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.
