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Business - Slattery > Finance > Flashcards

Finance Flashcards

1
Q

What is meant by Sources of Finance?

A

Where a business gets the money it needs from

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2
Q

What are some examples of businesses spending its finance?

A
  • Equiptment
  • Research + Development
  • Wages
  • Buying Stock
  • Maintenance
  • Tax
  • Survival
  • Expansion
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3
Q

What do we classify as short term?

A

Up to 3 years

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4
Q

What do we classify as medium term?

A

3-10 years

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5
Q

What do we classify as long term?

A

Over 10 years

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6
Q

Internal Sources of Finance - What is Divestment?

A

Close down a part of the business to free up more money to direct it elsewhere

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7
Q

Internal Sources of Finance - What are Personal Savings?

A

Owner puts their own money into the business

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8
Q

Internal Sources of Finance - What does Sale/Lease back mean?

A

Sell an asset and you leased it back from the owner

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9
Q

Internal Sources of Finance - What does Factoring mean?

A

Where you sell the debt

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10
Q

Internal Sources of Finance - What does retained profit mean?

A

Using spare profits from last year for current investment

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11
Q

Internal Sources of Finance - What is sale of fixed assets?

A

Sell land, cars, buildings etc

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12
Q

Advantages of using personal savings for finance.

A
  • You know exactly how much money is available (short term)

- More Control

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13
Q

Disadvantages of using Personal Savings for finance.

A
  • Strains family and personal life

- Lose personal Possessions

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14
Q

Advantages of using Sale / Lease back for finance

A
  • Release cash from existing items (long term)

- Can be cheaper than other methods

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15
Q

Disadvantages of using Sale/Lease back for finance

A
  • Asset is no longer under ownership of that company
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16
Q

Advantages of using Factoring for finance

A
  • Improves cash flow quickly (short term)
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17
Q

Disadvantages of using Factoring for finance

A
  • Reduction in the scope for other borrowing

- Lost money as part of debt

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18
Q

Advantages of using Retained Profit for finance

A
  • Cheap (short term)

- Quickly provide funds

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19
Q

Disadvantages of using Retained Profits for finance

A
  • Shareholder criticism
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20
Q

Advantages of using Sale of Fixed Assets for finance

A
  • Fast Money

- Extra space

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21
Q

Disadvantages of using Sale of Fixed Assets for finance

A
  • Asset Sales don’t sell that well

- Taxes can apply

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22
Q

Advantages of using Divestment for finance

A

Improves cash flow

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23
Q

What are Accounting Concepts?

A

Things businesses accounts should do when making a balance sheet

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24
Q

What are the Accounting Concepts?

A
  • Consistency (using the same method for the balance)
  • Going concern (Business is assumed to be running normally when doing the accounts)
  • Matching (produce the accounts at the same time)
  • Materiality (when producing accounts the figures should be realistic)
  • Objectivity (Trying to remove opinions)
  • Prudence (were judgement is need you are conservative)
  • Realisation (publish the accounts on the same day)
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25
Q

What is an Income Statement?

A

Is a financial statement that shows if a business has a profit or a loss

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26
Q

What is the Gross Profit Equation?

A

Sales - Cost of Sales = Gross Profit

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27
Q

What is the Net Profit Equation?

A

Gross Profit - Expenses/Overheads = Net Profit

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28
Q

What does the balance sheet show?

A

Shows the performance of a business in one moment of time

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29
Q

What does Liquidity mean?

A

The ability to turn fixed assets into cash

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30
Q

What are the 3 types of stock?

A
  • Raw materials
  • Work in progress (most stock is this)
  • Finished Products
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31
Q

What do Income Statements show?

A

Over a period of time wether a business has made a profit or a loss

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32
Q

An asset is something you […….]

A

OWN

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33
Q

A Liability is something you […….]

A

OWE

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34
Q

Fixed assets are things you can use [……..]

A

Again and again

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35
Q

When looking at [……..] we are looking at the ability to pay off short term debt.

A

Liquidity

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36
Q

What can Working Capital also be called?

A

Net Current Assets

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37
Q

What is Working Capital

/Net Current Assets?

A

Money used for the day to day running of business

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38
Q

What are Current Assets?

A

Things you own in the short term

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39
Q

What are Current Liabilities?

