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business. > Accounting and Finance > Flashcards

Accounting and Finance Flashcards

1
Q

What might a business invest finance in?

A
  • Purchasing machinery
  • Extending the factory
  • Investing in a marketing campaign
  • Growth
  • Advertisement
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2
Q

What are 2 ways of working out the returns of investments?

A
  1. Payback charts

2. Average Rate of Return (ARR %)

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3
Q

What is an advantage and disadvantage of using payback to determine returns on investments?

A

An advantage is that it is simple and easy to calculate, which will mean quicker decision making.

A disadvantage is that it is based on assumptions and doesn’t account for external influences so may not always be accurate

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4
Q

How do you work out ARR?

A
  • Add up all cash inflows
  • Subtract from cost of investment (profit)
  • Profit / Years of investment
  • = ARR

ARR
——– x 100 = Profit (%)
Initial Investment

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5
Q

What is are the advantages of using ARR to determine returns on investments?

A
  • % return can be compared with a target return

- Focuses on profitability, key issue for shareholders

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6
Q

What is are the disadvantages of using ARR to determine returns on investments?

A
  • Does not take into account cash flows, only profit
  • Takes no account of inflation, or the value of money
  • Assumes early profits are as important as late profits
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7
Q

What is ROCE?

A

Return on Capital Investment

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8
Q

What does ROCE do?

A

Tells us what returns/profits the business has made on the resources available to it

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9
Q

What is the formula for ROCE?

A

ROCE (%) = Operating Profit/Capital Employed x 100

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10
Q

What is capital employed?

A

All funds invested added together

E.g, Share capital + Retained Profit + Loan borrowings

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11
Q

What is meant by an internal source of finance?

A

Money sourced from within the business

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12
Q

What are some examples of internal sources of finance?

A
  • Divestment
  • Personal savings
  • Sale/lease back
  • Factoring
  • Retained profits
  • Sale of fixed assets
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13
Q

What is meant by divestment?

A

Close down/stop a certain part of the business or investment. Use this money a source of finance for something else. It is a long term source.

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14
Q

What is sale/lease back?

A

Selling your own property to be able to raise finance for investment, and then leasing the property back off the new owner. It is a medium term source.

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15
Q

What is factoring?

A

Selling your debt. It is a short term source.

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16
Q

What are retained profits?

A

Profits made by the business which are saved to be reinvested back into the business. It is a medium term source.

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17
Q

What is sale of fixed assets?

A

Sale of business assets which are unused or not necessary, in order to generate more finance. It is a long term source.

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18
Q

What are the 3 types of financial investment?

A
  • Short term (up to 3 years)
  • Medium term (3-10 years)
  • Long term (10+ years)
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19
Q

What factors need to be considered when choosing a source of finance?

A
  • Expensive or cheap?
  • Easy or hard to obtain?
  • Opportunity cost
  • Is this option available and accessible?
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20
Q

What are the advantages of personal savings?

A
  • Cheap for the business

- Easily available

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21
Q

What are the disadvantages of personal savings?

A
  • Might take a while to save enough
  • Personal risk
  • Opportunity cost
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22
Q

What are the advantages of sale/lease back?

A
  • Asset can still be used

- High finance obtained from sale

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23
Q

What are the disadvantages of sale/lease back?

A
  • Only short term gain, might not be able to leaseback over a long period of time
  • Expensive over time, cost builds up
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24
Q

What are the advantages of factoring?

A
  • Obtain finance quickly

- Saves time and inconvenience

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25
Q

What are the disadvantages of factoring?

A
  • Expensive, they take of portion of it (debt collection)

- May cause resentment

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26
Q

What are the advantages of retained profit?

A
  • Easy to obtain
  • Cheap source of finance
  • No loan/debt/lease to pay off
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27
Q

What are the disadvantages of retained profit?

A
  • Might be hard to obtain enough profit to fulfil the investment
  • Opportunity cost, no savings interest
  • May not be available
  • Can’t pay dividends
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28
Q

What are the advantages of sale of fixed assets?

A
  • Cheap, quick, easy money

- Get rid of unnecessary expenses

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29
Q

What are the advantages of divestment?

A
  • Can be reinvested into something more profitable
  • Allows specialisation
  • Efficient
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30
Q

What are the disadvantages of divestment?

A
  • Opportunity cost

- loss of staff and redundancy pay

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31
Q

What are external sources of finance?

