unit 5 key terms

Question 1

ASSETS

Answer 1

are items of value e.g. land, machinery, cash

Question 1

ADVERSE VARIANCE

Answer 1

The actual profit turns out to be lower than the budgeted profit.
This is due to costs being higher than targeted or revenue being lower than target.

Question 2

BALANCE SHEET

Answer 2

A statement of an organisations assets and liabilities at one point in time and shows the value of the company. Net assets must balance with total equity. The balance sheet also shows where the finance came from (liabilities) must equal where it is now (in what form of asset).

Question 3

BREAK-EVEN OUTPUT

Answer 3

The quantity of output at which total revenue just equals total costs

Question 4

BUDGET

Answer 4

A financial plan, which states future expected costs and revenue. It may be used
by management to keep control of business profitability. Budgets are targets rather
than forecasts.

Question 5

BUDGETING

Answer 5

making a budget, but also it could mean try to keep within or below a certain
level of spending.

Question 6

CAPITAL EXPENDITURE

Answer 6

Spending on new non-current assets typically plant and machinery.

Question 7

CAPITAL STRUCTURE

Answer 7

The way in which a business raises finance to purchase assets; notably how much from shares and how much from loans. Gearing shows the proportion of each. A business is highly geared when over half of its borrowing comes from external loans.

Question 8

CAPITAL STRUCTURE OBJECTIVES

Answer 8

Raising finance in a cheap way, that provides
sufficient funds for survival and expansion.

Question 9

CONTRIBUTION

Answer 9

how much money is left over from the sale of a product after variable costs have been deducted that can be used to pay off the fixed costs.

Question 10

CONTRIBUTION PER UNIT

Answer 10

the amount each unit sold contributes towards covering the fixed costs.

Question 11

CONTRIBUTION PER UNIT FORMULA

Answer 11

Price - Variable Cost per unit

Question 12

CURRENT ASSET

Answer 12

Items of value owned by a business that are likely to be turned into cash within one year. These are typically cash, inventories and receivables

Question 13

CURRENT LIABILITY

Answer 13

debts scheduled for repayment within one year e.g. bank overdraft

Question 14

CURRENT RATIO

Answer 14

A measurement of the level of liquidity in particular as to whether there are enough liquid assets to pay for imminent bills. Should be around 1.5:1

Question 15

CURRENT RATIO FORMULA

Answer 15

Current liabilities (trade payables and other current liabilities)

Question 16

DEBT FACTORING

Answer 16

a business sells its receivables (i.e. invoices) to a third party (called a factor) at a discount. This may provide cash to meet its current needs.

Question 17

DIRECT COSTS

Answer 17

(aka Cost of sales) includes raw materials, direct labour and all expenses directly involved with production. Direct sales are expenditures that can be clearly allocated to a particular product or area of the business.

Question 18

EXTERNAL SOURCE OF FINANCE

Answer 18

Funding that comes from outside of the business e.g. new share issue, bank loan, overdraft and venture capital

Question 19

FAVOURABLE VARIANCE

Answer 19

describes the situation where the financial outcome is better than budgeted for. This may be due to lower cost than budget or more revenue than budget.

Question 20

FINANCIAL DECISION MAKING

Answer 20

Strategies chosen to help improve cash flow, gearing, profitability or profits.

Question 21

FINANCIAL EFFICIENCY RATIOS

Answer 21

A way of measuring how well an organisation manages its working capital. It includes inventory turnover, payables days and receivable days.

Question 22

FINANCIAL OBJECTIVES

Answer 22

are monetary goals that a business sets itself usually a set target in a certain time. These include cost minimisation, levels of profit – measured in £ (or the local currency), levels of profitability -measured as a % , cash flow, safe levels of gearing and sound capital structure, return on investment

Question 23

GEARING

Answer 23

a measure of the extent to which a firm’s capital is financed using long-term loans. Long-term loans may include debentures, compulsory interest bearing sources or simply bank loans

Question 24

GEARING FORMULA

Answer 24

NON-CURRENT LIABILITIES
————————————————————X 100
TOTAL EQUITY + NON-CURRENT
LIABILITIES (OR CAPITAL EMPLOYED)

Question 25

GOING INTO ADMINISTRATION

Answer 25

A court appoints accountants to run a business after it has been declared insolvent and unable to pay its liabilities. There is hope that the
business can be turned around and have a future as a going concern.

Question 26

GROSS PROFIT

Answer 26

is the excess of revenue over the cost of sales. This measurement of profit has not yet deducted expenses

Question 27

GROSS PROFIT FORMULA

Answer 27

REVENUE – DIRECT COSTS