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Business > Unit 3 (updated) > Flashcards

Unit 3 (updated) Flashcards

1
Q

capital expenditure

A

finance spent on fixed assets e.g. machinery, vehicles, buildings

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2
Q

revenue expenditure

A

finance spent on the daily running of a business e.g. rent, insurance, electricity bills, wages etc.

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3
Q

Fixed costs

A

Payments which need to be made regardless of how much a firm produces or sells

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4
Q

variable costs

A

payments which are directly proportional to the output of a business. The more a business produces or sells, the more variable costs

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5
Q

direct costs

A

Costs which can be directly traced back to the output/ product, can include variable costs

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6
Q

indirect costs

A

costs which cannot be traced back to its source, can include fixed costs

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7
Q

What are the internal SOF

A

Sale of assets, personal funds and retained profit

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8
Q

What is share capital

A

Obtaining profit from selling shares

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9
Q

advantages and disadvantages of sale of assets + where it’s best

A

Has no interest rate, full control over finance but it’s usually an insignificant amount and takes a long time, best for businesses which are about to shut down or relocate

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10
Q

advantages and disadvantages of retained profit + where it’s best

A

It has no interest rate and you have full control over the finance, but its not available to start ups and is usually an insignificant amount. This is best for limited liability companies that are able to retain sufficient funds without depriving shareholders

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10
Q

What is retained profit

A

The amount of profit that is left after all costs and dividends have been paid, this is usually reinvested back into the business

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11
Q

What are personal funds?

A

Personal finance or finance provided by friends or family

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12
Q

advantages and disadvantages of personal funds + where it’s best

A

No interest and full control over finance, however, its usually insufficient and risky since its unlimited liability, works best for sole traders and partnerships

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13
Q

What is share capital

A

Finance obtained through selling shares

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14
Q

What is loan capital

A

Finance obtained through traditional lenders such as banks

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15
Q

What is trade credit

A

An agreement made following the “buy now pay later” between a creditor and debtor

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16
Q

What is Leasing

A

When a lessee hires an asset from a lessor, usually for a short period of time where an asset is needed but cannot be afforded

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17
Q

What is overdraft

A

When a business or individual takes more money than what they have in their account

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18
Q

What are Business angels

A

Wealthy individuals who invest in businesses with a high growth potential in return for ownership

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19
Q

What is crowdfunding

A

Small amounts of finance obtained from a large group of people, usually done on crowdfunding platforms

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20
Q

What are microfinance providers

A

Organizations which give small amounts of money (microcredit) to low income individuals or businesses

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21
Q

What are some other forms of revenue streams

A

Donations, subscriptions, advertising, sponsorships, royalties, rent, dividends, merchandise

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22
Q

statement of financial position vs Profit or loss statement

A

Balance sheet is a snapshot of the business’ current value while the profit or loss statement, done usually at the end of a trading period shows the profit, surplus or loss of a business

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23
Q

What are the three components of profit or loss statement

A

Trading account, Profit statement, Appropriation account

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24
What are the three components of a balance sheet
Assets, liability and equity
25
What is a trading account
Part of the profit or loss statement which shows the total gross profit
26
What is a profit statement
The part of the profit or loss account which shows the net profit (gross profit - expenses)
27
What is a appropriation account
The part of the profit or loss statement which shows the dividends and retained profits
28
What are the types of assets (with examples)
Current and non-current assets, Current: cash, debtors, stock Non-current: property, vehicles and equipment
29
What are the types of liabilities with examples
Non-current (Mortgages, bank loan, debentures) and current liabilities (overdrafts and trade credit)
30
What is equity
Value of all assets if they were liquidated
31
Equation for equity
Total assets- total liabilities or share capital + retained earnings (for-profit entities)
32
What are intangible assets
Assets which are non-physical and non-current but can earn revenue
33
What are types of intangible assets
Registered Trademark, Patents, copyright, Goodwill and brands
34
How to improve gross profit
Increase sales revenue or decrease cost of services
35
2 Pros and cons of statement of financial position
Pros: Makes sure all assets and liabilities are accounted for, quick way to assess a businesses standing in any point in time Cons: easily manipulated (window dressing) and values can change minutes after balance sheet is made, hard to predict
36
What stakeholders would be interested in final accounts, name 5
Government, suppliers, creditors, employees, pressure groups, potential investors, customers, competitors
37
What are the two types of ratios
Profitability and liquidity ratios
38
What are the profitability ratios
Gross profit margin, profit margin and ROCE (return on capital employed)
39
What are the liquidity ratios
Current and quick (acid test) ratios
40
What is the equation for gross profit margin
Gross profit/ sales revenue x100
41
What is the equation for profit margin
Profit before interest and tax/ sales revenue x100
42
What is the equation for ROCE
Profit before interest and tax/ capital employed x100
43
Equation for capital employed
Non-current liabilities + equity
44
Gross profit margin
Shows the gross profit in relation to the revenue. The higher the GPM the better as it shows that a business has more gross profit to spend on its expenses
45
Profit margin
Shows the percentage of profit before interest and tax in relation to the revenue. The higher the better as it shows that a firm has more profit to go towards dividends and retained profit
46
ROCE
Measures financial performance of a firm compared to the capital invested. The higher the better as it shows the firm has been more efficient at generating profit from the funds available.
47
Current ratio equation
Current assets/ current liabilities
48
Acid test ratio equation
Current assets- stocks/ current liabilities
49
Current ratio
Deals with liquid assets to see if a firm can cover its short term debts. Ratio must be between 1.5:1 or 2:1 for every $1 of current liabilities there is $1.5-2 of current assets to pay for it
50
Acid test ratio
deals with current assets minus stock divided by current liabilities, suitable for businesses who has stock which is high in value. Benchmark is 1:1 to 2:1
51
What is liquidity
Conversion of assets into cash
52
Working capital
Liquid assets available for the daily running of a business
53
Working capital equation
Current assets- current liabilities
54
Insolvency
When a business is unable to pay its debts on time. This is when current liabilities exceed current assets.
55
Bankruptcy
Process in which a business goes through when debts cannot be repaid at all. Causes a legally enforced liquidation of all assets until all debts are paid off, or paid to the best of their extent
56
What's the relationship between investment, cash flow and profit
When investing in short term, cash outflow will occur and profit will decrease, however, in the long term, there will be a cash inflow and profits will increase
57
Define investment
The purchase of non-current assets used to generate future earnings
58
Working capital cycle
The time difference between the firm paying cash for its costs of production to receiving cash from sales and customers
59
liquid assets
current assets which can usually be converted into cash
60
illiquid assets
non-current assets which cannot be converted into cash
61
Liquidity crisis
Insufficient cash flow in the working capital cycle. There is more cash outflow than there is inflow
62
Three features of cash flow forecast
Cash inflow, cash outflow and net cash flow
63
Opening balance
The amount of cash at the beginning of a trading period
64
Closing balance
Opening balance + net cash flow

Business (4 decks)

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