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Business Studies > Accounting And Finance > Flashcards

Accounting And Finance Flashcards

1
Q

What is needed when making financial comparisons?

A
  • avoid bias or misrepresentation
  • are all assets of the business been valued on the same manner?
  • financial figures are just numbers doesn’t show you other indications
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2
Q

What needs to be noted when setting financial objectives?

A
  • size of business
  • other objectives
  • budgets
  • state of the economy
  • level of competition
  • government
  • interest rates
  • legislation
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3
Q

What does working capital mean?

A

Short term finance required for the day to day running of the business

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4
Q

How long is short term?

A

Up to 3 years

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5
Q

What is cash flow?

A

A business needs sufficient inflows of cash to finance its day to day outgoings; if cash receipts are insufficient, the business is said to have cash flow problem

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6
Q

What are examples of short term finance?

A
  • overdraft
  • loan
  • trade credit
  • factoring
  • hire purchase
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7
Q

What factors do banks consider when deciding whether to lend?

A
  • what the finance is to be used for
  • company’s past trading record
  • type of product being sold
  • businesses current financial position
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8
Q

What is factoring?

A

When a business sells its debt to raise finance (“IOU”)

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9
Q

What is trade credit?

A

When here is delayed payment of products

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10
Q

What are the advantages and disadvantages of factoring?

A

Advantages - receives most of the finance at once

Disadvantage - lost a percentage of the money owed

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11
Q

What ae examples of medium term finance?

A

Medium term loan
Leasing
Hire purchase
Retained profit

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12
Q

What is a debenture?

A

A long term loan that are only available to a plc. The company does not borrow but sells debentures to investors in order to raise finance.

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13
Q

What are types of long term finance?

A 
Loan
Debenture
Share issue
Sale of assets 
Sale and lease back
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14
Q

What is depreciation?

A

Where the value of the asset falls over time

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15
Q

What is venture capital?

A

Finance from individuals or firms who lend money to, or buy shares in, small and medium sized businesses that require finance for starting up.

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16
Q

What should a business consider when choosing a method of finance?

A
  • length of time
  • legal structure of the business
  • quantitative factors
  • qualitative factors (e.g. control)
  • state of the economy
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17
Q

What are the two categories in accounting?

A
  • financial accounting

- management accounting

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18
Q

What is management accounting?

A

Concentrates on the internal financial accounts, allowing the business to monitor and evaluate its performance

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19
Q

What are the principles of accounting?

A
  • consistency
  • going concern
  • matching (accruals)
  • materiality
  • objectivity
  • prudence (conservatism)
  • realisation
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20
Q

What does matching/accruals mean?

A

The dates used to record financial transactions are those when the transaction occurred and not when the actual payment is made.

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21
Q

What dopes materiality mean?

A

Don’t count the value of all assets in the business when calculating the value of the business

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22
Q

What does objectivity mean?

A

Principle that means the accounts must be backed up by evidence and must be realistic and therefore based on facts, not opinions or guesses.

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23
Q

What does prudence mean?

A

Means don’t overstate the financial situation.

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24
Q

What is generally accepted accountancy practice (GAAP)?

A

Is a framework of accounting rules or principles

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25
Q

Why might a business want to comply with GAAAP?

A

Allows stakeholders to make comparisons on the basis that the businesses all use the same set of principles.

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26
Q

What is a fixed cost ?

A

Where costs do not vary with the level of out put e.g. factory’s rent, business rates, machines

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27
Q

What are overheads/indirect costs?

A

Costs that can not be attributed to a particular unit of output.

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28
Q

What is a stepped fixed cost and what is an example?

A

When production increases the business buys additional machinery to cope with the extra production required.

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29
Q

What are variable costs?

A

Costs that are directly related to the level of output or sales

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30
Q

What are direct costs?

A

Costs that are directly attributable to a unit output (raw materials)

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31
Q

What are variable costs?

A

Costs that change in proportions to the level of goods or services a business produces

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32
Q

How do you workout total costs?

A

Fixed costs + variable costs

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33
Q

How do you work out unit cost?

A

Total cost/output

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34
Q

What is a marginal cost?

A

It is the cost of producing one additional good. It is the increase in variable costs

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35
Q

What is a social cost?

A

It is a cost on an external stakeholder - e.g. pollution

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36
Q

What is opportunity cost?

A

what a business could have spent the money on the next best alternative.

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37
Q

How do you work out average revenue?

A

Total revenue/number of sales

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38
Q

What is standard costing?

A

Is the cost that the business would normally expect for the production of a particular product. E.g. the cost for a hairbrush is $3 this is what the business expects the final cot of production.