A

Sourcing money from outside of the business

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32
Q

What is an overdraft?

A

Withdrawing over the limit of your bank account (going into minus) - short term

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33
Q

What is trade credit?

A

Paying for stock/materials after a period of time (usually 30 days) giving time for finance to be raised from sales first - short term

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34
Q

What is leasing?

A

A legal agreement where you pay for a right to use an asset which is owned by someone else, effectively renting - short/medium term

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35
Q

What is hire purchase?

A

Hiring assets (cars, equipment etc.), they do not become property of the user until a final bloom payment has been made

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36
Q

What is a bank loan?

A

Borrowing money from the bank and paying it off with interest - long term

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37
Q

What is a grant?

A

Money from the government which is given to a business for a specific purpose - medium term

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38
Q

What is a share issue?

A

Only used by limited companies (plc/ltd), finance is raised in return for a share in the business - long term

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39
Q

What is a mortgage?

A

A legal agreement where a bank/building society lends money at interest in exchange for ownership of property. - long term

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40
Q

What is a venture capital?

A

Investment made by specialist or another business - medium term

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41
Q

What are the advantages of an overdraft?

A
  • Quick access

- Cheaper than other sources

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42
Q

What are the disadvantages of an overdraft?

A
  • Has to be repaid, usually w interest

- Bank can reduce overdraft limit

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43
Q

What are the advantages of trade credit?

A
  • Helps cash flow
  • No interest costs
  • Flexibility w repayment
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44
Q

What are the disadvantages of trade credit?

A
  • Problem if stock doesn’t sell
  • Bargain power lowered
  • Risk losing supplier if not able to repay
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45
Q

What are the advantages of a grant?

A
  • Interest free
  • No repayment/debt
  • Helps start up investment
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46
Q

What are the disadvantages of a grant?

A
  • Has to be for a specific purpose
  • May not get full amount required
  • Loss of flexibility, slow to access
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47
Q

What are the advantages of a share issue?

A
  • High finance raised

- Publicity

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48
Q

What are the disadvantages of a share issue?

A
  • Loss of control
  • More dividend payments
  • Expensive
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49
Q

What are the advantages of leasing?

A
  • Product readily available
  • More flexibility
  • Cheaper than buying outright
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50
Q

What are the disadvantages of leasing?

A
  • No ownership/expensive longterm

- Cannot be used to raise finance in future

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51
Q

What are the advantages of having a loan/mortgage?

A
  • Repayment can be spread over time and paid in instalments
  • Ownership of property (mortgage)
  • Usually large amount of capital obtained
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52
Q

What are the disadvantages of having a loan/mortgage?

A
  • Interest to be paid with repayment
  • Bank may not always give out loans if credit history is bad or weak
  • The bank hang on to the deeds of your property as security
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53
Q

What are the advantages of venture capital?

A
  • High finance raised
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54
Q

What are the disadvantages of venture capital?

A
  • hard to access

- take a % of profits in return

55
Q

State the principles of accounting

A
  • Consistency in methodology
  • Going concern (running normally)
  • Matching - all accounts are done at the same time
  • Materiality - realistic calculations
  • Objecitivity - removes bias and subjectivity
  • Prudence, being careful, perhaps undervalue
  • Realisation, published at the same time
56
Q

What is an income statement?

A

A financial document that shows the income and expenditure over the course of a 12 month period. It may also be known as a profit/loss account

57
Q

What items are included in an income statement?

A
  • Sales revenue
  • Cost of producing of sales
  • Gross profit
  • Overheads and expenses, costs not directly involved in the production process such as rent
  • Net profit
58
Q

What is a debenture?

A

An agreement between the lender and the borrower which is issued by the company. It typically carries a fixed rate or interest over the course of the loan. it is a long term source of finance/loan which is predominantly aimed at big company

59
Q

What are the quantitative factors surrounding methods of finance?

A
  • How much debt do we already have?

- How expensive is this source of finance?

60
Q

What are the qualititative factors surrounding methods of finance?

A
  • Do we remain in control of the business and the finance?

e. g) venture capital, share issue

61
Q

What is a budget and why is it necessary?

A

A budget involves allocating a set amount of money each month for various expenses. It is a necessary to limit costs and keep spending under control

62
Q

What is variance?

A

The difference between planned budgets and the actual spending outcome, e.g) whether a business was under or over budget

63
Q

What are the 2 types of variance?

