Financial documents and statements Flashcards
Financial documents, Payment methods, Revenue and costs, Financial statements, Profitability and liquidity
Why do businesses need finance (money)?
- For starting up
- For everyday bill payments
- To take over another business
- To replace machinery / equipment
- To expand
Where can businesses get money from if they need it?
- The bank
- Personal savings
- Friends/family
- Selling items
What is tax?
An amount of money you are required to pay to the Government depending on income or value of property
Who are taxes collected by?
Taxes are collected by the HMRC (Her Majesty’s Revenue and Customers)
Why is it crucial that the business keeps accurate financial records?
As these will be used to determine how much tax they are required to pay
What are the reasons for enterprises to keep financial documents?
- Managers and owners are able to calculate
finances - They have records of all customers and
suppliers for future business and marketing - Faulty goods can be tracked, and mistakes put
right/refunds sent to customers
Name the types of financial documents (8)
- Purchase Order
- Delivery Note
- Goods Received Note
- Invoice
- Receipt
- Credit Note
- Remittance Advice Slips
- Statement of Account
When is a Purchase Order used?
When a buyer orders goods or services from a seller
Why is a Purchase Order used?
- Lists types, quantities and agreed prices
- Forms a legal offer/request to buy goods or
services
When is a Delivery Note used?
When goods are delivered to the buyer
Why are Delivery Note’s used?
- Lists details about the order
- Explains the contents of the package (e.g.
items might be missing as out of stock) - Customer can tick off items to ensure they
received what they ordered
When is a Goods Received Note used?
When goods are received
Why are Goods Received Note used?
- Confirms all goods have been received
- Can be compared against the purchase order
before payment is made
When is a Credit Note used?
If a customer returns goods to the seller
Why are Credit Note’s used?
- Acts as a record that items have been returned
and the customer has received a refund - Can possibly be used as a ‘voucher’ later
When is an Invoice used?
Shows money owed, usually after goods have been received
What do invoices show?
- Details the amount owed
- Gives the date the money must be paid by
- Explains how to pay
When are Receipts used?
To acknowledge and provide proof of purchase
Why are Receipts used?
- Proof of purchase in case of an issue
- Provides details of the item, price paid and
date of purchase
When are Statement of Account’s used?
When needing to provide a summary of recent transactions between a business and customer including any outstanding amounts
Why are Statement of Account’s used?
To provide clarity to customers who make repeat purchases with a business
When are Remittance Advice Slip’s used?
Sent by the customer to the business with details of the payment they have made
Why are Remittance Advice Slip’s used?
- The seller (business) can check that payment
was received - Clearer communication between customer and
business
Give examples of Payment methods. (5)
- Cash
- Credit cards
- Debit cards
- Direct debits
- A range of payment technologies
What does ‘cash’ involve?
The most traditional method of payment .
Involves the use of notes and/or coins to make a payment for a good/service
What problems might there be with cash?
- Money being lost or stolen
- Mistakes being made during transactions (e.g.
wrong change being given)
What are the advantages of using ‘cash’?
- Consumers and enterprises are confident
using it. - Widely accepted by enterprises.
- Small denominations are available so can pay
for small items e.g. a drink at 30p. - Consumers and enterprises know how much
they have and can only spend that amount.
Therefore, it is easy to control expenditure. - Can be used to save.
What are the disadvantages of using ‘cash’?
- Risk of loss or theft both for customers and
enterprises. - Can only be used for physical transactions.
- Generally inappropriate for large items of
expenditure e.g. buying a new car. - Banks can charge enterprise for making cash
deposits. - Need to have change.
What does using ‘Credit Cards’ involve?
This is where a customer can buy something and defer the payment (put off until later)
The card acts as a credit agreement with the customer and they make monthly payments to pay off the amount borrowed
What problems might there be with credit cards?
- Customers have to pay interest (extra money
on top of what they have borrowed) - Businesses have to pay a ‘surcharge’; an extra
cost for using this method
What are the advantages of ‘Credit Cards’?
- Allows the customer to delay payment and
spread it out over a period of time. - Widely accepted (but not 100%).
- Can be used online or in store.
- Can encourage a customer to make purchases
when they don’t have cash hence, increasing
sales for enterprises.
