Unit 5 Flashcards
Start-up capital
the capital needed by an entrepreneur
to set up a business. This includes capital equipment, premises, location.
Working capital
the capital needed to pay for raw
materials, day-to-day running costs and credit of ered to
customers. In accounting terms working capital = current
assets – current liabilities.
Capital expenditure
the purchase of assets that are
expected to last for more than one year, such as building
and machinery.
Revenue expenditure
spending on all costs and assets
other than fixed assets and includes wages and salaries
and materials bought for stock.
Liquidity
the ability of a firm to be able to pay its short-
term debts.
Liquidation
when a firm ceases trading and its assets are
sold for cash to pay suppliers and other creditors.
Overdraft
bank agrees to a business borrowing up to an
agreed limit as and when required.
Factoring
selling of claims over trade receivables to a
debt factor in exchange for immediate liquidity – only a
proportion of the value of the debts will be received as cash.
Hire purchase
an asset is sold to a company that agrees
to pay fixed repayments over an agreed time period – the
asset belongs to the company.
Leasing
obtaining the use of equipment or vehicles and
paying a rental or leasing charge over a fixed period, this
avoids the need for the business to raise long-term capital
to buy the asset; ownership remains with the leasing
company.
Equity finance
permanent finance raised by companies
through the sale of shares
Long-term loans
loans that do not have to be repaid for
at least one year.
Long-term bonds or debentures
bonds issued by
companies to raise debt finance, often with a fixed rate of
interest.
Rights issue
existing shareholders are given the right to
buy additional shares at a discounted price.
Venture capital
risk capital invested in business start-ups
or expanding small businesses that have good profit potential
but do not find it easy to gain finance from other sources.
Crowd funding
the use of small amounts of capital from a
large number of individuals to finance a new business venture.
Microfinance
providing financial services for poor and
low-income customers who do not have access to banking
services, such as loans and overdraf s of ered by traditional
commercial banks.
Business plan
a detailed document giving evidence
about a new or existing business, and that aims to convince
external lenders and investors to extend finance to the
business.
Direct costs
these costs can be clearly identified with each
unit of production and can be allocated to a cost center.
Indirect costs
Costs that cannot be identified with a unit of production or allocated accurately to a cost center.
Fixed costs
Costs that do not vary with output in the short run
Variable costs
Costs that vary with output
Marginal costs
the extra cost of producing one more
unit of output.
Break-even point of production
the level of output at
which total costs equal total revenue, neither a profit nor a
loss is made.
Margin of safety
the amount by which the sales level
exceeds the break-even level of output.
Break even equation
fixed cost / contribution per unit
Contribution per unit
selling price minus the variable cost
per unit.
Income statement
records the revenue, costs and profit
(or loss) of a business over a given period of time.
Gross profit
sales revenue less cost of sales.
Revenue
the total value
of sales made during the trading period
Cost of sales
this is the direct cost
of the goods that were sold during the financial year.
Operating profit
gross
profit minus overhead expenses.
Profit for the year
operating profit minus
interest costs and corporation tax.
Dividends
the share of the profits paid to shareholders as
a return for investing in the company.
Retained earnings (profit):
the profit after all
deductions, including dividends, have been made, this is
‘ploughed back’ into the company as a source of finance.
Low-quality profit
one-of profit that cannot easily be
repeated or sustained.
High-quality profit
profit that can be repeated and
sustained.
Statement of financial position (balance sheet)
an
accounting statement that records the values of a
business’s assets, liabilities and shareholders’ equity at one
point in time.
Shareholders’ equity
total value of assets – total value
of liabilities.
Asset
an item of monetary value that is owned by
a business.
Liability
a financial obligation of a business that it is
required to pay in the future.
Share capital
the total value of capital raised from
shareholders by the issue of shares.
Non-current assets
assets to be kept and used by the
business for more than one year. Used to be referred to as
‘fixed assets’.
Intangible assets
items of value that do not have a
physical presence, such as patents, trademarks and
current assets.
Current assets
assets that are likely to be turned into
cash before the next balance-sheet date.
Inventories
stocks held by the business in the form of
materials, work in progress and finished goods.
Trade receivables (debtors)
the value of payments to be
received from customers who have bought goods on credit.
Current liabilities
debts of the business that will usually
have to be paid within one year.
Accounts payable (creditors)
value of debts for goods
bought on credit payable to suppliers; also known as ‘trade
payables’.
Non-current liabilities
value of debts of the business
that will be payable after more than one year.
Intellectual capital or property
the amount by which
the market value of a firm exceeds its tangible assets less
liabilities – an intangible asset.
Goodwill
arises when a business is valued at or sold for
more than the balance-sheet value of its assets.
Cash-flow statement
record of the cash received by a
business over a period of time and the cash outflows from
the business.
Gross profit margin
This ratio compares gross profit
(profit before deduction of overheads) with revenue.
Formula: (gross profit/revenue)
× 100
Operating profit margin
This ratio compares operating
profit (formerly this ratio was referred to as the net profit
margin) revenue
Formula: (Operating Profit/Revenue) x 100
Current ratio
current assets/current liabilities
Acid-test ratio
liquid assest/
current liabilities
Liquid assets
current assets – inventories (stocks)
Window-dressing
presenting the company accounts in a
favorable light – to flatter the business performance.
Cash flow
the sum of cash payments to a business
(inflows) less the sum of cash payments (outflows).
Insolvent
when a business cannot meet its short-term
debts.
Cash inflows
payments in cash received by a business,
such as those from customers (trade receivables) or from
the bank, e.g. receiving a loan.
Cash outflows
payments in cash made by a business,
such as those to suppliers and workers.
Cash-flow forecast
estimate of a firm’s future cash
inflows and outflows.
Net monthly cash flow
estimated difference between
monthly cash inflows and cash outflows.
Opening cash balance
cash held by the business at the
start of the month.
Closing cash balance
cash held at the end of the month
becomes next month’s opening balance.
Credit control
monitoring of debts to ensure that credit
periods are not exceeded.
Bad debt
unpaid customers’ bills that are now very
unlikely to ever be paid.
Overtrading
expanding a business rapidly without
obtaining all of the necessary finance so that a cash-flow
shortage develops.
Creditors
suppliers who have agreed to supply products
on credit and who have not yet been paid.
