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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
Reasons to budget
Control expenditure Set targets Establish priorities Provide direction Motivate staff Improve efficiency
26
Variance analysis
Involves calculating and investigating the differences between actual and budget figures
27
Zero budgeting
All budget set to zero and managers justify any requirements for funds
28
Cash flow
Money coming in and out of a business account
29
Main causes of cash flow problems
Low profits or losses Too much production capacity Excess stock held Seasonal demand
30
Working capital
Money used in business day to day trading operations = current assets - current liabilities
31
Step fixed cost
Cost that doesn’t change within certain high and low thresholds of activity, but will change when these thresholds are breached
32
Generally Accepted Accounting Practice (GAAP)
Framework for accounting rules
33
Internal sources of finance
Retained profits Working capital Asset disposals
34
External sources of finance
Share capital Bank loan Overdraft Debentures Venture capital Suppliers
35
Debt
Finance provided to the business by external parties
36
Equity
Amounts invested by owners of the business
37
Factors that influence choice of finance
- how long to pay back - legal structure - quantitive factors - qualitative factors - interest rates - external factors (economy) - security - amount required
38
Indirect costs
Doesn’t change regardless of output Insurance Rent Salaries Advertising
39
Direct cost
Raw materials Wages
40
Unit cost
Cost of producing one product Total cost / total output
41
social cost
Cost to society/third party
42
Opportunity cost
The next best option forgone
43
Revenue
Cash that flows into business from sales
44
Retained profit
Amount of business profit kept within its accounts
45
Why we budget
- control expenditure - set targets - establish priorities - provide direction - motivation - efficiency - monitor performance
46
Possible causes of favourable variances
- strong demand than expected - selling prices increased higher than budget - cautious sales and cost assumptions - better than expected productivity or efficiency
47
Possible causes of adverse variances
- Unexpected events lead to un budgeted costs - over spends - sales forecast proves optimistic - market conditions lowers demand - Inefficiency in production
48
How to manage cash flow problems
Use reliable cash flow forecasting Keep costs under control Manage working capital effectively Choose right sources of finance
49
ARR
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
Payback
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
Net present value
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
Return on Capital Employed (ROCE) - profitability
Profit before tax and interest (operative profit) / long term capital employed (equity shareholders’ funds or net assets) x 100 Return on investment
53
Gross profit margin - profitability
Gross profit / turnover x 100 How much of each £ of sales we keep as gross profit
54
Net profit margin - profitability
Net profit (before tax) / turnover x 100 How much in every £ of sales the business actually keeps
55
Return on equity - profitability
Net profit / equity x 100
56
Asset turnover - efficiency
Sales / non current assets (fixed assets) How well the assets of the business generate income
57
Stock turnover - efficiency
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
Debtor collection period (debtor days) - efficiency
Debtors/turnover x 365 Time it takes for trade debtors to settle their bills
59
Creditor payment (creditor days) - efficiency
Creditors (trade creditors) / cost of sales x 365 Average time it takes a business to settle its debts with trade suppliers
60
Current ratio - liquidity
Current assets / current liabilities Measures whether a business can pay debts due within one year out of the current assets
61
Acid test ratio - liquidity
(Current assets - stock) / current liabilities
62
Gearing ratio - liquidity (solvency)
Fixed cost capital (creditors falling) / long term capital (creditors falling + equity shareholder funds) x 100
63
Interest cover - solvency
Profit before tax and interest (operating profit) / interest
64
How to manage cash flow problems
Use reliable cash flow forecasting Keeps coots under control Manage working capital effectively Chose right sources of finance
65
Limitation of cash flow forecasts
Changes in interest rates Changes in economic policy Forecasts are estimates Competitor behaviour Changes in tech Changes in circumstances
66
Main causes of working capital problems
Poor control of inventories Poor control of receivables Ineffective use of payables Poor cash flow forecasting & unexpected events
67
Depreciation
Accounting estimate of the fall in value of fixed asset over time
68
Payback adv
Simple to apply Appropriate when tech is changing rapidly Helpful to analyse cash flow problems Good for rapid changing markets
69
Payback disadv
Ignores all cash flows after payback period Ignores overall profitability of investments Ignores timing of cash flows within payback period
70
ARR adv
Focuses on profit rather than payback Easy to compare different investment projects Can compare return on investment with return for whole business
71
ARR disadv
Doesn’t take into account the timing of cash flow Uses average profit Ignores value of money
72
ROCE adv
Good for evaluating the performance of whole business Easy to calculate Can compare investments of different sizes
73
ROCE disadv
Not good method for appraising investment in capital projects Generally used for past data Difficult to compare
74
NPV adv
Takes into account time and interest rates Easy to compare Opportunity costs can be taken into account
75
NPV disadv
Difficult to calculate Not that accurate Future rate of interest is unpredictable
76
Accumulated depreciation
Depreciation added up over the years
77
Net book value
Cost of machine minus the depreciation
78
Residual value
Value at end of its life once the depreciation has been deducted
79
Straight line method of depreciation
Value of asset is reduced equally per year over its lifetime (Initial cost - residual value) / life of asset
80
Straight line method advantages
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
Straight line method
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
Reducing balance method of depreciation
Constant % rate of depreciation each year
83
Reduced balance method advantages
More realistic No estimate of residual value required Simple to implement
84
Reduce balance method disadv
Higher initial depreciation lowers valuation of assets Difficult to borrow against assets
85
Income statement
(Profit loss account) measures the business performance over given period of time
86
Balance sheet
Business performance in one moment in time
87
Cost of sales
Cost of making the goods or buying them
88
Usefulness of income statements
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
Non current assets
Land and buildings, plant and machinery
90
Current assets
Cash balances, trade debtors, inventories - stock, raw materials
91
Current liabilities
Trade creditors, overdraft, short term borrowings
92
Current liabilities
Long term borrowings, long term liabilities
93
Debt equity ratio - profitability
Long term debt (creditors falling) / equity shareholders funds
94
Dividend per share ratio - shareholder
Dividends / number of shares Size of the dividends that the company actually pays to its shareholders
95
Dividend yield ratio - shareholder
(Dividends / number of shares) (dividend per share) / price per share Dividend per share expressed as % of market price of share
96
Dividend cover ratio - shareholder
Profit after tax (net profit）/ dividend
97
Earnings per share ratio - shareholder
Net profit / number of shares issued Shows how much profit each share has earned over past year
98
Price earnings ratio - shareholder
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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