FINANCE AND ACCOUNTS

Question 1

capital expenditure

Answer 1

finance spent on fixed assets

Question 2

revenue expenditure

Answer 2

payments for the daily running of a business

Question 3

personal funds

Answer 3

using personally owned money - most commonly used for sole traders and partnerships

Question 4

retained profits

Answer 4

the profits after tax and dividends that the organisation keeps to use for the business

Question 5

sale of assets

Answer 5

firms can sell their dormant assets that have been replaced to raise capital

Question 6

share capital

Answer 6

• money raised from selling shares of the company
• main source of finance for a limited liability company
• ownership becomes diluted

Question 7

overdrafts

Answer 7

allows a business to temporarily overdraw and take more money than it has in its account

Question 8

mortgages

Answer 8

long term loan from a financial statement used to buy property or land

Question 9

grants

Answer 9

government financial gifts to support business activities - tend to be offered in one off payments

Question 10

subsidies

Answer 10

governmental grants to reduce costs of production, to provide benefit to society - dont cut into profit margins

Question 11

debt factoring

Answer 11

when a firm sells its products, it issues an invoice stating the amount due. When a debtor fails to pay its bill in time, the factor returns these funds

Question 12

venture capital

Answer 12

venture capital firms find small businesses with high growth potential and interest

Question 13

fixed costs

Answer 13

costs of production paid that stay the same regardless of production levels

Question 14

variable costs

Answer 14

the costs of production paid that change in proportion with the level of output or sales

Question 15

direct costs

Answer 15

costs specifically related to a certain product or output

Question 16

indirect costs

Answer 16

costs that cant be clearly linked to the production or sale of a single product

Question 17

break even analysis

Answer 17

used to determine what quantity of a good a business needs to sell in order to cover costs of production

Question 18

break even

Answer 18

fixed costs / contribution per unit

Question 19

contribution per unit

Answer 19

selling price - average variable cost

Question 20

margin of safety

Answer 20

current output - break even output

Question 21

causes for change in break even

Answer 21

• level of demand may change
• reducing prices
• introduction of new technologies

Question 22

advantages of break even

Answer 22

• works for business with standardised products
• works for businesses in one single market

Question 23

disadvantages of break even

Answer 23

• assumes costs functions are linear
• assumes all output is sold
• only suitable for single product firms

Question 24

purpose of final accounts for shareholders

Answer 24

interested to see where money was spent and return on investments

Question 25

purpose of final accounts for employees

Answer 25

staff want to assess the likelihood of pay increase and job security

Question 26

purpose of final accounts for managers

Answer 26

use financial accounts to judge the operational efficiency

Question 27

purpose of final accounts for competitors

Answer 27

to make comparisons of financial performance

Question 28

depreciation

Answer 28

indicates how much of fixed assets value has been used up

Question 29

straight line depreciation

Answer 29

assumes fixed assets depreciate by the same value every year original cost - residual value / expected value

Question 30

strengths of straight line depreciation

Answer 30

- practical for small businesses with predictable decline in value - suitable when assets usefulness is expected to decline steadily over time - predictability can be helpful for budgeting and financial planning

Question 31

weaknesses of straight line depreciation

Answer 31

- if an asset is heavily used it may not accurately represent the value - may not match the actual wear and tear of an asset leading to inaccurate representation

Question 32

net profit margin

Answer 32

measures how well a business controls its overheads net profit before interest and tax / sales revenue x 100

Question 33

how to improve net profit margin

Answer 33

- negotiate payment terms with creditors and suppliers - negotiate cheaper rent - reduce indirect costs

Question 34

return on capital employed (ROCE)

Answer 34

compares the profit made by the business with the amount of money invested net profit before interest and tax / capital employed x 100

Question 35

how to improve ROCE

Answer 35

- reduce the amount of capital employed - increase the profitability of the company

Question 36

liquidity ratios

Answer 36

illustrate the solvency of a business

Question 37

current ratio

Answer 37

current assets / current liabilities

Question 38

acid test

Answer 38

current assets - stock / current liabilities

Question 39

how to improve liquidity ratios

Answer 39

- raising the value of current assets - reducing the value of current liabilities

Question 40

stock turnover

Answer 40

measures how quickly a business uses or sells its stocks average stock / cost of goods sold x 365

Question 41

how to improve stock turnover

Answer 41

- holding lower stock levels to replenish more often - disposal of stocks which are slow to sell - reducing range of products being stocked

Question 42

gearing ratio

Answer 42

shows the relationship between loan capital and share capital loan capital / capital employed x 100

Question 43

how to improve gearing ratio

Answer 43

- repay creditors - depend on external finance sources

Question 44

cash flow

Answer 44

a continuous movement of cash in and out of the business

Question 45

profit

Answer 45

the positive difference between a firms total sales revenue and its total costs of productions

Question 46

investment

Answer 46

the purchase of capital goods used in production of other goods. expenditure is likely to provide yield

Question 47

investment appraisal

Answer 47

how a business might objectively evaluate an investment project to determine whether its likely to be profitable

Question 48

payback period

Answer 48

the amount of time it takes for a project to recover or payback the initial outlay payback in last negative year / net cash flow in first positive year x 12

Question 49

average rate of return

Answer 49

the net return each year as a percentage of the capital cost of the investment