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A Business Studies Complete Overview of Specification > Finance > Flashcards

Finance Flashcards

1
Q

Why are financial objectives needed?

A

Measure financial performance

Maintain the business as a going concern

For decision making

Information provision for various stakeholders

For comparison purposes

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2
Q

What are the two forms of accounting?

A

Financial

Management

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3
Q

What are the 7 Accounting Concepts?

A 
Consistency 
Going Concern 
Matching 
Materiality 
Objectivity 
Prudence 
Realisation
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4
Q

What is consistency?

A

Transactions and valuations are treated the same way period on period.

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5
Q

What is going concern?

A

That unless there is evidence, the company isn’t going broke.

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6
Q

What is matching?

A

The date used for transactions is when it occurred not when its paid.

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7
Q

What is Materiality?

A

Accounting is concerned with the big picture, a business would not spend time calculating every single asset if it has no value.

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8
Q

What is objectivity?

A

Accounts must be realistic and therefore based on factors not opinions or guesses.

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9
Q

What is prudence?

A

Not overstating the financial situation, it is right to understate the level of profits and overstate the level of losses.

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10
Q

What is realisation?

A

Realisation of ownership takes place when the legal ownership changes hands and not when payment is payment.

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11
Q

What does GAAP stand for?

A

Generally accepted accountancy practice

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12
Q

What is Generally accepted accountancy practice?

A

A framework of accounting rules and principles.

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13
Q

What are types of internal sources of finance?

A

Retained profits
Working Capital
Sale of assets

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14
Q

What is working capital?

A

Reducing the volume of stock held
Delaying payment to creditors
Encouraging debtors to pay on time.

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15
Q

What is external short term sources of finance?

A

Overdraft
Trade Credit
Debt Factoring

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16
Q

What is an overdraft?

A

When you reach a negative bank account balance, and pay interest daily on this balance.

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17
Q

What is trade credit?

A

When you buy stock but don’t pay instantly.

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18
Q

What is Debt factoring?

A

When you sell your debts to a debt factoring company

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19
Q

What types of external medium term sources of finance are there?

A

Medium term bank loan
Leasing
Hire purchase

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20
Q

What is leasing?

A

Where monthly payments are made for use of equipment such as a car. Leased equipment is rented and not owned by the firm.

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21
Q

What is hire purchase?

A

Similar to leasing where monthly payments are made for equipment such as computers, at the end of the payment the business keeps the asset.

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22
Q

What types of external long term sources of finances are there?

A 
Long term bank loan
Debentures
Share capital
Venture Capitalist 
Sale and Leaseback
Government Grants
Mortgage
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23
Q

What are debentures?

A

A debenture is a form of long term loan issued by the company against the assets of the business

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24
Q

What are government grants?

A

The UK Govt does give grants to business (e.g.
individuals to help them get started and larger companies for relocating to a specific area that the Govt
want to regenerate.

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25
Q

What are the factors affecting what source of finance to use?

A

Size of the business, e.g. PLC has more options than sole traders
Short, Medium, Long term
Security, the more assets the business have the easier it is to secure a source of finance.
Cost- How much interest is paid?
Risk- If the loan cannot be repaid then assets may be at risk causing the business to fail
Control- If a business issues shares owners may lose control over the business

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26
Q

Why do businesses need finance?

A 
Setting up a new business
Finance working capital
Expansion of assets
Expansion
Research and Development
Business Stability
Market Strategies
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27
Q

What are stepped fixed costs?

A

In the long term fixed costs may not be constant, an increase in sales may lead to an increase in fixed costs.

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28
Q

What is marginal cost?

A

The cost of producing one extra unit.

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29
Q

What is social cost?

A

Social cost is the total cost to society, from the production or consumption of a good or service that the business doesn’t always include in its costs.

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30
Q

What is standard costing?

A

Is the cost that business would normally expect for the production of a product.

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31
Q

What is absorption costing?

A

All manufacturing costs are allocated to products.

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32
Q

What is the problem with absorption costing?

