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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
Q

What are the three components of a balance sheet

A

Assets, liability and equity

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25
Q

What is a trading account

A

Part of the profit or loss statement which shows the total gross profit

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26
Q

What is a profit statement

A

The part of the profit or loss account which shows the net profit (gross profit - expenses)

27
Q

What is a appropriation account

A

The part of the profit or loss statement which shows the dividends and retained profits

28
Q

What are the types of assets (with examples)

A

Current and non-current assets, Current: cash, debtors, stock Non-current: property, vehicles and equipment

29
Q

What are the types of liabilities with examples

A

Non-current (Mortgages, bank loan, debentures) and current liabilities (overdrafts and trade credit)

30
Q

What is equity

A

Value of all assets if they were liquidated

31
Q

Equation for equity

A

Total assets- total liabilities or share capital + retained earnings (for-profit entities)

32
Q

What are intangible assets

A

Assets which are non-physical and non-current but can earn revenue

33
Q

What are types of intangible assets

A

Registered Trademark, Patents, copyright, Goodwill and brands

34
Q

How to improve gross profit

A

Increase sales revenue or decrease cost of services

35
Q

2 Pros and cons of statement of financial position

A

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
Q

What stakeholders would be interested in final accounts, name 5

A

Government, suppliers, creditors, employees, pressure groups, potential investors, customers, competitors

37
Q

What are the two types of ratios

A

Profitability and liquidity ratios

38
Q

What are the profitability ratios

A

Gross profit margin, profit margin and ROCE (return on capital employed)

39
Q

What are the liquidity ratios

A

Current and quick (acid test) ratios

40
Q

What is the equation for gross profit margin

A

Gross profit/ sales revenue x100

41
Q

What is the equation for profit margin

A

Profit before interest and tax/ sales revenue x100

42
Q

What is the equation for ROCE

A

Profit before interest and tax/ capital employed x100

43
Q

Equation for capital employed

A

Non-current liabilities + equity

44
Q

Gross profit margin

A

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
Q

Profit margin

A

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
Q

ROCE

A

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
Q

Current ratio equation

A

Current assets/ current liabilities

48
Q

Acid test ratio equation

A

Current assets- stocks/ current liabilities

49
Q

Current ratio

A

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
Q

Acid test ratio

A

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
Q

What is liquidity

A

Conversion of assets into cash

52
Q

Working capital

A

Liquid assets available for the daily running of a business

53
Q

Working capital equation

A

Current assets- current liabilities

54
Q

Insolvency

A

When a business is unable to pay its debts on time. This is when current liabilities exceed current assets.

55
Q

Bankruptcy

A

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
Q

What’s the relationship between investment, cash flow and profit

A

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
Q

Define investment

A

The purchase of non-current assets used to generate future earnings

58
Q

Working capital cycle

A

The time difference between the firm paying cash for its costs of production to receiving cash from sales and customers

59
Q

liquid assets

A

current assets which can usually be converted into cash

60
Q

illiquid assets

A

non-current assets which cannot be converted into cash

61
Q

Liquidity crisis

A

Insufficient cash flow in the working capital cycle. There is more cash outflow than there is inflow

62
Q

Three features of cash flow forecast

A

Cash inflow, cash outflow and net cash flow

63
Q

Opening balance

A

The amount of cash at the beginning of a trading period

64
Q

Closing balance

A

Opening balance + net cash flow

Business (4 decks)

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