What are the disadvantages of ‘Credit Cards’?
- Interest is charged on the outstanding balance
making it a more expensive option for the
customer. - Can encourage over spending.
- Enterprises normally have to pay the bank a
fee for each transaction taken on a credit card.
What does using ‘Debit Cards’ involve?
Works in a similar way to credit cards, but this card is directly linked to the customer’s bank account.
When the card is used a message is sent to the customer’s bank and money is transferred into the account of the business.
What are the advantages of using ‘Debit Cards’?
- Secure method of payment e.g. need to know
the PIN to use it. - Widely accepted both online and in stores.
- Can withdraw cash from various places e.g.
ATM or at a cash desk in a store (cash back).
What are the disadvantages of using ‘Debit Cards’?
- Need to monitor spending and bank balance,
if a customer overspends this can be costly. - Contactless has increased the risk of
fraudulent use.
What does ‘Direct Debit’ involve?
This is where an agreement is in place with one bank and another to transfer funds between them (usually on an agreed date).
These are commonly used to pay frequent bills such as electricity.
What are the advantages of ‘Direct Debit’?
- Ensures regular payments are not missed.
- Ensures correct amount is paid as the amount
can vary. - Appear on bank statements as a record.
What are the disadvantages of ‘Direct Debit’?
- Amount taken will vary making budgeting
difficult. - Need to be re set up if bank details change
which may mean payments are missed if you
forget to do this. - Taken automatically whether the money is
there or not – may mean bank charges if the
account goes overdrawn.
What is Revenue?
The income an enterprise receives through various activities, such as selling products and services
Give the formula for Revenue.
Revenue = number of sales x price per unit
Give other sources of revenue (4)
- Interest from money in a bank account
- Investment income
- Leasing or rental income from renting out
property/machinery to others - Selling assets
What are the 4 types of Costs a business needs to pay?
- Start-up
- Running
- Variable
- Fixed
What is ‘Start-up costs’?
Things the business will need to buy before it starts trading, for example a restaurant needing an oven
What is ‘Running costs’?
Things the business will need to keep paying for while the business is trading, for example rent or electricity bills
What are the 2 types of ‘Running costs’?
Fixed and variable costs
What are ‘fixed costs’?
These are things that the business has to pay for regardless of how many products they sell
Give examples of ‘Fixed costs’.
Rent, tax, insurance, electricity, water
What are ‘Variable costs’?
These are things that are directly related to the product, so the amount the business pays will depend on how many products they make/sell
Give the equation for ‘Total costs’.
Total costs = fixed costs + variable costs
Give the formula for ‘Profit’.
Profit = Total Revenue – Total Costs
What are the 5 key terms that an enterprise would use when looking at financial performance?
- Turnover
- Gross Profit
- Cost of Sales
- Expenses
- Net Profit
What is Turnover?
This is the total revenue an enterprise receives in a given financial period (it can also be known as net sales)
Give the equation for ‘Turnover’.
Turnover = price x quantity sold
What is ‘Cost of Sales’?
This is the amount of money it costs to make the products the business is selling.
These costs are only the ones that go directly into a product
What is the first step in a business finding out how much money it has made?
By calculating their Gross Profit
What would Gross Profit show to a business?
This will show the business whether it costs too much to make its products
Give the formula for Gross Profit.
Gross Profit = Turnover – cost of sales
What is Net profit?
This is how much money the business has left after it has worked out its gross profit and paid for all other expenses
What would Net Profit show to a business?
After working this out the business will know whether it has made a profit or a loss.
Give the formula for Net Profit.
Net Profit = gross profit – expenditure
What does it mean when Gross Profit is positive?
Its Revenue is greater than Cost of Sales
What action should be taken when Gross profit is low or negative?
- Increase sales Revenue
- Reduce the Cost of Sales
What does it mean when Net profit is positive?
When Net profit is positive, Gross profit is also positive and expenditure is within budgeted levels.
What action should be taken when Net profit is low or negative?
- Increase Gross profit
- Reduce expenses by checking to see where
savings can be made
What does ‘Profitability’ mean?
The ability of an enterprise to make a profit
What does ‘Liquidity’ mean?