A

When absorption costing is calculated fixed overheads are based on an estimate when allocated to the products as they are unknown.

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33
Q

What is marginal costing?

A

Only variable manufacturing costs are allocated to the product.

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34
Q

What is a cost centre?

A

Is a specific part of a business where costs can be identified and allocated with reasonable ease.

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35
Q

What is a profit centre?

A

A profit centre is where costs and revenue can be calculated and controlled.

36
Q

Benefits of using a cost centre?

A

The information will help to highlight those departments that are performing well and those that are not.

The information gained can be used to help motivate the work force, e.g. incentives for achieving goals.

The availability of the information may encourage management to look for new suppliers or more efficient production techniques to bring costs down.

37
Q

Disadvantages of using cost centres?

A

Collection and separating out the information into different cost centres is likely to be expensive in terms of time and money.

Some of the costs for a business may be outside its control.

If the allocation of costs is felt to be unfair or unreasonable by some departments, this may lead to conflict between departments. Demotivating employees.

38
Q

What is contribution?

A

Contribution is the selling price - variable costs, it is how much does a product contribute towards the fixed costs.

39
Q

When should a business take on special orders?

A

If contribution is positive and no additional fixed costs occur when performing the special order.

40
Q

What does a business need to think before deciding to accept a special order?

A

Will they order again in the future?
Is there still capacity to meet future orders?
What would the impact be on existing customers?
Does the business have enough staffing to meet the additional orders?

41
Q

What is break even point?

A

The point at where the business is neither making a profit or a loss.

42
Q

How do you calculate break even point?

A

Fixed costs/Contribution per unit

43
Q

Uses of break even analysis?

A

Break even analysis is particular useful when
making decisions regarding the launch of new
products or services, or diversification into
new markets.

When launching a new product it is important
to know the level of output and sales needed
to break even.

44
Q

How do you calculate margin of safety?

A

Actual output-Break even point

45
Q

What is on the axis of a break even chart?

A

Cost/Revenue on Y Output on X

46
Q

What are the lines on a break even chart represent?

A

Horizontal line for fixed costs
Curve from the origin showing Total revenue
Curve from fixed costs showing Total costs

47
Q

Where is the break even point on a break even chart?

A

Where total revenue and total costs meet.

48
Q

What is cash flow?

A

The movement of money into and out of a business account.

49
Q

What are cash flow forecasts?

A

They are estimates of the likely inflows and outflows of cash over a period of time. The forecast shows the amounts and the likely timings.

50
Q

What are cash flow statements?

A

Are the actual figure produced once transactions have occurred of the cash flow of a business.

51
Q

What is working capital?

A

Current assets-Current Liabilities, Having enough cash to keep the business going (working capital) is essential to the survival of the business.

52
Q

What is the working capital cycle?

A

The time period for a business to settle liabilities, take customers and buying stock.

53
Q

What do liquidity ratios assess?

A

The level of liquidity of a business.

54
Q

Why are cash flow forecasts and statements important?

A

They can identify times when the business
might be short of cash

They can take action to avoid cash shortages
becoming a major problem.

Managers and owners of a business can use cash
flow forecasts and statements when applying to
banks for overdrafts and other loans.

(This makes lending to these businesses less risky
for banks).

Managers will also be able to make business
decisions based on the forecast or statement,
such as reducing outflows.

55
Q

What does insolvent mean?

A

This is when a business does not have enough
cash to pay it’s bills and has to stop trading by
law.

56
Q

What are solutions to cash flow problems?

A

Delay payments

Speed up cash inflows

Find new sources of cash inflows

Reduce cash outflows

Arrange an overdraft with the bank

Owners could invest more money into the
business

57
Q

What is investment appraisal?

A

The evaluation of an investment project to determine whether or not its likely to be worthwhile.

58
Q

How do you calculate ARR?

A

Average Yearly Return On Investment/Initial Outlay.

59
Q

How do you would out the average yearly return on investment for ARR?

A

Project Total Earned-Outlay for the investment/

No. Of years.

60
Q

What are the advantages of ARR?

A

Easy to compare the different % returns on different investments.

