Finance Flashcards
Pass the finance part of mgt388
What is sunk cost?
A cost that has already been incurred and cannot be recovered
What is a main characteristic of variable costs?
They vary directly in proportion with the cost of the activity.
What are fixed costs?
They are costs that remain constant over a wide range of activity.
What are opportunity costs?
The value of the benefit sacrificed when one course is chosen over another.
What is marginal cost?
The cost of one additional unit of a good or service.
What is venture capital?
A finance company provides a business with funds in exchange for shares. These can be sold back to the company later.
What’s a legal characteristic of a Limited Company.
Legally, the company is a separate person. The financial and business risks belong to the company.
What is Net Present Value (NPV)?
The value of a sum of money presently, compared to the value it may have in future after an interest rates/inflation is applied.
What is internal rate of return?
IRR is the discount rate applied to future cash flows that produces an NPV of zero.
What types of decision should marginal costing be accepted?
Short term decisions.
What is apportionment?
Apportionment of cost refers to distribution of various overhead items, in proportion, to the department on a logical basis.
What is “elastic” demand?
If the change in price leads to a MORE THAN proportionate change in quantity demanded then your demand is elastic.
What is “cost of sales”?
The direct costs attributed to the production of goods sold in a company.
Define “non-current assets”.
Long term investments in which the full value will not be realised until the end of the financial year.
What are trade receivables?
Amounts billed by a business to its customers when it delivers goods or services to them.
What is a debenture?
A type of debt instrument that is not secured by physical assets.
Explain the accruals concept.
The value of an investment or interest is added over a period of time so it is spread. It ensures the revenue is matched with the cost of making that revenue.
What is Gearing?
It is the Debt to Equity Ratio. Gearing=Debt/Equity
What is solvency?
The possession of assets in excess of liabilities. The ability to pay one’s debts.
What is liquidity?
The ability of a business to generate sufficient cash to pay its liabilities as they fall due.
What is profitability?
It’s an efficiency measure. It’s the ability of a business to produce a return on its investment based on its resources.
Explain absorption costing.
The cost of a product is calculated in full by considering direct and indirect expenses.
Explain product costs.
The costs incurred when producing a product. Both direct (such as labour and materials) and indirect costs.
Explain prime cost.
The direct cost of a commodity in terms of materials and labour involved in its production.
Explain direct costs.
Costs that can be related to a product in an economically feasible way.
Explain indirect costs.
Costs that cannot be related to a product in an economically feasible way.
Explain period cost.
Period costs are associated with the passage of time. They cannot be capitalised into pre-paid expenses. Example: Administrative cost
Explain variable costs.
These are costs that vary directly with the volume of production.
Explain fixed costs.
These costs do not change with the volume of production.
Explain contribution.
This only considers costs and revenues that will change. It is the amount a product can contribute to the fixed costs and profits of a business.
Define average rate of return.
ARR = (Average Expected Return)/(Average Capital Invested)
Define Payback Period.
The length of time it takes for an investment to recover its original outlay in terms of profits and savings.
Define Net Present Value.
The value in the present of a sum of money, in contrast to some future value it will have when it has been invested at compound interest.
What does a ROCE increase result in?
Improved profit margins.
True or false, a PLC has greater regulation than an LC?
TRUE
Name the six expenses that fall under product cost.
- Direct Materials
- Direct Labour
- Other Direct Expenses
- Prime Cost
- Indirect Production Cost (Overheads)
- Product Cost
What is market equilibrium?
The point where the supply and demand curve intersect.
If a company has an elastic demand curve, how could they try to sell at a higher price?
Market their product as unique. Hence people will be more willing to pay the premium.
What are the advantages and disadvantages of calculating payback time?
Payback is quick and simple to calculate. However it ignores the time value of money.
ROCE Formula?
OPERATING PROFIT/(EQUITY+NON-CURRENT LIABILITIES)
Gross Profit Margin Formula?
GROSS PROFIT/REVENUE
Operating Profit Margin Formula?
OPERATING PROFIT/TURNOVER
Asset Turnover Formula?
