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business studies me > FINANCE > Flashcards

FINANCE Flashcards

1
Q

What is short term finance ?

A

Money that is needed to run the day to day operations of a business

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2
Q

What is an overdraft ?

A

When you can withdraw money that you do not currently have - interest at high levels are placed on overdraft

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3
Q

What is a bank loan ?

A

An amount of money borrowed from a bank . Usually for a fixed period of time / they may want security of an asset if it is not paid

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4
Q

What is trade credit ?

A

When businesses Buy now and pay later to suppliers or contractors / they will be paid over a period of time or at once

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5
Q

What is factoring ?

A

The sale of assets to a specialist firm who secures payment and charges commission for the service

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6
Q

What is hire purchase ?

A

Obtaining items in return for a payment over a period of time / they do not become your property until the final payment is made

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7
Q

What is leasing ?

A

Obtaining an item for a period of time . At the end , the product goes back to the owner . Usually very expensive products or tech

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8
Q

What is long term sources of finance ? q

A

Finance used to secure resources for the long term future of the company . E.g borrowing or issuing shares

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9
Q

What is a long term loan ?

A

A loan which uses property or some other asset to act as security for the loan

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10
Q

What are debentures ?

A

A long term loan secured against an asset - for a fixed period of time . E.G premium seats at Wimbledon or a box at a football stadium

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11
Q

What is share issue ?

A

The creation of new shares for a company / A quick way to raise finance

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12
Q

What are shares/ordinary shares ?

A
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13
Q

What are preference shares ?

A

Shares paid before ordinary shareholders , a fixed rate of return which dividends can be carried over to next year

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14
Q

What are rights issue ?

A

Existing shareholders given the right to buy new shares at a discounted rate

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15
Q

What is bonus / scrip issue ?

A

Company gives out more shares rather than paying them out to shareholders

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16
Q

What is retained profit ?

A

Profit made from the business is kept back for their own use / cheapest method

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17
Q

What is a mortgage ?

A

. A large loan . A long term method of finance which requires a form of asset backed as security . Interest can be fixed or variable

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18
Q

What do businesses consider when creating a price for their products ?

A

Their objectives
Competitors pricing

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19
Q

What are factors that affect price ?

A

Nature of the product
Cost of production
Demand
Competition
Consumer incomes

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20
Q

What is investment appraisal ?

A

The means of assessing where an investment is worthwhile or not

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21
Q

What are the 3 types of investment appraisal ?

A

Payback period
Accounting rate of return
Net present value

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22
Q

Why do companies invest ?

A

To buy equipment /machinery . To increase efficiency so they can produce more

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23
Q

What is Pay back method ?

A

Measures how quickly an investment is paid back

Can be used to see the viability of an investment compared to other ones

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24
Q

Give an example on how to calculate the pay back method ?

A

Machine costs £600,000
Sell items at £5 per unit
Produces 60,000 units per year

60,000 X 5 = £300,000 per year
£600,000 / £300,000 = 2 years

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25
Q

What are the advantages of the payback method ?

A

Easy to do and cost effective

Quick in assessing the risk involved

Effective in markets that are always changing

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26
Q

What are the disadvantages of the pay back method ?

A

Ignores the value of money over time ( inflation )

Does not consider inflows after Payback period

Does not show what time of year the inflows will occur

Does not measure levels of profit from the investment

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27
Q

What is accounting rate of return ?

A

A comparison of the profit generated by the investment with the cost of the investment

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28
Q

What are some advantages of using accounting rate of return ?

A

Takes into account all cashflows throughout the lifetime of the investment

measures its profitability

allows simple comparision between 2 or more investments

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29
Q

What are some disadvantages of using accounting rate of return ?

A

Ignores the value of money over time

Life of investment needs to be known

Harder to calculate from payback method

Doesn’t show what time the inflows come in during the year

30
Q

Give a step by step guide on how to calculate ARR (accounting rate of return )

A

1 . Total all inflows
2. Profit = total Inflows - cost of investment
3. Average annual profit = profit / life of the asset
4. ( average annual profit / cost of investment ) x 100

31
Q

What is net present value ?

A

Takes into consideration the interest and the time of an investment

32
Q

What is the formula for net present value ?

A

Amount of money / ( 1+interest rate / 100 )^number of years

33
Q

What are the advantages of net present value ?