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39
Q

What are the advantages of standard costs?

A
  • gives the business a simple target
  • gives employees a target to aim for and can alert them to problems as and when they arise
  • can be used as a reward motivation policy
  • encourages workers to look for better and more efficient ways of completing a job.
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40
Q

What are the disadvantages of standard costs?

A
  • may be time consuming to collect information

- may result in a situation where quality is sacrificed to keep costs of production down

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41
Q

What is a cost centre?

A

Specific part of a business where costs can be identified and allocated with reasonable ease. E.g. the marketing department may get $10000 is costs allocated to them

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42
Q

What are the advantages if cost centres?

A
  • use the information to highlight inefficient departments
  • can be used to motivate workers
  • may encourage management to fin new suppliers or more efficient production techniques.
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43
Q

What are the disadvantages of cost centres?

A
  • time consuming
  • for some businesses it may be difficult
  • the way in which costs are allocated can have a significant effect on the performance
  • some costs for a business may be out of their control
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44
Q

What are profit centres?

A

Profits are split into different parts of the business

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45
Q

What is absorption costing?

A

Where all indirect costs or overheads of a business are absorbed by different cost centres.

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46
Q

What is contribution or marginal costing?

A

Where fixed costs or overheads are ignored and the business only considers the variable costs of production

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47
Q

How might costing methods be useful to stakeholders?

A
  • may affect future investment (shareholders)
  • may affect job security
  • may use it to back up loans etc
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48
Q

How do you calculate contribution per unit?

A

Price - variable costs

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49
Q

How do you work out contribution?

A

Revenue - variable costs

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50
Q

How do you work out profit?

A

Total contribution - fixed costs

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51
Q

How do you work out break-even level by formula?

A

Fixed costs/contribution per unit

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52
Q

How would you find break even by using a chart?

A

Total revenue = Total costs

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53
Q

What would the break even point look like on a graph?

A

Where the total revenue and total cost lines intercept.

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54
Q

What is the margin of safety?

A

The difference between the actual and breakeven level of output

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55
Q

What are the benefits if break even analysis?

A
  • easy to view and compare
  • aids the decision making process
  • can be used to show the level of profit at a given level of output
  • can consider the impacts of changes on a particular product
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56
Q

What are the limitations of break even analysis?

A
  • used using redacted figures
  • direct and variable costs may change
  • doesn’t take into account economies of scale
  • if batch production is being used breakeven wont be obtainable because they are producing a fixed quantity
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57
Q

How do you work out total revenue?

A

Price x quantity sold

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58
Q

What are three methods of investment appraisal?

A
  • Pay back
  • accounting rate of return
  • Net present value
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59
Q

What is pay back?

A

Measures how quickly the cost of the investment can be paid back.
Longer it is to payback the riskier the investment.

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60
Q

EOY 3 - cumulative cash inflow - (20,000)
EOY 4 - cumulative cash inflow - 10,000

What month did the investment payback?

A

20,000/30,000 = 2/3 = 0.66 = 8 months

61
Q

What are the advantages of investment appraisal?

A
  • It is easy to calculate ad understand
  • it is quick and a useful guid to the level of risk
  • effective method for companies in markets which are constantly changing.
62
Q

What are the disadvantages of payback?

A
  • ignores inflation
  • does not take into consideration any cash inflows after the payback period
  • does not measure the level of profits from the investment.
63
Q

What is accounting rate of return (ARR) what does it measure?

A

Measures the profitability of any investment - higher the rate of return the better the investment.

64
Q

How do you work out ARR?

A

1) total inflows
2) total inflows - cost of investment = profit
3) average annual profit/life of printer
4) return on investment = annual average profit/cost of investment
5) convert it into a percentage

65
Q

What are the advantages of ARR?

A
  • takes into account all of the cash flows throughout the life of the investment
  • it measures the profitability of the investment
  • relatively easy to calculate
  • allows simple comparison
66
Q

What are the disadvantages of ARR?

A
  • no indication of when the cash inflows occur within any given year.
  • ignores the value of money over time
  • life of the investment needs to be known and may alter over time
  • harder to calculate than payback
67
Q

What does Net present value take into count that ARR and payback don’t?

A

It takes into account inflation and the value of money.

68
Q

How do you work out Net present value?

A

Net return x discount factor

69
Q

What are the advantages of NPV?

A
  • It takes into account the value of money

- all cash inflows are accounted for

70
Q

What are the disadvantages of NPV?

A
  • more complicated to work out than payback and ARR
  • takes longer to workout, therefore more expensive
  • can only guess the discount factor in the future
71
Q

What are some Non-financial factors affecting investment?

