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PiXL Business > Accounting And Finance within a Business Environment > Flashcards

Accounting And Finance within a Business Environment Flashcards

1
Q

Explain how and why accounting and finance objectives are used by business and how they are used to achieve business objectives.

A
  • To focus the entire business
  • Important Measure of success or failure for the business
  • Reduced the risk of failure
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2
Q

Explain accounting and finance objectives.

A
  • Revenue Objectives
  • Cost Objectives
  • Profit Objectives
  • Cash Flow Objectives
  • Investment Objectives
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3
Q

Explain accounting and finance objectives - Revenue Objectives

A
  • REVENUE GROWTH
  • SALES MAXIMISATION - Aim to maximise sales regardless of wether those sales are profitable
  • MARKET SHARE improvements
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4
Q

Explain accounting and finance objectives - Cost Minimisation Objectives

A
  • Cost minimisation aims to achieve the cost-effective way of delivering goods and services to the required level of quality
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5
Q

Explain accounting and finance objectives - Profit Objectives

A
  • SPECIFIC LEVEL OF PROFIT - Achieve an operating profit of £10m
  • RATE OF PROFITABILITY - Achieve and operating profit margin of 10%
  • PROFIT MAXIMISATION - Maximise the Total Profit for that year
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6
Q

Explain accounting and finance objectives - Cash Flow Objectives

A
  • Reduce borrowings to target level
  • Minimise Interest Costs
  • Reduce amounts held in inventories or owed by customers
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7
Q

Explain accounting and finance objectives - Investment Objectives

A
  • Level of Capital Expenditure - Set a certain amount of investment every year
  • Return on Investment (ROCE)
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8
Q

Evaluate the usefulness of accounting and finance objectives to a business and its stakeholders.

A
  • Better confidence for investors and shareholders, because there is a sign of security within the business operations
  • Improves the visibility for owners and employees
  • Quite rigid and no room for error
  • Requires specialist staff to conduct the accounts
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9
Q

Recommend and Justify Accounting and Finance Objectives for a business - Size and status of a business

A

start-ups and smaller businesses tend to focus on survival, breakeven and cash flow objectives. Quoted multinational businesses are much more focused on growing shareholder value

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10
Q

Recommend and Justify Accounting and Finance Objectives for a business - Economic Conditions

A
  • A recession may lead to businesses focusing on Cost minimisation and maximising Cash flows
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11
Q

Recommend and Justify Accounting and Finance Objectives for a business - Competitors

A

directly affects the achievability of financial objectives. E.g. cost minimisation may become essential if a competitor is able to grow market share because it is more efficient

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12
Q

Recommend and Justify Accounting and Finance Objectives for a business - Social and Political Change

A

Often an indirect impact. E.g. legislation on environmental emissions or waste disposal may force an business to increase investment in some areas, and cut costs in others

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13
Q

Distinguish between internal and external sources of finance to a business.

A
  • Internal sources of finance are funds found inside the business. For example, profits.
  • External sources of finance are found outside the business, eg from creditors or banks.
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14
Q

Explain Sources of Finance

A

Sources of finance refer to the different ways a business can obtain money.

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15
Q

Short term sources of Finance

A
  • Overdraft
  • Trade Credit
  • Factoring
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16
Q

Long term sources of finance.

A
  • Owners Savings
  • Bank Loans
  • Mortgage
  • Hire Purchase
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17
Q

Define Short Term Sources of Finance

A

Short term sources of finance are used to meet the day-to-day cash requirements for expenses

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18
Q

Define Long Term Sources of Finance.

A

Sources of Long Term Finance are those sources from where the funds are raised for a longer period of time

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19
Q

High Amount of Finance Needed – Short Term, how should a firm raise its finance?

A

For this, the business should use a bank overdraft. It is a short term source of finance and has a high interest rate which may not suit this as the additional cost will be high due to the high amount of finance needed.
Another option is to reinvest profits! It requires no interest charge therefore no additional costs.

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20
Q

High Amount of Finance Needed – Long Term, how should a business raise its finance?

A

This would have the use of a bank as the source of finance. With a loan, the firm can either be repaid in instalments over time or at the end of the loan period. A bank loan has a much lower interest rate than an overdraft which is why it suits long term finance more. Banks provide loans up to 5 years +!

Another option is a venture capitalist such as a ‘dragon den’, in which they will provide cash straight up will want a substantial part of the ownership of the company in return.

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21
Q

Low Amount of Finance Needed – Short Term, how would a Business raise its finance?

A

This isn’t a serious worry to firms and only needs a quick injection of cash to sort out the cash flow. The business could sell assets or sale and lease them back to provide this injection of cash or squeeze out cash from day-to-day finances.

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22
Q

Low Amount of Finance Needed – Long Term, how would a Business raise its finance?

A

You don’t really have a solution to this as if a business constantly needs low amounts of finance, they can’t be that successful. The only solution is to see why the business needs the finance and solve the problem. Other than that, a long-term bank overdraft or short-term loan is the only other option, both I would not reccomend for the high additional costs included from interest charges.

23
Q

Investment Appraisal - What are the Non-Financial Factors affecting business decision (Qualitative)?

