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Business - 2 > Finance > Flashcards

Finance Flashcards

1
Q

Revenue (or income/turnover) is…

A

The money received from the sales of a product/ service

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2
Q

Profit is…

A

What you’ve got left

Revenue - cost = profit

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3
Q

Difference between fixed costs and variable costs

A

Fixed don’t change with output whereas variable does

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4
Q

Difference between direct and indirect costs

A

Direct costs go directly into the making of the products, indirect costs are any other costs you have to pay

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5
Q

What are overheads similar to?

A

Indirect costs

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6
Q

Marginal costs are?

A

The costs of producing an extra unit

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7
Q

Some costs?

A 
Production 
Raw materials 
Electricity 
Labour 
Insurance 
Taxes
Transport 
Rent 
Machinery
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8
Q

Total costs =

A

Fixed costs + variable costs

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9
Q

Average costs =

A

Total costs ➗ output

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10
Q

Total revenue =

A

Price ✖️ number sold

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11
Q

Break even point =

A

Fixed costs ➗ price ➖ variable costs

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12
Q

Contribution =

A

Price - variable costs

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13
Q

Advantages of using break even analysis:

A
  • easy to work out
  • can make predictions for objectives, pricing strategies etc
  • allows you to see impact of change
  • sets a target and allows you to monitor it
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14
Q

Disadvantages of using break even analysis:

A
  • doesn’t take into account external factors
  • only shows one product
  • it’s a simplification
  • assumes that you sell all products, doesn’t take into account competition
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15
Q

What is absorption costing?

A

It means that all the manufacturing costs are absorbed by the units produced

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16
Q

Overheads are what?

A

Those admin expenses of a business that are required to operate general corporate functions but cannot be allocated to units of outputs

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17
Q

What is a profit centre?

A

One part of the business that is maintained and run as an independent business ie. Virgin (ltd)

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18
Q

Benefits of profit centres:

A
  • easier communication
  • greater efficiency due to specialisation
  • easier to monitor each business
  • allocation costs will be easier
  • targets/ objectives are centre specific
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19
Q

Drawbacks of profit centres:

A
  • creates complications for the business
  • loss of control
  • can create extra expenses
  • problems when allocating costs
  • leads to poorer communication
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20
Q

What are step fixed costs?

A

A type of expense that is more or less constant over a low level shift in activity, but which changes intern when activity shifts substantially

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21
Q

Factors influencing money invested (investment appraisal)

A 
Return
Price of investment 
Opportunity costs
Quality 
Lifetime
Alternatives
Inflation
Ethical issues
State of economy 
Business confidence 
Predicted demand
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22
Q

Quantitative is..

A

Factors that are measurable

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23
Q

Qualitative is..

A

Based on opinion

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24
Q

Average rate of return =

A

Average profit ➗ cost ✖️100

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25
Q

Average profit =

A

Profit ➗ lifetime

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26
Q

What does average rate of return measure?

A

Average profit as a percentage of the cost of the machine

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27
Q

Factors influencing choice of finance:

A
  • what you need it for
  • how long you need it
  • state of your cash flow
  • amount you need
  • benefits and drawbacks of each
  • cost of the finance
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28
Q

Advantages of average Rate of Return:

A
  • easy to calculate
  • easier to compare with a variety of decisions
  • puts return in perspective of machine costs
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29
Q

Disadvantages of average Rate of Return:

A
  • doesn’t include all costs
  • based on forecast
  • assuming machines don’t break
  • doesn’t say when you make profit
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30
Q

What does payback do?

A

Calculates how long it takes for a machine to generate enough revenue for it to pay for itself

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31
Q

What does discounted cash flow do?

A

Discounts the value of the cash flow to allow for inflation

32
Q

Cost is…

A

The cost incurred in making and selling a product or service

33
Q

Was is a budget and what does it show?

A

A financial plan that is agreed in advance

Shows money available for spending and how it will be financed

34
Q

What is an income budget?

