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AA IB Business HL > Finance > Flashcards

Finance Flashcards

1
Q

What is expenditure?

A

Spending money on inputs

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2
Q

What is capital expenditure?

A

goods used to produce other goods, and aren’t used up in the production process

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3
Q

What are some examples of capital expenditure?

A

Machinery, buildings, factories, equipment

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4
Q

What are the time terms of capital/revenue expenditure?

A

capital - long term
revenue - short term

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5
Q

What are fixed assets?

A

assets kept for 1+ year, also considered capital expenditure

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6
Q

What is the importance of capital expenditure?

A

increases scope of operations and adds economic benefit

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7
Q

What is revenue expenditure?

A

goods consumed/used up in the production process, where they become part of the final product. it is done consistently

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8
Q

What are some examples of revenue expenditure?

A

labour, raw materials, rent, legal expenses, marketing

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9
Q

What are internal sources of finance?

A

from internal stakeholders
- personal funds (sole traders)
- retained profit
- sale of business assets

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10
Q

What are the three main types of external sources of finance?

A
  • equity finance
  • debt finance
  • other sources
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11
Q

What is trade credit?

A

willingness to offer product on credit, agreeing to receive payment at a later date - short term

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12
Q

What are advantages of trade credit?

A
  • trust relationship created
  • can form regular customers
  • helps purchaser’s cash flow
  • no interest
  • no loss of control
  • will have more cash for production for a period of time
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13
Q

What are disadvantages of trade credit?

A
  • can damage relations
  • can ruin reputations
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14
Q

What is share capital?

A

capital raised by selling shares in the stock market

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15
Q

What are advantages of share capital?

A
  • no need to be repaid
  • permanent and long term
  • no interest or debts
  • publicly held companies can sell additional shares
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16
Q

What are disadvantages of share capital?

A
  • shareholders must be paid dividends
  • loss of control and ownership
  • IPOs are expensive
  • only for publicly held companies
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17
Q

What are business angels?

A

capital raised by funding from a wealthy person who wants to invest and get richer

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18
Q

What are advantages of business angels?

A
  • helps those not on stock market
  • good for start ups and new businesses who struggle with the bank
  • expertise and mentorship
  • helps inexperienced entrepreneurs
  • long term
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19
Q

What are disadvantages of business angels?

A
  • risky for angels, no guarantees
  • rare to find
  • loss of control and ownership
  • potential conflict
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20
Q

What is loan capital?

A

capital raised from getting loans

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21
Q

What are advantages of loan capital?

A
  • regular, smaller, more accessible payments
  • larger businesses may negotiate lower interests
  • no loss of control/ownership
  • long term
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22
Q

What are disadvantages of loan capital?

A
  • interests
  • must be paid back
  • collateral may be offered and taken
  • interest increases
  • inaccessible for sole traders and very small businesses
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23
Q

What is overdraft?

A

banks allowing businesses to withdraw more money than they have from their accounts - like a very short term loan

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24
Q

What are advantages of overdrafts?

A
  • easily obtainable
  • emergency funds when necessary
  • may help with cash flow problems
  • flexibility
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25
Q

What are disadvantages of overdrafts?

A
  • usually very high interests
  • usually only small amount
  • repayments may be ordered at short notice
  • high cost and short term
  • may start a cycle of cash flow problems
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26
Q

What is microfinancing?

A

basically a social bank - providing those in poor/vulnerable positions with loans and money that would be otherwise difficult to obtain

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27
Q

What are advantages of microfinancing?

A
  • reduces poverty
  • encourages (especially female) financial independence
  • helps wider community
  • social purpose
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28
Q

What are disadvantages of microfinancing?

A
  • unethical to gain profits from poor people
  • small scale
  • high interest may be charged
  • may increase debts
  • low profitability - difficulty attracting employees
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29
Q

What is crowdfunding?

A

raising funds by obtaining small amounts of money from many different stakeholders, usually in exchange for the product (stakeholders only charged after threshold reached)

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30
Q

What are advantages of crowdfunding?

A
  • limits risk and impacts if business fails
  • no need for banks
  • less costly than stock exchange
  • no loss of control
  • no debt/interest
  • can help small/medium businesses
  • long term
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31
Q

What are disadvantages of crowdfunding?

A
  • legal challenges
  • investors may ask for more information, causing delays
  • theft of intellectual property risk
  • possible scams
  • must be able to attract enough to pass threshold
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32
Q

What is leasing?

A

the process of a lessee renting an asset over a certain period of time

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33
Q

What are advantages of leasing?

