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Business > Accounting & Finance > Flashcards

Accounting & Finance Flashcards

1
Q

Overdraft

A

Agreement with the bank to overspend on an account

+can be flexible
+handles seasonal fluctuations
-expensive if interest is high

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2
Q

Trade Credit

A

Ability to buy stock now and pay for it at a later date

+immediate access
+easily available
-hard to obtain for startups
-wrong to abuse supplier goodwill

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3
Q

Factoring

A

Find cash flow by selling their invoices to a 3rd party at a discount

+quick boost to cash flow
-reduction in profit margin

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4
Q

Hire Purchase

A

Buy assets by paying instalments over time

+Fixed interest
+Simple
+Flexible
-High costs
-Long contracts

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5
Q

Bank Loan

A

Lending of money by the bank

+Low interest rates
-Lengthy application process

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6
Q

Leasing

A

Arrangement calling for the user to pay the owner for use of an asset - contract between 2 parties.
+Balanced cash outflow
+Tax benefit
-Limited financial
-Expensive

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7
Q

Debenture

A

Loan agreement in writing between a borrower and a lender registered at companies house.
+Valuable financial protection
+Fixed rate
-No flexibility

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8
Q

Government Assistance

A

Action by gov designed to provide a benefit

+Don’t have to repay
-Time-consuming

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9
Q

Venture capital & Business angels

A

High amount of money into business for high return

+Easy way to raise capital
-High dividend to pay back in long-term

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10
Q

Accounting Concepts

A

-Consistency (accounts produced in same way)
-Going Concern (operating as normal)
-Matching (record transaction when it takes place)
-Materiality (realistic value figure only state what adds value to business)
-Objectivity (not based on opinions)
-Prudence (not overstating)
- Realisation (only record when ownership changes hands)

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11
Q

Financial Accounting

A

Assets, profits, levels of cash

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12
Q

Managerial Accounting

A

Internal records

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13
Q

Break even

A

FC/P-VC

+ can measure profit and loss at different production levels
+ predict effect of cost changes
- assumes prices are constant
- single product

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14
Q

Margin of Safety

A

Difference between actual sales and break-even providing the sales are greater.

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15
Q

Contribution

A

What business needs to achieve from selling products in order to cover fixed costs and make profit
P-VC

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16
Q

Standard costing

A

Forecast the business expects the production of product or service to be - sets cost target.

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17
Q

Cost centres

A

Specific part of business where costs can be identified and allocated by product, department, location and size.

+look for better production techniques
+monitor performance
-issues collecting data
-unfair?

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18
Q

Profit centre

A

Separate part of business where it’s possible to identify revenue and costs

+improves decision making
+supports budgeting control
-time consuming
-difficult

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19
Q

Absorption costing

A

all costs absorbed of unit into price charged
Via % of value of sales
% production
% total variable costs

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20
Q

Full costing

A

Sum of all costs in business

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21
Q

Investment Appraisal

A

Process of analysis whether investment projects are worthwhile

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22
Q

Payback

A

Time taken for project to repay its initial investment

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23
Q

Budget

A

A detailed plan for the future concerning the revenues and costs expected over a certain period of time

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24
Q

Budgetary control

A

Process by which financial control is exercised within an organisation

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25
Q

Reasons to budget

A

Control expenditure
Set targets
Establish priorities
Provide direction
Motivate staff
Improve efficiency

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26
Q

Variance analysis

A

Involves calculating and investigating the differences between actual and budget figures

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27
Q

Zero budgeting

A

All budget set to zero and managers justify any requirements for funds

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28
Q

Cash flow

A

Money coming in and out of a business account

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29
Q

Main causes of cash flow problems

A

Low profits or losses
Too much production capacity
Excess stock held
Seasonal demand

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30
Q

Working capital

A

Money used in business day to day trading operations

= current assets - current liabilities

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31
Q

Step fixed cost

A

Cost that doesn’t change within certain high and low thresholds of activity, but will change when these thresholds are breached

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32
Q

Generally Accepted Accounting Practice (GAAP)

