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A2 Business Specification Cards > 5 - Accounting and finance > Flashcards

5 - Accounting and finance Flashcards

(107 cards)

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1
Q

sources of short term finance

A
  • overdraft
  • loan
  • trade credit
  • factoring
  • hire purchase
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2
Q

sources of medium term finance

A
  • medium term loan

- leasing

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3
Q

sources of long term finance

A
  • long term loan
  • mortgage
  • share issues
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4
Q

overdraft

A

when money is withdrawn from the bank and the available balance goes below zero, the account is overdrawn. an overdraft is a pre arranged amount that can be withdrawn. interest is only paid on the actual amount overdrawn. ‘safety net’ for businesses

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5
Q

loan

A

loan is granted for a period of time and can be demanded back from the bank if interest payments are not made

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6
Q

trade credit

A

deferring payments to a supplier (wait for the debtors to pay)

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7
Q

factoring

A

sells its debts to pay for things and raise finance

often sold to a factoring company (offer a % of the debt and then own that debt)

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8
Q

hire purchase

A

method of paying for an item in instalments over a period of time, not purchased until the final payment, simply hired
more money will be paid over the period than buying it outright

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9
Q

medium term loan

A

similar to short term loans. interest is determined by, how much is borrowed, how long for etc

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10
Q

leasing

A

payments made in instalments but the business never owns it… only if the owner wishes to sell it
if it breaks down, leasing company must deal with it

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11
Q

long term loan/mortgage

A

amounts of finance are large and the banks require title deeds for security. can adopt a variable or fixed rate mortgage

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12
Q

share issues

A

where a company issues new shares to shareholders ..

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13
Q

fixed costs..

A

costs do not vary with the level of output

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14
Q

variable costs..

A

costs that change with the level of output

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15
Q

direct costs..

A

costs which go directly into the making of a product

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16
Q

indirect costs.. (overheads)

A

costs which do not directly go into the making of a product

tax, wages, electricity, heating

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17
Q

stepped fixed costs..

A

fixed in short term but if production increases may need to purchase another machine - costs have increased

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18
Q

unit costs..

A

cost of producing one unit

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19
Q

unit cost =

A

total cost / output

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20
Q

total cost =

A

fixed costs + variable costs

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21
Q

marginal cost..

A

cost of producing one extra unit

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22
Q

opportunity cost..

A

the loss of other alternatives when one thing is chosen

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23
Q

what are forecasts?

A

estimates of the likely inflows and outflows of cash in a business

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24
Q

what are statements?

