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Business > Finances > Flashcards

Finances Flashcards

1
Q

What is an internal source of finance?

A

Finance raised within the business

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2
Q

Internal sources of finance

A
  • Personal sources (savings, credit cards)
  • Retained profits
  • Selling fixed assets
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3
Q

What is an external source of finance?

A

Finance raised from a third party

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4
Q

External sources of finance

A
  • Hire purchases
  • Government grants
  • Trade credit
  • New share issues
  • Loans from friends and family
  • Bank loans, overdrafts and mortgages
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5
Q

4 factors affecting the choice of finance

A
  • Size and type of the company (small businesses less likely to sell shares or get a bank loan, some businesses do not have fixed assets)
  • Amount of money needed
  • Length of time the finance is needed for
  • Cost of the finance
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6
Q

What is cash?

A

The money a company can spend immediately.

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7
Q

What is cash flow?

A

The money flowing in and out of a business.

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8
Q

What is net cash flow?

A

The difference between cash inflow and cash outflow. (Cash inflow - Cash outflow)

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9
Q

What is the opening balance?

A

The closing balance of the previous month.

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10
Q

What is the closing balance?

A

Opening balance + Net cash flow

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11
Q

What problems can poor cash flow cause?

A
  • Lack of working capital (unable to meet its day-to-day expenses)
  • Staff may not get paid on time
  • Some suppliers offer discounts for prompt payment
  • Creditors may not get paid on time
  • Some creditors may take legal action
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12
Q

What are the 3 main reasons for poor cash flow?

A
  • Poor sales
  • Overtrading (Takes on too many orders)
  • Poor business decisions
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13
Q

How can a business improve its cash flow?

A
  • Rescheduling payments
  • Overdrafts
  • Reducing cash outflow
  • Increasing cash in flow
  • Finding new sources of finance
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14
Q

What are cash flow forecasts and how do they help businesses?

A

Cash flow forecasts predict future cash inflows and outflows based on past data. They help businesses to detect any future liquidity problems.

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15
Q

What are fixed costs?

A

Costs that do not change with output.

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16
Q

What are variable costs?

A

Costs that change with output.

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17
Q

What is the formula for total costs?

A

Total costs = Fixed costs + Variable costs

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18
Q

What is revenue?

A

The income from sales (Sales x Price)

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19
Q

What is the formula for profit?

A

Profit = Revenue - Costs

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20
Q

What is the formula for gross profit?

A

Gross profit = Revenue - Variable costs

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21
Q

What is the formula for net profit?

A

Net profit = Revenue - Total costs

22
Q

What is the formula for the gross profit margin?

A

Gross profit / Revenue x 100

23
Q

What is the formula for net profit margin?

A

Net profit / Revenue x 100

24
Q

What is the formula for net current assets?

A

Net current assets = Current assets - Current liabilities

25
Q

What is the formula for current assets?

A

Current assets = Non current assets + net current assets - non current liabilities

26
Q

What is the formula for total equity?

A

Total equity = Share capital + Retained profits

27
Q

What is ARR?

A

The average rate of return is a formula used to evaluate the effectiveness of an investment. It is the average profit per year as a percentage of the original investment.

28
Q

What is the formula for ARR?

A

Average yearly profit / Initial investment x 100

29
Q

What is an investment?

A

A decision which a business makes in order to make the business more profitable.

30
Q

Example of investments

A
  • New machinery
  • New buildings
  • New vehicles
31
Q

What is the margin of safety?

A

The difference between the current output and the break-even output.

32
Q

What is break-even?

A

The point at which total revenue equals total costs.

33
Q

Advantages and disadvantages of break even analysis

A

+ Quick and easy
+ Allows business to predict how changes may affect sales
+ Helps to persuade investors
+ Can stop businesses from making products it would be hard to sell in large quantities
- Assumes the firm can sell any quantity at the current price
- Assumes all products will be sold without waste
- If the data is wrong the results will be wrong
- Doesn’t predict how much the business will sell

34
Q

What are the 3 components in an income statement?

A
  • Trading account
  • Profit and loss account
  • Appropriation account
35
Q

What is a trading account?

A

The account that records the firm’s gross profit or loss, as well as the cost of sales and revenue.

36
Q

What is the profit and loss account?

A

The account that records some fixed costs such as wages, rent, advertising and deprecation, which is subtracted from the revenue to give the operating profit. Interest is than accounted for, to give net profit.

37
Q

What is the appropriation account?

A

An account for limited companies that records tax, dividends and retained profits.

38
Q

Why might a business compare income statements between different years?

A

To see how much the business has improved.

39
Q

What values on the income statement show performance?

A
  • Gross profit
  • Operating profit
  • Retained profit
40
Q

What does the statement of financial position (balance sheet) record?

A

Sources of finance and uses

41
Q

What is contained in the balance sheet?

A

Part 1 (Uses of finance):

  • Fixed assets
  • Current assets
  • Current liabilities
  • Net current assets
  • Net assets

Part 2 (Sources of finance):

  • Shareholder’s funds (Share capital + retained profit)
  • Long-term liabilities
  • Capital employed (Shareholder’s funds + Long-term liabilities)
42
Q

What is the formula for operating profit?

A

Operating profit = Gross profit - Expenses

43
Q

How might stakeholders use a financial analysis?

A
  • Shareholders can use financial statements to assess the performance of the directors
  • Potential shareholders will use financial statements to assess whether the business is safe to invest in
  • Employees can use financial statements to see if they will be given a pay rise or made redundant
  • The government uses financial statements to see how much tax businesses need to pay
  • Suppliers can use financial statements to assess the liquidity of a business to see if it is likely to pay its bills on time
44
Q

What is liquidity?

A

How quickly a business can turn assets into cash.

45
Q

How might a business use an analysis of financial statements?

A

A firm may decide to reduce dividends if they have had slow growth in assets so they have more profit to invest.

46
Q

What does a quick increase in fixed assets show?

A

The business has invested.

47
Q

What does an increase in retained profit suggest?

A

An increase in profits.

48
Q

What do liabilities show?

A

How well managed a business is.

49
Q

Why might a business compare financial statements with competitors?

A

To assess how well the business is doing in the market.

50
Q

How can a balance sheet be used to show the performance of a business?

A

A balance sheet is a snapshot in time, but they can be compared to produce trends.

51
Q

Why are financial statements important?

A

They can be used to assess performance and help make business decisions.

Business (6 decks)

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