A

Things you owe NOW

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40
Q

What is the Working Capital Equation?

A

Working Capital = Current Assets - Current Liability

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41
Q

What is the Current Ratio Equation?

A

Current Assets / Current Liabilities

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42
Q

What is the Return on Capital Employed (ROCE) Equation?

A

( Profit before tax and interest / Long term capital employed ) x 100

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43
Q

What is the Gross Profit Margin Equation?

A

( Gross Profit / Turnover ) x 100

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44
Q

What is the Net Profit Margin Equation?

A

( Net Profit / Turnover ) x 100

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45
Q

What is the Return of Equity Equation?

A

( Net Profit / Equity )

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46
Q

What equations are Profitability equations?

A
  • Return on Capital Employed (ROCE)
  • Gross Profit Margin
  • Net Profit Margin
  • Return on Equity
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47
Q

What are the Liquidity Ratios?

A
  • Current Ratios
  • Acid Test Ratio
  • Gearing Ratio
  • Interest Cover
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48
Q

What is the Current Ratio Equation?

A

Current Assets / Current Liabilities

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49
Q

What is the Acid Test Ratio?

A

Current Assets - ( Stock / Current Liabilities )

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50
Q

What is the Gearing Ratio?

A

( Fixed Cost Capital / Long Term Capital ) x 100

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51
Q

What is the Interest Cover Equation?

A

( Profit before Tax and Interest / Interest

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52
Q

What is the Average Rate of Return Equation?

A

Average Profit / Capital Outlay

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53
Q

What is Capital Outlay?

A

Is the money firm uses to purchase fixed assets ( they are also known as Capital Expenditures )

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54
Q

What is the Average Profit Equation?

A

Profit / Number of years

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55
Q

What is the Payback equation?

A

( Remaining to pay / Revenue ) x 12

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56
Q

What does Payback mean?

A

How long it takes you to payback the cost of the machine

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57
Q

What is the Benefit of Payback?

A
  • Simple and easy to calculate
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58
Q

Drawbacks of Payback?

A
  • Doesn’t tells you how easy it is to get the money in the first place
  • Doesn’t tell you how long the investment will last
  • Based on assumptions
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59
Q

How is Profit Expressed?

A

As a % of the investment

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60
Q

What is the Profit Calculation?

A

( Average yearly profit / Initial Investment ) x 100

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61
Q

What is another Profit calculation?

A

Total money made - Investment

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62
Q

What is the average profit equation?

A

Profit / Number of Years

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63
Q

How do you calculate the average rate of Return?

A

Average Profit / Investment

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64
Q

What are the Advantages of Average Rate of Return?

A
  • % Return can be compared with a target return

- Focuses on profitability a key issue for shareholders

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65
Q

What is the disadvantages for Average Rate of Return?

A
  • Does not take into account cash flows, only profits
  • Takes no account of the time value of money (inflation)
  • Treats profits arising late in the project in the same way as those which might arise early
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66
Q

Does Net Present Value take into account inflation?

A

Yes

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67
Q

What are the Benefits is Net Present Value?

A
  • Takes inflation into account

- Provides a real judgement on investment

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68
Q

What are the Disadvantages of Net Present Value?

A
  • Overly optimistic returns
  • Difficulty Working Out discount rate
  • Other issues may arise over its lifetime
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69
Q

Current Assets is what you won in the [………] term

A

Short

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70
Q

Current Liabilities are things you owe [……..]

A

Now

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71
Q

What is the Working Capital Equation?

A

Current Assets - Current Liability

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72
Q

What is the Current Ratio?

A

Current Assets / Current Liabilities

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73
Q

What is the optimum values for current ratio?

A

2:1

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74
Q

Is it bad if the current asset is a lot greater than the Current Liabilities? And why? (Current Ratio)

A

Bad - because you may be holding lots of stock, lots of debtors

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75
Q

What would a Current Ratio of 1.5:1 or 2:1 suggest?

A

Efficient management of working capital

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76
Q

What does a Current Ratio of below 1 indicate?

A

Cash problems

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77
Q

What does a High Current Ratio indicate?

A

Cash problems

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78
Q

What is the Acid Test Ratio Equation?

A

( Current Assets - Stock ) / Current Liabilities

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79
Q

What is the best value for the Acid Test Ratio?

A

1:1

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80
Q

What does the Acid Test Ratio show?

