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AS BUSINESS > UNIT 5 - Finance and accounting > Flashcards

UNIT 5 - Finance and accounting Flashcards

1
Q

Chapter 28 - Business finance

Start-up capital

A

The capital needed by an entrepeneur to start up a business

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2
Q

chapter 28 - Business finance

Working capital

A

The captial needed to pay for raw materials, day-to-day running costs and credit offered to customers. The life-blood.
Current assets - current liabilities

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3
Q

chapter 28 - Business finance

Capital expenditure

A

The purchase of assets that are expected to last for more than one year, such as building and machinery

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4
Q

Chapter 28 - Business Finance

Revenue expenditure

A

Spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock

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5
Q

Chapter 28 - Business finance

Liquidity

A

The ability of a firm to be able to pay its short-term debts

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6
Q

Chapter 28 - Business finance

liquidation

A

When a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors

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7
Q

Chapter 28 - Business Finance

What can happen as a result of too much working capital?

A

Opportunity cost

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8
Q

Chapter 28 - Business finance

What is the working capital cycle, and explain

A

Cash -> materials & stock -> production -> sell on credit (repeat)
The longer each process takes, the more working capital that will be required (eg. the longer creditors take to pay, the more capital is needed before materials and stock can be paid for)

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9
Q

Chapter 28 - Business finance

What are internal sources of finance? (3)

A
  • profits retained within the business
  • Selling of assets
  • Reductions in working captial
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10
Q

Chapter 28 - Business finance

What are the short-term external sourcs of finance

A
  • Bank overdrafts
  • Trade-credit
  • Debt-factoring
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11
Q

Chapter 28 - Business finance

Overdraft

A

Bank agrees to a business borrowing up to an agrees limit as and when required

Different to a loan, as a loan is a fixed amount

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12
Q

Chapter 28 - Business finance

Debt factoring

A

Selling of claims over trade recievables to a debt factor in exchange for immediate liquidity - only a proportion of the value of the debts will be recieved as cash

often has a % loss of credit

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13
Q

Chapter 28 - Business Finance

What is the time frame for short-term finance methods?

A

less than one year

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14
Q

Chapter 28 - Business Finance

What are the medium-term external sources of finance

A
  • Hire purchase
  • Leasing

Expensive options, but free up cash for the business

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15
Q

Chapter 28 - Business Finance

Hire purchase

A

An asset is sold to a company that agrees to pay fixed repayments over an agreed time period - the asset belongs to the company

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16
Q

Chapter 28 - Business Finance

Leasing

A

Obtaining the use of equipment or vehicles and paying a rental charge over a fixed period, this avoids the need for the business to raise long-term capital to buy an asset; ownership remains with the leasing company

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17
Q

Chapter 28 - Business Finance

What is the time period for medium-term finance?

A

3-5 years

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18
Q

Chapter 28 - Business Finance

What are the 2 long-term external sources of finance

A
  • Long term bank loans (don’t have to be repaid for at-least one year
  • Debentures
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19
Q

Chapter 28 - Business Finance

What are bonds/debentures?

A

an agreed time period for investors to get interest on a bond, and eventually money back

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20
Q

Chapter 28 - Business finance

Equity finance

A

permanent finance raised by a company through the sale of shares

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21
Q

Chapter 28 - Business Finance

rights issue

A

Existing shareholders are given the right to buy additional shares at a discounted price

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22
Q

Chapter 28 - Business finance

Advantages to debt finance

A
  • No change in ownership of the company without shares
  • loans will be repaid eventually so no permanent increase to liabilities
  • Banks remain external to the operation of the business
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23
Q

Chapter 28 - Business finance

Advantages to Equity finance

A
  • Permanent - never has to be repaid
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24
Q

Chapter 28 - business finance

Other sources of long-term finance

A
  • Grants
  • venture capital
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25
Q

Chapter 28 - business finance

Venture capital

A

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

Often from wealthy individuals

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26
Q

Chapter 28 - Business finance

Finance for unincorporated businesses

A
  • Microfinance
  • crowd funding
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27
Q

Chapter 28 - Business finance

Microfinance

A

Providing financial services for poor and low-income customers who do not have access to traditional sources of finance by traditional banks

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28
Q

Chapter 28 - Business finance

Crowd funding

A

The use of small amounts of capital from a large umber of individuals to finance a new business venture

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29
Q

Chapter 28 - Business Finance

Business plan

A

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

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30
Q

Chapter 29 - Costs

What are the 5 different cost categories?

