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Business Ocr As Level Required Notes. > Finance > Flashcards

Finance Flashcards

1
Q

What is the use of short term finance in a business?

A

It used as working capital used in the day to day running of the business.

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2
Q

What is an example of short term finance?

A

Overdraft, Factoring, Hire purchase,

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3
Q

What is the use of medium term finance?

A

Replace vital broken expensive pieces of equipment

Growth in the business

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4
Q

What are examples of medium term finance?

A

Leasing, Medium term loan

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5
Q

What is the use of long term finance in a business?

A

Usually for long term growth.

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6
Q

What are examples of long term finance?

A

Issuing Shares, Long term loan, Debentures, Retained Profit.

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7
Q

What is a debenture?

A

A special type of long term loan that are only available to a PLC, They sell debentures to investors in order to raise finance, the debentures carry a fixed rate of interest which the company pay to the debenture holding, usually secured with a asset.

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8
Q

What is factoring?

A

This means that a business sells its debts to raise finance to special factoring companies for a lower cost than the actual debt, however receiving the money instantly.

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9
Q

What is the difference between debt and equity?

A

Equity is a share capital that doesn’t have to be repaid

Where as debt is the an amount that needs to be paid back from source of finance that was borrowed.

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10
Q

Analyse three factors that would influence a business’s choice of finance?

A

The security it can provide on the finance that is be borrowed, if they have assets that are of high value then it will be easier to borrow greater amounts.
The amount of time and finance they need, if they need a greater amount of finance, they will have to look at longer time finances.
The amount of loans and debts it has at the moment if it has a high amount of debts at the moment then it may have to reconsider if the finance is vital, as they may not be able to pay all the debts back.

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11
Q

What is opportunity cost and give an example.

A

The opportunity cost is related to what a business could have spent money on. If a business such as McDonald’s spends money on a new advertising campaign to highlight its range on healthy salad foods, it cannot spend that money on helping franchise owners improve the standard of their seats. Opportunity cost is the next best alternative.

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12
Q

What are the two types of costs?

A

Variable and Fixed.

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13
Q

What is the formula for break even?

A

Fixed Costs/

Contribution per unit

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14
Q

What is the formula for revenue?

A

Total revenue=price*level of output

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15
Q

What is the margin of safety?

A

The amount of extra products past the break even level of output.

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16
Q

How do you calculate the target level of profit?

A

Fixed Costs +(Target level of profit)/

Contribution.

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17
Q

What are the benefits of breakeven analysis?

A

New businesses can use it as part of their business plan, as it will show them how much they will need to sell until break-even occurs allowing them to decide whether there objectives are SMART.
Easier to see and inform the business the amount they need to sell until they reach a profit

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18
Q

What are the limitations of breakeven analysis?

A

Its based on predicted figures so there is no certainty to fixed costs, variable costs and prices will stay constant.
Economies of scale may come into effect reducing the variable cost thus increasing contribution.
If batch production is being used, it may be harder to determine break even level, as if its 840 units of break even and they produce in batches of 50units then they will have to over produce the breakeven that may surplus demand or result in less than 840 resulting in a loss.

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19
Q

What are the different things a business can invest in?

A

Purchase of machines
Building extensions or new factories
Buying another business (Acquisitions)
Undertaking a large marketing campaign

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20
Q

What is Payback?

A

Payback is a method used to see how long it will take for a business to payback the cost of investment.

21
Q

What is accounting rate of return?

A

A method used to see how much return the business will get on an investment each year

22
Q

(Example of accounting rate of return)

A

A business invests 15,000 into a printing company, they keep the printer for 5 years, the total cash inflow from the printer was £60,000, the accounting rate of return would be £60,000-£15,000=£45,000/5=£9000 annually resulting in a accounting rate of return of £9,000/£15,000=60%

23
Q

What is net present value?

A

An investment appraisal method that takes into consideration the value of money over time. Converting all monetary values into today’s values.

