Finance Flashcards
What is meant by break even?
Where the level of output is defined by total revenue = total costs
What is the formula for net assets?
Total assets - current liabilities
What is budgeting?
Setting future revenue and expenditure targets with the aim or ensuring that a profit is made
What is budgetary control?
Checking performance against the plan and taking action if necessary
What is the formula for break even?
Fixed costs
————————————–
Selling price - variable price
per unit per unit
What is the formula for total costs?
Fixed costs + variable costs
What is the formula for working capital?
Current assets - current liabilities
What is the formula for revenue?
Number of sales x price per unit
What is the formula for profit/loss?
Revenue - expenditure
What is the formula for gross profit?
Revenue - cost of sales
What is the formula for net profit?
Gross profit - expenses
What is meant by the term operating costs?
Expenses that a business has in its day-to-day operations
What is meant by the term start-up costs?
The expenses paid before trading begins
What are some of the main types of expenditure?
- rent and business rates
- staff wages
- raw materials
- utility bills
- line rental and Internet access
- vehicles, insurance and petrol
- advertising and printing costs
What is the income statement also known as?
Profit and loss account
What is an alternative name for the balance sheet?
Statement of financial position
What does the income statement show?
It shows the profit or loss made by the business over a period of time (usually one year)
What does the balance sheet show?
How much money is invested into the business and what it is spent on, on a particular day.
What is an asset?
Something owned by the business
What is a liability?
Something that the business owes
What is an overhead?
An everyday running cost of the business
When is profit made?
When revenue is greater than expenditure
When does loss occur?
When expenditure is more than revenue
What is an inflow?
Money coming into the business
What is an outflow?
Money going out of the business
What are cost of sales?
Costs that are directly linked to the production of a product
On a balance sheet, the shareholder’s funds are equal to…
Total assets - current liabilities
What is the likely effect on break even is there is an increase in sales?
The break even point decreases
What is the likely effect on break even is there is a decrease in cost of sales?
The break even point decreases
What is the likely effect on break even is there is an increase in costs?
The number of sales required to break even increases so the profit level will fall or become a loss
What is the likely effect on break even if there is a decrease in sales?
The break even point is higher
What is a break even analysis?
One of several financial planning tools that businesses use to help make the right decisions and increase their chance of success
What are some of the benefit to break even analysis?
- both fixed and variable costs are known
- projected sales revenue is calculated
- the business owner knows how many products must be sold to make a profit
- the owner can make adjustments to make profit sooner e.g. reduce costs by obtaining cheaper materials or increase selling price
- the margin of safety is known
- the best goods are stocked and sold at the optimum price so the business is successful
When is break even analysis used?
- a new business is set up
- a new product is launched
- realistic production targets need to be set
- realistic sales targets need to be set
- past performance needs to be reviewed and analysed
What are the risks of not completing a break even analysis?
- costs are unknown and/or too high
- the selling price is too high or too low
- the owner has no idea how many items must be sold to make a profit
- the business makes a loss over a long period of time without any action being taken
- the margin of safety is unknown
- stock costs too much, sold at the wrong price and the business fails
What is another word for receipts?
Inflows
What is another word for payments?
Outflows
What THREE things are included in the trading account?
Sales income, cost of sales and gross profit
What is net cash flow?
The difference between the cash inflow and outflow figures over a particular time period
What are some types of inflows for a business?
- bank loans
- sales revenue
- rents from properties owned by the business
- share capital invested by the owners
What is cash flow?
The money flowing in and out of a business on a daily basis
What is the purpose of cash flow forecasting?
To predict the money that should be coming into and out off the business’s bank account over a period of time. To avoid the risk of serious money problems and to plan for success.
What is cash balance?
The amount of money forecast to be on the bank after the net cash flow figure has been added or subtracted from the existing bank balance.
What is an overdraft?
This occurs if a business pays more out of its bank account that it has in credit. The bank may allow this but will make an extra charge.
What two financial documents are used to assess success?
- the income statement (profit and loss account)
- the statement of financial position (balance sheet)
What is a current asset?
Items that change with every transaction. E.g. Stock, debtors and cash in the bank.
What is a fixed asset?
Items that the business must keep in order to trade. E.g. A van or computer.
What is a current liability?
Money that must be paid back within a year. E.g. Money to suppliers or a bank overdraft.
What is a long-term liability?
These include loans as they can be repaid over a long period of time.
What is a financial year?
The trading period over which a business collects information for their annual income statement.
What is share capital?
The amount of money invested into a business by the shareholders.
What is another name for debtors?
Trade receivables
What is another name for creditors?
Trade payables
What is a a debtor?
A person who owes money to the business.
What is a creditor?
Someone who is owed money by the business.
