Finance Flashcards
What is turnover?
The number of product sales
Describe the purpose of a balance sheet.
A balance sheet allows an organisation to calculate its value/worth at a particular point in time. It shows the organisations assets and liabilities
Distinguish between fixed and current assets?
Current assets are short term assets (last less than a year) e.g. Stock, whereas fixed assets are long term assets (last longer than a year) e.g. Machinery
What are dividends?
Dividends are payments made to shareholders.
What are debtors?
Debtors are people who owe the organisation money having bought goods on credit
What are creditors?
Creditors are people the organisation owes money to
What is working capital?
Working capital is the organisations ability to pay off short term debts. Current liabilities deducted from current assets
Describe sources of finance a large organisation could use.
- Share issuing is when a plc issues shares to new or existing shareholders. Selling shares is a way of obtaining large amounts of capital that cannot be paid back.
- Leasing is when an organisation rents its equipment or premises rather than buying it.
- Venture capitalists (business angels) provide large loans to an organisation that other lenders may refuse to finance. The venture capitalist will take part ownership of the business in return.
How could an organisation improve cash flow?
- Introduce a Just-In-Time stock control system
- Encourage debtors to pay bills using discounts
- Increase promotion to raise awareness of products
- Sell fixed assets that are not required
- Purchase cheaper supplies
Justify the use of 3 sources of finance.
Bank loan
- Is flexible and can be paid back over time, helping cashflow
- Large amounts of finance can be obtained
Grant
- Large amounts of capital can be obtained
- Money does not have to be paid back
Overdraft
- Can prevent the organisation from getting into debt
- Interest is only paid on the amount borrowed
Share issuing
- Large amounts of capital can be obtained
- Money does not have to be paid back
Venture capitalist
- May be easier to obtain than a bank loan
- Large amounts of finance can be obtained
How could an organisation improve efficiency?
- Increase number of sales
- Purchase cheaper materials
- Reduce cost of manufacturing
What is return on capital employed (ROCE)?
Return on capital employed is the measure of money made from investments in the organisation
Compare liquidity ratios with profitability ratios.
Liquidity ratios measure how able an organisation is to pay off debt whereas profitability ratios measure the money made by the organisation
Give 2 examples of profitability ratios.
Gross profit percentage ratio
- Shows profit from buying and selling goods
- High % is good
- Shows the gross profit made for every £1 of sales
- Gross profit/Sales x 100 = %
Net profit percentage ratio
- Shows profit made once expenses are deducted from gross profit
- High % is good
- Shows net profit made for every £1 of sales
- Net profit/Sales x 100 = %
Return on capital employed ratio
- Shows the return on capital invested by the owner or shareholder in the organisation
- High % is good
- Shows the return for every £1 invested
- Net profit/Capital employed x 100 = %
Give 2 examples of liquidity ratios.
Current ratio
- Shows the organisations ability to pay of short term debts
- Ideal ratio 2:1
- Current assets/Current liabilities :1
Acid test ratio
- Shows the organisations ability to pay off short term debts without selling stock
- Acceptable ratio 1:1
- Current assets - Stock/Current liabilities :1