Finance Complete Flashcards
Why are financial objectives needed?
Measure financial performance Maintain the business as a going concern For decision making Information for stakeholders Allows comparison
What is cost minimisation?
The process by which businesses attempt to maximise profits by keeping costs low.
How can cost minimisation be achieved?
Cost minimisation can be achieved by a tactical decision such as changing suppliers or through a more strategic decision such as to relocate abroad.
What are the benefits of cost minimisation?
If a business can minimise costs without having a negative effect on the revenue then the profit margins will be improved.
What are cashflow targets?
A financial objective focused on maintaining a healthy cash balance
What are the benefits of cashflow targets?
A firm which doesn’t set and achieve a healthy target may struggle to survive due to liquidity problems.
What is accounting?
Accounting is the process of control on the expenditure of a business and is a vehicle for the publication of figures for profit, value and cash.
What are the two forms of accounting?
Financial and Management
Name all 7 Accounting concepts?
Consistency Going concern Matching Materiality Objectivity Prudence Realisation
What is the accounting concept consistency?
Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.
What is the accounting concept going concern?
Accountants assume, unless there is evidence to the contrary, that a company is not going broke.
What is the accounting concept matching?
The dates used to record transactions are those when the transaction occurred and not when the actual payment is made.
What is the accounting concept materiality
Where decisions are required about the appropriateness of a particular accounting judgement, the “materiality” convention suggests that this should only be an issue if the judgement is “significant” or “material” to a user of the accounts – transactions are recorded according to their importance
What is the accounting concept objectivity?
This implies that accounting information is prepared and reported in a “neutral” way. In other words, it is not biased towards a particular user group or vested interest
What is the accounting concept Prudence?
When here is any uncertainty as to the value of profits/losses or valuations, this principle suggests that it is right to understate the level of profits and overstate the level of losses – take a pessimistic view.
What is the accounting concept Realisation?
With this convention, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer of legal ownership - rather than just when cash actually changes hands.
What does GAAP stand for?
Generally Accepted Accountancy Practice
What is GAAP?
A framework for accounting rules and principles.
What are internal sources of finance?
Retained profit, Working Capital, Sales of Assets
What is retained profit?
Putting profit back into the business
What is working capital?
Delay payments to creditors, Encouraging debtors to pay on time
What is sale of assets?
E.g. selling factories or machinery
What are external sources of finance?
Overdraft Trade credit Debt factoring Loans Leasing Hire purchase Debentures Mortgages Share capital Venture capitalists Sale and leaseback Grants
What is an overdraft?
When you reach minus figures on your bank account, it has a high rate of interest
What is trade credit?
When you buy stock you do not pay immediately…the idea is that you make and sell goods and recoup the money before you have to pay the supplier
What is debt factoring?
Someone owes you money, you can sell this debt to a debt factoring company who give you the money owed to you, they then chase up the people who owed you money to get paid themselves
What is leasing?
If a business is short of money it can lease instead of buy. The Business does not own the assets and has to return it to the leasing company.
What is hire purchase?
similar to leasing BUT the businesses owns the asset once all the payments have been made