A
  • Resources available
  • the economy
  • data sources
72
Q

How is internal rate of return different to NPV?

A

It allows the return to be calculate NPV does not do this.

73
Q

What is internal rate of return?

A

The discount rate at which the NPV is equal to zero.

74
Q

What is an overdraft facility?

A

An agreement with a bank to be able to overdraw on an account up to a stated limit.

75
Q

What is zero budgeting?

A

Involves setting all budgets at zero, requiring managers to justify any requirement for funds.

76
Q

What are flexible budgets?

A

Allow businesses to make allowances for changes in the level of sales volume so that adverse variances are advoided

77
Q

What is variance?

A

The amount by which the actual financial results for an item differ from the mount in the budget.

78
Q

What are the reasons for cash flow forecasts?

A
  • allows a valuable planning procedure
  • useful for helping the business set its prices
  • can be used to address marketing strategies
  • looked at by potential investors
79
Q

What are the limitations of cash flow forecasts?

A
  • changes to the rate of interest
  • changes in economic policy
  • changes in economic climate
  • they’re only estimates
  • changes in technology
80
Q

What is the impact of cash flow forecasts and statements on a business?

A
  • they are used as a measure of performance
  • they allow management to correct any problems that may occur
  • employees may be able to judge the ability of the business to offer higher levels of pay.
81
Q

What may be some of the causes of cash flow problems?

A
  • level of sales
  • business sales
  • business environment
  • excess stock
  • late payments
82
Q

What are liquidity ratios?

A

They assess the level of cash within a business

83
Q

How might you improve the cash flow of the business?

A
  • increase sales
  • reduce stock levels
  • factoring
  • leasing not buying
  • loans
  • changing creditor and debtor days
  • cut operating costs
84
Q

How do you work out index numbers?

A

Number in year required/number in base year x 100

85
Q

How do you work out gross profit?

A

Revenue - cost of sales

86
Q

How do you work out operating profit?

A

Gross profit - expenses

87
Q

How do you work out profit for the year?

A

Profit and dividends - tax

88
Q

How do you work out revenue?

A

Price x sales

89
Q

How do you work out cost of sales?

A

Direct costs

90
Q

What is an asset and liability?

A

Asset - what a business owns

Liability - what a business owes

91
Q

What are current and non current liabilities?

A

Current - less than one year

Non current - money owed for more than one year

92
Q

What is liquidity?

A

The ability to convert assets to cash

93
Q

What is goodwill?

A

The difference in the value of the business and the net asset value

94
Q

What is depreciation?

A

The concept that the fixed asset will be of less value over time.

95
Q

What is net book value?

A

Cost of asset - depreciation value

96
Q

What is straight line method?

A

Simplest method of depreciation.

97
Q

How do you work out straight line method?

A

Initial cost - residual value/life of asset

98
Q

What are the disadvantages and advantages of straight line depreciation method?

A

advantages

  • amount of depreciation is lower in the first few years
  • by having lower level of depreciation there is a higher valuation of an asset

Disadvantages

  • estimate of residual value is required
  • Assumes that the life of the assets is known
  • having lower amount of depreciation in the first few years can be misleading
99
Q

What is declining balance?

A

Applies a constant percentage rate of depreciation each year

100
Q

What are the advantages and disadvantages of declining balance?

A

Advantages

  • method reflects more realistically the value of assets that lose value significantly in the early years
  • no estimate of the residual value is required

Disadvantages

  • with a higher level of depreciation in the early years, the valuation of the assets is lower on the balance sheet
  • lower valuation of assets may make it harder to borrow against assets
101
Q

What are examples of liquidity ratios?

A
  • current ratio

- acid test ratio

102
Q

What are examples of profitability ratios?

A
  • gross profit margin
  • net profit margin
  • return on net assets
  • return on capital employed
103
Q

What are some Examples of efficiency ratios?

A
  • Asset turnover
  • stock turnover
  • debtor days
  • creditor days
104
Q

What are efficiency ratios concerned with?

A

How efficient the business is to move stock, collect money it is owed or pay oink money it is owed

105
Q

What are some examples of gearing ratios?

A
  • Gearing

- interest cover

106
Q

What are gearing ratios concerned with?

A

Concentrates on the long term liabilities of the business and its ability to borrow money and its ability to cover the cost of borrowing

107
Q

What does liquidity mean?

A

The ability to convert assets into cash

108
Q

How do you work out current ratio?

A

Current assets/current liabilities

109
Q

What is the ideal ratio for the current ratio and what does it mean?

A

1.5 - for every $1 of liabilities the business hods $1.50 in assets

110
Q

How do you work out acid test ratio?