A

How much money you have made in sales

35
Q

What is an expenditure budget?

A

How much money is spent

36
Q

Why do we have budgets?

A
  • to prevent overspending
  • control money spent
  • monitoring performance
  • set targets
  • needed in a business plan
  • helps with efficiency
  • allocating resources
37
Q

Objectives budget?

A

Money is allocated by objectives rather than expenditure

38
Q

Flexible budget?

A

Budget changes as conditions change, therefore you wouldn’t allocate all the money at once

39
Q

Capital budget?

A

Money put aside for big projects ie. Machinery

40
Q

Operating budget?

A

Money allocated for day to day running

41
Q

Contingency budget?

A

Back up budget incase anything goes wrong

42
Q

What is working capital?

A

Money used for the day to day running of the business

43
Q

What is liquidity?

A

The firms ability to pay off its short term debts

44
Q

Working capital is a measure of a businesses..?

A

Liquidity

45
Q

Working capital =

A

Current assets - current liabilities

46
Q

What is an asset and a liability?

A

Asset = something you own

Liability = something you owe

47
Q

4 main current assets?

A
  • stock/ raw materials
  • cash in hand
  • cash in bank
  • debtors (customers)
48
Q

3 main current liabilities

A
  • creditors (suppliers)
  • overdraft
  • short term loan
49
Q

2 ratios to measure liquidity of a business?

A

Current ratio and acid test ratio

50
Q

Current ratio =

A

Current assets ➗ current liabilities

51
Q

Acid test ratio =

A

Current assets ➖ stock ➗ current liabilities

52
Q

What is cash flow?

A

A record of the money going in and out of the business

53
Q

How is cash flow used in business?

A
  • setting targets
  • allows control of finances
  • allows to spend within budget
  • allows to predict and measure between prediction and actual
  • used to gain sources of finance
  • in the interest of stakeholders
54
Q

What does profit and loss account measure?

A

Whether the business makes a profit or a loss, over a period of time

55
Q

What is turnover?

A

Income/revenue from sales

56
Q

Gross profit margin shows?

A

Shows the amount of gross profit in every one pound of sales

57
Q

Net profit =

A

Gross profit - expenses

58
Q

Net profit margin shows?

A

The amount of net profit in every one pound of sales

59
Q

Gross profit =

A

Turnover - cost of sales

60
Q

What does the balance sheet show?

A

What you own, what you owe and what you’ve paid

It also shows how the business is using their money

61
Q

What does contribution show?

A

How much each item sold contributes to profit and fixed costs

62
Q

Total contribution (how to work it out)

A

You have to ✖️ number sold

63
Q

Gross profit margin =

A

Gross profit ➗ sales ✖️ 100

64
Q

Net profit margin =

A

Net profit ➗ sales ✖️ 100

65
Q

Return on capital employed (ROCE)

=

A

Operating profit ➗ capital employed ✖️ 100

66
Q

Return on equity (ROE)

=

A

Profit for the year➗shareholders equity

67
Q

Sources of short term finance?

A

Overdrafts

Trade creditors

68
Q

Sources of medium term finance?

A

Leasing

Loans

Hire purchases

69
Q

Sources of long term finance?

A

Mortgage loan

Share issues

70
Q

Overdrafts?

A

A deficit in a bank account caused by drawing more money than the account holds

71
Q

Trade creditors?

A

A supplier who has sent your business goods or supplied it with services, who you haven’t yet paid
The amount unpaid goes on the balance sheet

72
Q

Leasing?

A

A contractual arrangement calling for the user to pay the owner for use of an asset

73
Q

Loans?

A

A thing that is borrowed, especially a sum of money that is expected to be paid back with interest

74
Q

Hire purchase?

A

A method of buying goods through making instalment payments over time

75
Q

Mortgage loan?

A

A loan in which property is used as warranty, helping to buy a property

76
Q

Share issues?

A

The number of authorised shares that is sold and held by all the shareholders of a company

Business - 2 (4 decks)

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