Year 1 Finance Flashcards
What is a balance sheet
Statement of what we have and what we owe
What is income statement
The measures the business’ performance over a given period
Measures profit and loss
What is cash flow statement
Shows how the business has generated and disposed of cash and liquid finds during a specific period
What are assets
Resources with future economic benefits
What are current assets
Short term
Cash, stock, receivables (customer credit)
What are non-current assets
Long term
Property, motor vehicles
What are current liabilities
Short term
Money owed to suppliers
What are non-current liabilities
Long term
Loans or bank borrowings *debt)
What is gross profit
Profit from buying and selling goods
How to find gross profit
Revenue - costs of sale
How to find operating profit
Gross profit - expenses
How to find profit for the period
And what is profit for the period
Operating profit - finance costs (interest)
Profit before tax
Cash inflows
Cash sales
Share capital invested
Loans from bank
Cash outflows
Payments to suppliers Wages and salaries Tax on profits Dividends paid to shareholders Payment for fixed assets
What is gearing
A measurement of the proportion of a business’s capital provided by debt compared to equity
What is equity
Amounts invested by shareholders / owners
Why may a business want higher levels of debt
If interest rates are low (debt is cheap to finance)
Where profits and cash flow are strong (debt is easily repaid)
What is high gearing
High debt / low equity
What is low gearing
Low debt / high equity
Benefits of high gearing
Less investment required from shareholders
Debt can be a relatively cheap source of finance compared with dividends
Benefits of low gearing
Less risk of defaulting on debts
Shareholders have power rather than debt providers
Can add debit if required