A

Positive variance = underbudget

Negative variance = overbudget

64
Q

What is meant by a gearing ratio?

A

A ratio that is the percentage that shows how much of the investment business has to pay back

65
Q

What is the formula for calculating gearing ratio?

A

Long term liabilities/Capital employed x100

66
Q

What does it mean if a businesses gearing ratio is over 50%?

A

If it is over 50%, the business is said to be highly geared. Ideally, a business should aim for low gearing

67
Q

What is meant by interest cover?

A

A figure that compares interest payments with profits and assess’ risk

68
Q

What is the purpose of interest cover?

A

To see if interest payments can be covered with profits

69
Q

What is the formula for calculating interest cover?

A

Profit before tax and interest (operating profit)/Interest

70
Q

What is meant by the gross profit margin?

A

GPM is a profitability ratio that shows the % profit made per item/unit of output

71
Q

How do you calculate the gross profit margin?

A

Gross Profit/Sales Revenue x 100

72
Q

What is meant by the net profit margin?

A

NPM is a profitability ratio that shows the % profit made per item/unit of output with production costs deducted. This is the profit a business keeps

73
Q

What is meant by the net profit margin?

A

Net profit (before tax)/Sales Revenue x 100

74
Q

What is cash flow forecasting?

A

Estimating/forecasting the money that flows in and out of a business

75
Q

How can cash flow concerns be addressed?

A
  • Boost prices to bring in more revenue
  • Launch a new desirable product
  • Reduce wage bill by giving less hours for overtime
  • Pay expenses such as insurance on a monthly basis to manage outflows
76
Q

Explain how producing a cash flow forecast helps when applying for a bank loan

A

It might be helpful because the bank can see the management of income and expenses over a 12 month period from which they can make a judgement of how much risk there is providing a bank loan and how well they can pay off overdraft credit

77
Q

What are the benefits of cash flow forecasting?

A
  • Helps set targets for management
  • Helps see cash flow which is vital for survival
  • Spots problems in advance which allows solutions to be put in place
78
Q

What are the limitations of cash flow forecasting?

A
  • only an estimate, may not be accurate

- Doesn’t show the liquid position of the business

79
Q

What is return of equity?

A

How much profit is made per £ of shares. A higher figure is more desirable for the business

80
Q

Why do businesses use efficiency ratios?

A

To see how well the business manages its assets and liabilities

81
Q

What is meant by asset turnover?

A

How much revenue assets are generating

82
Q

What is the formula for calculating the net asset turnover?

A

Sales Revenue/Net assets

83
Q

What is the formula for calculating the non current asset turnover?

A

Sales Revenue/Non current assets

84
Q

What is the formula for calculating stock turnover?

A

Cost of sales/Average stock held

85
Q

How would you interpret figures for stock turnover?

A
  • Higher number is better

- Low number suggests problem with stock control

86
Q

How do you calculate dividend per share (£)?

A

Total dividends paid/Number of shares

87
Q

How do you calculate dividend yield?

A

Dividend per share(pence)/Share price(pence)

88
Q

How do you calculate earnings per share?

A

Profit for the year/No. of shares issued

89
Q

How do you calculate price earnings ratio?

A

Market price of share/Earnings per share

90
Q

What does ARR measure?

A

ARR measures the average profit gained as a % of the cost of the investment

91
Q

What are the steps for working out ARR?

A
  1. Calculate total profits (Rev-Costs)
  2. Total profit/Lifetime of investment (5 years) = AV profit
  3. (AVP/Cost of investment) x 100
92
Q

What are 4 examples of profitability ratios?

A
  1. ROCE
  2. Gross profit margin
  3. Net profit margin
  4. Return on equity
93
Q

How do you calculate return on equity?

A

Net profit/equity x 100

94
Q

What are 4 examples of activity ratios?

A
  1. Asset turnover
  2. Stock turnover
  3. Debtor collection period
  4. Creditor payment
95
Q

How do you calculate the debtor collection period?

A

Debtors/Turnover x 365

96
Q

How do you calculate creditor payment?

A

Creditors/Cost of sales x 365

97
Q

What are 4 examples of liquidity ratios?

A
  1. Current ratio
  2. Acid test ratio
  3. Gearing ratio
  4. Interest cover
98
Q

What are 4 examples of shareholder ratios?

A
  1. Earnings per share
  2. Price earnings ratio
  3. Dividend per share
  4. Dividend yield
99
Q

How do you calculate dividend cover?

