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Higher business > management of finance > Flashcards

management of finance Flashcards

1
Q

what is revenue

A

quantity sold x price. money made from selling goods

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2
Q

what is total costs

A

fixed costs + variable costs.

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3
Q

what is fixed costs

A

costs that DONT vary with output

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4
Q

what is variable costs

A

costs that DO vart=y with output

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5
Q

what is profit

A

revenue - total costs. money you have left over from deductions

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6
Q

what is gross profit

A

sales revenue - cost of sales. profit made from buying and selling materials. money you have BEFORE deductions

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7
Q

what is net profit

A

gross profit - expenses. calculated tax owned to HMRC. - Her Majesty’s Revenue and Customs

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8
Q

what is a creditor

A

business who owes someone money

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9
Q

what is a debtor

A

someone who owes money to business

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10
Q

what is an asset

A

things that business owns eg vehicles, buildings

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11
Q

what are liabilities

A

debts business owes to creditors

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12
Q

what is cash flow/liquidity

A

refers to how readily company has access to finance to allow it to meet its financial obligations and operate successfully

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13
Q

what is efficiency

A

refers to gaining maximum outputs from minimum inputs. refers to how well company uses money it has

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14
Q

what is capital

A

provides good revenue ie will grow in value. views as money invested in business

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15
Q

what is a budget

A

plan expenditure and projected income over period of time allows org to predict cash flow and profitability to as to allocate resources efficiently. projection where you are going to spend

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16
Q

what are reciepts

A

money recieved by business

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17
Q

what is a payment

A

money paid out by business

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18
Q

what is a drawing

A

money owner takes out for own personal uses. must be recorded and replaced as has to be taxed

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19
Q

what is a final/annual account

A

documents business must produce at end of each financial year. show how business is doing. comprised of Trading, Profit and Loss account and balance sheet

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20
Q

what is a T, P + L

A

summary of sales and expenditure during course of year. calculates gross and net profit

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21
Q

what is a balance sheet

A

worth of org at a particular point in time. shows assets, liabilities and capital invested

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22
Q

what is an accounting ratio

A

different pieces of financial info and compare them to identify how well a business is doing

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23
Q

what is a fixed asset

A

items business owns normally longer than a year

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24
Q

what is a current asset

A

items business will own likely to change value during course of a year

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25
Q

what is a current liability

A

short term debts of business normally within course of year

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26
Q

what is working capital

A

measure of company’s efficiency and short term financial health. calculated as current assets minus current liabilities

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27
Q

what is a dividend

A

payments to shareholders from share of business’ profits

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28
Q

what is the role and importance of finance

A

control costs and expenditure - identifying areas of business where expenditure and costs will need be cut eg find cheaper supplier

monitor cash flow - biggest reason for business to fail each year therefore businesses should ensure to have sufficient cash to cover outgoings each months

forecast of what will happen in future - done by producing budgets for each department so business can allocate resources at efficiently as possible

monitor current performance - use accounting tactics to do this across various areas of org in order to produce best quality info for decision making

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29
Q

what are the different sources of finance

A

short term, medium term and long term

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30
Q

what are the short term sources

A

sale of asset, grant, bank overdraft, factoring and trade credit

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31
Q

what are the medium term sources

A

hire purchase, leasing, bank loan

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32
Q

what are the long term sources

A

debenture, venture capitalists, share issue, mortgage, owner’s savings

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33
Q

what is a sale of an asset

A

firm sells off a piece of equipment they no longer need/using

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34
Q

what is a grant

A

fixed sum of money provided by government to business to be used for a specific purpose eg employing people from high area of unemployment. comes with a condition attached which you have to abide by. if don’t then grant can be taken away

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35
Q

what is a bank overdraft

A

money business can take out of its account when balance is zero. required to agree to this with bank in advance. often cost more interest than bank loan

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36
Q

what is trade credit

A

supplier will deliver raw materials and allow firm to pay back at a later date

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37
Q

what is factoring

A

business gives trade credit to customer and customer fails to repay business. business can’t get that money to pay back their supplier. business can sell off customer to a third party (usually a debt collecting business) for a cheaper price.

