Business Finance

Question 1

Stock turnover ratio

Answer 1

how many times a business replenishes it stock inventory or how long it takes for its inventory to be replenished (all sold) – higher the value, the better

Question 2

Debtor days ratio

Answer 2

number of days it takes a firm to collect money from its debtors – the lower the value, the better

Question 3

Creditor days

Answer 3

number of days it takes for a business to pay its trade creditors – depends on whether higher or lower is better

Question 4

Gearing Ratio

Answer 4

used to assess a firm’s long-term liquidity position by comparing a company’s debt to its capital – a higher ratio means that a firm must pay more interest on profit this year so a lower ratio is preferable

Question 5

gross profit margin

Answer 5

percentage of sales, how much money a business has after subtracting the direct costs (costs of goods sold
) – higher, better

Question 6

net profit margin

Answer 6

the percentage of sales revenue you have left after deducting operating expenses, depreciation, amortization, interest, and income taxes – higher, better

Question 7

return on capital employed

Answer 7

a financial ratio that can be used to assess a company’s profitability and capital efficiency – the higher the better

Question 8

current ratio

Answer 8

liquidity ratio that assesses the company’s ability to pay its short-term debts with its current assets – the higher the ratio, the more capable you are at paying you debts

Question 9

acid test ratio

Answer 9

liquidity ratio assessing how well current assets can cover current liabilities – should exceed 1

Question 10

profit and loss account

Answer 10

financial statement of a firm’s trading activities for some time – also known as income statement

Question 11

balance sheet

Answer 11

information on the value of organization assets, liabilities, and capital invested by owners

Question 12

cash flow forecast

Answer 12

expected inflow and outflow of cash

Question 13

cash flow statement

Answer 13

actual flow of cash in the past

Question 14

working capital

Answer 14

money needed for day to day running of a business

Question 15

receipts

Answer 15

monthly income of cash

Question 16

payments

Answer 16

outflows of a business

Question 17

assets

Answer 17

items of monetary value owned by the business

Question 18

liabilities

Answer 18

amount of money owed by the business

Question 19

equity

Answer 19

value of business belonging to owners ( or shareholders )

Question 20

fixed asset

Answer 20

asset owned by a business lasting longer than 12 months

Question 21

current asset

Answer 21

cash or liquid asset likely to turn into cash within 12 months (cash, debtors, stock)

Question 22

current liabilities

Answer 22

debts settled within one year of the balance sheet date ( tax, dividends, overdrafts )

Question 23

long-term liabilities

Answer 23

debts to be repaid after 12 months ( debentures, mortgages, bank loans )

Question 24

intangible assets

Answer 24

non-physical assets that can earn revenue for a business (brand, patents, trademarks)

Question 25

depreciation

Answer 25

fall in value of an asset over some time

Question 26

straight-line method

Answer 26

depreciating an asset by the same amount each year

Question 27

reducing balance method

Answer 27

depreciating an asset by the same percentage each year, so most of the decreased value will occur in the first few years

Question 28

debtors

Answer 28

a company or individual who owes money

Question 29

stocks

Answer 29

capital earned by the issue of shares

Question 30

creditors

Answer 30

an individual or company owed money to

Question 31

debentures

Answer 31

a long-term liability that usually has a term of greater than 10 years

Question 32

loan capital

Answer 32

money required to run a business raised from loans rather than shares

Question 33

investment appraisal

Answer 33

analysis done to consider the profitability of an investment – considering the life of the asset, affordability, and strategic fit

Question 34

budgets

Answer 34

a spending plan based on income and expenses

Question 35

average rate of return

Answer 35

evaluates the profitability of an investment (percentage) – the higher, the better the investment

Question 36

net present value

Answer 36

financial metric to evaluate the profitability of an investment by comparing the value of expected future cash flows to the initial investment – positive value means profitable, negative value means not profitable

Question 37

capital employed

Answer 37

the total amount of capital a firm uses to operate