A
  • reduces capital expenditure
  • lessor has responsibility for asset
  • good if only needed for shorter period of time
  • no need to maintain/repair
  • can be used for assets that depreciate quickly
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34
Q

What are disadvantages of leasing?

A
  • lessee never owns the asset
  • for too long, can be more expensive than buying
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35
Q

What are fixed costs?

A

costs that do not change as output changes

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36
Q

What are examples of fixed costs?

A
  • rent (short term)
  • salaries
  • advertising
  • legal/administrative costs
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37
Q

What are variable costs?

A

costs that change as output changes

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38
Q

What are examples of variable costs?

A
  • wages
  • raw materials
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39
Q

Total costs formula

A

TC = FC + (AVC x Q)

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40
Q

What are direct costs + examples?

A

costs that go into the production of a good or service like wages and raw materials

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41
Q

What are indirect costs?

A

costs that cannot be individualised to each good produced ad aren’t directly associated to production

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42
Q

What are examples of indirect costs?

A
  • cleaning supplies
  • cleaners/support staff
  • rent/lighting/heating
  • loan installments
  • advertising
  • accountancy
  • board of directors
  • HR dpt
  • infrastructure
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43
Q

How are indirect (overheads) costs seen?

A
  • less desirable
  • ‘lost’ money
  • eats up profit and doesn’t contribute to the product/service
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44
Q

What is contribution?

A

whatever is left over after paying variable costs, which may be directed towards fixed costs/perhaps profit

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45
Q

Profit formula

A

Profit = (P x Q) - FC - (AVC x Q)

46
Q

Contribution formula

A

TR - (AVC x Q)
total revenue - total variable costs

47
Q

What are patents?

A

legal protection given to an inventor of a product to safeguard it from being copied for a certain period of time (average 20 years)

48
Q

What is a copyright?

A

legal protection given to creative producers (eg music, books, movies, photos, images…), protecting their exclusive right to publish/sell the artistic works

49
Q

What is a registered trademark?

A

A distinctive mark, sign, or symbol that a company uses for identification

50
Q

What is goodwill?

A

the intangible value of a company derived from its ‘good nature’ of business
seen when selling price is higher than value of net assets of a company

51
Q

What is revenue?

A

the income that a business earns from selling goods and services

52
Q

What are revenue streams?

A

one specific way that a company generates income

53
Q

What are effects of having multiple and diverse revenue streams?

A

it becomes more resilient, if revenue from one area declines due to external factors, the business is still earning revenue

54
Q

Why would managers want the final accounts?

A
  • how easily a business can cover its immediate, short and medium term debts, ensuring that the company doesn’t become insolvent
  • annual profit
  • value of assets owned
  • amount of money invested by shareholders
55
Q

What is management?

A

refers to people in the organisation that plan, organise, coordinate and control the business’ activities

56
Q

What might owners and shareholders use the final accounts for?

A

identifying how effectively their money has been invested and how much in dividends they will receive

57
Q

Why might employees be interested in seeing the final accounts?

A
  • to know the financial stability of the business and the security of their jobs
  • to be able to negotiate for better wages based on business profits
58
Q

Why would a government be interested in the final accounts?

A

may wish to assess taxes on business based on profits
assess health of business and if it is able to keep contributing to society, or if it needs supoort

59
Q

Why would a competitor be interested in seeing the final accounts?

A

to assess the overall financial strength of the company and compare profits for the year of businesses in the same industry

60
Q

Why would banks be interested in seeing final accounts?

A

to see if the business has the ability to repay loans

61
Q

Why would suppliers be interested in the final accounts?

A

to assess how effectively the company would be able to pay for goods supplied to it on credit

62
Q

Why would the local community be interested in seeing the final accounts?

A

assessing if the business is financially stable, able to keep providing jobs, goods, and services necessary

63
Q

The statement of profit or loss is also known as

A

the income statement

64
Q

The income statement is also known as

A

the statement of profit or loss

65
Q

What is the statement of profit or loss

A

a statement that records sale revenues and costs of a business. shows profit or loss generated from a business’ trading activities.
determines the net profit and distribution of profit.

66
Q

gross profit (income statement)

A

sales revenue - COGS

67
Q

profit before interest and tax (income statement)

A

gross profit - expenses (overheads)

68
Q

net profit is also known as

A

profit before interest and tax

69
Q

profit before tax (income statement)

A

profit before interest and tax - interest

70
Q

profit for the period (income statement)

A

profit before tax - tax

71
Q

retained profit (income statement)

A

profit for the period - dividends

72
Q

What are the differences in the profit and loss statements for profit and non for profit enterprises?

