Finance Flashcards
There are 3 main financial documents you need to know, one looks backwards, one records the current financial position of the business and one predicts the future. Name them.
Profit and Loss Account looks back
Balance Sheet is the present position
Cash Flow forecast looks fortward
Define a cash flow forecast
A prediction of the cash in and the cash out of a business over time
Define a balance sheet
A snapshot of the assets and liabilities in a business at a particular point in time
Define a profit and loss account
A financial record of the profit or loss made in the previous year by the business after all costs have been taken away from the income sources
What are the 3 sections of a profit and loss statement?
Trading Account, Profit and loss account, appropriation account
The Trading Account summarises the Gross Profit, how is this worked out?
Revenue - Cost of Sales
How is Cost of Sales worked out?
Opening Stock - Closing Stock + stock purchased
The Profit and Loss account summarises the Net Profit, how is this worked out?
Gross Profit - Operating Costs
Give examples of operating costs
Admin, marketing, utilities, rent
The Appropriation Account summarises what happened with any profit made. What are the 2 options?
Retained Profit (ie banked for next year) and Shareholder dividends
If opening stock is £100, £200 stock is bought and £50 stock is left. What was the cost of sales?
£250
In a cash flow forecast, what happens to the closing balance each month?
It is carried forward to the opening balance the following month
In a cash flow forecast, how do you work out the net cash flow each month?
Cash in - cash out
Why does a negative balance cause a business problems?
The business is unable to pay the bills and this can cause the business to go bankrupt and stop operating
Give suitable sources of short term finance for a business with cash flow problems
Overdraft, Trade credit, not family and friends
What is gross profit margin and how do you work it out?
The proportion of gross profit that is made on each sale. Gross profit/sales x 100
What is net profit margin and how do you work it out?
The proportion of net profit that is made on each sale. Net profit/sales x 100
How does a business improve a gross or net profit margin?
reduce cost of sales if it is a low GPM or reduce operating costs if it is a low NPM.
What is the break even point?
The number of sales when the revenue is exactly the same as the total costs
What is the formula for the break even point?
Fixed costs/contribution
What is contribution?
Selling price - variable costs in other words the amount left over of each sale that pays the variable costs
If selling price is £10 and variable costs is £2, what is the contribution?
£8
When drawing a break even chart, which line is a horizontal line no matter how many sales are made?
fixed cost
Which two lines of the break even cross to show the break even point?
Total Revenue and Total Costs
Where is the profit and loss shown on the break even chart?
Using the break even cross over point, the profit is the area to the right below total revenue and above total costs and the loss is to the left of the cross over point
How do you work out total revenue?
price x quantity sold
How do you work out total costs?
Fixed costs + variable costs
On a balance sheet, which 2 numbers always are identical, in other words they “balance”
Net Assets Employed = Capital Employed
What is an asset and a liability?
Asset is owned by the business, liabilities are owed by the business
What is the difference between current and fixed?
Current is used within 1 year eg stock, fixed uses a time frame of more than 1 year eg equipment
Give 3 current assets and 2 fixed assets
current: stock, debtors and cash. Fixed: buildings, equipment
Give 2 current liabilities and 1 long term liability:
current: creditors and overdraft. long term: mortgage
What is the margin of safety?
The predicted level of production greater than the break even point
If a business wished to reduce the break even point of production, how could it do this?
Reduce fixed cost, increasing selling price or reduce variable costs
What information is in a business plan?
The planned objectives, strategies, financial forecasts, competition
Give 3 stakeholders who are interested in a business plan and state their interest?
the business owner to monitor his/her progress
the bank manager to decide if to lend
the investor to decide if to buy shares
