Finance Flashcards
`Describe two internal sources of finance
Retained Profit-Profit that has been made by the business in previous years and does not need to be repaid.
Sale of asset- This is when the business sells assets that re no longer required and money does not need to be repaid.
Describe three external sources of finance from the bank
Bank loan-A fixed amount of capital that is given by the bank which needs to be repaid with interest
Mortgage-A fixed amount of capital given by the bank and is used to buy property and needs to be repaid with interest
Bank overdraft-This is a facility that will allow you to withdraw more funds than you actually have in your account and this can be arranged quickly.
Describe two more external sources-other
Grant- This is a fund awarded by the EU or government and the business needs to meet criteria in order to be awarded this and this does not need to be repaid.
Crowd funding- Income generated via social media and gaining media attention
Describe the purpose of preparing an income statement[4]
Shows the value of sales-income generated from selling goods and services
Shows the value of cost of sales= [opening inventory+purchases-closing inventory]
Shows the value of gross profit=sales - cost of sales
Shows the value of profit for the year= [gross profit-expenses]
Describe the purpose of preparing the statement of financial position[4]
Shows the value of current assets=items owned by the business which have a degree of liquidity no longer than 1 financial year
Shows the value of non current assets =items owned by the business which have a degree of permanence and last more than 1 financial year
Shows the value of current liabilities= debts of the business which will be paid off within 1 financial year
Shows the value of non current liabilities= debts of the business which will take more than 1 financial year to repay.
Describe the purpose of the inland/HRMC revenue [2]
Every UK business has to submit a tax return every year to ensure HMRC collect the correct % of tax due
Every UK business has to submit an income statement and a statement of financial position every year to ensure HMRC have the evidence for profitability and liquidity.
Describe the reasons of use of financial statements for stakeholders[3/4]
Owners =interest in the income statement which overall shows profitability performance
Employees=interested in the profitability performance in order to have job security
Competitors=interested in the income statement which overall shows profitability performance in order to compare expenditure enhancing financial decision making.
What are the two profitability ratios
Gross profit% ratio =Gross profit / sales *100
Profit for the year % ratio= Profit for the year /sales *100
What are the two equity ratios and what does equity mean
Rate of inventory ratio=Cost of sales / avg inventory
Return on equity employed %= Profit for the year / [opening] equity *100
Equity=shareholder capital
What are the two liquidity ratios
Working equity ratio[current ratio]=current assets / liabilities = [desirable ratio-2:1]
Acid test ratio= Current assets - inventory / current liabilities
Explain the benefits of preparing a cash budget
it can show periods of surplus cash= which can then be used for capital investment
it can be shows to potential investors who can then see if it is a viable business
it helps to highlight periods of when cash flow problems occur which allows the organisation to take corrective action.
it can be used to aid future financial planning which can help identify when an overdraft is required.
it can be used to set departments and managers a budget giving them a target to focus on
Describe the impact on an org having poor cash flow
May have to find a cheaper supplier
unable to pay expenses
may need to sell unused assets
may need to reduce price of goods
may lead to staff redundancies
Describe these financial terms
Trade payables
Trade receivables
Working equity
Trade payables= shows the value of the amount the business owes other businesses
Trade receivables= shows the value of outstanding bills to be settled by customers
working equity= current assets - current liabilities