A
  • Resources available
  • Productive Capacity
  • Labour
  • Economy
  • Data Sources
24
Q

Investment Appraisal Qualitative Factors affecting a business decision (Non-Financial) - Resources Available + Labour

A
  • Business may not have the required labour to operate the new machinery, means business will have to spend a lot on training staff which may be too costly to the firm
  • Finance to purchase the new machinery may not be available.
25
Q

Investment Appraisal Qualitative Factors affecting a business decision (Non-Financial) - The Economy

A
  • Level of inflation may affect the discount factor, which I turn may lead to an investment no longer being worthwhile
  • If the economy is moving into a recession there may not be enough future demand to justify the investment
  • If the firm sells the product abroad the value of the currency could affect sales, furthermore the value of different currencies can fluctuate daily making and forecast impossible.
26
Q

Investment Appraisal Qualitative Factors affecting a business decision (Non-Financial) - Data Sources

A

Validity of forecast depends on the accuracy of the market research.

27
Q

What are the Advantages of using Payback - Investment Appraisal

A
  • Easy to calculate and understand, therefore is a cost effective way of assessing an investment
  • Quick and useful guide to the level of risk involved in the investment, long the Payback greater the risk.
28
Q

What are the Disadvantages of using Payback?

A
  • Ignores the value of money over a period of time (inflation - eroded the spending power of money over time)
  • It does not take into consideration any cash inflows after the Payback period
  • Does not measure the profit made from the investment
29
Q

What are the Advantages of using Average Rate of Return?

A
  • Takes into account all of the cash flows throughout the life of the investment (useful for potential shareholders)
  • Measures the profitability
  • Easy to calculate and understand
30
Q

What are the Disadvantages of using Average Rate of Return?

A
  • Does not take into account inflation, the purchasing power of money falls through Time!
  • Harder to calculate than Payback so will take more time and cost the business more
31
Q

What are the different Quantitative Measures of Investment Appraisal?

A
  • Payback
  • Average Rate of Return
  • Net Present Value
32
Q

Explain what is meant by a Budget?

A

Is a plan for the future that takes into account that are available for a business.

33
Q

Explain what is meant by a Variance?

A

When there is a difference between actual and budget figures.

34
Q

Why should a firm undertake a Budget?

A
  • Measuring the cash flow indicates the level of efficiency and effectiveness of he businesses activities
  • Giving information on the productivity levels of staff and giving a possible means of rewarding staff
  • Providing information to current and future staff.
35
Q

In terms of revenue, when is Variance adverse?

A

If costs exceed the budget figure figure

36
Q

In terms of revenue, when is revenue favourable?

A

If sales exceed the budgeted figures

37
Q

Why do you have to be careful when calculating a Favourable and Adverse Variance?

A

This is because for sales a figure that is greater than the budgeted figure is Favourable but for Labour costs a figure that is above the budgeted figure is Adverse!

38
Q

Why is Variance useful?

A

Allows managers to see where problems in meeting budgets are.

39
Q

What is meant by an Overdraft Facility?

A

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

40
Q

What are Cash Flow Charts?

A

Are calculated by adding receipts for each time period and then deducting payments.
Gives a closing balance for this time period but becomes the opening balance for the next time period.

41
Q

What is Delegation?

A

The passing of responsibility.

42
Q

What is Zero Budgeting? What is an Advantage of this?

A
  • Involves setting all budgets at zero, requiring any managers to justify any requirement for funds.
  • The advantage is that it prevents a situation where the same money is given each year without consideration of actual need.
43
Q

State a disadvantage of Zero Budgeting?

A

The amount of time it takes for budget holders and financial co-ordinaries to manage the system.

44
Q

What are Flexible Budgets?

A

Allow the business to make allowances for changes so that adverse variances are avoided.

45
Q

Evaluate Variances Analysis and Budgeting.

A
  • Possible that the forecasts were too optimistic or too pessimistic in the first place
  • In large businesses its is difficult for senior managers to analyse and review every budget for the business.
  • Cannot be used in isolation
46
Q

Define Cashflow.

A

Amount of money being transferred into and out of a business.

47
Q

What are CashFlow Inflows?

A

Money coming into the business, as a result of sales and borrowing.

48
Q

What are CashFlow Outflows?

A

Money leaving the business to pay for materials and others costs.

49
Q

What are Cashflow Forecasts?

A

Are estimates of the likely inflows, and outflows of cash into and out of a business over a given period of time.

50
Q

What are CashFlow Statements?

A

Are the actual figures produced once transactions have occurred.

51
Q

Distinguish between Cash-Flow and profit?

A
  • Cash is the money entering and leaving the business.

- Profit is the difference between revenues and costs.

52
Q

What are the Reasons for using a CashFlow forecasts?

A
  • Preparing a CashFlow forecast is a valuable planning procedure, allows a business to in place strategies to deal with negative CashFlow forecasts.
  • Useful for the business to set its prices
  • Managers can use this information to monitor the business and react accordingly
  • Looked at by potential investors
53
Q

What are the reasons for using a CashFlow Statement?

A
  • Tells you where the money went

- Help with financing decisions

PiXL Business (8 decks)

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