Chapters 18-22 Finance

Question 1

A Budget

Answer 1

A financial plan of action for a period, describing expected levels of revenue and expenditure.

Question 2

Zero budgeting

Answer 2

Managers are not allocated with a budgeted amount of money that they are entitled to spend. Instead they must request and justify all expenditure made.

Question 3

Variance

Answer 3

Any unplanned change from the budgeted amount.

Question 4

Favourable variance

Answer 4

When actual expenditure is less than expected, or revenues are higher than expected.

Question 5

Sale of assets

Answer 5

When a business sells fixed assets they no longer need, such as an old factory site or unused machinery.

Question 6

Owner’s capital

Answer 6

Money invested in a business by the owners from their own savings, selling their own assets or through personal borrowing to fund the business.

Question 7

Share issue or Share Capital

Answer 7

When a business sells shares to investors in exchange for part ownership, voting rights and a share of the profits.

Question 8

Cashflow statement

Answer 8

A historical document of cash flowing in and out of a business during a trading period.

Question 9

Cashflow forecast

Answer 9

Shows future expected flows of cash into and out of a business over a trading period.

Question 10

Inflows

Answer 10

Money received by a business. Examples include revenues, loans from a bank and government assistance.

Question 10

Outflows

Answer 10

Money paid out by a business to pay for expenses. Examples include wages, rent and raw materials.

Question 11

Net cash flow

Answer 11

Inflows minus outflows.

Question 12

Opening balance

Answer 12

The amount of money a business starts with at the beginning of the period

Question 13

Closing balance

Answer 13

The amount of money a business has at the end of the period.
Opening balance plus net cash flow.

Question 14

Liquid assets

Answer 14

Things a business owns that can quickly be used, or turned into cash, to pay bills as they fall due. E.g. Cash in hand, cash in bank, debtors, stock

Question 15

Trading, profit & loss account

Answer 15

A financial document showing a historic view of all the business’s trading income and expenditure over a year.

Question 16

Cost of sales

Answer 16

The direct costs of purchasing the stock that is used in sales.
Opening stock, plus purchases, minus closing stock.

Question 17

Opening stock

Answer 17

The value of inventory (stock) held by a business at the beginning of the trading period.

Question 18

Purchases

Answer 18

The value of stock purchased by the business during the trading period.

Question 19

Closing stock

Answer 19

The value of stock held by the business at the end of the trading period.

Question 20

Gross profit Formula

Answer 20

Revenue minus Cost of Sales

Question 21

Expenses

Answer 21

The indirect costs (overheads) that a business must pay. E.g. rent, salaries, insurance.

Question 22

Net profit

Answer 22

Gross profit minus Expenses.
Revenue minus Total Costs.
The money left over in a business after all costs have been paid.

Question 23

Dividends

Answer 23

The share of the profits that is paid to shareholders (owners) of a limited company.

Question 24

Gross profit margin equation

Answer 24

Gross profit x 100
Sales revenue

Question 25

Net profit margin equation

Answer 25

Net profit x 100
Sales revenue