Finance and accounting Flashcards
Start-up capital
The capital needed by an entrepreneur to set up a business.
Working capital
The capital needed to pay for raw materials, day-to-day running costs and credit offered to customers. In accounting terms working capital = current assets – current liabilities.
Capital expenditure
The purchase of assets that are expected to last for more than one year, such as building and machinery.
Revenue expenditure
Spending on all costs and assets other than fixed assets including wages and salaries and materials bought for stock.
Liquidity
The ability of a firm to be able to pay its short-term debts.
Liquidation
When a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors.
Overdraft
Bank agrees to a business borrowing up to an agreed limit as an when required.
Factoring
Selling of claims over trade receivables to a debt factor in exchange for immediate liquidity – only a proportion of the value of the debts will be received as cash.
Hire purchase
An asset is sold to a company that agrees to pay fixed repayments over an agreed time period – the asset belongs to the company.
Leasing
Obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period, this avoids the need for the business to raise long-term capital to buy the asset; ownership remains with the leasing company.
Equity finance
Permanent finance raised by companies through the sale of shares.
Long-term loans
Loans that do not have to be repaid for at least one year.
Long-term bonds or debentures
Bonds issued by companies to raise debt finance, often with a fixed rate of interest.
Rights issue
Existing shareholders are given the right to buy additional shares at a discounted price.
Venture capital
Risk capital invested in business start-ups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources.
Microfinance
Providing financial services for poor and low-income customers who do not have access to banking services, such as loans and overdrafts offered by traditional commercial banks.
Crowd funding
The use of small amounts of capital from a large number of individuals to finance a new business venture.
Business plan
A detailed document giving evidence about a new or existing business, and that aims to convince external lenders and investors to extend finance to the business.
Direct costs
These costs can be clearly identified with each unit of production and can be allocated to a cost center.
Indirect costs
Costs that cannot be identified with a unit of production or allocated accurately to a cost center.
Fixed costs
Costs that do not vary with output in the short run.
Variable costs
Costs that vary with output.
Marginal costs
The extra cost of producing one more unit of output.
Break-even point of production
The level of output at which total costs equal total revenue, neither a profit of a loss is made.
Margin of safety
The amount by which the sales level exceeds the break-even level of output.
Contribution per unit
Selling price less variable cost per unit.
Cost centre
A section of a business, such as a department, to which costs can be allocated or charged.
Profit centre
A section of a business to which both costs and revenues can be allocated - so profit can be calculated.
Full costing
A method of casting in which all fixed and variable costs are allocated to products, services or divisions of a business.
Contribution or marginal costing
Costing method that allocates only direct costs to cost/profit centres, not overhead costs.
Income statement
Records the revenue, costs, profit (or loss) of a business over a given period of time.
Gross profit
Equal to sales revenue less costs of sales.
Revenue (formerly called sales turnover)
The total value of sales made during the trading period = selling price × quantity sold.
Cost of sales (or cost of goods sold)
This is the direct cost of the goods that were sold during the financial year.
Operating profit (formerly referred to as net profit)
Gross profit minus overhead expenses.
Profit for the year (profit after tax)
Operating profit minus interest costs and corporation tax.
Dividends
The share of the profits paid to shareholders as a return for investing in the company.
Retained earnings (profit)
The profit left after all deductions, including dividends, have been made, this is ‘ploughed back’ into the company.
Low-quality profit
One-off profit that cannot easily be repeated or sustained.
High-quality profit
Profit that can be repeated and sustained.
Statement of financial position (balance sheet)
An accounting statement that records the values of a business’s assets, liabilities and shareholders’ equity at one point in time.
Shareholders’ equity
Total value of assets – total value of liabilities.
Asset
An item of monetary value that is owned by a business.
Liability
A financial obligation of a business that it is required to pay in the future.
Share capital
The total value of capital raised from shareholders by the issue of shares.
Non-current assets
Assets to be kept and used by the business for more than one year. Used to be referred to as ‘fixed assets’.
Intangible assets
Items of value that do not have a physical presence, such as patents, trademarks and current assets.
Current assets
Assets that are likely to be turned into cash before the next balance-sheet date.
Inventories
Stocks held by the business in the form of materials, work in progress and finished goods.
Trade receivables (debtors)
The value of payments to be received from customers who have bought goods on credit.
Current liabilities
Debts of the business that will usually have to be paid within one year.
