Financial Terms Used To Check The Financial Health Of A Business

Question 1

What is a opportunity cost?

Answer 1

A benefit, profit or other advantages that must be given up to acquire or achieve something else.

Question 2

What are costs?

Answer 2

The expenses a business incurs when producing and supplying products and services to customers.

Question 3

What is Depreciation?

Answer 3

The cost of an asset consumed over its useful life

Question 4

What are fixed costs?

Answer 4

These are costs that have to be paid even if the business produces or sells nothing

Question 5

Give 5 examples of fixed costs

Answer 5

1 - Rent
2 - Office Salaries
3 - Advertising 
4 - Insurance 
5 - Depreciation

Question 6

What are variable costs?

Answer 6

These are costs that vary directly with the level of output. If output doubles, the variable costs double. If the output halves, the variable costs halve.

Question 7

Give 4 examples of a variable cost?

Answer 7

1 - Direct Labour (cost of paying employees involved in production)
2 - Raw Materials
3 - Packaging costs
4 - Royalties paid

Question 8

What is revenue?

Answer 8

Revenue (also called sales, total revenue or turnover) is the money earned from selling manufactured output, goods purchased or services offered; the total revenue of a business is based on both the level of output and the selling price per unit.

Question 9

How do you work out revenue?

Answer 9

Selling price X Quantity sold

Question 10

What is cash flow?

Answer 10

The money going in and out of the business

Question 11

Give 4 examples of cash inflow

Answer 11

1 - Cash received from selling products/services
2 - Loan receipts
3 - Commission received
4 - Rent received

Question 12

Give 4 examples of cash outflow

Answer 12

1 - Wages
2 - Insurance
3 - Payments to suppliers
4 - Loan interest

Question 13

What is net cash flow?

Answer 13

Net cash flow is the difference between cash inflow and cash outflow

Question 14

What is profit?

Answer 14

The main objective for most businesses- the money left over from revenue after paying total costs

Question 15

What is a loss?

Answer 15

The deficit of revenue after paying total costs

Question 16

What does insolvent mean?

Answer 16

When a business is unable to pay its debts

Question 17

What is break even?

Answer 17

Break even is the point at which the level of sales allows total costs to equal a total revenue; at the break even point a business makes no profit or loss

Question 18

How do you work out profit?

Answer 18

total revenue - total costs

Question 19

How do you work out the break even point?

Answer 19

Total fixed costs /contribution per point

Question 20

What is the margin of safety?

Answer 20

The amount a business sells in excess of its break-even point.

Question 21

How do you work out the margin of safety (in units)?

Answer 21

Actual output in units - break-even output in units

Question 22

What is an income statement?

Answer 22

An income statement is produced by a business for a specific period of time. This is usually 12 months and produced at the end of the business’ financial year.

Question 23

What is gross profit?

Answer 23

Revenue - cost of sales

Question 24

What is cost of sales?

Answer 24

The total amount the business has paid to create or make available a product or service that has been sold

Question 25

What is net profit?

Answer 25

Gross profit - expenses

Question 26

What is an asset?

Answer 26

Resources owned by a business e.g. cash, motor vehicles, premises, machinery

Question 27

What is a statement of financial position?

Answer 27

resources that are owned by a business. They are used to help the business survive and function

Question 28

What are the five main assets for a current asset?

Answer 28

1 - Cash in the bank?
2 - Cash in hand 
3 - Trade receivables 
4 - Inventory 
5 - Prepayments

Question 29

What is a current asset?

Answer 29

Part of a business’ operating cycle and are likely to be converted into cash within a 12 month period.

Question 30

What are Liabilities?

Answer 30

Liabilities represent the debts owed by an organisation

Question 31

What are current liabilities?

Answer 31

Amounts falling due within one year that arise through day to day trading.

Question 32

What are non-current liabilities?

Answer 32

Amounts falling due after one year and will exist for more than 12 months

Question 33

What is equity?

Answer 33

Equity, or capital, is the term used to describe how much a business is worth.

Question 34

What is a cash flow forecast?

Answer 34

a management accounting document and a form of budget. The forecast will show when cash is expected to come in to and go out of a business. It is made out of receipts, payments and net cash flow.

Question 35

What is a cash flow statement?

Answer 35

A financial accounting statement that shows the actual cash inflows and outflows for a business over the previous 12 months.

Question 36

How does accurate cash flow forecasting help a business?

Answer 36

1 - They can identify problems before they happen
2 - They can plan how to use excess cash
3 - Plan a project with minimal borrowing
4 - support for application for finance

Question 37

How can cash flow problems be resolved?

Answer 37

1 - Holding less inventory within the business
2 - Improving credit control 
3 - Increasing sales levels
4 - Selling non-current assets 
5 - Reducing costs