A
  • profits are recorded as surpluses
  • they pay no taxes
  • pay no dividends as there are no shareholders
73
Q

balance sheet is also known as

A

the statement of financial position

74
Q

the statement of financial position is also known as

A

the balance sheet

75
Q

What is the balance sheet?

A

set of final accounts that shows the value of a business’ assets, liabilities and equity at a specific point in time

76
Q

What is the balance sheet/statement of financial position often referred to as and why?

A

‘snapshot’ of a firm’s financial position, indicates its financial health

77
Q

What are assets?

A

possessions of a business that can be liquidated and have monetary value

78
Q

Examples of assets

A

PP&E, stock, cash…

79
Q

What are liabilities?

A

debts of a business

80
Q

What are the 2 main things a statement of financial position must show?

A
  • sources of finance (including liabilities and equity)
  • uses of finance
81
Q

Why is a balance sheet called a balance sheet?

A

a firm’s uses of finance must match its sources of finance

82
Q

how should you call a balance sheet?

A

ALWAYS statement of financial position

83
Q

non-current assets =

A

PP&E (property, plant and equipment) - accumulated depreciation

84
Q

current assets =

A

cash + debtors + stock

85
Q

total assets =

A

non-current assets + current assets

86
Q

current liabilities =

A

bank overdraft + trade creditors + other short term loans

87
Q

tip for remembering structure of statement of financial position

A

sandwich of current with a side of equity

88
Q

non-current liabilities =

A

long term borrowings

89
Q

total liabilities =

A

current liabilities + non-current liabilities

90
Q

equity =

A

share capital + retained earnings

91
Q

What are non-current assets?

A

long-term assets - fixed - that are not intended for sale in less than one year

92
Q

What are current assets?

A

possessions of an organisation with a monetary value but intended to be liquidated in less than one year

93
Q

3 ways that stocks can be categorised?

A
  • raw materials
  • work-in-progress
  • finished goods
94
Q

Examples of non-current liabilities

A

Bank loans
Mortgages
Corporate bonds
Debentures

95
Q

What are mortgages?

A

long term loans used to purchase property, and so the property is used as collateral

96
Q

What are corporate bonds?

A

debt securities sold to investors, represent a debt obligation that the borrower must repay with interest over a period
no ownership given

97
Q

What are debentures?

A

long term loans issued by orgs. that borrow money from investors and repay it with interest, depends on borrower’s creditworthiness

98
Q

What is depreciation?

A

the fall in value of a non-current asset

99
Q

What causes depreciation?

A

wear and tear
new technologies (outdating)

100
Q

What is the danger of not accounting for depreciation?

A

the firm’s non-current assets will be over-valued

101
Q

What are the two methods of measuring depreciation?

A

the straight line method and the units of production method

102
Q

What is the straight line method for accounting depreciation?

A

spreads depreciation evenly over the life of the asset
falls by equal amounts each year

103
Q

How is depreciation recorded in the balance sheet?

A

net book value = original cost of asset - accumulated depreciation

104
Q

Advantages of the straight line method

A
  • easy to calculate
  • suitable for assets with a known useful shelf life, can be estimated accurately
  • suitable for assets with consistent usage rate
  • easier to depreciate until scrap value is 0
  • same amount charged to P&L: easy to make historical data comparisons
105
Q

Disadvantages of the straight line method

A
  • many assets depreciate most during beginning, can be inaccurate/misleading
  • many assets don’t depreciate consistently
  • not suitable if life span can’t be estimated accurately
  • scrap values are only estimates - less accurate
106
Q

What is the units of production method of depreciation?

A

depreciation of a non-current asset is based on each physical unit of output
calculates based on units of usage rather than time

107
Q

How can you calculate depreciation per unit?

A

depreciation per unit = (cost of asset - scrap value)/estimated units of production

108
Q

How can you calculate the depreciation expense?

A

depreciation per unit x actual units produced

109
Q

Advantages of units of production depreciation

A
  • for many, more accurate/realistic
  • better for machinery/equipment
  • more accurate for wear and tear rather than obsolence
  • useful for fluctuations in production
110
Q

Disadvantages of units of production depreciation

A
  • more complicated to calculate
  • subjectivity due to salvage value that can change
  • subjectivity due to estimated units of production
  • many tax authorities don’t allow units of production depreciation - used mainly for internal bookkeeping

AA IB Business HL (4 decks)

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