TURNOVER/(EQUITY+NON-CURRENT LIABILITIES)
Inventory Days Formula?
365 x CLOSING INVENTORY/COST OF SALES
Trade Receivable Days Formula?
365 x CLOSING TRADE RECEIVABLES/REVENUE
Trade Payable Days Formula?
CLOSING TRADE PAYABLES x 365 DAYS/COST OF SALES
Current Ratio Formula?
CURRENT ASSETS/CURRENT LIABILITIES
Quick Ratio Formula? (Also known as acid test ratio..)
(CURRENT ASSETS - INVENTORY)/CURRENT LIABILITIES
Gearing Formula?
DEBT/EQUITY
Interest Cover Formula?
OPERATING PROFIT/FINANCE COST
Dividend Cover Formula?
PROFIT FOR THE YEAR/DIVIDEND
What is the statement of financial position?
A financial statement that reports all of the assets, liabilities and equity of a company for a given period of time.
What is equity?
Equity is the difference between the value of the assets and the value of the liabilities of something owned. What’s left over is “residual interest”. It is owed to shareholders.
True or false? Only the cost of stock that has actually been sold will be included in the income statement and not all the expenditure.
True - this allows a business to show a profit whilst still having an overdraft.
What is the Break Even Point (BEP)?
It is the fixed costs/contribution. It is the number of units that need to be sold to meet the original fixed costs of production.
What is Margin of Safety?
It is the number of units sold beyond the break even point.
What is Kate Doyle?
A spas.
What’s the difference between financial and management accounting?
Financial:
- Past orientated
- Heavily regulated (needs to stick to accounting standards)
- Provides info to users outside the organisation
Management:
- Future orientated
- More freeform (less regulated)
- Provides info to internal users
Define assets.
Resources controlled by an entity that are expected to bring economic benefit.
Which accounting mechanism eliminates profit “spikes” or slumps?
Accruals
What does a ROCE of 21% mean?
For every £1 invested, a company has managed to bring a 21p return.
What is cost of finance also (apparently) known as?
Interest cover.
What are the shareholder’s six main rights?
1 - Voting power on major issues
2 - Ownership in a portion of the company
3 - The right to transfer ownership
4 - An entitlement to dividends
5 - The opportunity to inspect corporate books
6 - The right to sue the company for wrongful acts
What does the supply and demand curve look like?
Price
. . .(demand)
. . .
. . .
. . .
. . .
. .
. . .(supply)
.. .
………………………………………………………………. Quantity
On the supply and demand curve, which has the positive gradient? Why?
Supply has the positive gradient.
Companies the can supply more will sell at a higher price to improve profit margins.
What is accounting?
The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.
What is operating profit?
Gross profit - operating expenses.
What are liabilities.
Amounts owed by a company to third parties arising from past events.
What does a net asset turnover of 1.55 mean?
For every £1 of investment available, £1.55 of turnover is available.
What decided the size of an asset figure.
Usually the non-current assets. Old assets will have suffered from depreciation over time.
Why shouldn’t a current ratio be too high?
Too high a ratio means inefficiency. A company shouldn’t hold massive reserves of cash, it should be invested into making profit.
Why have debt?
Does not dilute share ownership of a company.
When should absorption costing be used?
For businesses where large parts of costs are direct costs.
When shouldn’t absorption costing be used?
> Business where most costs are overhead costs.
Business with competitive markets
Businesses with a niche/premium product.
What is gross profit?
Revenue - Cost of production
What is a dividend?
A sum of money paid out regularly (usually annually) to shareholders by a company from its profits or reserves.
Give an example of a current asset.
Inventory
Give an example of a non-current asset.
Land
True or false - Shareholding can appreciate or depreciate in value.
TRUE
Give an example of a current liability.
Trade payable
Give an example of a non-current liability.
Bank loan
Should you give ASSET TURNOVER as a decimal.
YES. Fuck knows why.
How long is Jack’s penis?
24 inches
Is an asset turnover of 0.9 good or bad?
Bad.
Would you expect a low asset turnover in a start-up company?
Yes - There is initially a lot of investment in assets. They is a delay between asset investment and revenue generated from assets.
