Financial Strategies

Question 1

Acid-test ratio

Answer 1

A liquidity ratio that looks at whether a business can pay for current liabilities out of cash and near-cash assets (it ignores the value of stocks)

Question 2

Asset turnover

Answer 2

A ratio that calculates the relationship between revenues and the total assets employed in a business

Question 3

Assets

Answer 3

Amounts owned by, or owed to a business

Question 4

Average rate of return

Answer 4

A measure of the total accounting return from an investment project

Question 5

Balance sheet

Answer 5

The financial statement that provides a snapshot of the assets and liabilities of a business at a particular date

Question 6

Capital expenditure

Answer 6

Expenditure on assets which are intended to be kept in the business (e.g. IT systems, machinery) rather than sold or turned into products

Question 7

Cash flow targets

Answer 7

Specific objectives set by a business for cash-flow generated by a business

Question 8

Corporation tax

Answer 8

The tax levied on the profits of companies. The percentage varies depending on the size of the profits earned; typically 20-30%

Question 9

Cost minimisation

Answer 9

A strategy of achieving the most cost-effective way of delivering goods and services to the required level of quality

Question 10

Creditor days

Answer 10

A ratio that estimates the average period (in days) taken to settle amounts owed by a business to suppliers

Question 11

Current ratio

Answer 11

A simple and popular measure of liquidity that assess the ability of current assets (e.g. cash, stocks) to finance current liabilities (e.g. trade creditors)

Question 12

Debentures

Answer 12

A long-term source of finance – a debenture is a form of bond or long-term loan issued by a company

Question 13

Debtor days

Answer 13

A ratio that focuses on the average time it takes for trade debtors to settle their accounts. Usually measured in days

Question 14

Depreciation

Answer 14

An accounting estimate of the fall in value of a fixed asset over time

Question 15

Discount factor

Answer 15

The multiplication factor that converts a projected cost or benefit in a future year into its present value

Question 16

Dividend

Answer 16

Amounts paid to shareholders out of the profits earned by a company.

Question 17

Dividend yield

Answer 17

A measure of shareholder return – calculated by comparing the dividend per share by the share price

Question 18

Fixed assets

Answer 18

Assets such as property, equipment and vehicles that are intended to be retained and used in a business for more than one year

Question 19

Gearing

Answer 19

A ratio that focuses on the long-term financial stability and capital structure of a business. The gearing ratio measures the proportion of assets in a business that are financed by borrowing

Question 20

Going concern

Answer 20

A business that is viable and able to continue in business for the foreseeable future

Question 21

Goodwill

Answer 21

An intangible asset that can be included in a balance sheet = the difference between the net assets of a business acquired and the price paid for the business

Question 22

Income statement

Answer 22

A financial statement that summarises the trading results of a business over a specific period – usually one year

Question 23

Investment appraisal

Answer 23

Analytical techniques to help management evaluate the returns from potential investments, and to help choose between competing investments

Question 24

Liabilities

Answer 24

Amounts owed by a business to others

Question 25

Liquidity

Answer 25

The ability of a business to finance required payments to creditors

Question 26

Net present value

Answer 26

The present value of a series of future net cash flows that will result from an investment, minus the amount of the original investment

Question 27

Operating profit

Answer 27

The profit earned by a business from its entire trading operations – stated before financing (e.g. interest) and tax

Question 28

Overtrading

Answer 28

Where a business suffers financial difficulties from expanding too quickly – usually suffering set-up losses and increased working capital

Question 29

Payback period

Answer 29

The time it takes for a project to repay its initial investment

Question 30

Profit centres

Answer 30

A separately-identifiable part of a business for which it is possible to identify revenues and costs and calculate a relevant profit

Question 31

Profit quality

Answer 31

The sustainability of profit from one period to the next. Higher quality profit is profit that is likely to be repeated rather than affected by one-off items

Question 32

Profitability

Answer 32

The amount of profit earned in a period (absolutely measure) or rate of profit earned compared with revenue (relatively measure)

Question 33

Provisions

Answer 33

Amounts set aside to cover future costs or liabilities (e.g. redundancies, business closures, legal disputes)

Question 34

Ratio analysis

Answer 34

Interpretation of financial performance by calculating and interpreting ratios

Question 35

Retained earnings

Answer 35

Profits earned by a business that are kept in the business rather than distributed as dividends

Question 36

Revenue expenditure

Answer 36

Spending on day-to-day operation of the business – e.g. paying for materials, staff costs, management salaries, advertising

Question 37

Rights issue

Answer 37

Spending on day-to-day operation of the business – e.g. paying for materials, staff costs, management salaries, advertising

Question 38

ROCE

Answer 38

A measure of the percentage return that a business earns from the capital employed in the business. Often referred to as the “primary ratio”

Question 39

Share capital

Answer 39

The amount invested into a company by shareholders

Question 40

Shareholder returns

Answer 40

The rewards earned by shareholders = dividends paid to them + any increase in the value of their shares

Question 41

Stock turnover

Answer 41

A liquidity ratio that looks at how often a business rotates its stock during a year

Question 42

Trade creditors

Answer 42

Amounts that a business owes to its suppliers

Question 43

Trade debtors

Answer 43

Amounts that are owed to a business from its customers

Question 44

Working capital

Answer 44

The net amount invested by a business to finance day-to-day trading: usually calculated as current assets less current liabilities