Finance Flashcards

1
Q

What is turnover?

A

The number of product sales

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2
Q

Describe the purpose of a balance sheet.

A

A balance sheet allows an organisation to calculate its value/worth at a particular point in time. It shows the organisations assets and liabilities

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3
Q

Distinguish between fixed and current assets?

A

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

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4
Q

What are dividends?

A

Dividends are payments made to shareholders.

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5
Q

What are debtors?

A

Debtors are people who owe the organisation money having bought goods on credit

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6
Q

What are creditors?

A

Creditors are people the organisation owes money to

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7
Q

What is working capital?

A

Working capital is the organisations ability to pay off short term debts. Current liabilities deducted from current assets

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8
Q

Describe sources of finance a large organisation could use.

A
  • 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.
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9
Q

How could an organisation improve cash flow?

A
  • 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
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10
Q

Justify the use of 3 sources of finance.

A

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
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11
Q

How could an organisation improve efficiency?

A
  • Increase number of sales
  • Purchase cheaper materials
  • Reduce cost of manufacturing
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12
Q

What is return on capital employed (ROCE)?

A

Return on capital employed is the measure of money made from investments in the organisation

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13
Q

Compare liquidity ratios with profitability ratios.

A

Liquidity ratios measure how able an organisation is to pay off debt whereas profitability ratios measure the money made by the organisation

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14
Q

Give 2 examples of profitability ratios.

A

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 = %
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15
Q

Give 2 examples of liquidity ratios.

A

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
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16
Q

Give an example of an efficiency ratio.

A

Stock turnover ratio

  • Shows the length of time stock is held
  • If stock is held for long periods of time stock levels may be too high
  • If stock is held for short periods of time it may be due to a JIT stock management scheme
  • Cost of sales/Average stock = Time
17
Q

What may be a drawback to using ratio analysis?

A
  • Figures collected are from past data and cannot predict future figures
  • External factors are not considered making it difficult pinpoint why figures are the way they are
  • Workforce related factors such as motivation are not considered making it difficult to pinpoint why figures are the way they are
  • Product development and research periods are not taken into account but have a big impact on figures - may be unclear why losses are made
  • It can be difficult to compare data to other organisations as the organisation must be the same size for the data to be valid
18
Q

Distinguish between a trading account and a profit and loss account.

A

A trading account shows the profit made from buying and selling goods (gross profit) whereas a profit and loss account shows the profit made once expenses have been deducted from the gross profit (net profit).

19
Q

Justify the use of a cash budget.

A
  • Can help identify cash flow issues
  • Can help identify money available for purchases
  • Can help predict when a loan or external source of finance may be required
  • Can allow an organisation to compare predictions to actual figures
20
Q

Why might an organisation experience cash flow problems?

A
  • Too much money tied up in stock
  • A very long credit period given to customers who owe the organisation money
  • Not enough income from sales
  • A very short credit period being offered by creditors or suppliers
  • To much money being taken out by owners
  • Large sums of money being spent on items such as machinery
  • Sudden increase in operating expenses