A

the actual figures produced once transactions have occurred

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25
reasons for making forecasts?
- valuable for planning - helps set prices - payment terms can be assessed - managers can monitor and act accordingly - suppliers and investors can asses the business
26
limitations of forecasts?
- estimates based on assumption which means they lack accuracy - seasonal demand variations - competitor behaviour may change - changes in; interest rates, economy, technology
27
liquidity ratios can be used for what?
asses the level of cash in a business
28
what does too little cash mean for a business?
- inability to meet creditor deadlines - difficult to buy stock - additional loans needed, which leads to more interest
29
what does too much cash mean for a business?
- wasted opportunity to get stock - borrowing costs are unnecessary - loss of interest if not invested into the bank
30
what is ratio analysis?
method of measuring business performance
31
liquidity?
ability to convert assets to cash (pay off the short term debts)
32
current ratio = | def
current assets / current liabilities considers the level of liabilities in relation to assets to see if theres enough cash
33
acid test ratio = | def
current assets - stock / current liabilities business cannot be certain it will sell all stock therefore this is more reliable
34
gearing = | def
non current liabilities / capital employed x 100 considers risk by comparing levels of debt with equity >50% suggests potential problems
35
interest cover = | def
operating profit / interest used to help decide if a business can afford to repay a loan - higher the better
36
profitability?
level of profits measured against the business
37
gross profit =
total revenue - cost of sales
38
net profit =
gross profit - expenses
39
gross profit margin = | def
gross profit / revenue x 100] how much of each £1 of sales you keep as gross profit considers only direct costs
40
net profit margin = | def
net profit / revenue x 100 how much of each £1 of sales is kept as net profit considers both direct and indirect costs
41
ROCE = | def
operating profit / capital employed x 100 net profit as a % of the capital employed
42
ROE = | def
profit for the year / equity measures the ability of a business to generate profits from its investments
43
what is the difference between ROCE and ROE?
ROE considers the amount of profit generated from quit y whereas ROCE is better as it takes into account shareholders funds and loans
44
how do you work out capital employed?
shares (equity) + non current liabilities
45
what is operating profit?
profit before tax and interest
46
efficiency?
ability to manage assets and liabilities efficiently
47
asset turnover = | def
turnover / non current assets measures how effectively a business is able to use its non current assets to generate sales revenue
48
stock turnover = | def
cost of sales / stock measures how quickly stock is turned over - higher the better as lower suggests poor stock control
49
debtor collection period = | def
debtors / revenue x 365 average time customers take to pay - looking for around 28/30 days
50
how is stock turnover calculated if you want number of days?
stock / cost of sales x 365
51
creditor payment period = | def
creditors / cost of sales x 365 higher is better - looking for a higher figure than debtor collection period
52
dividend per share = | def
total dividends paid / number of shares higher the better
53
dividend yield = | def
dividend per share / share price x 100 look at this when deciding whether to invest in the first place - higher the better
54
earnings per share = | def
profit after tax / number of ordinary shares how much profit each share generates
55
price earnings ratio = | def
share price / earnings per share numer of times the share price can be divided by the EPS - higher the better
56
standard costing?
the cost that a business would normally expect for the production of a product
57
what are cost centres?
a specific part of the business where costs can be identified and allocated with ease
58
what are profit centres?
similar to a cost centre however, profits are ascribed to different parts of the business. From this, the managers can judge which products are the most profitable part of the businesses operations
59
absorption costing?
the indirect costs of a business are absorbed by different cost centres.
60
contribution/ marginal costing?
a method whereby fixed costs or overheads are ignored and the business considers only the variable costs of production.
61
consistency?
all accounts being produced in the same way so info is more accurate
62
going concern?
assumes the business is acting 'normally'
63
objectivity?
accounts must be realistic and based on facts, not guesses or opinions
64
materiality?
calculating realistic figures | only calculating the assets which are of value to the business
65
prudence?
not over stating the businesses financial position
66
realisation?
takes place when legal ownership changes hands, not when a payment is made
67
matching?
recording a transaction when it occurs, not when payment is received
68
accruel?
record when a transaction occurs
69
economic entry assumption?
each transaction recorded individually
70
monetary unit assumption?
all transactions are quantifiable
71
full disclosure?
cannot hide anything
72
time period?
usually the financial year/ could be calendar year
73
cost principle?
recording the actual cost
74
relevance/ reliability consistency?
data must be relevant and reliable
75
conservatism?
understate rather than overstate
76
revenue recognition assumption?
record when the transaction occurs
77
dividend cover =
profit after tax / dividends
78
ways to improve stock turnover?
- sell off slow moving stock - lean production methods i.e. JIT - negotiate with suppliers
79
what are some ways in which a business chooses to allocate its costs?
-
80
ads and disads of cost centres?
-
81
ads and disads of standard costing?
-
82
ads and disads of profit centres?
-
83
ads and disads of absorption costing?
-
84
ads and disads of contribution/marginal costing?
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85
what are the 3 types of investment appraisal?
ARR average rate of return Payback Net present value
86
ARR
-
87
ARR | calc
average/accounting rate of return calculates the total return for a project to see if it meets the target return works out a % based on the initial cost of a good (total net profit / num of years) / initial costs x 100
88
ads of ARR?
- looks at the whole profitability of a project - focuses on profitability - can provide a % return which can be compared with a target
89
disads of ARR?
- does not take into account cash flows - takes no account of the time value of money - treats profits arising late the same as those that arrive early
90
Payback
how quickly the cost of an investment is paid back - the longer the payback time the higher the risk
91
ads of payback?
- quick and easy method | - risk of each investment can be compared
92
disads of payback?
- doesn't measure the profit of investments | - doesn't look at the changing value of money
93
Net Present Value
takes into account the value of money and gives a more realistic measurement of an investment
94
ads of NPV?
- takes into account the value for money - more realistic and accurate - looks at the cashflow during the life of the project
95
disads of NPV?
- more complicated to measure which takes time and therefore can be more costly - only as reliable as the data used - doesn't take into account external factors
96
what is depreciation?
when a fixed asset looses its value over time
97
depreciation =
initial cost - residual value / life of asset
98
disads of depreciation?
-
99
-
-
100
what is a budget?
-
101
zero bugeting?
-
102
flexible budgeting?
-
103
whats the point in budgeting?
-
104
variance and how to work it out..
-
105
income statements..
-
106
contribution per unit =
price - variable cost per unit
107
total contribution =
sales x contribution per unit

A2 Business Specification Cards (10 decks)

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