paper 2 - 2022 Flashcards
1
Q
total revenue
A
sale price x quantity
2
Q
total variable costs
A
variable cost per unit x quantity
3
Q
total costs
A
total variable costs + total fixed costs
4
Q
contribution per unit
A
sales price - variable cost per unit
5
Q
breakeven output units
A
total fixed cost / contribution per unit
6
Q
total contribution
A
contribution per unit x quantity
7
Q
margin of safety
A
actual output - breakeven output
8
Q
profit
A
total revenue - total costs
total contribution - total fixed costs
margin of safety x contribution per unit
9
Q
variance
A
actual figure - budgeted figures
favorable or adverse
10
Q
profit margin
A
profit/revenue x100
11
Q
gross profit
A
revenue - cost of sales
12
Q
operating profit
A
revenue - cost of sales - operating expenses
or
gross profit - operating expenses
13
Q
net profit or profit for year
A
revenue - cost of sales and operating expenses + net interest
14
Q
current ratio :1
A
current asset / current liability :1
1.5:1 = good (however important to compare to industry average)
less 1 means not enough current assets to meet current liabilities
15
Q
acid ratio test
A
current assets - inventory/ current liabilities
1:1 = good (compare to industry average)
16
Q
capacity utilization
A
actual output / maximum possible output x 100
85% to 90% is ideal
17
Q
gearing
A
non-current liabilities/ capital employed x100
high gearing = 50% above
low gearing 50% below
18
Q
return on capital employed
A
operating profit / capital employed x100
compare to industry average or back account interest
19
Q
sale forecasting underpin what forward planning in a business
A
- HR planning
- cash flow forecast
- profit forecasting and budgets
- production planning
20
Q
the 3 quantitative sales forecasting techniques
A
- moving average
- extrapolation
- correlation
21
Q
define moving average
A
is a quantitative method used to identify underlying trends in a set of raw data
22
Q
what is moving averages is used to identify what type of underlying trends
A
seasonal variation or erratic patterns
23
Q
how to calculate a 3 period moving average
A
add 3 month of raw data together
calculate average by dividing by 3
calculate variation
24
Q
how to calculate an average variation
A
average variation = actual data - trend data
25
how to calculating seasonal variation
add up every 4 pieces of data
calculate 8 point total by adding two four points together
divide by 8
26
define extrapolation
means predicting by projecting past trends into the future
| assumes past trends will continue
27
define time series data
is a series of figures covering an extended periods of time
28
what can be a challenge of using extrapolation
when trends aren't clear cut
have to decide between Long term and short term trends
long term tend to dominant but short term tends such as downloads may continue into the foreseeable future.
29
define correlation
expresses a relationship between two variables
30
limitations of using quantitative forecasting
1. the future may not be the same as the past - extraneous factors
2. the quality of a forecast is reliant on the ability of the forecaster to interpret the data being used to generate the forecast.
31
payback years and month calculation
1. get net cash flow for each year (inflow - outflows)
2. subtract initial investment from one year of cash flow
3. continue to subtract each year of cash flow until the remaining amount to pay off is a lower number than the next years cash flow (state as year)
4. month = average left to pay/ amount received in the following year x12
32
average rate of return
1. total net cash flow - investment = project lifetime 'profit'
2. profit/ number of years life of project to calculate average annual return
3. use answer to 2 to carry out the sum: average annual return/initial investment x100
33
net present value - (Discounted cash flow )
1. calculate the net cash flow for each year
2. apply the relevant discount factor for each year to calculate the discounted net cash flow
3. add up the discounted cash flow figures across the life of the project to reach an overall net present value of the project at the end of its life
4. deduct the initial cost of investment
34
define breakeven
is the point when total revenue is the same as total cost
35
what is meant by contribution
is the surplus of revenue left over after variable costs have been paid which are used to pay fixed costs
once fixed costs have been paid contribution becomes profit
36
name 3 limitations of breakeven analysis
assumes the output are sold
assumes the variable costs remain constant
is an estimate
37
define a budget
a budget is a financial plan that is agreed in advance. its a planned outcome that the firm hopes to achieve
38
name 3 reasons why a business would produce a budget
1. planning - allows the business to think ahead
2. communication - can share financial objectives with the workforce
3. control and monitored - can compare actual figures with budgeted figures
39
historical budgets
uses current figures to prepare the new budget. Adjustments made such as changes in the costs of production.