A

A companies ability to pay its Current Liabilities with its Quick Assets (quick Assets are Assets that can be sold for cash within 90 days)

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81
Q

What is the Debtor Collection Period Equation?

A

( Debtors / Turnover ) x 365

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82
Q

What does Turnover also mean?

A

Revenue

83
Q

What is Debtors Collection Period measured in?

A

Days

84
Q

What does Debtors Collection Period measure?

A

Measures how long it takes debtors to pay back

85
Q

With Debtor Collection Period what do you do if your answer is a decimal?

A

Always Round UP

86
Q

For Debtors Collection Period what is the ideal Value?

A

28/30 working days is the benchmark

87
Q

What is the Creditor Payments Equation?

A

( Creditors / Cost of Sales ) x 365

88
Q

What is Creditor Payments Measured in?

A

Days

89
Q

What does Credit Payments measure?

A

Measures how quickly a business can pay a debt

90
Q

What is the difference between Debtors Collection Period and Creditor Payments?

A

Debtor Collection Period - you can see how long it takes a business to get payed
Creditor Payments shows how fast a business can pay suppliers

91
Q

Examples of External Sources of Finance.0

A
  • Overdraft
  • Trade Credit
  • Leasing
  • Hire Purchasing
  • Bank Liam
  • Grant
  • Share Issue
  • Mortgage
  • Venture Capital
92
Q

What is an Overdraft?

A

Drawing more money out than the bank account holds

93
Q

What is Trade Credit?

A

Buy now pay later

94
Q

What is Leasing?

A

Don’t own the asset but pay for the right to use it

95
Q

What is Hire Purchasing?

A

Paying for something you use in regular instalments

96
Q

What is a Bank Loan?

A

Money the banks lends out with interest

97
Q

What is a Grant?

A

A sum of money given by the government to another organisation for a particular purpose

98
Q

What is a Share Issues?

A

When a company gives shares out to potential investors

99
Q

What is a Mortgage?

A

Agreements that allows you to borrow money from a bank in order to buy property

100
Q

What is a Venture Capital?

A

Financing that investors provide to start up companies

101
Q

What Finance is used in this Example - Business needs £250,000 to buy a new factory.

A

Mortgage

102
Q

What Finance is used in this Example - The new owners will revise £50,000 but wants 25% of the company?

A

Venture Capitalist

103
Q

What Finance is used in this Example - A business needs £1 million to expand into Asia

A

Loan

104
Q

What Finance is used in this Example - the business needs to keep its Cash Flow good every month

A

Trade Credit

105
Q

What Finance is used in this Example - the business can get a sum of money specifically for Solar Panel Energy.

A

Grant

106
Q

What Finance is used in this Example - the business wants flexibility with the equipment they use.

A

Lease

107
Q

What Finance is used in this Example - a Sole reader needs £25,000 for new machinery.9

A

Loan

108
Q

What Finance is used in this Example - a business wants to pay for its cars in instalments and eventually own them.

A

Hire Purchasing

109
Q

What Finance is used in this Example - the business needs finance for a few days to pay for stock

A

Trade Credit

110
Q

True or False - a loan is usually repaid with interest

A

True

111
Q

True or False - Shareholders Are part owners of the business

A

True

112
Q

True or False - banks will always lend a business money

A

False

113
Q

True or False - venture capitalists are easy to attract

A

False

114
Q

True or False - an overdraft is a long term source of finance?

A

False

115
Q

True or False - a Mortgage can be used to buy equipment and machinery

A

False

116
Q

True or False - Leasing gives you flexibility to change in the future

A

True

117
Q

True or False - app businesses have lots of cash available

A

False

118
Q

Advantages of Bank Loans?

A
  • Bank doesn’t take an ownership position in the company

- No more obligations to the lender once payed off

119
Q

Bank loan disadvantages

A
  • Difficult to obtain without a suitable reputation

- High Interest Rates

120
Q

Advantages of a venture capitalist

A
  • Free to make fast investment decisions

- acres to investors knowledge m

121
Q

Disadvantages of venture capitalist

A
  • takes longer to find a suitable investor

- requires giving up a date of a company

122
Q

Advantages of a grant?