A

Acid test = current assets - inventory(stock)/ current liabilities

111
Q

What is the ideal value for the acid test ratio?

A

1

112
Q

What are the advantages of using liquidity ratios?

A
  • comparisons can be made
  • useful to stakeholders
  • measure of performance
  • aids decision making process
113
Q

What are the limitations of ratios?

A
  • inflation may distort figures such as profits
  • state of the economy may mean that a fall in certain ratios is not due to the poor performance of the business
  • external factors may have an impact on the figures
114
Q

What are gearing ratios also called?

A

Solvency ratios

115
Q

How do you work out the gearing ratio?

A

Non-current liabilities/capital employed x 100

116
Q

If the value of the gearing ratio is 28.1% what does that mean?

A

Indicates that 28.1% of the total capital employed in the business is financed by long term borrowing - low gearing

117
Q

How do you work out debt to equity ratio and what type of ratio is it?

A

Gearing - debt/equity x 100

118
Q

What are the benefits to being highly geared?

A
  • it may be cheaper than alternative source of funds when compared to shares
  • may suggest fewer shareholders which means higher control of the business
  • may reduce dividend payments
119
Q

How do you work out interest cover and what type of ratio is it?

A

Operating profit/interest payable

120
Q

For interest number what value is most desirable and why?

A

Higher the value as it shows how many Times the loan can be paid over with the operating profit

121
Q

How do you work out asset turnover?

A

Revenue/non current assets

122
Q

What value is most desirable with asset turnover?

A

The higher the ratio, the better as it implies that the assets are being used in a more efficient manner

123
Q

What does asset turnover measure?

A

Measures how efficiently a business is able to use its non-current assets to generate sales revenue

124
Q

How do your work out stock turnover and what type of ratio is it?

A

Efficiency - cost of stock/sales/average sales

125
Q

How would you try and find out how many days it takes to Turn the stock over?

A

Stock/cost of sales x 365

126
Q

What value is most desirable with stock turnover?

A

Higher the value the better

127
Q

How do you work out debtor days? What type of formula is it?

A

Efficiency ratio - Trade receivables/revenue x 365

128
Q

How do you work out creditor days?

A

Trade payables/cost of sales x 365

129
Q

What dies a creditor days value of 36.5 mean?

A

It men’s that the business takes in average 36.5 days to pay its creditors

130
Q

How do you work out gross profit margin?

A

Gross profit/sales(revenue)x 100

131
Q

What does a Gross profit margin of 40% mean?

A

It means for every $1 of sales $0.40 is gross profit

132
Q

How do you work out net profit margin?

A

Net profit (operating profit)/sales x 100

133
Q

Why is net profit better than gross profit?

A

Takes into account direct and indirect costs where as gross profit only takes into account

134
Q

How do you work out ROCE? And what type of ratio is it?

A

Profitability ratio - operating profit/capital employed x 100

135
Q

What does ROCE show?

A

Shows the amount of money earned by the business in terms of profits in relation to the amount invested by share holders

136
Q

What does capital employed mean? And the formula

A

capital employed is total assets minus current liabilities.

137
Q

How do you work out return on equity and what type of ratio is it?

A

Profitability - profit for the year/shareholders equity

138
Q

What does return on equity measure?

A

Measures the ability of a business to generate profits from its shareholders investments into the business.
- how much profit is generated for every pound of shareholders funds invested

139
Q

What is the difference between ROCE and return on equity?

A

ROE considers the amount of profits generated from equity(shares). Whereas ROCE takes into consideration shareholders funds and liabilities.

140
Q

How do you work out dividend per share and what type of ratio is it?

A

Shareholder ratio - total dividends paid/number of shares issued

141
Q

What does dividend per share measure?

A

how much of the profits are distributed to the shareholders.

142
Q

How do you work out dividend yield?

A

Dividend per share/market price of share x 100

143
Q

What does dividend yield measure?

A

Measures the return on the investment - comparing the dividend per share and the price of the share

144
Q

How do you work out earnings per share? What type of ratio is it?

A

Share holder ratio - profit for the year/number of shares issued

145
Q

What does earnings per share measure?

A

Shows how much each share earned in a financial year.

146
Q

A EPS is $0.55 what does this mean?

A

Means that each share has earned $0.55 profit

147
Q

How do you work out price earning ratio?

A

Market price of share/earnings per share

148
Q

What does price earnings ratio measure?

A

Measures and compares the current market price with the earnings for that share.

149
Q

If the PE ratio is 16.4 what does that mean?

A

The market price is 16.4 times the earnings per share, it would take 16.4 years to cover the cost of buying the shares.

Business Studies (10 decks)

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