts used

Answer 5

as they are used by many stakeholders may be portrayed in a favourable light. window dressing.

Question 6

why may window dressing occur

Answer 6

• 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

Question 7

what is short term finance

Answer 7

is needed for the day-to-day running of a business and is usually for a period of up to three years.

Question 8

what is cashflow

Answer 8

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.

Question 9

what is an overdraft

Answer 9

a bank allows a firm to take out more money than it has in its bank account,
interest rates are typically higher than loans.

Question 10

how does an overdraft work

Answer 10

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

Question 11

what are the two types of bank accounts

Answer 11

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

Question 12

name something about a deposit account

Answer 12

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.

Question 13

name something about a current account

Answer 13

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.

Question 14

what are interests like on an overdraft

Answer 14

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.

Question 15

what shouldn’t an overdraft be used for

Answer 15

it should not be used for the purchase of capital items such as computers or photocopiers.

Question 16

what is a loan

Answer 16

Loans from a bank (or from family and friends). Usually paid with interest. Interest rates could be fixed or variable rate.

Question 17

how does a short term loan work

Answer 17

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).

Question 18

what should a loan be used for

Answer 18

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.

Question 19

what is the difference between a loan and an overdraft

Answer 19

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.

Question 20

what factors influence a banks decision to lend

Answer 20

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.

Question 21

what is a trade credit

Answer 21

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.

Question 22

how does a trade credit work

Answer 22

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.

Question 23

what is factoring

Answer 23

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.

Question 24

how does factoring work

Answer 24

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.

Question 25

what is hire purchase

Answer 25

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.

Question 26

how does hire purchase work

Answer 26

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.

Question 27

what is medium term finance

Answer 27

Usually of a period of between three and ten years.

Question 28

why would a business use medium term finance

Answer 28

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

Question 29

what is a medium term loan

Answer 29

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.

Question 30

The amount of interest payable on a medium-term loan depends on several factors, what are they

Answer 30

o how much is borrowed.
o How long the money is wanted for.
o The security that is provided.

Question 31

what is a variable rate loan

Answer 31

the amount of interest which the business pays vary, according to the bank of England’s decision on interest rates.

Question 32

what is a fixed rate loan

Answer 32

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.

Question 33

what are the disadvantages of a fixed rate loan

Answer 33

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.

Question 34

what is leasing

Answer 34

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.

Question 35

how does leasing and hire purchase differ

Answer 35

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.

Question 36

what is long term finance

Answer 36

Usually for a period of time in excess of 10 years. The finance is for securing the resources for the long-term growth.

Question 37

what are long term loans

Answer 37

used for expensive pieces of machinery, the cost of which needs to be spread over a lengthy period of time.

Question 38

what are loans for buildings called

Answer 38

mortgages. possible to have variable or fixed rate.
however fixed is not for the whole length of loan.

Question 39

what is a debenture

Answer 39

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.

Question 40

what are debentures

Answer 40

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).

Question 41

what is issue of shares

Answer 41

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

Question 42

what is another name for issue of shares

Answer 42

equity finance

Question 43

what is sales and leaseback

Answer 43

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.

Question 44

what is a disadvantage of a leaseback

Answer 44

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.

Question 45

what is retained profit

Answer 45

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.

Question 46

what does a government provide assistance for

Answer 46

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.

Question 47

what is venture capital

Answer 47

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

Question 48

what can the venture capitalist gain if business goes well

Answer 48

large dividend payments and a substantial capital gain from the shares if it chooses to sell them.

Question 49

what is a business angel

Answer 49

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.

Question 50

problem with business angels

Answer 50

conflict

Question 51

what is internal finance

Answer 51

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.

Question 52

what is external finance

Answer 52

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.

Question 53

what is selling unwanted assets

Answer 53

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.

Question 54

what is depreciation

Answer 54

An allowance for the falling value of assets as a result of wear and tear.

Question 55

what are the main principles of accounting

Answer 55

consistency, going concern, accurals, materiality, objectivity, prudence, realisation

Question 56

what is consistency

Answer 56

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.

Question 57

what is going concern

Answer 57

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

Question 58

what is accruals

Answer 58

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.

Question 59

what is materiality

Answer 59

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

Question 60

what is objectivity

Answer 60

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.

Question 61

what is prudence

Answer 61

be pessimistic. being realistic with valuation of assets, understand assets and consider depreciation.

Question 62

what is realisation

Answer 62

record assets when legal ownership changes rather than payment date.

Question 63

what is generally accepted accounting practice (GAAP)

Answer 63

framework of accounting rules or principles.

Question 64

what are generally accepted accounting practices

Answer 64

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

Question 65

what is the definition of cost

Answer 65

amount incurred to make goods of services

Question 66

what are fixed costs

Answer 66

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

Question 67

what are two other names for fixed costs

Answer 67

overheads
indirect costs- however can vary

Question 68

what are stepped fixed costs

Answer 68

Although these costs are referred to as fixed costs, it is more accurate to suggest that they are fixed in the short term.

Question 69

what are variable costs also known as

Answer 69

direct costs

Question 70

what are variable costs

Answer 70

are directly related to the level out output or sales. They increase when output increases and falls when output falls.

Question 71

what is the formula for total costs

Answer 71

Total costs= fixed costs + variable costs

Question 72

what is unit cost

Answer 72

is the cost of producing one product

Question 73

how do you calculate unit costs

Answer 73

Unit cost= total cost/ output

Question 74

how do you calculate average costs

Answer 74

Average cost= FC + VC (TC)/ output

Question 75

what are marginal costs

Answer 75

costs of producing one extra good

Question 76

what are social costs

Answer 76

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.

Question 77

what is an example of social costs

Answer 77

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.

Question 78

what is opportunity cost

Answer 78

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.

Question 79

what is the definition of revenue

Answer 79

money made from selling goods or services

Question 80

how do you calculate average revenue

Answer 80

total revenue/ number of sales

Question 81

what is the impact of cost and revenue on a business

Answer 81

Costs influence both the price that a product may be sold for and the level of profit for the business.

Question 82

what is standard costing

Answer 82

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.

Question 83

what are the advantages of standard costing

Answer 83

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

Question 84

what are disadvantages of standard costing

Answer 84

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

Question 85

what are cost centres

Answer 85

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

Question 86

what are the number of ways in which a business can choose to allocate costs to cost centres

Answer 86

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.

Question 87

what are the benefits of cost centres

Answer 87

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.

Question 88

what are the disadvantages of cost centres

Answer 88

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.

Question 89

what are profit centres

Answer 89

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.

Question 90

what is absorption costing

Answer 90

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.

Question 91

what are the benefits of absorption costing

Answer 91

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.

Question 92

what are the disadvantages of absorption costing

Answer 92

time consuming and expensive to complete. Risk that information is old and does not represent current situation.

Question 93

how do you calculate contribution

Answer 93

Contribution per unit (CPU)= price- variable costs per unit.

Question 94

how do you calculate total contribution

Answer 94

sales X Contribution per unit

Question 95

how is contribution different to profit

Answer 95

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.

Question 96

what is contribution

Answer 96

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.