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38
Q

what is hire purchase

A

firm will hire equipment and pay for it in instalments. After last payment firm takes ownership of good

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39
Q

what is leasing

A

firm rents building of piece of equipment for an agrees amount of time

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40
Q

what is a bank loan

A

fixed sum of money given to business by bank which is to be paid pack in fixed instalments over a fixed period of time. fixed interest is to be paid back as well

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41
Q

what is a mortgage

A

a loan given to firm who wish to purchase premises and repaid in instalments with interest

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42
Q

what is owner’s savings

A

funds saved by owner and invested in business

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43
Q

what is share issue

A

firm releases more shares in firm to existing/prospective shareholders. diluting value of existing shares

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44
Q

what is venture capital

A

private investors who provide finance where banks deem it as too risky

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45
Q

what is debenture

A

group of loans from number of organisations/individuals or finance institutions make an interest payment annually then you make the capital repayment at end of term.

lump sum up front to take over co. make smaller interest repayment at end you pay back capital at end

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46
Q

what is the standard list of sources of finance

A

bank loan, hire purchase, leasing, bank overdraft, trade credit, mortgage

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47
Q

what is a soletrader’s sources of finance

A

standard list + owner’s savings, gov grant

48
Q

what is a partnership’s sources of finance

A

standard list + partner’s savings, gov grant

49
Q

what is an LTD’s sources of finance

A

standard list + share issue, gov grant

50
Q

what is a PLC’s sources of finance

A

standard list + tax revenue, fines

51
Q

what is a charity’s sources of finance

A

standard list + donations, fundraising

52
Q

what is the equation of profit

A

profit = revenue - cost

53
Q

what is another word for sales

A

revenue

54
Q

what are the different types of cost

A

variable cost, fixed cost and total cost

55
Q

what is total cost

A

= fixed costs + variable costs

56
Q

what is an example of fixed costs

A

rent of factory/rental fee for photocopying machine

57
Q

what is an example of variable costs

A

raw materials

58
Q

what is a challenge for any manager

A

knowing which level of sales is producing a loss and which levels of sales is producing a profit

59
Q

what is break even

A

when total costs is equal to total revenue

60
Q

before breakeven what is happening

A

the firm is making a loss

61
Q

after breakeven what is happening

A

the firm is making a profit

62
Q

what is a margin of safety

A

number of actual sales above break even poiny

63
Q

what are the benefits of using a break even chart

A

firm can determine minimum target level for sales

once sales target set firm can set target level of output

target can be communicated to rest of firm

break even chart acts like planning doc for firm

managers can pass judgement as to whether members of staff are performing well

64
Q

what are annual accounts

A

comprised of Trading, Profit and Loss account and Balance sheet

65
Q

what must LTD AND PLCs do

A

publish their annual accounts

66
Q

where should LTDs lodge their accounts

A

with the companies house in edinburgh

67
Q

where should PLCs lodge their accounts

A

stock market

68
Q

what does a Trading, Profit and loss account show

A

profit/loss over period of time (usually a year)

69
Q

what does a t,p+l account identify

A

how much money has come into firm and how much moeny has been spent and on what

70
Q

what does a trading account do

A

calculates gross profit/loss. excludes firms internal expenditure

71
Q

what is a profit and loss account do

A

calculates net profit/loss

72
Q

what does a balance sheet show

A

value of business at a point in time

73
Q

what does a balance sheet take into consideration

A

fixed assets, current assets, current liabilities, working capital, financed by, capital, net profit and drawings

74
Q

what is fixed assets

A

items which business owns and will keep for more than a year

75
Q

what is a current asset

A

business owns and keeps for less than a year

76
Q

what is a current liability

A

item which business owes and pays for in short term

77
Q

what is working capital

A

difference between current assets and current liabilities. shows funds available after short debts have been met

78
Q

what is financed by

A

how the firm has been financed

79
Q

what is capital

A

investment that owner has put into firm

80
Q

what is net profit

A

profit made after all business expenses. tax to be paid is calculated using this figure

81
Q

what is drawings

A

funds taken out by owner from firm for their own personal use

82
Q

what does ratio analysis provide

A

a quick and relatively simple means of examining financial health of a business

83
Q

what does a ratio analysis express

A

one figure appearing in financial statements with some other figure appearing in financial statements (net profit in relation to capital employed) or perhaps some resource of the business

84
Q

what does a ratio analysis allow you to do

A

compare performance to previous years

85
Q

how can ratios be grouped

A

into certain categories, each of which reflect particular aspect of financial position/performance