A
  • fixed costs
  • Variable costs
  • Direct costs
  • indirect costs
  • Marginal costs
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31
Q

Chapter 29 - Costs

Direct costs

A

These costs can be clearly identified with each unit of production and can be allocated to a cost centre

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32
Q

Chapter 29 - Costs

Indirect costs

A

Costs that cannot be idetified with a unit of production or allocated accurately to a cost centre

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33
Q

Chapter 29 - Costs

Fixed costs

A

Costs that do not vary with output in the short run

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34
Q

Chapter 29 - Costs

Variable costs

A

Costs that vary with output

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35
Q

Chapter 29 - Costs

Marginal costs

A

The extra cost of producing one more unit of output

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36
Q

Chapter 29 - Costs

Break-even point of production

A

The level of output at which total costs equal total revenue, neither a profit nor a loss is made.

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37
Q

Chapter 29 - costs

Margin of safety

A

The amount by which the sales level exceeds the break-even level of output

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38
Q

Chapter 29 - Costs

What is the break-even equation?

A

Fixed costs / contribution per unit

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39
Q

Chapter 29 - Costs

Contribution per unit

A

Selling price - variable costs per unit

40
Q

Chapter 29 - costs

Why a break-even analysis is useful (3)

A
  • charts are easy to costruct
  • decisions can be made on pricing, location and which product would be most useful to engage in - can make comparisons
  • Provides useful guidelines for management
41
Q

Chapter 29 - costs

limitations of a break-even analysis

A
  • not all costs can be represented in a straight line
  • No allowance is made for inventory levels
  • not all costs can be conveniently organised into fixed and variable costs
42
Q

Chapter 30 - Accounting fundamentals

income statement

A

records the revenue, costs and profit (or loss) of a busiess over a given period of time

43
Q

Chapter 30 - Costs

Gross profit

A

sales revenue - cost of sales

44
Q

Chapter 30 - Costs

Revenue

A

Selling price x quantity sold = total value of sales made during the trading period

45
Q

Chapter 30 - Costs

Cost of sales

A

(or cost of goods sold) - the direct cost of the goods sold that financial year

46
Q

Chapter 30 - Costs

operating profit

A

Gross profit - overheads

47
Q

Chapter 30 - costs

Profit for the year

A

Operating profit - taxes and interest costs

48
Q

Chapter 30 - Costs

Divedends

A

The share of the profits paid to shareholders as a return for investing in the company

49
Q

Chapter 30 - Costs

Retained earnings

A

The profit left after all deductions, including dividends, have been made.
This can be taken back into the company as an internal source of finance

50
Q

Chapter 30 - costs

Low quality profit

A

one-off profit that cannot be easily repeated or sustained

51
Q

Chapter 30 - costs

High-quality profit

A

Profit that can be repeated and sustained

52
Q

Chapter 30 - costs

Statement of financial position

A

an accounting statement that records the values of a business’s assets, liabilities and shareholder’s equity at one point in time

53
Q

Chapter 30 - Costs

shareholders’ equity

A

total value of assets - total value of liabilities

54
Q

chapter 30 - Costs

Asset

A

An item of monetary value that is owned by the business

55
Q

Chapter 30 - Costs

liability

A

A financial obligation of a business that is required to pay in the future

56
Q

Chapter 30 - Costs

liability

A

A financial obligation of a business that is required to pay in the future

57
Q

Chapter 30 - costs

Share capital

A

The total value of capital that is raised from shareholders by the issue of shares

58
Q

Chapter 30 - costs

non-current assets

A

Assets to be kept and used by the business for more than 1 year

59
Q

Chapter 30 - Costs

Current assets

A

Assets that are likely to be turned into cash before the next balance-sheet date

60
Q

Chapter 30 - Costs

Intangible assets

A

Items of value that do not have a physical presence, such as trademarks and current assets.

61
Q

Chapter 30 - costs

Inventories

A

Stocks held by the business in the form of materials, work in progress, and finsihed goods

62
Q

Chapter 30 - Costs

Trade recievables (debtors)

A

The value of payments to be recieved from customers who have bought goods on credit

63
Q

Chapter 30 - costs

Accounts payable (creditors)

A

Value of debts for goods bought on credit payable to suppliers; also known as trade payables

64
Q

Chapter 30 - costs

Current liabilities

A

Debts of the business that will usually have to be paid within one year

65
Q

Chapter 30 - Costs

non-current liabilities

A

Value of debts of the business that will be payable after more than one year

66
Q

Chapter 30 - Costs

Intellectual capital or property

A

The amount by which the market value of a firm exceeds its tangible assets less liabilities - an intangible asset

67
Q

Chapter 30 - costs

goodwill

A

arises when a business is valued at or sold for more than the balance-sheet value of its assets

68
Q

Chapter 30 - Costs

Cash-flow statement

A

record of the cash received by a business over a period of time and the cash outflows from the business

69
Q

Chapter 30 - costs

What are the 2 profit margin ratios?