The ability of an enterprise to pay its debts
What does ‘Cash’ mean?
The physical money a business has e.g. in the bank or in the till
What does ‘Profit’ mean?
The amount of money left after a business has paid for all its expenses
Give the formula for Cash balance.
Cash balance = cash inflow – cash outflow
What does ‘Profit margin’ refer to?
- The amount an enterprise can sell its goods/services for
- What it costs to produce them
How can an enterprise increase its profitability?
- Raise its prices without lowering demand
- Lower its costs without lowering the quality or customer
experience
What does it mean when an enterprise has positive liquidity?
If an enterprise has good (positive) liquidity then it has sufficient working capital to pay any creditors
What does it mean when an enterprise has negative liquidity?
If an enterprise has poor (negative) liquidity then it may struggle to pay its debts
What are the 2 important profitability ratios that managers use?
- The gross profit margin ratio (GPM)
- The net profit margin ratio (NPM)
What does the Gross Profit Margin help an enterprise to measure?
The GPM helps an enterprise to measure its gross profit as a percentage of its sales
Give the formula for Gross Profit Margin (%).
Gross Profit Margin (%) = (Gross Profit / Sales Revenue) x 100
What does the Net Profit Margin help an enterprise measure?
The NPM helps an enterprise to measure its net profit as a percentage of its sales
Give the equation for Net Profit Margin (%)
Net Profit Margin (%) = (Net Profit / Sales Revenue) x 100
What 2 ratios are used to judge Liquidity?
- Current ratio
- Liquid Capital ratio
What is an asset?
Something the business owns
What is fixed assets?
These are things the business owns that don’t change in the short term
The owner will use these to make money
What is Current assets?
These are items that will change with every transaction and can be turned into cash quickly
What are debtors?
People who owe the business money.
What is a liability?
Something the business owes.
What types of financial obligations are typically included in an enterprises liabilities?
- The money the enterprise owes to other enterprises
- Money that needs to be returned to customers
- Money that has been borrowed from the bank
What is Current liabilities?
Money that must be paid back within a year
Examples include trade credit with suppliers and a bank overdraft
These are short term debts
What is long-term liabilities
These are debts that can be paid back over a long period of time
People that this money is owed to are known as creditors
Examples include bank loans and mortgages
What is ‘Capital’?
This is the money put in to start up or grow a business
Give sources of Capital (3)
- A loan (long-term liability)
- Money invested by the owners (known as share
capital) - Capital linked to profit (retained profit)
What does Net Current assets show to a business?
This will show the business’ working capital, which is the funds it has available day to day to pay for its expenses.
Give the formula for Net Current assets.
Net current assets = current assets – current liabilities
Give the formula for Net assets.
Net assets = fixed assets + net current assets
What do financial statements show?
They show how well an enterprise is doing financially.
What are stakeholders?
These are the people that would be interested in how the business is doing
Name stakeholders (9)
- Employees
- Customers
- Community
- Shareholders
- Owners
- Managers
- Government
- Investors and lenders
- Suppliers
What is the owners interest in the business?
Value of the enterprise/its profits belong to them, so they will want it to be profitable
What is the Managers interest in the business?
They may get bonuses for good financial performance
What is the Employees interest in the business?
Job security. Opportunities for promotion if the business does well
What is the Investors and Lenders interest in the business?
Will want a good return on investment/their money to be repaid
What is the Governments interest in the business?
The more profit the business makes, the more tax it pays
What is the Customers interest in the business?
Continuity and security
What is the Suppliers interest in the business?
The business are its customers, they want them to keep buying
What is the Shareholders interest in the business?
The more profit the business makes, the higher their dividend
What is the Community interest in the business?
Businesses behaving well e.g. minimal noise pollution, community work
What does a Profit and Loss account tell a business?
It tells them how the business has performed financially over a period of time (usually a year)
What does a Profit and Loss account show?
- How much revenue has been received from sales of goods and/or services
- How much of this was spent
- What it was spent on
What is a Balance sheet?
A snapshot of the financial position of an enterprise on a particular day (usually the last day of the financial year)
What does a Balance sheet show?
- The value of all assets and liabilities in the enterprise
- The sources of capital used to fund the enterprise
