Finance Flashcards
What are the 4 financial objectives?
- return on capital employed targets
- shareholders returns
- cost minimisation
- cash flow targets
What are the 4 internal influences on the financial objectives?
- the corporate objectives
- the nature of the product that is sold
- the managers objectives
What are the 3 external influences on the financial objectives?
- actions of other businesses
- availability of external finance
- state of the market
what 2 types of financial statements are there?
balance sheets and income statements
what is a balance sheet?
a financial statement that records the assets and liabilities
what are assets?
something the business owns
what are non current and current assets?
non current - assets they expect to own for over a year e.g land
current - assets that will be quickly converted into cash e.g stock
what are liabilities?
a debt owed by a business
what are current and non current liabilities?
current - debts to pay back in less than a year
non current - debts not repayed for over a year e.g mortgages and bank loans
what is total equity?
Used to be known as shareholders funds. it is money invested into the business which one day has to be paid back or generate a return every year.
Why do you need to record the assets and liabilities?
it shows how the business has made money and what that has been spent on
who is interested in the balance sheets?
shareholders, suppliers and managers
why does a balance sheet always balance?
because when a business buys something, lets say it costs £100, they owe the seller £100 which is a liability but they also now have a new asset which is worth £100
What is working capital
working capital is the money you have to pay day to day transitions such as fuel and raw materials.
what is wrong with having too much working capital?
having working capital doesn’t earn you anything
What is depreciation?
the reduction in the value of an asset over time
why do firms depreciate assets
because if they buy a machine for £100, every year it will be older and therefore worth less.
Why does depreciation matter?
because it provides an accurate value of assets so you can see the truth worth of a business
What is an income statement
it states a businesses income
what is gross profit?
the profit of a business once direct costs have been taken away
what is net profit?
revenue minus both the direct and indirect costs (e.g rent)
Describe the 3 types of new profit
- operating profit - profit from regular trading activities. Ignores profit from one off sales.
- net profit before tax - operating profit plus profits from one off activities
- net profit after tax - profit once corporation tax has been deducted
what is high quality profit
profit that will continue into the future. This includes operating profit as it excludes one offs and products that have high demand as you know you will continue getting profit for it
Do public limited companies have to publish their income statement?
yes but they provide as little information as possible
what are group income statements
companies taken over by other companies form a group. They keep their own legal identity but have to publish a group income statement
who is interested in the income statements?
shareholders, managers, employees and revenue & customs
what is window dressing?
making the financial statements look as good as possible
what are 2 ways in which businesses window dress
- borrow some short term money so it looks like they are in a better position to pay back debts
- ## sale and leaseback
why are balance sheets important? (3 points)
- shows the worth of a business
- shows stakeholders if they have borrowed an excessive amount of money
- shows you if the business is capable of paying their liabilities
Why are income statements important?
- shows whether or not the business has grown
what are the limitations of financial statements?
- doesn’t show the quality of leadership
- doesn’t show their market position
- doesn’t show the performance of the workforce
What do liquidity ratios show?
- if the business can pay back its debts in the short term
What re the 2 liquidity ratios?
current ratio and acid test
what does the current ratio measure?
the ability of the business to pay its debts over the next year
what does the acid test ratio measure?
the very short term liquidity of a business
What is does gearing measure
the long term liquidity of a business
what does the asset turnover ratio measure?
a businesses sales in relation to the assets used to generate these sales
What does the inventory turnover ratio measure?
measures a companies success in converting stock into sales
what are the receivables days?
how many days it takes to receive money from customers
what are the payables days?
how many days it takes you to pay your suppliers
what is the gross profit margin?
compares the gross profit with the revenue
what is the net profit margin?
calculates the percentage of a products selling price that is the net profit
What is the return on capital employed?
how much money was made compared to how much was invested
what is a dividend per share
how much money each share is worth
what is the dividend yield
compares the dividend received on a single share with the current market price of the share
what are 4 ways of raising finance?
- using retained profits
- selling shares
- borrowing
- selling assets
what is a profit centre?
an areas, division, department or branch of a business that is allowed to control itself separately
3 benefits of using profit centres
- diseconomies of scale is avoided as its easier to control smaller areas
- improves motivation as everyone has more power and authority
- easier to monitor performance
3 drawbacks of using profit centres
- individual centres can become too narrowly focused and not contribute to the corporate objectives
- performance of individual areas might be affected by local market conditions
- costs may rise e.g training and economies of scale are less likely
what are 3 ways in which you could minimise costs?
- minimise labour costs
- use technology
- relocate abroad where all costs are lower
what 4 ways can you minimise labour costs?
- reduce staffing levels
- reduce the wage
- outsource
- use a more flexible workforce
what are 3 techniques for making investment decisions
payback, average rate of return and discounted cashflow
what is payback?
say you invest £100 in a machine. If each year the machine makes £25 profit, it takes 4 years to re make the cost of the investment. The payback time is the 4 years.
what are the 3 advantages and disadvantages of payback?
- quick and simple
- ignores the level of profit
- ignores the timing of any receipts
What is the average rate of return?
it calculates the return on investments as a percentage so you can choose which investment would be best
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