40
zero budgets
use figures based on potential performance to show that the spending will generate an adequate return
41
strength of using a historical based budget
less time consuming
42
weakness - historical based budgeting
May become out of date
| No incentive to reduce the costs if the budget is the same
43
strength of zero-based budget
Forward looking - may benefit from departments having a complete new budget
44
zero-based budget - weakness
time consuming
| Short termism - focus in increasing profit and sales
45
what is meant by variance
The difference between the actual figures and budgeted figures. The results are classed as favorable or adverse
46
what is the difference between an adverse variance and favorable variance
favorable is when the actual figures are higher than the budgeted and adverse is when the actual figure of sale and profit is lower than the budgeted
47
indication of an adverse variance
actual sales lower than budgeted sales
actual profit lower than budgeted profit
actual costs higher than budgeted costs
48
how does analyzing variances help a business in its decision making
can help to alter the budgets to be more accurate to what the budgets tell you
49
name 4 difficulties of budgeting
1. Setting budgets - time consuming, not actual figures, over ambitious, conflict between depts
2. Motivation - unrealistic figures can be stressful leading to decreased productivity
3. Short -termism - over focused on current figures
4. rigidity - circumstances change
50
name the 3 types of profit
Gross profit - profit made after the direct costs have been met
Operating profit - profit made after direct and indirect costs have been met
Net profit - the profit of the year
51
what is a statement of comprehensive income
a record of a business's revenue, costs and profits over a given time period
52
name 5 items that would appear on a statement of comprehensive income
1. revenue
2. cost of sales
3. gross profit, operating profit, net profit
4. interest and expenditure items
5. bottom line
53
what is meant by an exceptional item and why will this affect profit quality
it's a one off sale of a non-current asset which generates profit for the business, but it not sustainable e.g. the selling of a building
profit quality will be low as this profit has not come from the day to day activities of the business. a business can only sell its asset once
54
name 3 profitability ratio that can be calculated with the information provided on a statement of comprehensive income
1. gross profit margin
2. operating profit margin
3. net profit margin
55
explain why increasing prices will increase profitability
Increased prices - receive more revenue per unit - but costs stay the same - therefore increased profitability
56
explain why increasing prices may not increase profitability
However - may not increase profitability - as may decrease sales - therefore depends on the price elasticity of demand
57
define cash
is the physical money a business has in notes and coins, along with any money in the bank
58
define profit
the surplus of revenue left over after all costs have been paid
59
name 2 differences between cash and profit
Selling goods on credit - revenue is recorded straight away but the money may not have been paid to the business
Buying goods/ materials - cash balance is reduced, no effect on profit until selling those goods
60
what is a statement of financial position
What a business owns and owes on one given day
61
what is the difference between a non-current asset and a current asset
Current - items owned by a business whose value varies as a result of daily business activity (cash, product)
Non-current - items of value owned by a business that are likely to be kept for more than one year (property)
62
what is the difference between a current liability and non-current liability, give an example of both
Current liability = A current liabilities is a short term debt (under a year )
Non-current liability = Non-current liabilities are a long term debts
63
what is meant by the term working capital
Is the amount of money needed to pay for the day to day trading of a business
(Current assets - current liabilities = working capital)
64
why is the amount of working capital a business has an important issue
A business that doesn’t have sufficient working capital will find it hard to survive as it doesn’t have enough cash to cover its expenses
65
name 2 reasons why different businesses have different working capital needs
1. Stock requirements
| 2. How much credit the business gives
66
why might a supermarket be able to operate with negative working capital, is this a normal situation
Because customers pay for their goods straight away so it keeps the minimum amount of cash in its accounts as it is replenished every day
67
name 2 problems with a business having inadequate amount of working capital
1. Can't buy more materials to make product or replenish its shelves
2. Can't pay staff their wages
68
name 2 problems with a business having too much working capital
1. the business could be be using its spare cash to invest
| 2. the inventory it is holding may become obsolete which is huge waste of cash
69
why is cash so important to a business
CASH IS KING - businesses need cash to pay for wages, expenses and supplies
- a business with no cash can fail and become insolvent
70
name 2 ways a business could prevent a poor liquidity position
1. raise current assets
| 2. reduce current liabilities
71
name 4 ways a business could improve its liquidity position
1. reduce credit periods for its customer / make sure customers pay their debts