Uses all the cash flow over the projects life.

61
Q

What are the disadvantages of ARR?

A

Ignores the timing of the cash flows, e.g. you get £10 in year 1 but in year 2 you get £100 the average would make it seem you get a lot at the start.

Ignores the time value of money invested, e.g. deflation.

62
Q

NPV and Payback?

A

Make sure you know how to do these should be easy.

63
Q

What are budgets?

A

A means of delegating spending power and a way to measure business performance.

64
Q

What is budgeting for?

A

Motivation, giving staff a target for what they need to be successful can motivate staff to work harder to achieve this.

To measure a managers performance and reward success.

To ensure no overspending.

To enable spending power to managers who better understand how to use the firm’s money.

65
Q

Why do companies need to set budgets?

A

Control and Monitoring (money) – acting as an objective.
Variances from the budget can then be assessed

Planning – forces businesses to plan for the future; anticipating problems and solutions.

Co-ordination – helps to organise larger companies

Communication – communicate plans to, and expectations of employees

Efficiency – allocating budgets to departments allows those in charge (dept. managers) to allocate money in the best way for their area

Motivation – e.g. beating the targets set by the budget can be seen as a success.

66
Q

What different types of budges are there?

A

Income budget- Sets out the minimum desired revenue level to be achieved in a period of time.

Expenditure Budget- Sets a minimum target for costs

Profit Budget- Shows how much profit a business is expected to make over a time period.

Cash Budgets – shows the amount of cash a business is
expected to flow in and out of the business over a period. Particularly useful for managing liquidity.

67
Q

What are the two ways to construct budgets?

A

Zero-Based Budgeting

Historical Budgeting

68
Q

What is Zero based budgeting?

A

When budgets are set by default to 0 and budget holders have to justify every expenditure.

69
Q

What is Historic based budgeting?

A

Using the previous years budget as a basis for the judgement making minor adjustments.

70
Q

Why is it hard for new businesses to determine a budget?

A

As they don’t have previous budget data and many new businesses have limited knowledge of the industry so it can be hard to construct a budget.

71
Q

What are final accounts?

A

By law, all limited companies have to produce final
accounts these include Profit and Loss Account,
Balance Sheet and Cash Flow Statement

72
Q

What is gross profit?

A

Gross profit is the income left after deducting direct expenses.

73
Q

What is operating profit?

A

Operating profit is the income left after deducting direct and indirect expenses.

74
Q

What is net profit?

A

Net profit is the income left after after deducting all expenses, interest and tax.

75
Q

What is the formula for Return on capital employed?

A

Net Profit/Capital employed

76
Q

What is the formula for gross profit margin?

A

Gross profit/Revenue

77
Q

What is the formula for net profit margin?

A

Net profit/Revenue

78
Q

What are types of profitability ratios?

A

Gross profit margin
Net profit margin
ROCE

79
Q

What are the advantages of making profit and loss accounts?

A

They can help set objectives and targets for the future.

They can help when making decisions about future projects and expenditure.

Provides Banks with information that can help businesses obtain loans.

Legal requirement of the companies act

80
Q

What negatives of making a profit and loss account?

A

Some firms may manipulate figures to show the company in the best light

It is only a snap shop in time

They don’t consider external influences, e.g. Economic recession causing less demand.

81
Q

What are assets?

A

Are things that the business owns, e.g. machinery.

82
Q

What are liabilities?

A

Is money that the business owes, e.g. money owed to suppliers that haven’t been paid as they were purchased on credit.

83
Q

What are current liabilities?

A

Debts that the business will pay within the next 12 months, e.g. Trade credit or short term loans.

84
Q

What are long term liabilities?

A

Money that the business owes and has to pay back in more than 12 months time. E.g. Long term loans/Mortgages.

85
Q

What are current assets?

A

Assets that can easily be liquidated, e.g. Stock and Cash Balances.

86
Q

What are non current assets?

A

Assets that cannot be easily liquidated, e.g. Land and Machinery.

A Business Studies Complete Overview of Specification (7 decks)

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