Business Finance

Question 1

Payback

Answer 1

How long it takes for an investment to pay for itself

Amount still to be paid back / next years cash inflow

Question 2

Accounting rate of return

Answer 2

The profitability of the investment as % of the cost of the investment.
Total inflows - cost of investment = profit
Profit / life of asset (average annual profit)
Aap/ cost of investment

Question 3

Net present value (NPV)

Answer 3

Considers the value of money changing over time

Net return x discount factor

Question 4

Overdraft

Answer 4

When more money can be taken out of the account then is in it

Question 5

Loan

Answer 5

A fixed amount borrowed from a lender on which interest is paid

Question 6

Trade credit

Answer 6

Deferring a payment to a supplier until a later date

Question 7

Factoring

Answer 7

Selling off debts to raise finance

Question 8

Hire purchase

Answer 8

Paying for an item in instalments over a set period of time

Question 9

Leasing

Answer 9

Paying for an asset in instalments but you don’t keep it at the end

Question 10

Debentures

Answer 10

A bond sold by a business to raise capital. Interest is paid to the holder of the bond

Question 11

Retained profit

Answer 11

Using profit kept by the business

Question 12

Share issuing

Answer 12

Selling a part of the business

Question 13

Sale and Leaseback

Answer 13

An asset is sold and rented back to the business

Question 14

Venture capitalist

Answer 14

People lend money to a business in return for a part of it

Question 15

Government assistance

Answer 15

Businesses that operate in certain areas can get money for doing so

Question 16

Fixed costs

Answer 16

Do not change in relation to output

Question 17

Variable costs

Answer 17

Costs that change in relation to output

Question 18

Total costs

Answer 18

Fixed + variable costs

Question 19

Direct costs

Answer 19

Costs that go directly into making the product

Question 20

Indirect

Answer 20

Any other cost not going directly pay into production

Question 21

Unit cost

Answer 21

The cost to produce, store and sell one unit

Question 22

Average costs

Answer 22

Total costs divided by the number produced

Question 23

Marginal cost

Answer 23

The cost of producing an extra unit

Question 24

Opportunity cost

Answer 24

What is given up when a choice is made

Question 25

Social cost

Answer 25

The cost to society when a transaction takes place. Can be negative or positive

Question 26

Accounting principles:

Answer 26

``` Consistency Going concern Matching (accruals) Materiality Objectivity Prudence Realisation ```

Question 27

Margin of safety

Answer 27

The difference between actual output and the break even output

Question 28

Break even

Answer 28

The amount of products you have to sell to make money back

Question 29

Cost centre

Answer 29

A specific part of a business where costs can be identified and allocated with reasonable ease

Question 30

Profit centre

Answer 30

A separately identifiable part of a business for which it is possible to identify revenues and costs

Question 31

Absorption costing

Answer 31

Treats al, costs of production as production costs regardless of whether they’re variable or fixed

Question 32

Standard costs

Answer 32

Forecasted costs (what a business expects them to be)

Question 33

Budget

Answer 33

A financial plan for the future concerning the revenues and costs of a business

Question 34

Budgeting control

Answer 34

The process by which financial control is exercised within a business

Question 35

Cashflow

Answer 35

The movement of cash in and out of the business

Question 36

Cash inflows

Answer 36

Money coming into a business

Question 37

Cash outflows

Answer 37

Money leaving a business

Question 38

Net cash flow

Answer 38

Difference between totals inflows and outflows

Question 39

Opening balance

Answer 39

Balance at start of period

Question 40

Closing balance

Answer 40

Balance at end of period

Question 41

Depreciation

Answer 41

The drop in value of an asset over time

Question 42

Net book value

Answer 42

Cost - the amount written off

Question 43

Accumulated depreciation

Answer 43

Depreciation added up

Question 44

Residual value

Answer 44

Value at the end of an assets life

Question 45

Straight line method

Answer 45

The value of the asset is reduced equally per year over its life time Initial cost - residual value all divided by life of asset

Question 46

Reducing balance method

Answer 46

Applies a constant percentage rate of depreciation each year