A
  • can provide huge investments
123
Q

Grant disadvantages

A
  • very hard to get

- must be spent in what is is intended to be spent on

124
Q

Leasing advantages

A
  • lease startup costs are lower than buying

- flexible

125
Q

Leasing disadvantages

A
  • more expensive than outright purchasing

- Depend In landlord maintainance

126
Q

Mortgage advantages

A
  • Keep ownership of premises

- Fixed Interest option

127
Q

Mortgage disadvantages

A
  • need a large deposit

- less flexible when premises is owned not leased

128
Q

Factors that influence the choice of what external source of finance to use.

A
  • Time
  • Legal Structure
  • Security
  • External issues (economy as a whole)
129
Q

What does Quantitative mean?

A

How much will it cost us (Debt)

130
Q

What does Qualitative mean?

A

Do we lose some control? (% of the business)

131
Q

What does the Current Ratio show?

A

How much you have to how much you owe

132
Q

What is the Gross Profit Margin Formula?

A

Margin(%) = (Gross Profit) / (Sales Revenue) X 100

133
Q

What is the Net Profit Margin Formula?

A

Net Profit Margin = (Net Profit [before tax]) / (Sales) X 100

134
Q

What is Net Profit Margin the same as?

A

Gross Profit Margin

135
Q

Sales is the same as what?

A

Revenue

136
Q

What is the Operating Profit Margin Equation?

A

(Operating Profit) / (Sales) X 100

137
Q

What is Operating Profit?

A

Is when they haven’t taken off financial expenses such as: Tax, Inflation etc

138
Q

What is the Return of Capital Employed (ROCE) Equation?

A

Operating Profit / Capital Employed X 100

139
Q

What is ROCE expressed as?

A

As a %

140
Q

What does Return of Capital Employed show us?

A

Shows the return for every £1 invested

141
Q

What are Net assets?

A

What you payed for

142
Q

What is Equity Shareholder Funds?

A

How you pay for it

143
Q

What is the Return o Equity Equation?

A

Profit for the year / Shareholder Equity

144
Q

What does the Return on Equity Equation show us?

A

Shows us how much you are making for every £1 invested

145
Q

What is the Gearing Equation?

A

(Loans) / (Shares + RP + Loans) X 100

146
Q

What does a Gearing Ratio show us?

A

Shows how much money in the business has to be payed back as a loan

147
Q

What value is bad in a Gearing Ratio?

A

A value close to 100%

148
Q

Gearing Ratios - Anything over 50% is said to be [………………]

A

Highly Geared

149
Q

Gearing Ratios - Anything below 50% is said to be [……………………..]

A

Low geared

150
Q

What is the Interest Cover Equation?

A

(Operating Profit) / (Interest Payable)

151
Q

What does Interest Cover show us?

A

Shows is there is enough Profit to pay the interest

152
Q

What does the Interest Value mean?

A

Shows how many times over profit can pay interest

153
Q

What is the best value for Interest Cover?

A

The higher the value the better

154
Q

What is the Non-Current Asset Turnover Ratio?

A

(Revenue) / (Non-Current Assets)

155
Q

Why are Current Assets called Current Assets?

A

because they change regularly

156
Q

What is the Net Asset calculation?

A

All Assets - All Liabilities

157
Q

What can Fixed Assets be called?

A

Non-Current Assets

158
Q

What does the Non Current Asset Turnover show us?

A

Shows us for every £1 invested on machinery it creates (…..) revenue

159
Q

What is the best value for Non Current Asset Turnover?

A

The bigger the value the better

160
Q

What is the Stock Turnover equation?

A

(Cost of Sales) / (Average Stock Held)

161
Q

What does Stock Turnover show us?

A

Shows how many times over you sell over your current stock in a year.

162
Q

What does the Stock Turnover depend on?

A

On the type of business

163
Q

How do you calculate how long it takes to sell your current stock?

A

365 / (Stock Turnover Figure)

164
Q

What value is good for Stock Turnover?

A

Higher the value the better

165
Q

Evaluative points for Stock Turnover.

A
  • Low number suggests problems with stock control

- Seasonal fluctuations in demand

166
Q

What is the Dividend per Share Equation?

A

(Total Dividends Paid) / (Number of ordinary share in issue)

167
Q

What is dividend per share measured in??

A

£

168
Q

What is the Dividend Yield equation?

A

(Dividend per share [pence]) / (Share price [pence])

169
Q

What is Yield?