A

Framework for accounting rules

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33
Q

Internal sources of finance

A

Retained profits
Working capital
Asset disposals

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34
Q

External sources of finance

A

Share capital
Bank loan
Overdraft
Debentures
Venture capital
Suppliers

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35
Q

Debt

A

Finance provided to the business by external parties

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36
Q

Equity

A

Amounts invested by owners of the business

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37
Q

Factors that influence choice of finance

A
  • how long to pay back
  • legal structure
  • quantitive factors
  • qualitative factors
  • interest rates
  • external factors (economy)
  • security
  • amount required
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38
Q

Indirect costs

A

Doesn’t change regardless of output

Insurance
Rent
Salaries
Advertising

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39
Q

Direct cost

A

Raw materials
Wages

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40
Q

Unit cost

A

Cost of producing one product

Total cost / total output

41
Q

social cost

A

Cost to society/third party

42
Q

Opportunity cost

A

The next best option forgone

43
Q

Revenue

A

Cash that flows into business from sales

44
Q

Retained profit

A

Amount of business profit kept within its accounts

45
Q

Why we budget

A
  • control expenditure
  • set targets
  • establish priorities
  • provide direction
  • motivation
  • efficiency
  • monitor performance
46
Q

Possible causes of favourable variances

A
  • strong demand than expected
  • selling prices increased higher than budget
  • cautious sales and cost assumptions
  • better than expected productivity or efficiency
47
Q

Possible causes of adverse variances

A
  • Unexpected events lead to un budgeted
    costs
  • over spends
  • sales forecast proves optimistic
  • market conditions lowers demand
  • Inefficiency in production
48
Q

How to manage cash flow problems

A

Use reliable cash flow forecasting
Keep costs under control
Manage working capital effectively
Choose right sources of finance

49
Q

ARR

A

The profitably of investment as % of cost of investment

Total rev - total costs = total profit
Total profit / life time of investment = average profit
Average profit / cost of investment x100 = ARR

50
Q

Payback

A

How long it takes for investment to generate enough revenue to pay for itself

The year inflows > outflows = how many years
Outflows of that year / inflows of next year x 12 months = months

51
Q

Net present value

A

the difference between the present value of cash inflows and the present value of cash outflows over a period of time

Cash flow x discount factor, profits - the investment = NPV

52
Q

Return on Capital Employed (ROCE) - profitability

A

Profit before tax and interest (operative profit) / long term capital employed (equity shareholders’ funds or net assets) x 100

Return on investment

53
Q

Gross profit margin - profitability

A

Gross profit / turnover x 100

How much of each £ of sales we keep as gross profit

54
Q

Net profit margin - profitability

A

Net profit (before tax) / turnover x 100

How much in every £ of sales the business actually keeps

55
Q

Return on equity - profitability

A

Net profit / equity x 100

56
Q

Asset turnover - efficiency

A

Sales / non current assets (fixed assets)
How well the assets of the business generate income

57
Q

Stock turnover - efficiency

A

Cost of sales / stock
365 / ans = number of days stock is turned over in a year

How many times we turn over stock per year

58
Q

Debtor collection period (debtor days) - efficiency

A

Debtors/turnover x 365

Time it takes for trade debtors to settle their bills

59
Q

Creditor payment (creditor days) - efficiency

A

Creditors (trade creditors) / cost of sales x 365

Average time it takes a business to settle its debts with trade suppliers

60
Q

Current ratio - liquidity

A

Current assets / current liabilities

Measures whether a business can pay debts due within one year out of the current assets

61
Q

Acid test ratio - liquidity

A

(Current assets - stock) / current liabilities

62
Q

Gearing ratio - liquidity (solvency)

A

Fixed cost capital (creditors falling) / long term capital (creditors falling + equity shareholder funds) x 100

63
Q

Interest cover - solvency

A

Profit before tax and interest (operating profit) / interest

64
Q

How to manage cash flow problems

A

Use reliable cash flow forecasting
Keeps coots under control
Manage working capital effectively
Chose right sources of finance