24
Q

What are the advantages of payback?

A

It’s easy to calculate and understand, therefore doesn’t take much time resulting in it being an cost-effective way of assessing an investment.
It’s a quick and easy way to see the risk involved in an investment.

25
Q

What are the disadvantages of payback?

A

It ignores the value of money over a time period

It doesn’t measure the level of profits from the investment just how long it takes to be paid back.

26
Q

What are the advantages of Accounting rate of return?

A

It measures the profitability of an investment
Its easy to calculate and understand
It allows simple comparison between other investments.

27
Q

What are the disadvantages of Accounting rate of return?

A

It ignores the value of money over time
It takes longer to calculate than payback
No indication when the cash flow will occur within the given year.

28
Q

What are the advantages of net present value?

A

It takes into account the value of money over time.

All cash inflows are accounted for.

29
Q

What are the disadvantages of net present value?

A

Its more complicated than Accounting rate of return and Payback thus may take longer to calculate and understand resulting it being more expensive to make a decision.
The discount factor is only a best value guess that could fluctuate.

30
Q

What are the non-financial factors affecting investment?

A

Resources available
The economy(Inflation, Recession)
Accuracy of predicted values

31
Q

What are the reasons for cashflow forecasts?

A

Preparing a cashflow forecast is a valuable planning procedure. It allows the business to put into place strategies to deal with any forecasted negative cash flow, such as organising a loan or an extension to its overdraft facilities.
If the forecasted sales are low the business’s marketing may consider action such as a advertising boost.
Suppliers may demand figures to ensure payment is on time.
Managers will use the cash flow forecast to ensure the business has enough budgeted for each month.

32
Q

What are the limitations of cashflow forecasts?

A

If interest rates changed, there may be lower costs on interest rates resulting it reduced outflows. However, interest on loans might be fixed.
If there is a change in economic policy, this may result in a change in taxation and national insurance contributions, resulting in a price increase or less available money for consumers.
Natural disasters, e.g. Ebola limiting African airlines

33
Q

What can cause cashflow problems?

A

Level of sales to low
Holding to much stock
Debtors paying late
Paying creditors to quickly

34
Q

What is Gross profit?

A

The profit-The cost of sales

35
Q

What is Operating profit?

A

The profit of the business before tax and dividends

36
Q

What is the Retained profits?

A

The profit made of the year after the tax and dividends have been paid.

37
Q

What is the usefulness of income statements?

A

The income statements enable the business to make decisions. Being able to see the amount of profit made may affect the future expenditure.
Figures can be used to assess the performance of the business by using them for ratios.
If the income statement shows an increasing profit or a healthy profit it may attract more shareholders.
Companies Act State that public limited companies have to publish income statements.

38
Q

What is goodwill?

A

The additional value of a businesses reputation and other factors, when a business is being valued, e.g. business value at £500,000, where as all the assets are only worth £450,000, resulting in £50,000 value of goodwill.

39
Q

What are tangible assets?

A

These are assets that can be seen, e.g. factor and machines

40
Q

What are intangible assets?

A

These are assets that are not visible such as a patent or good will of business, its very hard to put a value on these assets.

41
Q

What is prudence?

A

Overestimating the value of a business in the accounting phrase.

42
Q

What is the formula for current ratio?

A

Current assets/

Current liabilities

43
Q

What is the ideal number for current ratio?

A

1.5:1

44
Q

What is the formula for the acid test ratio?

A

Current assets-inventory/

Current liabilities

45
Q

What is the formula for gross profit margin?

A

Gross profit/

sales *100

46
Q

What is the formula for net profit margin?

A

Net Profit/

Sales *100

47
Q

What is the formula for return on capital invested?

A

Operating profit/

Capital employed *100

48
Q

What is the formula for return on equity?

A

Profit/

Shareholders equity

Business Ocr As Level Required Notes. (6 decks)

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