finance Flashcards
what does finance involve
involves the control of money within the business
what is accounting
is a managerial and administrative tool for recording financial transactions
what is double entry bookkeeping and what does it ensure
every transaction is recorded twice in accounting records to ensure that the financial statements are accurate
define financial statements
reports that summarise transactions over a period of time
describe a cashflow statement
indicates the movement of cash receipts and cash payments resulting from transactions over a period of time
show the movement of cash in and out of a business
describe an income statement
shows the revenue earned and expenses incurred over the accounting period with the resultant profit or loss
statement of financial performance
it is a summary of all the revenue (income) earned minus all the costs incurred, for a period of time (normally one year)
describe balance sheets
represent a business’s assets and liabilities at a particular point in time and represent the net worth of the business
lists all the business’s assets and liabilities on a certain date
define assets
things that the business owns
define liabilities
amounts that the business owes externally e.g. to suppliers and backs
what is the accounting equation
assets = liabilities+owner’s equity
what categories are assets divided into?
current and non-current assets
what are current assets? with examples
are items easily converted into cash and are expected to be used within 12 months e.g. cash, stock, amounts due from customers (accounts receivable)
what is accounts reveivable
amounts due from customers
what is non-current assets? with examples
expected to be held by the business for more than 12 months e.g. plant, machinery, vehicles, furniture
define owners equity
is amounts that the business owes internally e.g. to investors and owners
what are liabilities dived into
current and non-current
what are current liabilities and examples
current liabilities are amounts due to be repaid in less than 12 months, including bank overdrafts, amounts due to suppliers (accounts payable) and short term loans
what is accounts payable
amounts due to suppliers
what is non-current liabilities and examples
non-current liabilities are amounts due for repayment in more than 12 months, including mortgages and loans
what is owners equity divided into
capital and retained profits
define capital
is the amount invested by the owner(s) of the business, including shareholders. It is owed by the business back to those investors
define dividend
profit distributed to investors
what 2 things can a business do with its profits
distribute dividend or retain profits
what is retained profits
business reinvests profits back into the business
why would business retain profits
to plough the money back into the business in the hope it will generate even more profit and higher dividends in the future
what 2 ways have assets owned by a business been bought
using either finance invested by owners/investors (owner’s equity) or finance borrowed from third parties (debt=liabilities)
define debtors
people who owe the business money a.k.a. accounts payable
define creditors
people the business owes money to a.k.a. accounts receivable
what is the profit equation
revenue-costs=profits
what is revenue equation
number of items sold/ divided by units sold times x selling price
what is COGS
cost of goods sold
what is the cost of good sold
how much it costs to buy all those items that were sold during the period
what is COGS equation
opening stock + purchases of stock - closing stock = COGS
what is gross profit equation
revenue -COGS = gross profit
what does the gross profit tell businesses
tells them the profit margin that the business is making on its products i.e. the difference between what it buys them for and what it sells them for
what are expenses
are all the other costs incurred by the business in making and selling its products
how are expenses categorised
selling: relate to the process of selling the good or service and can be directly traced to the need for sales e.g. advertising, salaries
administration: related to the general running of the business e.g. electricity, rent
finance: costs associated with borrowing money from outside people or organisations and to minimising business risk e.g. interest payments, lease payments, dividends
what is the net profit equation
net profit = gross profit - expenses
how can net profit be paid
the overall net profit earned by a business can either be paid out in the form of drawings (to owner) or dividends (to investors), or retained within the business
what happens when a business is said to be liquid
a business is said to be liquid when it can meet its short term debts as they fall due
what do cashflow statements highlight
periods of surplus and deficit cash positions
define surplus
when income or revenue exceeds expenditures
define deficit
when expenses exceed revenues
what is the importance of cashflow statements
cashflows problems are often the first indicator that a business is in trouble, it identifies if sales are on credit and customer have taken a long time to pay their invoices because then the business will not have the cash it needs to pay its costs
define inflows and examples
the money going into a business which could be from sales, investments, or financing e.g. cash sales, credit sales when paid, other income (interest from investments, non-operating income)
define outflows and examples
any money leaving a business e.g. payments for stock, payments for expenses (wages, insurance), payments for non-operating expenses
what activities can cashflow statements be divided into
operating: cash inflows and outflows relating to the main activity of the business
financing: related to the acquisition and repayment of both debt and equity finance
investing: related to the purchase and sale of non-current assets and investments
what should the closing cash position on the cashflow statement correspond with?
the cash position reflected on the balance sheet
what is the cashflow forecasting process?
businesses may calculate how many items they need to sell in order to break even
define break even
means that you make no profit or loss - you sell just enough to cover you costs
what is the breakeven point
total revenue=total costs
what is the point of making a profit
total revenue>total costs
`what is the point of making a loss
total revenue<total costs
what is the breakeven point equation
breakeven point = fixed costs / (price - variable costs)
what is a cashflow projection
is a forecast of your cashflow statement, estimating cash inflows and outflows