65
Q

Limitation of cash flow forecasts

A

Changes in interest rates
Changes in economic policy
Forecasts are estimates
Competitor behaviour
Changes in tech
Changes in circumstances

66
Q

Main causes of working capital problems

A

Poor control of inventories
Poor control of receivables
Ineffective use of payables
Poor cash flow forecasting & unexpected events

67
Q

Depreciation

A

Accounting estimate of the fall in value of fixed asset over time

68
Q

Payback adv

A

Simple to apply
Appropriate when tech is changing rapidly
Helpful to analyse cash flow problems
Good for rapid changing markets

69
Q

Payback disadv

A

Ignores all cash flows after payback period
Ignores overall profitability of investments
Ignores timing of cash flows within payback period

70
Q

ARR adv

A

Focuses on profit rather than payback
Easy to compare different investment projects
Can compare return on investment with return for whole business

71
Q

ARR disadv

A

Doesn’t take into account the timing of cash flow
Uses average profit
Ignores value of money

72
Q

ROCE adv

A

Good for evaluating the performance of whole business
Easy to calculate
Can compare investments of different sizes

73
Q

ROCE disadv

A

Not good method for appraising investment in capital projects
Generally used for past data
Difficult to compare

74
Q

NPV adv

A

Takes into account time and interest rates
Easy to compare
Opportunity costs can be taken into account

75
Q

NPV disadv

A

Difficult to calculate
Not that accurate
Future rate of interest is unpredictable

76
Q

Accumulated depreciation

A

Depreciation added up over the years

77
Q

Net book value

A

Cost of machine minus the depreciation

78
Q

Residual value

A

Value at end of its life once the depreciation has been deducted

79
Q

Straight line method of depreciation

A

Value of asset is reduced equally per year over its lifetime

(Initial cost - residual value) / life of asset

80
Q

Straight line method advantages

A

Amount of depreciation is lower in first few years compared to reduced balance method
Lower level of depreciation means higher value asset
Easier to calculate
Simple to apply and understand

81
Q

Straight line method

A

Estimate of residual value is required
Assume life of asset is known
Lower depreciation at start may be inaccurate
Doesn’t account for loss of efficiency

82
Q

Reducing balance method of depreciation

A

Constant % rate of depreciation each year

83
Q

Reduced balance method advantages

A

More realistic
No estimate of residual value required
Simple to implement

84
Q

Reduce balance method disadv

A

Higher initial depreciation lowers valuation of assets
Difficult to borrow against assets

85
Q

Income statement

A

(Profit loss account) measures the business performance over given period of time

86
Q

Balance sheet

A

Business performance in one moment in time

87
Q

Cost of sales

A

Cost of making the goods or buying them

88
Q

Usefulness of income statements

A

Progress can be monitored
Business can set targets and make decisions
Figures can be used to carry our ratio analysis
Provides other stakeholders with valuable information

89
Q

Non current assets

A

Land and buildings, plant and machinery

90
Q

Current assets

A

Cash balances, trade debtors, inventories - stock, raw materials

91
Q

Current liabilities

A

Trade creditors, overdraft, short term borrowings

92
Q

Current liabilities

A

Long term borrowings, long term liabilities

93
Q

Debt equity ratio - profitability

A

Long term debt (creditors falling) / equity shareholders funds

94
Q

Dividend per share ratio - shareholder

A

Dividends / number of shares

Size of the dividends that the company actually pays to its shareholders

95
Q

Dividend yield ratio - shareholder

A

(Dividends / number of shares) (dividend per share) / price per share

Dividend per share expressed as % of market price of share

96
Q

Dividend cover ratio - shareholder

A

Profit after tax (net profit）/ dividend

97
Q

Earnings per share ratio - shareholder

A

Net profit / number of shares issued

Shows how much profit each share has earned over past year

98
Q

Price earnings ratio - shareholder

A

Market price of share / earnings per share (Net profit / number of shares issued)

Market price of the share as proportion of earnings per share

Business (8 decks)

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