Section 3 - Accounting and Finance Flashcards
This section explores the use of accounting and financial information as an aid to decision making.
Hire Purchase
Buying specific goods with a loan, often provided by a finance house.
Leasing
Renting or hiring equipment or property.
Retained Profit
The profit held by a business rather than returning it to the owners.
Short-term Finance
Money borrowed for one year or less.
Debenture
A long-term loan to a business.
Gearing
The amount of capital raised from loans in relation to the amount raised from the sale of shares.
Long-term Finance
Money borrowed for more than one year.
Mortgage
Long-term loan secured with property.
Share Capital
Money raised from the sale of shares in a limited company.
Venture Capitalists
Specialists (individuals or financial institutions) which provide funds for businesses, usually in exchange for an equity stake.
Working Capital
The funds left over to meet day-to-day expenses after current debts have been paid. It is calculated by current assets minus current liabilities.
Working Capital Cycle
The flow of liquid resources into and out of a business.
Budget
A plan that shows how much money a business expects to spend or receive in a specified period.
Cash Flow
The flow of money into and out of a business.
Cash Flow Forecast
The prediction of all expected receipts and expenses of a business over a future time period which shows the expected cash balance at the end of the month.
Cash Inflows
The flow of money into a business.
Cash Outflows
The flow of money out of a business.
Liquid Asset
An asset which is easily changed into cash.
Net Cash Flow
The difference between the cash flowing in and cash flowing out of a business in a given time period.
Net Cash Flow = Total Cash Outflow - Total Cash Inflow
Costs
Expenses that must be met when setting up and running a business.
Average Costs = Total Costs ÷ Quantity Produced
Direct Cost
A cost which can be clearly identified with a particular unit of output.
Fixed Costs
Costs that do not vary with the level of output.
Indirect Cost or Overhead
A cost which cannot be identified with a particular unit of output. It is incurred by the whole organisation or department.
Total Costs
Fixed costs and variable costs added together.
Total Costs = Fixed Costs + Variable Costs
Total Revenue
The money generated from the sale of output. It is price multiplied by quantity.
Total Revenue = Price x Quanitity
Variable Costs
Costs which rise as output levels are increased.
Break-even
The level of output where total costs and total revenue are exactly the same. Neither a profit or a loss is made.
Break-even Point = Fixed Costs ÷ (Selling Price - Variable Cost per Unit)
Break-even chart
A graph which shows total cost and total revenue. The break-even point is where total cost and total revenue intersect.
Margin of safety
The amount of output available to be sold above the break-even point where the business makes a profit.
Distributed profit
Profit that is returned to the owners of a business.
Dividend
Money paid to shareholders (owners of the business) when profit is distributed.
Gross profit
Sales revenue minus cost of sales.
Gross Profit = Turnover - Cost of Sales
Net profit
Gross profit minus expenses.
Net Profit = Gross Profit + Other Income - Expenses
Profit
The money left over after all costs have been subtracted from revenue.
Profit = Total Revenue - Total Costs
Profit and loss account or income statement
A financial document showing a firm’s income and expenditure in a particular time period.
Profit and loss account
Shows how net profit is calculated by subtracting expenses from gross profit.
Profit and loss account appropriation account
Shows how the profit after tax is distributed between owners and the business.
Retained profit
Profit that is kept by the business and may be used in the future.
Trading account
Shows how gross profit is calculated by subtracting cost of sales from turnover.
Assets
Resources owned or used by the business in production.
Balance sheet
A summary at a point in time of business assets, liabilities and capital.
Capital
A source of funds provided by the owners of the business and used to buy assets.
Current assets
Assets likely to be changed into cash within the year.
Current liabilities
Debts that have to be repaid within a year.
Drawings
The money taken from the business by the owner for personal use.
Fixed assets
Assets with a life span of more than one year.
Liabilities
The debts of the business which provide a source of funds.
Long-term liabilities
Debts that are payable after 12 months.
Net assets
The total at the bottom of the first part of the balance sheet. It is the value of all assets minus the value of all liabilities.
Net Assets = Total Assets - Total Liabilities
Net current assets
Current assets minus current liabilities. Also known as working capital.
Net Current Assets = Current Assets - Current Liabilities
Auditing
An accounting procedure which checks thoroughly the accuracy of a company’s accounts.
Acid test ratio
Similar to the current ratio but excludes stocks from current assets. Sometimes called the quick ratio.
Acid Test Ratio = (Current Assets - Stocks) ÷ Current Liabilities
Current ratio
Assesses the firm’s liquidity by dividing current liabilities into current assets.
Current Ratio = Current Assets ÷ Current Liabilities
Gross profit margin or Mark-up
Gross profit expressed as a percentage of turnover.
Gross Profit Margin = Gross Profit ÷ Turnover x 100
Net profit margin
Net profit expressed as a percentage of turnover.
Net Profit Margin = (Net Profit ÷ Turnover) x 100
Ratio analysis
A numerical approach to investigating accounts by comparing two related figures.
Return on capital employed (ROCE)
The profit of a business as a percentage of the total amount of money used to generate it.
ROCE = (Net Profit ÷ Long-term Capital Employed) x 100