86
Q

what is a profitability ratio

A

businesses come into being with primary purpose of creating wealth for their owners. Profitability ratios provide an insight to degree of success in achieving tyhis purpose

87
Q

what is an efficiency ratio

A

ratios used to measure efficiency with which certain resources have been utilised within business

88
Q

what is a liquidity ratio

A

vital for there to be sufficient liquid resources available to meet maturing obligations. ratios may be calculated which examine relationship betweeen liquid resources and creditors due for payment in near future

89
Q

what are the uses of ratio analysis

A

compare current performance with past experiences

compare performance against similar organisations eg competitors

identify differences actual performance and planned performance. use this to help make decisions on future performance

highlight trends over period of time

90
Q

what are the limitations of ratio analysis

A

info contained in annual accounts is historical as it related to last year’s trading

inter-firm comparisons must be made with firms of similar size and same type of industry

findings may not take into account external factors PESTEC

findings do nit show implications of product developments/declining product ie product life cycle

findings do not reveal elements such as staff morale

91
Q

what is the gross profit percentage

A

gross profit / sales x 100 = %

92
Q

what does the gross profit percentage measure

A

profit being made from buying and selling stock

93
Q

if gross profit %age needs improved then….

A

increase selling price
find cheap suppliers
negotiate discounts with suppliers
reduce theft (cost) or waste

94
Q

what is the net profit percentage

A

net profit / net sales x 100 = %

95
Q

what does the net profit percentage measure

A

profit being made after business has paid expenses

96
Q

if net profit percentage needs improved then…

A

improve gross profit

identify costs that can be reduced

97
Q

what is the return on capital employed

A

net profit / opening capital x 100 = %

98
Q

what does the return on capital employed measure

A

returm on capital invested in business by owner

99
Q

if return on capital employed needs improved then

A

increase sales and gross profit

decrease expenses

100
Q

what is the current ratio/working capital ratio

A

current assets / current liabilities

101
Q

what does the current ratio/working capital ratio show

A

shows ability of business to pay short term debts. answer of 2:1 is regarded as acceptable

102
Q

if current ratio needs to be improved then…

A

increase assets by selling off current assets or decrease liabilities by discounts

103
Q

what is the acid test ratio

A

current assets - stock / current liabilities (answer:1)

104
Q

what does acid test ratio show

A

ability of business to pay short term debts in crisis situation

105
Q

what is a generally acceptabke answer for the acid test ratio

A

1:1

106
Q

what is a cash budget

A

forecast of all money coming into and out of the business over a period of time ie normally a year

107
Q

why is a cash budget produced

A

used to predict recipets and payments of cash. can be produced for few months/year

108
Q

what is a budget used for

A

highlight periods when cash flow problems may occur, allows org to take corrective action

secure potential investors

used to make comparisons between actual spending and targeted spending

show surplus cash which could be used for capital investment

used to give departments / managers a budget/target for capital investment

used as aid for future financial planning

help measure performance of org

109
Q

how many businesses fail due to cash flow problems

A

80%

110
Q

what can businesses be unless debtors pay.

A

very profitable on their annual accounts.

111
Q

what are the reasons for cash flow problems

A

tying up too much cash in stock

allowing customers too much credit

customers not paying within agreed credit terms

borrowing too much finance at high interest payments

owners taking out too many personal drawings

low sales

112
Q

how can you resolve cash flow problems

A

offer discounts and promotions to encourage cash sales and reduce stock levels

sell any unneccessary fixed assets

introduce JIT

encourage overdue customers to pay bills

arrange credit with suppliers

owners draw less

produce cheaper prods

seek another source of finance - bank loan

113
Q

who uses financial info

A

employees/trade unions to make sure they are being paid fairly

shareholders/owbers - whether or not to invest more into business or not

HMRC - calculating how much tax org should pay

competitors - to measure org’s market share, expenses

114
Q

what can a spreadsheet do

A

construct cash budget, performs calculations and is for a more accurate and consistent than human.

allows graphs to be produced which allows finance department to spot trends eg rising wage costs

graphs and pie charts can be used as communication tools for management

115
Q

what are databases used for

A

firm can use electronic filing systems to record prices and costs of suppliers

116
Q

what is sage

A

firm of accounts software allows firms to complete bookkeeping on computers

117
Q

what is pay pal

A

allows customers to pay on line which makes easier for firm to control cash flow

Higher business (11 decks)

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