Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Business Studies Unit 3 > Topic 2 > Flashcards

Topic 2 Flashcards

1
Q

Give 5 reasons for financial objectives

A 
Focus for decision making
To measure success and failure
Improve coordination and efficiency 
Shareholders can assess investments
Outside organisations can confirm financial viability
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the four main financial objectives

A

Cost minimisation
Cash flow targets
Return on capital employed
Shareholders return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Name 7 ways of achieving cost minimisation

A 
Reduce waste
Reduce staff with automation 
Adopt lean production
Stop unprofitable activities
Find cheaper suppliers 
Delayering and reorganisation
Outsourcing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Having poor cash flow causes liquidity problems, but holding too much cash creates an opportunity cost, name 6 examples of cash flow targets

A 
Maintain minimum monthly closing balance
Reduce overdraft
Create even spread of revenue
Spread costs more evenly
Raise certain levels of cash
Set contingency fund levels
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Why is it important to make sure shareholders get a good return?

A

If become dissatisfied, they may sell their shares, shares become available at a lower price, could become vulnerable to a takeover

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

ROCE is a measure of return achieved from investment - profitability and performance - to what 4 things can it be set as?

A

Benchmark to industry standards
Internal benchmarking
External factors
In recognition of risk being taken

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

From the calculation for ROCE, what is capital employed?

A

The money put in

Total equity plus non current liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are 2 main external influences of financial objectives

A

Competitors actions

Economic conditions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Name 3 main internal influences of financial objectives

A

Characteristics of the firm
Relationship between owners and directors
Sector

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is an income statement?

A

Summarises trading activities and expenses to show whether it has made a profit or loss
Considers:
Gross/operating profit
Profit margins
Profit quality – degree to which profit is sustainable for the future
Profit utilisation – how profit is used

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

4 key analysis points for an income statement

A

Insight into performance
Identify trends to show success in the market
Details on cost controlling ability
Trends in profit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

5 key evaluation points for an income statement

A 
Rising profits – damaged market share due to rising prices
Growing/declining markets
New competition
Extent of achieving objectives
Sustainability/quality of profit
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is a balance sheet?

A

Summarises net worth of a business at a set moment in time – what business owns and owes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What 4 key features need to be considered in a balance sheet?

A

Working capital – ability to meet short term daily expenses
Depreciation
Noncurrent liabilities as a % of capital employed – gearing
Trade receivables/trade payables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

3 key analysis points for a balance sheet

A

Insight to strengths and weaknesses (potential for growth, stability and how financed)
Only one day snapshot
Must compare with previous balance sheets to identify trends and changes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

4 key evaluation points for a balance sheet

A

Wrong to assume high assets mean success, must see how financed
Rising interest will be a problem if high debt, but may appear stable
Importance on short term asset structure
Consider internal problems with workforce and obsolete products

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What are the 4 main uses of financial data?

A

Inter-firm comparisons (different firms/.competitors)
Intra-firm comparisons (same firm, different branches, divisions, locations and product ranges)
Decision making
Trend analysis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Outline 4 strength/weakness points of financial data

A

Accounts by PLC are audited independently to check accuracy
Income statement looks at many years of trading so should be true and fair image of activities
Balance sheet shows true representation at time of creation
Accounts can be window dressed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Explain window dressing

A

Manipulating accounts to look more favourable, done by altering methods of inventory valuation, valuation of intangible assets and depreciation calculations

Can be identified by reading notes to accounts which explain how financial decisions were made

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

what are the 5 main types of ratio analysis

A 
Profitability ratios
Liquidity ratios
Financial efficiency ratios
Shareholder returns
Gearing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are profitability ratios?

A

Analyse profits in relation to trading performance or capital utilised in generating profit
Eg) operating profit margins or ROCE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Explain the operating profit margin

A

Can be compared year on year, with other firms in same industry or whole market
Declining OPM can mean they are not managing costs effectively or sales are declining
`

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Explain ROCE

A

Performance as % of capital invested
How effectively a business is using capital to make profit
Can be compared to assess
Higher % is better
Low quality profit boosts ROCE
Leased equipment is not included in capital employed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are liquidity ratios?

A

Measure of ability to meet daily expenditure – having sufficient short term assets to cover short term debts
Eg) current ratio or acid test ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Explain current ratio

A

Ability to pay off short term debts
1:1.5/2.0 would be sufficient
Low ratio means cash problems
High ratio means too much working capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Explain acid test ratio

A

Ability to pay off short term debts without including stock
Recognises that it can be difficult to turn stock to cash quickly
1:1.5 is sufficient
Less relevant if they have a high stock turnover

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is gearing?

A

the % of a firms capital that is financed by long term loans
debt can be cheaper than equity
high gearing is risky if interest rates rise
low gearing may miss out on investment opportunities

28
Q

Give 4 ways to reduce gearing

A

Profit improvement
Repay loans
Retain profits
More shares

29
Q

Give 3 ways to increase gearing

A

Growth
Buy back shares
Pay more dividends

30
Q

What are the 4 main financial efficiency ratios?

A

Asset turnover
Stock turnover
Creditor days
Debtor days

31
Q

What is asset turnover?

A

how efficiently assets generate sales

32
Q

Give 3 imitations of asset turnover

A

no account of profitability
less relevant if labour intensive
varies between industry

33
Q

What is stock turnover?

A

How many times a business turns over inventories in a year

Low number means problem with stock held

34
Q

Give 4 issues with stock turnover

A

Varies between industries
Holding stock may improve customer service
Seasonal fluctuations not represented
Irrelevant if service sector

35
Q

Give 3 ways to improve stock turnover

A

Sell off/dispose of slow stock
Lean production
Rationalise product range

36
Q

What are creditor days?

