FINANCE: Processes Flashcards
What is a budget?
A financial document used to estimate future revenue and expenses over a period of time.
What are the 3 types of financial budgets?
Operating budgets: production, raw materials etc.
Project budgets: research and development.
Financial budgets: cash flow, income statements, balance sheets.
What are record systems?
The mechanisms used to ensure that data recorded is accurate and reliable.
Why are record systems important in financial management?
- Decision making.
2. Businesses are required by law to keep records of financial transactions for at least five years for tax purposes.
What is credit risk?
The danger associated with borrowing money.
What is market risk?
The risk of changing conditions in the specific marketplace.
What is operational risk?
Dangers faced during the day-to-day management such as fraud risk, HR issues.
What are financial controls?
The procedures and policies by which a business monitors and controls the usage of its resources.
What are the advantages of debt financing?
- Funds are readily available and ready at short notice.
- Increased funds should lead to increased profits.
- Ownership is not diluted.
What are the disadvantages of debt financing?
- Security required.
- Regular repayments have to be made.
- Expensive - interest.
What are the advantages of equity financing?
- Does not have to be repaid unless the owner leaves the business.
- Cheaper - no interest payments.
- Low gearing.
What are the disadvantages of equity financing?
- Lower profits and lower returns for the owner.
2. Ownership is diluted.
Matching the terms and source of finance.
Short-term finance should be used to purchase short-term assets and vis versa.
Cash flow statements.
It indicates the movement of cash receipts and cash payments.
What are operating activities in the cash flow statement?
The cash inflows and outflows relating to the main activity of the business (provision of goods and services).
What are investing activities in the cash flow statement?
The cash inflows and outflows relating to the purchase of non-current assets.
What are financing activities in the cash flow statement?
The cash inflows and outflows relating to the borrowing activities of the business.
Income statements.
A summary of the income earned and expenses over a period of time.
What are the 3 steps in income statements?
- Calculate COGS: start inventory + purchases – ending inventory.
- Calculate gross profit: revenue - COGS.
- Calculate net profit: gross profit - expenses.
What are the types of expenses?
Selling: salaries, wages etc.
Administrative: costs related to the general running of the business like stationary, rent etc.
Finance: lease, dividends etc.
What are balance sheets?
Represents a business’s assets and liabilities at a point in time and its equity.
What are the types of assets on balance sheets?
Current: assets that a business will use up within 12 months, e.g. cash, accounts receivable and inventory.
Non-current: assets that have an expected life of longer than 12 months.
What are the types of liabilities on balance sheets?
Current: overdraft and accounts payable.
Non-current: mortgage, debenture.
What is owners equity on the balance sheet?
The funds contributed by the owner.
Assets = liabilities + owner’s equity.
