Role of Financial Management

Question 1

Goal

Answer 1

A measurable and observable long-term aim. It identifies the business’s direction and focus for the future. Goals may involve several objectives.

Question 2

Objectives

Answer 2

A series of short-term steps or targets needed to achieve the final goal.

Question 3

Bankruptcy

Answer 3

A legal declaration that a person or business has more liabilities than assets. A consumer or business that is unable to pay its bills may be formally declared bankrupt by a court. A business may declare itself bankrupt voluntarily as part of the process of closing the business.

Question 4

Profit

Answer 4

What remains from revenue after all expenses have been paid.

Question 5

Drawings

Answer 5

Money taken out of a business by a sole trader or partner for their personal use.

Question 6

Sole trader

Answer 6

An unincorporated business with one owner.

Question 7

Dividend

Answer 7

The income earned from owning shares in a company. It is usually paid every six months and is based on the profits the company makes.

Question 8

Gross profit

Answer 8

The revenue remaining after paying the cost of goods sold; that is, the expenses of purchasing the goods wholesale (wholesale cost) and transporting them to the business ready for sale (freight or cartage inwards).

Question 9

Net profit

Answer 9

The final amount of revenue remaining after all expenses haven been paid.

Question 10

Profitability

Answer 10

The earnings of the business after expenses have been paid.

Question 11

Growth

Answer 11

The size of the business compared to its competitors in the same market.

Question 12

Accounts receivable

Answer 12

A current asset that represents money owed to the business in the short term. This money is owed to the business by customers who are yet to pay for goods or services they have already received. Accounts receivable is also known as debtors.

Question 13

Invoice

Answer 13

A bill sent to a customer requiring payment by a specified date. Invoices are primary documents in accounting because they are records of credit sales.

Question 14

Liquidity

Answer 14

A measure of how quickly an asset may be converted into cash and therefore determines the ability of the business to pay short-term debts as they fall due.

Question 15

Current assets

Answer 15

Assets (such as cash in the bank, accounts receivable and stock) that earn revenue for a business in the short term; usually within 12 months.

Question 16

Debtors

Answer 16

The businesses or individuals that owe money to a business. Also known as accounts receivable.

Question 17

Liability

Answer 17

The amount of money owed to individuals and businesses (creditors; for example, suppliers or institutions such as a bank).

Question 18

Current liabilities

Answer 18

Money that is owed to an external business or person that will be repaid in the sort term; usually within 12 months.

Question 19

Accounts payable

Answer 19

The money a business owes to its suppliers and service providers. Accounts payable is also known as creditors or trade creditors.

Question 20

Creditors

Answer 20

The businesses, financial institutions and individuals to which a business owes money. Also known as accounts payable.

Question 21

Solvency

Answer 21

The ability of a business to pay both short- and long-term liabilities as they fall due. It is a measure of whether a business is financially stable.

Question 22

Gearing

Answer 22

How much debt finance the business has acquired to fund its operations compared to its use of equity finance.

Question 23

Short-term

Answer 23

In less than a 12-month period.

Question 24

Long-term

Answer 24

Longer than a 12-month period.