A

Average time to pay for supplies purchased on credit
High figure is better but may suggest liquidity problems
Evidence from liquidity ratios to see if problems with paying debts
Easy to window dress

37
Q

What are debtor days?

A

Number of days to receive payments from customers
Varies between industries but can compare with competitors
Can offer discounts for prompt payments and try to avoid cash flow problems
Small businesses with large customers may be forced to give good terms

38
Q

Dividend per share calculates the dividend returned to shareholder per share held, what are the 2 main problems?

A

Don’t know how much was paid per share

Don’t know how much profit per share was earned which could’ve been paid as dividends

39
Q

Explain dividend yield

A

It is the dividend received compared to market share price
High yield might suggest undervalued share price
Allows for meaningful comparison against other potential investments
Shareholders can compare if more interest could be earned in a bank

40
Q

state 2 main values of ratio analysis

A

Provide structure and context for analysing financial documents
Ratios provide framework for meaningful comparisons

41
Q

Name 8 limitations of ratio analysis

A

Ratios don’t include quality, customer service and employee morale
Look at past not future
Most useful to compare with other businesses but isn’t always available
Can be window dressed/manipulated
Only a snapshot – only true on that day – working capital fluctuates daily
Missing qualitative data
Don’t know trade conditions
Inflation

42
Q

What is window dressing?

A

More favourable accounts attract more investors and help fight off takeovers – so manipulate them to appear financially stronger than it is – helps secure loans and support sale of new shares

43
Q

What are 4 main ways of window dressing?

A

Sale and leaseback of fixed assets – generates cash injection, hide liquidity problems
Bring forward sales – include sale when order made not when payment received
Change in approach to depreciation – increase life expectancy
Write off bad debt – treat as expense, reduces profit, reduces tax

44
Q

What are 3 main sources of finance?

A

Retained profit
Equity share capital
Debt

45
Q

3 advantages of retained profit

A

cheap
flexible
doesn’t dilute ownership

46
Q

2 disadvantages of retained profit

A

Shareholders may prefer dividends if not earning sufficient ROCE
High profits and cash flows suggest could afford debt instead

47
Q

what are 4 main financial strategies to improve business?

A

finding new sources of finance
implement profit centres
cost minimisation
capital expenditure

48
Q

what is cost minimisation?

A

Aims to achieve most cost effective way of delivering products to required level of quality
Allows to compete on price
Businesses with higher market share or is a market leader will be in higher power position to negotiate terms with suppliers

49
Q

Name 9 sources of cost minimisation

A 
Lean production
Outsourcing
Better supplier deals
Improved communication
Eliminate unprofitable business
Effective training
Flexible working
Reducing overheads
50
Q

6 problems with cost minimisation

A

Business may be left with insufficient capacity to handle unexpected increases in demand
Cost reduction in one area may affect other functions if not properly communicated and coordinated
Customer dissatisfaction
Poor quality
Poorly trained staff
Damage to relationships with employees and suppliers due to pressure

51
Q

What is capital expenditure?

A

The purchase of a long term asset which is regarded as essential
A high cost so decisions must be taken seriously
Must monitor performance of asset closely to ensure does achieve predicted benefits
Must consider opportunity cost

52
Q

What is a profit centre?

A

Involves delegating responsibility for revenues, costs and profits to identifiable subsections within business
Helps to achieve objectives as it makes it easier to monitor financial performance
Identified by product, department or location
With each subsection working towards targets and aware of responsibilities which helps to achieve a competitive advantage
Increases motivation

53
Q

3 advantages of profit centres

A

Success of individual areas can be easily identified
Delegation of control may increase motivation
Localised decision making will be quicker and better suited to local conditions

54
Q

2 disadvantages of profit centres

A

Not all costs/revenues can be easily associated with specific area of operation
Areas of business may end up competing with each other

55
Q

Give 4 reasons for capital expenditure and investments

A

add extra production capacity
replace machinery and equipment
support introduction of new products and processes
comply with changing legislation

56
Q

what are the 3 main ways of calculating investment appraisals

A

payback period
average rate of return
net present value

57
Q

What is investment appraisal?

A

An evaluation of the attractiveness of an investment proposal

58
Q

Payback period is the length of time is will take to payback the initial cost of the investment, what are the 2 steps to calculate?

A

1) add up all net cash flows until value covers initial investment = years
2) amount actually needed from year of payback divided by that years net cash inflow x12 = month

59
Q

4 advantages of payback period

A

simple and easy
focuses on cash
emphasises speed of return (good for fast changing markets)
shorter period = less risk = quicker generate profits

60
Q

4 disadvantages of payback period

A

doesn’t look at overall project return
no account of ‘time value of money’
ignores qualitative aspects
assumes inflow in year of payback is steady across whole year

61
Q

Average Rate of Return is the average profit each year as a % of the initial investment, what are 4 advantages?

A

provides % to compare with target return
considers whole profitability
higher ARR = more potentially profitable
easily compared with alternatives and ROCE

62
Q

what are 4 disadvantages of ARR?

A

doesn’t consider cash flows
doesn’t consider timings
no account of time value of money
may appear profitable but if takes a long time then may threaten short term survival

63
Q

What is Net Present Value?

A

total return from investment in todays terms, changes in value for money, using a discount factor

64
Q

what is a discount factor?

A

the rate at which future cash flows reduced by to reflect current interest rates

65
Q

4 advantages of NPV

A

considers time value of money
looks at all cash flows
discounting reduces impact of less likely cash flows
provides a decision (+ve means accept / -ve means reject)

66
Q

4 disadvantages of NPV

A

complicated
non financial managers may find it hard to understand
doesn’t consider speed of repayment
difficult to choose correct discount factors

Business Studies Unit 3 (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions