Topic 3 - Finance and Accounts Flashcards
Business Angels
wealthy entrepreneurs who risk their own money by investing in small to medium-sized businesses that have high grotwth potential
Capital Expenditure
investment spending on fixed assets such as the purchase of land and buildings
Debt Factoring
a financial service whereby a factor (such as a bank) collects debt on behalf of other businesses, in return for a fee
External sources of finance
getting funds from outside the organization
Grants
government financial gifts to support business activities and are not expected to be repaid
Initial Public Offering (IPO)
a business converting its legal status to a public limited company by floating (selling) its shares on the stock exchange for the first time
Internal sources of finance
getting funds from within the organization
Leasing
A form of hiring whereby a contract is agreed between a leasing company (the lessor) and the customer (the lessee). The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets
Loan Capital (debt capital)
medium to long-term sources of interest bearing finance obtained from commercial lenders, e.g. mortgages, business development loans and debentures
Long-term finance
sources of finance of more than five years, used for the purchase of fixed assets or to finance the expansion of a business
Medium-term finance
sources of finance of one to five years in duration, used mainly to pay for fixed assets, i.e. capital expenditure
Overdrafts
allows a business to spend in excess of the amount in its bank account, up to a predetermined limit. they are the most flexible form of borrowing in the short term.
Personal Funds
a source of internal finance, referring to the use of an entrepreneur’s own savings, they are often used to finance business start-ups
Retained Profit
the value of surplus that the business keeps to use within the business after paying corporate taxes on its profits to the government and dividend to its shareholders
Revenue Expenditure
spending on the day-to-day running of a business, i.e. rent, wages and utility bills
Sale-and-leaseback
a source of external finance involving a business selling a fixed asset (such as its computer systems or a building) but immediately leasing the asset back. In essence, the lessee transfers ownership to the lessor but the asset does not physically leave the business
Share Capital
money raised from the sale of shares of a limited company, from its initial public offering (IPO) and any subsequent share issues
Share issue (share placement)
exists when an existing public limited company raises further finance by selling more of its shares
Short-term finance
sources of finance needed for the day-to-day running of a business, i.e. revenue expenditure
Sources of Finance
General term used to refer to where or how businesses obtain their funds, such as from working capital, commercial lenders and/or government assistance
Stock Exchange
a highly regulated marketplace where individuals and businesses can buy and/or sell shares in public limited companies (joint stock companies)
Subsidies
funded by the government to lower a firm’s production costs as output provides extended benefits to society, e.g. farmers are often provided with subsidies to stabilize food prices
Trade Credit
Allows a business to “buy now and pay later”. The credit provider does not receive any cash from the buyer until a later date.
Venture Capital
a high-risk capital invested by venture capital firms, usually at the start of a business idea. The finance is usually in the form of loans and/or shares in the business venture.
Examples of internal sources of finance
Personal funds, retained profit, sale of assets
Examples of external sources of finance
share capital, loan capital, overdrafts, trade credit, grants, subsidies, debt factoring, leasing, venture capital, business angels
Debentures
Long-term loans issued by a business.
Dividends
a share of the net profit distributed to shareholders at the end of the tax year
Balance Sheet
contains financial information on an organization’s assets, liabilities and the capital invested by the owners on one specific day, thus showing a ‘snapshot’ of the firm’s financial situation
Book value
the value of an asset as shown on a balance sheet
Costs of goods sold (COGS) or cost of sales (COS)
shown in the trading account and represents the direct costs of producing or purchasing stock that has been sold
Creditors
suppliers who allow a business to purchase goods and/or services on trade credit
Current Assets
the short-term assets that belong to a firm, which are expected to remain in the business for up to 12 months, e.g. cash, debtors and stock (inventory)
Debtors
a category of current assets, referring to customers who have bought goods or services on credit, i.e. they owe money to the business
Depreciation
the fall in the value of fixed assets over time, from wear and tear or outdated
Final Accounts
the published annual financial statements that all limited liability companies are legally obliged to report, i.e. the balance sheet and the profit and loss accounts
Fixed Assets
items owned by a business, not intended for sale within the next twelve months, but used repeatedly to generate revenue for the organization, e.g. land, premises and machinery
Goodwill
an intangible asset which exists when the value of a firm exceeds its book value
Gross Profit
the difference between the sales revenue of a business and its direct costs incurred in making or purchasing the products that have been sold to its customers
Historic cost
the purchase cost of a particular fixed asset
Intangible assets
fixed assets that do not exist in a physical from, e.g. goodwill, copyrights, brand names and registered trademarks
Long-term liabilities
the debts owed by a business, which are expected to take longer than a year from the balance sheet date to repay
Net assets
show the value of a business by calculating the value of all its assets. this must match the equity in a balance sheet
Net profit
the surplus that a business makes after all expenses have been paid for out of gross profit
Profit and Loss Account (income statement)
a financial record of a firms trading activity over the past 12 months, consisting of three parts: the trading account, the profit and loss account and the appropriation account
Reducing balance method
a method of depreciation that reduced the value of a fixed asset by the same percentage each year throughout its useful like
residual value
an estimate of the scrap or disposal value of the asset at the end of its useful life
Retained Profit
the amount of net profit after interest, tax and dividends have been paid
Share Capital
the amount of money raised through the sale of shares
Shareholders’ Funds
show the equity if the owners, i.e. the share capital invested by the owners and the retained profit and reserves that have been accumulated
Straight Line Method
a method of depreciation that reduces the value of a fixed asset by the same value each year throughout its useful life
Trading Account
the first section of a profit and loss account, showing the difference between a firm’s sales revenue and its direct costs of trading, i.e. it shows the gross profit of a business
Window Dressing
the legal act of creative accounting by manipulating financial data to make the results look more flattering
Acid Test Ratio
a liquidity ratio that measures a firms ability to meet its short-term debts
Capital Employed
the value of all long-term sources of finance for a business, e.g. bank loans, share capital and accumulated retained profit
Current Ratio
a short-term liquidity ratio that calculates the ability of a business to meet its debts within the next twelve months
Efficiency Ratio
indicates how well a firm’s resources have been used, such as the amount of profit generated from the available capital used in the business
Gross Profit Margin (GPM)
a profitability ration that shows the percentage of sales revenue that turns into gross profit
Liquid Assets
the possessions of a business that can be turned into cash quickly without losing their value, i.e. cash, stock, debtors
Liquidity Crisis
a situation where a firm is unable to pay its short-term debts, i.e. current liabilities exceed current assets
Liquidity Ratio
looks at the ability of a firm to pay its short-term liabilities, such as by comparing working capital to short-term debts
Net Profit Margin (NPM)
the percentage of sales revenue that turns into net profit, i.e. the proportion of sales revenue left over after all direct and indirect cost have been paid
Profitability Ratio
examine profit in relation to other figures, e.g the GPM and NPM ratios
Ratio Analysis
a quantitative management tool that compares different financial figures to examine and judge the financial performance of a business
Return on Capital Employed (ROCE)
an efficiency ratio measuring the profit of a business in relation to its size
Credit Control
the ability of a business to collect its debts within a suitable timeframe
Creditor Days Ratio
an efficiency ratio that measures the average number of days it takes for a business to pay its creditors
Debtor Days Ratio
an efficiency ratio that measures the average number of days it takes for a business to collect the money owed from debtors
Gearing Ratio
measures the percentage of an organizations capital employed that comes from external sources, such as debentures and mortgages
Profit Quality
the ability of a business to earn profit in the foreseeable future
Stock Turnover Ratio (Inventory Turnover Ratio)
measures the number of times a business sells its stocks within a year