A

Profit after tax/Dividends

100
Q

What is dividend cover?

A

How many times dividends can be paid from net profits

101
Q

What is meant by working capital?

A

The capital of a business which is used in its daily operations, the money that is currently available to a business for purchasing stock, paying wages & rent etc.

102
Q

How do you calculate working capital?

A

Current Assets - current liabilities

103
Q

What is the working capital cycle?

A

The amount of time it takes to turn working capital into actual cash

104
Q

What does a long working capital cycle mean for a business?

A

The longer the cycle is, the longer a business is tying up capital without earning a return to it

105
Q

What is the formula for calculating the working capital cycle?

A

Working capital x 365 / Sales Revenue

106
Q

What are some examples of fixed/non current assets?

A
  • Factory
  • Furniture
  • Delivery van
  • Machinery
  • Land
107
Q

What are some examples of current assets?

A
  • Cash in the till

- Stock

108
Q

What are some examples of long term/non current liabilities?

A
  • Mortgage

- Loan over 10 years

109
Q

What are some examples of short term/current liabilities?

A
  • Payment owed for stock on trade credit
  • Electric/gas bill payments
  • Overdraft
110
Q

What is depreciation?

A

A reduction in the value of an asset over time

111
Q

What is the difference between straight line depreciation and percentage depreciation?

A

Straight line is when the asset reduces by a set value every year (simple) whereas percentage is when the asset reduces by a set percentage every year (compound)

112
Q

What is net book value?

A

The value of the asset once depreciation has been taken into account

113
Q

What is residual value?

A

The end of lifetime value post depreciation

114
Q

acid test ratio formula

A

(current assets-stock) / liabilities

115
Q

ROCE formula

A

operating profit / capital employed x 100

116
Q

What are the 2 main types of accounting?

A
  1. Financial accounting

2. Management accounting

117
Q

What is meant by financial accounting, and what is its main purpose?

A

Concentrates on the assets, profits and levels of cash within the business. The main purpose is to satisfy the external stakeholders of a business, such as shareholders and financial institutions.

118
Q

What is meant by management accounting, and what does it enable a business to do?

A

Concentrates on the internal financial accounts, allowing the business to monitor and evaluate performance. It enables the business to set targets and therefore achieve its objective

119
Q

What are accounting principles for?

A
  • 7 principles that are put in place to ensure that figures are produced in a standardised manner
  • All these principles are guides which exist in order for stakeholders to view the accounts with confidence and trust
120
Q

What is the consistency principle?

A
  • All accounts produced in the same way

- Businesses will have a policy for the formulation of accounts and will apply this consistently

121
Q

What are the advantages of break even?

A
  • Helps set targets
  • Help to monitor success of the business
  • Identifies whether products are a waste of time
  • Helps justification for loans and borrowing money
122
Q

What are the disadvantages of break even?

A
  • Fixed costs may unexpectedly change
  • It is only a prediction
  • Assumes all output is sold
123
Q

What is break even formula?

A

Fixed costs/(selling price-variable costs)

124
Q

What is the margin of safety?

A

The difference between the number of products sold and the break even point

125
Q

What is a profit centre?

A

A separately identifiable part of a business for which it is possible to identify revenues and costs

126
Q

What are the advantages of profit centres?

A
  • Identifies where profit is earned
  • Support budgetary control
  • Comparisons can be made
  • Finance can be allocated more efficiently
127
Q

What are the disadvantages of profit centres?

A
  • Can be time consuming to set up and monitor
  • May lead to conflict and competition within the business
  • Potentially demotivating if profit centre targets are unattainable
128
Q

What is a cost centre?

A

A department for which costs can be solely calculated

129
Q

What are the 2 types of costing?

A 
Absorption costing (split into %)
Full costing (shared equally amongst all products)
130
Q

State 4 possible financial objectives

A
  1. Good cash flow
  2. Maintain a high share price
  3. Maximise profits and dividends
  4. Retaining profits and saving money
131
Q

What are some internal factors that might influence whether a business can meet its financial objectives or not?

A
  • Corporate objectives
  • Existing debt
  • Management ambition
132
Q

What are some external factors that might influence whether a business can meet its financial objectives or not?

A
  • Competition
  • Interest rates
  • STEEPLE
133
Q

Current Ratio

A

current assets / current liabilities

134
Q

Payback

A

cost of investments / cash inflows

business. (11 decks)

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