Accounts payable (creditors)
Value of debts for goods bought on credit payable to suppliers; also known as ‘trade payables’.
Non-current liabilities
Value of debts of the business that will be payable after more than one year.
Intellectual capital or property
The amount by which the market value of a firm exceeds its tangible assets less liabilities – an intangible asset.
Goodwill
Arises when a business is valued at or sold for more than the balance-sheet value of its assets.
Cash-flow statement
Record of the cash received by a business over a period of time and the cash outflows from the business.
Gross profit margin
This ratio compares gross profit (profit before deduction of overheads) with revenue.
Operating profit margin
This ratio compares operating profit (formerly this ratio was referred to as the net profit margin) with revenue.
Liquidity
The ability of a firm to pay off its short-term debts.
Liquid assets
Current assets – inventories (stocks) = liquid assets.
Window-dressing
Presenting the company accounts in a favorable light – to flatter the business performance.
Cash flow
The sum of cash payments to a business (inflows) less the sum of cash payments (outflows).
Liquidation
When a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors.
Insolvent
When a business cannot meet its short-term debts.
Cash inflows
Payments in cash received by a business, such as those from customers (trade receivables) or from the bank, e.g. receiving a loan.
Cash outflows
Payments in cash made by a business, such as those to suppliers and workers.
Cash-low forecast
Estimate of a firm’s future cash inflows and outflows.
Net monthly cash flow
Estimated difference between monthly cash inflows and cash outflows.
Opening cash balance
Cash held by the business at the start of the month.
Closing cash balance
Cash held at the end of the month becomes next month’s opening balance.
Credit control
Monitoring of debts to ensure that credit periods are not exceeded.
Bad debt
Unpaid customer’s bills that are now very unlikely ever to be paid.
Overtrading
Expanding a business without obtaining all of the necessary finance so that a cash-flow shortage develops.
Creditors
Suppliers who have agreed to supply products on credit and who have not yet been paid.
Budget
A detailed financial plan for the future.
Budget holder
Individual responsible for the setting and achievement of a budget.
Variance analysis
Calculating differences between budgets and actual performance, and analysing reasons for such differences.
Delegated budgets
Giving some delegated authority over the setting and achievement of budgets to junior managers.
Incremental budgeting
Uses last year’s budget as a basis and an adjustment is made for the coming year.
Zero budgeting
Setting budgets to zero each year and budget holders have to argue their case to receive any finance.
Flexible budgeting
Cost budgets for each expense are allowed to vary if sales or production vary from budgeted levels.
Adverse variance
Exists when the difference between the budgeted and actual figure leads to a lower-than-expected profit.
Favourable variance
Exists when the variance between the budgeted and actual figure leads to a higher-than-expected profit.
Intellectual property
The amount by which the market value of a a firm exceeds its tangible assets less liabilities - an intangible asset.
Market value
The estimated total value of a company if it were taken over.
Capital expenditure
Any item bought by a business and retained for more than a year, that is the purchase of fixed or non-current assets.
Revenue expenditure
Any expenditure on costs other than non-current asset expenditure.
Depreciation
The decline in the estimated value of a non-current asset over time.
Net book value
The current Statement of financial position value of a non-current asset = original cost - accumulated depreciation.
Straight-line depreciation
A constant amount of depreciation is subtracted from the value of the asset each year.
Net realisable value
The amount for which an asset (usually an inventory) can be sold minus the cost of selling it - it is only used on Statements of when NRV is estimated to be below historical cost.
Capital employed
The total value of all long-term finance invested in the business: it is equal to (non-current assets + current assets) - current liabilities or non-current liabilities + shareholders’ equity.
Share price
The quoted price of one share on the stock exchange.
Dividend
The share of the company profits paid to shareholders.
Earnings per share
This is the amount of profit (after tax and interest) earned per share.
Investment appraisal
Evaluating the profitability or desirability of an investment project.
Annual forecasted net cash flow
Forecast cash inflows minus forecast cash outflows.
Payback period
Length of time it takes for the net cash inflows to pay back the original capital cost of the investment.
Accounting rate of return
Measure the annual profitability of an investment as a percentage of the initial investment.
Net present value (NPV)
Today’s value of the estimated cash flows resulting from an investment.
Internal rate of return (IRR)
The rate of discount that yields a net present value of zero - the higher the IRR, the more profitable the investment project is.
Criterion rates or levels
The minimum levels (maximum for payback period) set by management for investment-appraisal results for a project to be accepted.
