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cambridge igcse business studies > financial information and decisions > Flashcards

financial information and decisions Flashcards

1
Q

quantative factors

A

financial factors and numerical outcomes

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2
Q

qualitative factors

A

non-financial factors and looking beyond numerical outcomes of the business and to assets etc.

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3
Q

examples of quantitative factors

A

cost of site
transport costs
market potential
government incentives

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4
Q

examples of qualitative factors

A

size of available site
legal restrictions
quality of local infrastructure
ethical issues and concerns

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5
Q

overdraft

A

an agreement with the bank which allows a business to spend more money than they have in its account up to an agreed limit. the loan has to be repaid within 12 months

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6
Q

trade credit

A

a business does not always have to pay their bills as soon as they recieve them but they are given period of credit, normally around 30-60 days.

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7
Q

personal savings / owners capital

A

this involves using the owner’s savings. this is good because they do not have to pay any interest. however, there is an opportunity cost with this option.

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8
Q

venture capital

A

money invested into the business in exchange for part ownership of the business. the person investing tends to be a successful entrepreneur.

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9
Q

share capital

A

money invested into the business by selling shares either on the stock exchange or to friends and family.

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10
Q

loans

A

money borrowed from the bank in the long term. the business will have to pay back interest on top of the money they have borrowed.

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11
Q

retained profit

A

profit remaining after all expenses, tax and dividends have been paid. profit which is ploughed back into the business

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12
Q

crowd funding

A

this is when a large number of people each pay a small amount of money to the business.

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13
Q

internal funding

A

funds found within the business

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14
Q

external funding

A

funds found from outside the business

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15
Q

working capital

A

this is the amount of money available for the day to day running of the business, referred to as the difference between current assets and current liabilities

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16
Q

debt factoring

A

selling trade receivables to improve business liquidity

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17
Q

sale and leaseback

A

obtaining the use of a non-current asset by paying a fixed amount per time period for a fixed period of time. ownership remains with the leasing company

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18
Q

debenture

A

bonds issued by companies to raise long term finance usually at a fixed rate of interest.

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19
Q

hire purchase

A

the purchase of an asset by paying a fixed repayment amount per time period over an agreed period of time. the asset is owned by the purchasing company on completion o f the final repayment.

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20
Q

micro-finance

A

small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain. these loans are usually repaid after a relatively short period of time.

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21
Q

micro-credit

A

the provision of small-scale loans to the poor for example by credit unions.

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22
Q

micro-savings

A

for example, voluntary local savings clubs provided by charities

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23
Q

micro-insurance

A

especially for people and businesses not traditionally served by commercial insurance
business - a safety net to prevent people from falling back into extreme poverty.

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24
Q

remittance management

A

managing remittance payments sent from one country to another including, for example, transfer payments made through mobile phone solutions.

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25
Q

Who usually performs better as clients of micro finance and why?

A

Women, their participation has mor desirable long term development outcomes.

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26
Q

start up capital definition

A

the capital needed by an entrepreneur when first setting up a business

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27
Q

working capital definition

A

the capital needed to finance the day to day running expenses and pay short-term debts of the business

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28
Q

non current fixed assets definition

A

resources owned by a business which will be used for a period longer than one year, for example buildings and machinery

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29
Q

capital expenditure definition

A

spending by a business on non-current assets such as machinery or buildings

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30
Q

why do businesses need finance

A

to set up the business
to pay day to day expenses like wages, suppliers and fuel.
to purchase buildings and other non-current fixed assets
to invest in the latest technology
to finance expansion
to finance R&D

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31
Q

long term finance definition

A

debt or equity used to finance the purchase of non current assets or finance expansion plans. long term debt is borrowing a business does not expect to repay in less than five years

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32
Q

short term finance definition

A

loans or debt that the business expects to pay back within one year

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33
Q

why do sole traders and partnerships not use loans often

A

they are often considered by lenders to be too high risk

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34
Q

how can business use some of their working capital to finance capital expenditure

A

using cash balances (keeping enough for the day to day running of the business)
reducing inventory levels (less warehouse costs)
reducing trade receivables

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35
Q

what are the three types of short term external finance

A

overdraft
trade credit
debt factoring

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36
Q

what are the six types of long term external finance

A 
bank loan
hire purchase
leasing
mortgage
debenture
share issue
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37
Q

what are the limitations of taking longer to pay the supplier in order to have more money available for longer

A

any early payment discount will be lost
the supplier may refuse further deliveries to the business until the outstanding payment has been made
if delayed payment occurs too often, then the supplier may demand payment before delivery.

