Financial Project Flashcards
Difference between fixed and current assess
Fixed assets are long term assets so over 12 months. Current assets are short term assets that are typically used in under 12 months
Examples of
Costs that are not expenses
A cost is an amount that has to be paid. Whereas an expense has the price of it and is regular payments.
Example of receipts that are not revenues
A company’s receipts refers to the cash that the company received.
A companies revenue is the amount it has earnt and paid within 30 days
Example of receipts that are not revenues
Eg borrowing 1000 from bank
Collecting 4000 from a sale that was recorded one month earlier
Example of expenditure that is not (yet) a cost
Expense is a cost whose utility has been used up.
For example depreciation
Examples of receipts that are also revenues
When a company makes a 209 cash sale. They receive 200 rev and 200 cash receipt
What is capital budgeting
Capital budgeting is the process a business undertakes to evaluate potential major products or investments
What’s the difference befeeen period profit and free cash flow
Free cash flow is a measure of how much cash a business generates after accounting for capital expenditures such as buildings and equipment.
Period profit is excess of revenues over outlays and expenses in a business enterprise over a given period of time
When computing npv with residual value what do you do
You add residual value to the last free cash flow (last year)
What is meant by the term economic order quantity
Economic order quantity is the optimum quantity of an item to be purchased at one time in order to minimise the combined annual costs of ordering and carrying the item in inventory
What is the purpose of safety inventory
safety inventory purpose is of satisfying demand that exceeds the amount forecasted in a given period j
Safety inventory is the average inventory remaining when the replenishment lot arrives
What is the effect of safety inventory and economic order quantity
Safety inventory is having extra stock that is maintained to mitigate risks of stockpiles caused by uncertainties in supply and demand.
Whereas economic order quantity looks at the optimal way of getting inventory at the cost effective way
What is the purpose of customer evaluation in the context of credit management
Credit management is the function of granting credit terms and making sure money is collected when it becomes due. Good credit management promotes dialogue between finance and sales team to create a balancing act where risk is minimised and opportunities maximised
What is the purpose of debt collection policy in the context of credit management
Debt collection is the process of pursuing payments of debts owed by individuals or businesses.
It’s important as it allows businesses to only deem credit to individuals who are likely to oh back
Give three reasons why a business may wish to maintain a sufficient balance
Holds right about of cash to meet its immediate and long term needs
It needs a sufficient balance to survive
Cash management encompasses how a company manages its operations or business activity, financial activities and financing activities
List 3 drawbacks to financial statement analyses carried out using the ratio analysis method
Firms can make changes to financial statements to improve them - “window dressing”
Ratio’s ignore price level changes due to inflation - it uses historical costs
Accounting ratios do not resolve any financial problems of the company. They are a means to the end, not the actual solution
What is financial leverage
Financial leverage is the use of debt to buy more asssts
What is meant by the term solvency
Solvency is the possession of assets in excess of liabilities; ability to pay ones debts
What is meant by the term financial resilience
Financial resilience is defined as the ability to withstand life events that impacts ones income and or assets. Eg what would happen if there was a job loss in the household, are you financially resilient enough to withstand it
What is the difference between dynamic liquidity and static liquidity
Static liquidity results from existing assets and liabilities only. Dynamic liquidity gaps add the projected new credits and new deposits to the amortisation profiles of existing assets
Which value of the current ratio points to good static liquidity
A good current ratio is between 1.2 to 2 ( business has 2 times more current assets than liabilities to cover its debt).
Also defendant on industry and environment
What is the characteristics difference between fixed and variable costs
Fixed costs are costs that stay the same over a period of time whereas variable costs change depending on output and time
What is meant by the term relevant range in relation to fixed costs
Relevant range refers to a specific activity level that is bounded by a minimum and maximum amount. Within the designated boundaries, certain revenue or expenses levels can be expected to occur.
In terms of fixed costs, they will remain fixed as long as the level of activity stays within a certain range.
What is usually chosen as normal output when using absorption costing
all manufacturing costs have been assigned
Why is an output level variance used to calc the operating profit under absorption costing
The output level variance measures the amount of overhead applied to the number of units produced. It is the difference between the actual number of units produced in a period and the budgeted number of units that should have been produced, multiplied by the budgeted overhead rate