2. increase credit periods for suppliers
3. make use of a loan or sell assets
4. make use of an overdraft
72
define capacity utilization
the use a business make of its resources
73
what is meant by under-utilization of capacity
where a business producing at less than full capacity
74
name 2 drawbacks of under-utilization
Inefficiency as its unit costs won't be minimized as it is not making the most of its available resources, fixed costs won't be spread over the max unit of output
Poor morale amongst workers - they may be sitting around idle or fear for their job
75
what is meant by over-utilization of capacity
where a business at full capacity and straining resources
76
name 2 drawbacks of over-utilization
Stressed and tried employees - increased risks of accident or breakdown of machinery with no time for staff training or maintain work to be carried out
Unable to respond to an increase in demand - poor reputation
77
name 2 benefits of over- utilization
Lower average costs, increasing competitiveness and profits
Happier and more motivated workforce, opportunities for overtime, safe job
78
name 3 measures a business could take if it has excess capacity (under-utilization)
1. rationalization - reducing excess capacity by getting rid of resources it doesn't need
2. increasing sales - improve marketing, such as better promotional
3. take on outsourcing contracts for other businesses to make an effective use its resources
79
name 3 measures a business could take on alleviate a lack of capacity (e.g. over-utilization)
1. outsourcing the extra work - make use of another business to complete the orders that cant be done
2. redeploy workers - move them to quieter parts of the business
3. reduce sales by raising prices - if the product is elastics demand will decrease.
80
why is it important to look at whether the business has short-term or long-term problems with under or over capacity
a seasonal business will only have a short term problem so will address the problem differently to a business with a year round capacity issue
e.g. seasonal business may be more likely to outsource resources whereas long term issues may have to be rationalized
81
define SWOT analysis
a method for analysis a business, it resources and it's environment, focusing on the internal strengths and weakness of the business and the external opportunities and treats for the business
82
SWOT analysis - strength
examples - strong brand name - committed workforce
| internal factor
83
SWOT analysis - Weakness
examples - poor financial decisions - outdated technology compared to competitors
internal factor
84
SWOT analysis - opportunity
example - new markets - new product development
| external factor
85
SWOT analysis - threats
examples - increasing competition - economic uncertainty
| external factor
86
name 3 uses for a SWOT analysis
1. find out what the business strength and weaknesses - things it does better than competition
2. find out the business opportunities and threats
3. plan future strategy based on its findings - so ensure business survival
87
define competition
is the rivalry that exist between business when trying to sell goods in a particular market
88
describe a competitive market
where there are a large number of buyers and seller and the products are close substitutes
89
name two features of a competitive market
1. no barriers to entry
| 2. little ability to exploits customers
90
define an uncompetitive market
where the market is dominance by a single producer (monopoly) or just a few large businesses (oligopoly)
91
name 2 features of an uncompetitive market
1. high barriers to entry
| 2. control over prices
92
name 2 reasons why the structure of markets is likely to change overtime
1. in some markets competition intensifies as new businesses enter the market, perhaps with a novel product
2. in other markets competition is reduced as business consolidate e.g. mergers and takeovers
93
name 3 impacts on business of a changing competitive environment
1. new entrants - existing business will need to consider their position e.g. offering online services
2. new products - existing business will need to make changes to their own product, lower prices or invest in a marketing campaign
3. consolidation - if competitors are buying up the competition, existing business may need to do the same or look to develop their products, diversify or cut their costs
94
what does PESTLE stand for
```
P - politics
E - economic
S - social
T - technological
L - legal
E - environmental
```
95
name 2 political influences
1. competitive policy - some governments are stricter on mergers and takeovers
2. government spending or taxation
96
name 2 economic influences
1. interest rates
| 2. economic growth
97
name 2 social influences
1. demographic changes
| 2. changing consumer tastes
98
name 2 technological influences
1. mobile technology
| 2. disruptive technology
99
name 2 legal influences
1. health and safety laws
| 2. minimum wage
100
name 2 environmental influences
1. sustainability
| 2. ethical sourcing
101
porters five forces model
```
power of customers (top left)
power of suppliers (top right)
intensity of rivalry (middle)
threat of market entry (bottom left)
threat from substitutes (bottoms right)
```
102
list the factors that would suggest an industry is likely to be very profitable
1. strong suppliers
2. strong customers
3. low barriers to entry
4. few opportunities for substitutes
5. little rivalry
103
name the four components that a business wants to identify in time series data
1. trend (upwards, downwards, constant )
2. seasonal fluctuations (time of year)