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38
Q

trade recievables definition

A

amount owed to a business by its customers who bought goods on credit

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39
Q

bank loan definition

A

provision of finance by a bank which the business will repay with interest over an agreed period of time

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40
Q

bank loans are offered with a _______ or ________ rate of interest

A

fixed or variable

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41
Q

advantage of a fixed rate of interest as opposed to a variable rate

A

it will not change depending on economic factors

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42
Q

mortgage definition

A

long term loans used for the purchase of land or buildings

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43
Q

share issue definition

A

source of permanent capital available to limited liability companies

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44
Q

equity finance definition

A

permanent finance provided by the owners of a limited company

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45
Q

what type of companies can use share issue

A

public/private limited companiees

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46
Q

a company can offer to sell shares up to a maximum number. this is called…

A

authorised share capital

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47
Q

who can private limited companies sell shares to

A

existing shareholders or private investors (not to public)

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48
Q

who can public limited companies offer shares to

A

the general public

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49
Q

does the money raised through a share issue have to be repaid

A

no it becomes permenant capital

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50
Q

benefit of debt financing for long term finance

A

does not change the ownership of the company. leaders have no say in the running of the company

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51
Q

benefit of equity financing for long term finance

A

it never has to be repaid. there is no ongoing cost. if the business makes a loss it does not have to pau dividends to shareholders.

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52
Q

limitation of debt financing for long term finance

A

interest is charged on the amount borrowed and this increases business costs. interest must be paid even of the business makes a loss. the amount borrowed must be repaid.

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53
Q

limitation of equity financing for long term finance

A

the increase in shareholders ‘dilutes’ the ownership of the company. producing a prospectus to offer the shares for sale is expensive.

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54
Q

factors influencing the choice of finance

A 
size and legal form of business (e.g. sole traders and smaller businesses unlikely to get loans)
amount required (large = share issues or debenture, small = bank loans or leasing and hire purchase)
length of time (long term = debentures or share issues, short term = overdraft)
existing borrowing (if the business already has existing borrowing, then borrowing again will be harder.
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55
Q

net cash flow

A

cash inflow minus cash outflow

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56
Q

what is positive cash flow

A

when the cash inflow is greater than the cash outflow

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57
Q

what is negative cash flow

A

when the cash inflow is less than the cash outflow

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58
Q

why is having a greater cash inflow and smaller cash outflow better than having a small cash inflow and large cash outflow

A

any temporary cash shortage may cause problems for the business and result in an increase in borrowing costs

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59
Q

what do businesses need to prevent a negative cash flow

A

an accurate forecast of the size and timing of cash inflows and outflows. this enables businesses to identify any future periods where cash shortages may occur

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60
Q

what should a business do as a result of a negative cash flow

A

the managers need to increase the inflows or reduce the outflows

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61
Q

how to finance a short term cash shortage

A

ask trade receivables to pay more for goods more quickly by offering discounts to customers who have been sold goods on credit.
negotiate longer credit terms with suppliers
delay the purchase of non - current assets until the cash flow improves.

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62
Q

why do businesses need cash

A

to pay wages
to pay suppliers
for rent, heating, lighting and other costs

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63
Q

cash flow forecast def

A

an estimate of the future cash inflows and outflows of the business

64
Q

net cash flow def

A

cash inflow - cash outflow

65
Q

what does a cash flow forecast aim to do

A

it enables businesses to identify any future time periods when cash shortages may occur.

66
Q

how can a business finance a short term cash shortage

A

ask trade receivables to pay more for goods more quickly by offering discounts
negotiate longer credit terms with suppliers
delay the purchase of non-current assets until the cash flow improves
find other sources of finance for the purchase of non-current assets

67
Q

liquidity def

A

the ability of a business to pay its short term debts

68
Q

a business which does not have enough working capital will be

A

illiquid

69
Q

what is the working capital cycle

A

the time it takes from buying raw materials, making these into goods for sale, finding buyers for finished goods, and then receiving payment from customers.