A

Is the return as a percentage of the value

170
Q

What is the Yield for this? A - £200 bought with £20 Fixed interest
B - First bought for £400 with £20 Fixed interest

A

A - 10% interest (yield)

B - 5% interest (yield)

171
Q

Evaluative Points for Dividend Yield?

A
  • Annual yield be compared with:
    > Other companies in the same sector
    > Rates of return on alternative investments
  • Shareholders look at dividend yield when deciding to invest
  • Usually high yield might suggest an under-valued share price
172
Q

What is the Earnings Per Share (EPS) equation?

A

(Profit for the year) / (Number of Shares Issued)

173
Q

What does the earnings per share show us?

A

Shows how much profit each share has earned over the past year.

174
Q

What is the Price Earnings Ratio?

A

(Per market share price) / (Earnings per Share)

175
Q

What does Price Earnings ratio measure?

A

Measures the confidence about what the shares will earn

176
Q

What does a Price Earnings Ratio of 10 show?

A

Means the market price is 10x the earnings of that shares will earn

177
Q

What is the Average Profit Equation?

A

Profit / Time period

178
Q

What is Payback

A

Is how long it takes to pay back an initial investment

179
Q

What is a Budget?

A

Is allocating a set amount of money each month for various expenses

180
Q

What is Variance?

A

Where there is a difference between planned budget and actual outcome of the budget (what you think will happen eventually does)

181
Q

What is Positive Variance?

A

We underspend on our planned expenditure

182
Q

What is Negative Variance?

A

We overspend on our planned expenditure

183
Q

What is the Closing Balance equation?

A

Opening Balance - Total Balance

184
Q

What is Zero Budgeting?

A

Is the process of creating a budget from nothing without using prior years budget or spending numbers

185
Q

How does overspending on this years budget affect next years budget?

A

Take it off next years budget

186
Q

How are budgets used for cash flow forecasting?

A

Given o people or departments

187
Q

How do you Improve Cash Flow?

A
  • New products
  • Put Prices up
  • Spread Costs
188
Q

3 short term sources of finance?

A
  • Trade Credit
  • Overdraft
  • Owner uses their own money
189
Q

What are the benefits of producing a cash flow forecast?

A
  • Helps to set targets for management
  • Cash Flow is vital for survival
  • It spots problems in advance and allows solutions to get put in place
190
Q

What are the Limitations is a Cash Flow Forecast?

A
  • Can be affected by external factors being experienced by the company
  • Limited Information (estimates)
  • Uncertain business environment ( business environment may be different tomorrow than it is today)
191
Q

What is meant by owners drawings?

A

Taking out money from the business for yourself

192
Q

What is Investment Appraisal?

A

Is how a business decides if an investment project is worthwhile

193
Q

What are some advantages of Payback?

A
  • Simple to calculate
194
Q

What is the ARR calculation?

A

(Average annual accounting profit) / (Initial Investment) x 100

195
Q

What are the three steps to work out ARR?

A
  • Total Revenue - Total Costs = Profit
  • Total Profit / Time Period = Average Profit
  • Average Profit / Initial Cost. X 100 = ARR
196
Q

What are the Advantages of Investment Appraisal?

A
  • Simple to apply

- Helpful to analyse cash flow problems

197
Q

Disadvantages of Investment Appraisal?

A
  • Ignores all cash flows after payback period

- Only includes Initial Cost of the machine

198
Q

What are the advantages of Average Rate of Return? (ARR)

A
  • Focuses on Profit rather than Payback

- Easy to compare different investment projects

199
Q

Disadvantages of Average Rate of Return?

A
  • Does not take into account the timing of cash flows

- If ores the value of money (Inflation)

200
Q

What are the advantages of ROCE?

A
  • Good for evaluating the performance of the whole business

- Easy to calculate

201
Q

Disadvantages of ROCE?

A
  • Not a good method for Appraising investment in capital projects
  • Generally used for past data rather than future projects
202
Q

Disadvantages of NPV/Discounted Cash Flow?

A
  • Difficult to calculate

- Not accurate if initial outlay on projects is considerably different

203
Q

What are the Advantages of NPV/Discounted Cash Flow?

A
  • Takes into account time and interest rates

- Returns from different investment options so can be easily compared.

Business - Slattery (9 decks)

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