A
  • gross profit margin
  • operating profit margin
70
Q

Chapter 30 - costs

Gross profit margin

A

Gross profit / revenue X 100
good indicator to how a manager has added value to the cost of sales

71
Q

Chapter 30 - Costs

Operating profit

A

Operating profit / revenue X 100

72
Q

Chapter 30 - costs

What are the two liquidity ratios, and what do they tell us?

A
  • Current ratio
  • Acid-rest ratio

Tell us the ability of a business to pay its short-term depts

73
Q

Chapter 30 - costs

Current ratio

A

Current assets / current liabilities

74
Q

Chapter 30 - costs

Acid-test ratio

A

Liquid assets / Current liabilitites

75
Q

Chapter 30 - costs

Liquid assets

A

Current assets - inventories

76
Q

Chapter 30 - costs

Window dressing

A

presenting the company accounts in a favourable light - to flatter the business performance

77
Q

Chapter 30 - costs

Limitations to ratio analysis (4)

A
  • Can only highlight a potential problem
  • Must be compared with other businesses to be able to be looked at properly, and this should be done with caution
  • The four ratios give an incomplete overview of a business’s financial position
  • Financial statements and ratios can only measure qauntitative factors
78
Q

chapter 30 - costs

3 ways to increase profit margins

A
  • reducing direct costs
  • increasing price
  • reducing overheads
79
Q

Chapter 30 - costs

3 ways to increase liquidity (ratios)

A
  • sell off fixed assets
  • sell off inventories
  • Increase loans
80
Q

Chapter 31 - forecasting and managing cash flows

Cash flow

A

The sum of cash paymets to a business (inflows) - The sum of cash payments (outflows)

81
Q

Chapter 31 - forecasting and managing cash flows

Insolvent

A

When a business cannot pay its short term debts

82
Q

Chapter 31 - forecasting and managing cash flows

Cash inflows

A

Payments in cash recieved by a business, such as those from customers (trade recievables) or from the bank eg. by loan

83
Q

Chapter 31 - forecasting and managing cash flows

cash outflows

A

Payments in cash made by a business, such as those to suppliers and workers

84
Q

Chapter 31 - forecasting and managing cash flows

What is profit?

A

The reward to business owners after taking the risk of investing their capital into the business

85
Q

Chapter 31 - forecasting and managing cash flows

Cash vs profit - explain

A

Having enough cash in the short term is important - as cash payments are always being made. Profit can wait and is more of a long term reward

86
Q

Chapter 31 - forecasting and managing cash flows

Cash-flow forecast

A

Estimate of a firm’s future cash inflows and outflows

87
Q

Chapter 31 - forecasting and managing cash flows

Net monthly cash flow

A

estimated difference between monthly cash inflows and cash outflows

88
Q

Chapter 31 - forecasting and managing cash flows

Opening cash balance

A

cash held by the business at the* end of the month*

89
Q

Chapter 31 - forecasting and managing cash flows

Opening cash balance

A

cash held by the business at the* beginning of the month*

90
Q

Chapter 31 - forecasting and managing cash flows

Closing cash balance

A

Cash held at the end of the month becomes next month’s opening balance

91
Q

Chapter 31 - forecasting and managing cash flows

Closing cash balance

A

Cash held at the end of the month becomes next month’s opening balance

92
Q

Chapter 31 - forecasting and managing cash flows

Causes of cash-flow problems (4)

A
  • lack of planning
  • Poor credit control
  • Expanding too rapidly
  • unexpected events
93
Q

Chapter 31 - forecasting and managing cash flows

Credit control

A

monotoring debts to ensure credit periods are not exceeded

94
Q

Chapter 31 - forecasting and managing cash flows

Bad debt

A

Unpaid customers’ bills that are now very unlikely to ever be paid

95
Q

Chapter 31 - forecasting and managing cash flows

Over-trading

A

Expanding a business rapidly wihtout obtaining all necessary finance so that a cash-flow shortage develops.

96
Q

Chapter 31 - forecasting and managing cash flows

Creditors

A

Suppliers who have agreed to supply products on credit and who have not yet been paid.

97
Q

Chapter 31 - forecasting and managing cash flows

2 ways to improve cash-flow

A
  • increase inflow
    Trade recievables (credit control), sale of assets, debt-factoring, overdrafts
  • decrease outflows
    Delay spending on equipment, use leasing

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