70
Q

credit sales def

A

goods sold to customers who will pay for these at an agreed rate in the future

71
Q

what does the length of the working capital cycle depend on

A

level of inventories held by a business
how long production takes
how quickly buyers are found
the length of the credit period given to customers

72
Q

how can a business improve it’s working capital

A

reducing inventory levels
negotiating longer credit terms with suppliers
reducing the amount of time it takes to receive customer payments.

73
Q

gross profit def

A

the difference between revenue and cost of sales

74
Q

profit def

A

the difference between revenue and total costs

75
Q

total costs

A

costs of sales plus expenses

76
Q

revenue def

A

the amount earned from the sale of products

77
Q

profit =

A

revenue - total costs

78
Q

cost of sales def

A

the cost of purchasing the goods used to make the products sold

79
Q

expenses def

A

day-to-day operating expenses of the business

80
Q

gross profit =

A

revenue - cost of sales

81
Q

profit (2) =

A

gross profit - expenses

82
Q

revenue =

A

selling price x quantity sold

83
Q

the total cost of a business supplying its goods and services can be divided into

A

cost of sales and expenses

84
Q

what is profit used for

A

measuring sucess of a business
measuring success of a manager
decision-making on whether to continue a product or not
finance the purchase of non-current assets, expansion
attract investors who will provide the additional funds needed to finance business expansion

85
Q

give differences between cash and profit

A

money invested or borrowed increases cash but not profit
capital expenditure decreases cash but not profit
sales of goods on credit increases profit but cash does not increase until payment is received.

86
Q

which is more important for the business long term, cash or profit

A

profit

87
Q

which is more important for the business short term, cash or profit

A

cash

88
Q

income statement def

A

financial statement which records the revenue, costs and profits of a business for a given period of time

89
Q

when does an income statement have to be produced

A

legally once a year, but may be produced more for managerial use

90
Q

what is the most important figure on an income statement for stakeholder groups

A

profit

91
Q

use of income statements to owners/shareholders

A

profit after tax belongs to them.

92
Q

use of income statements to shareholders

A

usually the higher the profit the higher the dividends

the market value of shares may rise or fall

93
Q

use of income statements to employees

A

high profit increases job security
can evaluate salary as compared to profit
profit sharing schemes

94
Q

use of income statements to lenders

A

want to be sure that profit is enough to pay interest and the amount borrowed back

95
Q

use of income statements to the government

A

the higher the profit the higher the tax recieved by the government wil be

96
Q

use of income statements to suppliers

A

profitable firms will continue to purchase supplies

97
Q

use of income statements to managers

A

can compare profit with a past profit or with competitors

retained profit is an important source of finance.

98
Q

balance sheet def

A

an accounting sheet that records the assets, liabilites and owners’ equity of a business at a paticular date

99
Q

assets

A

resources that are owned by the business

100
Q

liabilities

A

debts of the business that wll have to be repaid sometimes in the future

101
Q

non-currerent (or fixed) assets

A

resources that a business owns and expects to use for more than one year

102
Q

examples of non-current (or fixed) assets

A

land, buildings, machinery, computers and motor vehicles

103
Q

current assets def

A

resources that the business owns and expects to convert into cash before the date of the next balance sheet

104
Q

trade recieveable

A

the amount of money owed to the business by customers who have been sold goods on credit

105
Q

current liabilities

A

debts of the business which it expects to pay before the date of the next balance sheet

106
Q

trade payable

A

the amount a business owes to its suppliers for goods bought on credit

107
Q

non-current liabilities

A

debts of the business which will be pauable after more than one year

108
Q

owner’s equity

A

the amount owed by the business to its owners; includes capital and retained profit

109
Q

shareholder’s equity (funds)

A

alternative term for owner’s equity, but can only be used by limited liability companies

110
Q

what does a balance sheet show

A

the assets the business owns
what the business is owed
what the business owes
how the business finances its activites.