3. cyclical fluctuations (related to the economy and the business cycle)
4. random fluctuations (unknown reasons)
104
why would a business be interested in using quantitative sales forecasting as a decision-making technique
to attempt to increase the accuracy of predictions. as the future is uncertain, business will aim to forecast sales so they can meet demand and plan stock and staffing levels
105
why would a business uses a 4 quarter moving average
used when a business is seasonal so data can be smoothed out across the year
106
why would a business use a moving average
to smooth out the raw data to make it easier to spot the trend line
107
what is meant by the line of best fit
plotting a straight line through as many of the points as possible to show the general trend of the data
108
what is meant by the term extrapolation
extending the line of best fit to predict future sale figures
109
why would a business calculate variations
as variations look at the difference between the actual data and the trend data, it is used in an attempt to make the future more accurate
110
name 2 limitations of quantitative sale forecasting
1. past performance is no guarantee of future performance - a business needs to appreciate changing internal and external factors
2. lack of sales history makes it difficult to make an accurate prediction or inexperience of the forecaster
111
name the 2 key financial statements that companies are required by law to produce
1. statement of comprehensive income (profit and loss account)
2. statement of financial position (balance sheet)
112
define statement of comprehensive income
a record of a business's revenue, costs and profits over a given time period
113
name 5 pieces of key information contained in a statement of comprehensive income
1. revenue
2. cost of sales
3. gross profit
4. other operating expenses
5. operating profit
114
define statement of financial position
what the business owns (assets) and owes (liabilities) on a particular day
115
name 5 pieces of key information contained in a statement of financial position
1. non-current assets
2. current assets
3. current liabilities
4. non-current liabilities
5. net assets
116
name 2 stakeholders likely to have an interest in a statement of financial position
1. shareholder - want to know if the business is worth investing in
2. suppliers - want to know that the business hasn't got liquidity problems
117
what does the gearing ratio measure
a business's reliance on debt as a form of finance
118
what does the return on capital employed ratio measure
shows the percentage return in profit of all the funds invested into the business ( this included retained profits, share capital and loan capital )
119
how would you analysis the ROCE of a business
the higher the better
a higher percentage indicates that the business is making a good return on its investment
as long it is higher the interest rate, then it is a good investment
120
name 2 limitations of ratio analysis
1. the accounts are a representation of the whole organization so may conceal poor performing areas/ weal players
2. quantitative information only. there is a wealth of qualitative information that should be considered such as ethics, future plans, green credentials, workforce morale, management style and development in technology.
121
benefit of using - breakeven
+ provides a target number of sales to reach to break even
+ able to manipulate the dat to see what happens in certain scenarios e.g. what happens to breakeven output if the price is increased or cost increase
122
benefit of using - budgets
+ set a target to achieve - everyone working for the same goal, motivating for workers to have something to strive for
123
benefit of using - Ratio analysis
+ it is a variable tool for making informed decisions and target setting as well as planning the future direction of the business
124
benefit of using - quantitative sales forecasting
+allows the business to increase the accuracy of predications through the use of moving averages and variations. as the future is uncertain, businesses will aim to predict sales so as to meet demand as well as plan for staffing and stock levels
125
benefit of using - SWOT analysis
+ it allows the business to analyse its internal strengths and weaknesses (compared with competition) and its key external opportunities and threats to enable it to plan for the future
126
drawback of using - breakeven
- variable costs may fall as output rises. for example, as output rises, the business may benefit from being able to buy inputs at lower prices ( buying power), which would reduce variable cost per unit
- assumes all output is sold
- estimated figures - the outcome might not be as expected (changes in market or economy)
127
drawback of using - budgets
- short termism = as too much focus on the current budget or year can undermine future performance
- unrealistic targets can cause unnecessary stress and reduce productivity
128
drawback of using - ratio analysis
- quantitative information only. there is a wealth of qualitative information that should be considered as well, such as ethics, future plans, green credentials, workforce morale, management style and developments of technology
129
drawback of using - quantitative sale forecasting
- past performance is no guarantee of the future. businesses need to appreciate the additional factors (internal and external) that can affect future predictions
130
drawback of using - SWOT analysis
- it doesn't offer any solutions to the issue that have been highlighted. this requires more thought and time on top of the time spent producing the SWOT