A

Takes into account the value of money over time

All cashflows are accounted for

34
Q

What are some disadvantages of net present value

A

More difficult to work out than AAR and payback methods

More complex=longer decision making = more expensive

decision making tool limited by selection of discount factors

35
Q

What are fixed costs ?

A

costs which do not change regardless of output
E.g: Rent , Insurance , Salary

36
Q

What are variable costs ?

A

Costs which change with output
E.g Wages , electricity , parking

37
Q

What are stepped fixed cost ?

A

For a short time , fixed costs may rise E.g rent may increase

38
Q

How do we calculate total costs ?

A

Fixed cost + variable costs

39
Q

How do we calculate unit cost ?

A

Total cost / units produced

40
Q

What are marginal costs ?

A

The cost of producing one more unit

41
Q

What is social cost ?

A

The cost society bears . E.g pollution and noise pollution

42
Q

What is opportunity cost ?

A

Cost of choosing one decision over another

43
Q

How do we calculate contribution

A

Selling price - variable cost

( they go towards paying fixed costs )

44
Q

What is a budget ?

A

A plan for the future which considers the resources available / allows them to monitor monetary values of revenue

45
Q

What are some reasons why a business will budget ?

A

Measures the effectiveness of activities
Ensuring adequate cashflow

Gives managers information to manage a department

46
Q

What is Zero Budgeting ?

A

All budgets in all departments are set to 0

Managers have to justify why they need the funds

Prevents the same money being allocated in the same areas / very time consuming

47
Q

What are flexible budgets ?

A

Allowances for changes to sales levels

E.g if sales increase , then raw materials will need to increase

48
Q

What is variance ?

A

The difference between the budgeted figure and the actual figure

49
Q

What is variance analysis ?

A

A positive variance improves profit - negative V reduces profit

V allows managers to see what areas are doing well or not

50
Q

Name some reasons for favorable variances for sales

A

Better advertising
Budget may be set too low
Competitors leaving the market
Lower prices increase sales

51
Q

Name some reasons for favorable variances for production

A

Costs have decreased
Economies of scale achieved
Discounts offered to them
Incorrect budget set

52
Q

Name some reasons for adverse variance for sales

A

Poor advertising
Higher costs means higher price
Better competition
Budgets set too high

53
Q

Name some reasons for adverse variance for production

A

High costs
Change of suppliers
Material shortages
Incorrect set budget

54
Q

What are cashflow statements / forecasts ?

A

Estimates inflows and outflows for a business / usually done over a period of time

55
Q

What are some reasons for doing a cashflow forecast ?

A

Valuable planning procedure
Helps set prices for products
Allows strategies to be placed
used to manage the business

56
Q

What are some limitations of cashflow forecast ?

A

Does not consider :

Changes to Interest rates
Changes in economic policy
Changes in technology
Changes in competitors behavior

57
Q

What are some causes of cashflow problems ?

A

Fall in sales
Changes in the business environment
Excess stock / paid before manufacture
Late payment from debtors
Overtrading stresses cashflow

58
Q

How do businesses improve cashflow ?

A

Increase sales
reduce the price of products
Factoring ( selling off debts )
Cut operating costs

59
Q

What are profit margins ?

A

The relationship between profit and sales - indicate how effectively costs are being managed

60
Q

What is the formula for gross profit margin ? `

A

Gross profit
—————— X100
Sales turnover

61
Q

What is the formula for gross profit ?

A

Revenue - Cost of producing
the product

62
Q

What could be the reason for a low gross profit margin ?

A

Increased cost of raw materials
Reduced selling price
Stock being lost / poor managment

63
Q

What is the formula for net profit margin ?

A

Net profit
—————— X100
Sales turnover

64
Q

What is the formula for net profit ?

A

Gross profit - any other expenses

65
Q

What is liquidity ?

A

The amount of cash available in the business to meet daily requirements / meet debts

66
Q

What is the formula for current ratio ?

A

Current assets
——————— = X:1
Current liabilities

67
Q

What does an ideal 1:1 ratio look like ?

A

1:1 - for every £1 in short term asset there is £1 in short term debt

Below 1:1 is dangerously low cash to meet debts

68
Q

What is the acids test ratio ?

A

current assets ( less stock ) / current liabilities

69
Q

What is return on capital ? ( ROCE )

A

Expresses profit of a business as a % of capital invested

Relates profit to the size of the business

Higher % = Higher performance

70
Q

What is the formula for ROCE ?

A

Net profit
————— X100
Capital
employed

71
Q
A
72
Q
A

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