111
Q

how often must a balance sheet produced

A

once a year

112
Q

how often must an income statement produced

A

once a year

113
Q

internal sources of finance

A

owners savings
retained profits
sale of non current fixed assets
use some of the business’’s working capital

114
Q

debt-factoring def

A

selling trade recievables to improve busines liquidity

115
Q

leasing def

A

obtaining the use of non-current asset by paying a fixed amount per time period of time. ownership remains with leasing company

116
Q

why should a business check its performance regularly

A

identify strengths and weaknesses
show whether the business is meeting its objectives
improve future business performance

117
Q

which ratios are used to measure a business’ profitability

A

gross profit margin
profit margin
return on capital employed

118
Q

gross profit margin % =

A

(gross profit / revenue) x 100

119
Q

what does gross profit % margin show

A

gross profit as a percentage of revenue

how much gross profit is earned per $1 of revenue

120
Q

gross profit margin def

A

ratio between gross profit and revenue

121
Q

gross profit def

A

difference between revenue and cost of sales (revenue - cost of sales)

122
Q

profit margin def

A

ratio between profit before tax and revenue

123
Q

profit margin % =

A

(profit/revenue) x 100

124
Q

how does a business improve its gross profit

A

increasing revenue without a similar cost in sales - increase in price
reducing cost of sales without similar reduce in revenue - achieved through buying cheaper supplies

125
Q

adding value def

A

selling a product for more than it cost to produce it

126
Q

what does gross profit ratio measure

A

the amount of profit made for every $1 of revenue

127
Q

what does profit ratio measure

A

the amount of profit made for every $1 revenue after allowing for expenses

128
Q

profit def

A

difference between revenue and total costs

= revenue - (cost of sales + expenses)

129
Q

capital employed

A

the amount invested in the business by the owners.

130
Q

return on capital employed =

A

(profit/capital employed) x 100

131
Q

what does it mean if the ROCE increases from one year to the next, or is higher than competitors

A

the business’s profitability has improved

132
Q

what does ROCE tell us

A

how much profit is earnt for every $1 invested in the business

133
Q

what is capital employed usually used to buy

A

profit earning assets such as buildings and machinery

134
Q

liquidity def

A

the ability of a business to pay its short term debts

135
Q

what does liquidity mean

A

a business’s access to cash

136
Q

how do you monitor a business’s liquidity

A

current ratio

acid test ratio

137
Q

what does the current ratio show

A

the ratio between current assets and current liabilites

138
Q

current ratio =

A

current assets / current liabilities

139
Q

what is the acid test ratio

A

ratio between liquid assets and current liabilities

140
Q

problems with the current ratio

A

some current assets are more difficult to turn into cash than others

141
Q

why are inventories the least liquid of the current assets

A

the finished goods inventories have to be sold

when they are sold on credit, the business has to wait for customers to pay.

142
Q

acid test ratio =

A

(current assets - inventories) / current liabilities

143
Q

what does the acid test ratio do that the current asset ratio doesnt

A

it excludes inventories from current assets. this means it is a better measure of a business’s liquidity.

144
Q

how do owners/shareholders use accounts

A

Whether they are getting a good return on their investment.

145
Q

how do potential investors use accounts

A

Interested in the profits and return they might expect to recieve from their investment.

146
Q

how do managers use accounts

A

Responsible for runnning of business so will want to know if financial objectives have been achieved.

147
Q

how do employees use accounts

A

Interested in profitability and job security. Could use figures to support claims for higher wages.

148
Q

how do trade payables use accounts

A

Suppliers can ensure the business is able to pay them back. Interested in liquidity. Will help them to increase their own revenue and profits.

149
Q

how does the government use accounts

A

Companies have to pay tax, so the higher the progits the higher the tax revenue recieved by government. Expanding companies will also provide employment.

150
Q

how do customers use accounts

A

Want to know that business will continue supplying them with goods and services meeting their needs and wants.

151
Q

how do lenders use accounts

A

Banks and other lenders will want to know they will recieve interest on money loaned. Interested in profits and liquidity.

152
Q

revenue =

A

selling price x quantity sold

153
Q

profit =

A

gross profit - expenses

154
Q

net cash flow =

A

inflows - outflows

155
Q

closing balance =

A

net cash flow + opening balance

156
Q

break even units =

A

fixed costs/(selling price - variable costs)

cambridge igcse business studies (6 decks)

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