Chapter 8 Flashcards
Sale and leaseback ?
Selling an asset such as the building to a leasing company and paying an annual leasing charge so that it can still be used.
Internal finance .
Retained profit ?
Profit that’s kept in the business after dividends and taxes have been paid this is an example of internal finance
What is the mortgage
A mortgage is a long term loan used to buy property such as factories or an office space if the business cannot pay back the loan the bank or lender takes over the ownership of the property
What are the benefits of using retained profit as a source of finance ?
No interest has to be repaid.
No loss of control of the owners/shareholders.
What are the disadvantages of using retained profit as a source of finance?
Many businesses may expand but still not be very profitable. Profits may be to low finance growth
What are the benefits of selling unwanted assets as a source of finance?
No interest has to be paid
no loss of control of the business
What are the disadvantages of selling unwanted assets as a source of finance?
The business is no longer owns that asset
If the asset is still needed by the business still be a leasing cost
What are the advantages of using share issue as a source of finance?
The money raised does not have to be repaid and the interest does not have to be repaid.
What are the disadvantages of using share issue as a source of finance?
Dividends has to be paid to shareholders
The original owners may lose control of the business
What are the advantages of using a loan as a source of finance?
Overdrafted very flexible-it can be varied on a daily basis up to agreed limit
No loss of control by existing owners
Llower interest rate than overdraft on secured loan
What are the disadvantages of taking out a loan as a source of finance?
Interest cost maybe high
Property is used as security - will be given up by the business is the debt cannot be repaid
What is the purpose of having financial statements
Whether a profit or loss is being made.
How much cash is flowing into and out of the business.
When suppliers must be paid for goods and when tax must be paid to the government
Financial records will include details of ?
Products sold the value of them and which customers have not yet paid.
Goods and services bought by the business the value of them and which suppliers have not yet been paid
Wage and other labour costs
Equipment and other assets purchase
Financial statements help share holders answer what two questions ?
Is the business trading at a profit or loss
How much the business is worth
What is a profit and loss account?
This shows whether the business made a profit or loss over my last period it is also known as an income statement
The profit and loss account contains it’s important pieces of information….
Sales revenue Cost of sales Gross profit Expenses Overheads Netprofit
Gross profit margin
This is the percentage of sales revenue that is gross profit.
(Gross profit ~ sales revenue x 100)
Net profit margin
The percentage of sales revenue that is no profit
Net profit ~ sales revenue x100
How can you increase gross profit margin ?
By increasing the price or reducing the cost of sales this is making a higher profit on each £ of sales
What is a balance sheet
Balance sheets show the value of what a company is worth it lists the value of the companies assets and liabilities
What are non-current assets
Assets owned by the business of a life span more than a year such as property and equipment
Current assets are assets owned by the business that are either in…..or are likely to be turned into cash within a ……
Cash
Year
What is meant By the term net current assets
It is the difference between current assets and current liabilities .
Current ratio?
(Current assets ~current liabilities)
If the current ratio is more than 1 then it is safe this means that for every £1 of current debts or liabilities the company has over £1 of current assets to pay them back
What does acid test ratio show ?
This ratio is a tougher test of liquidity this is always a low result than the current ratio if the acid test ratio is below 0.25 it means that the business has really little cash either in the bank or just about to be received from customers to be used to pay short-term debts.
Acid test ratio excludes what?
Stock as stock could take ages to sell so it is not very useful for paying back debts
How to calculate acid test ratio?
Debtors+cash ~ current liabilities
