Finance 3.1-3.4 Flashcards
(99 cards)
1
Q
What is expenditure?
A
Spending money on inputs
2
Q
What is capital expenditure?
A
goods used to produce other goods, and aren’t used up in the production process
3
Q
What are some examples of capital expenditure?
A
Machinery, buildings, factories, equipment
4
Q
What are the time terms of capital/revenue expenditure?
A
capital - long term
revenue - short term
5
Q
What are fixed assets?
A
assets kept for 1+ year, also considered capital expenditure
6
Q
What is the importance of capital expenditure?
A
increases scope of operations and adds economic benefit
7
Q
What is revenue expenditure?
A
goods consumed/used up in the production process, where they become part of the final product. it is done consistently
8
Q
What are some examples of revenue expenditure?
A
labour, raw materials, rent, legal expenses, marketing
9
Q
What are internal sources of finance?
A
from internal stakeholders
- personal funds (sole traders)
- retained profit
- sale of business assets
10
Q
What are the three main types of external sources of finance?
A
- equity finance
- debt finance
- other sources
11
Q
What is trade credit?
A
willingness to offer product on credit, agreeing to receive payment at a later date - short term
12
Q
What are advantages of trade credit?
A
- trust relationship created
- can form regular customers
- helps purchaser’s cash flow
- no interest
- no loss of control
- will have more cash for production for a period of time
13
Q
What are disadvantages of trade credit?
A
- can damage relations
- can ruin reputations
14
Q
What is share capital?
A
capital raised by selling shares in the stock market
15
Q
What are advantages of share capital?
A
- no need to be repaid
- permanent and long term
- no interest or debts
- publicly held companies can sell additional shares
16
Q
What are disadvantages of share capital?
A
- shareholders must be paid dividends
- loss of control and ownership
- IPOs are expensive
- only for publicly held companies
17
Q
What are business angels?
A
capital raised by funding from a wealthy person who wants to invest and get richer
18
Q
What are advantages of business angels?
A
- helps those not on stock market
- good for start ups and new businesses who struggle with the bank
- expertise and mentorship
- helps inexperienced entrepreneurs
- long term
19
Q
What are disadvantages of business angels?
A
- risky for angels, no guarantees
- rare to find
- loss of control and ownership
- potential conflict
20
Q
What is loan capital?
A
capital raised from getting loans
21
Q
What are advantages of loan capital?
A
- regular, smaller, more accessible payments
- larger businesses may negotiate lower interests
- no loss of control/ownership
- long term
22
Q
What are disadvantages of loan capital?
A
- interests
- must be paid back
- collateral may be offered and taken
- interest increases
- inaccessible for sole traders and very small businesses
23
Q
What is overdraft?
A
banks allowing businesses to withdraw more money than they have from their accounts - like a very short term loan
24
Q
What are advantages of overdrafts?
A
- easily obtainable
- emergency funds when necessary
- may help with cash flow problems
- flexibility
25
What are disadvantages of overdrafts?
- usually very high interests
- usually only small amount
- repayments may be ordered at short notice
- high cost and short term
- may start a cycle of cash flow problems
26
What is microfinancing?
basically a social bank - providing those in poor/vulnerable positions with loans and money that would be otherwise difficult to obtain
27
What are advantages of microfinancing?
- reduces poverty
- encourages (especially female) financial independence
- helps wider community
- social purpose
28
What are disadvantages of microfinancing?
- unethical to gain profits from poor people
- small scale
- high interest may be charged
- may increase debts
- low profitability - difficulty attracting employees
29
What is crowdfunding?
raising funds by obtaining small amounts of money from many different stakeholders, usually in exchange for the product (stakeholders only charged after threshold reached)
30
What are advantages of crowdfunding?
- limits risk and impacts if business fails
- no need for banks
- less costly than stock exchange
- no loss of control
- no debt/interest
- can help small/medium businesses
- long term
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What are disadvantages of crowdfunding?
- legal challenges
- investors may ask for more information, causing delays
- theft of intellectual property risk
- possible scams
- must be able to attract enough to pass threshold
32
What is leasing?
the process of a lessee renting an asset over a certain period of time
33
What are advantages of leasing?
- reduces capital expenditure
- lessor has responsibility for asset
- good if only needed for shorter period of time
- no need to maintain/repair
- can be used for assets that depreciate quickly
34
What are disadvantages of leasing?
- lessee never owns the asset
- for too long, can be more expensive than buying
35
What are fixed costs?
costs that do not change as output changes
36
What are examples of fixed costs?
- rent (short term)
- salaries
- advertising
- legal/administrative costs
37
What are variable costs?
costs that change as output changes
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What are examples of variable costs?
- wages
- raw materials
39
Total costs formula
TC = FC + (AVC x Q)
40
What are direct costs + examples?
costs that go into the production of a good or service like wages and raw materials
41
What are indirect costs?
costs that cannot be individualised to each good produced ad aren't directly associated to production
42
What are examples of indirect costs?
- cleaning supplies
- cleaners/support staff
- rent/lighting/heating
- loan installments
- advertising
- accountancy
- board of directors
- HR dpt
- infrastructure
43
How are indirect (overheads) costs seen?
- less desirable
- 'lost' money
- eats up profit and doesn't contribute to the product/service
44
What is contribution?
whatever is left over after paying variable costs, which may be directed towards fixed costs/perhaps profit
45
Profit formula
Profit = (P x Q) - FC - (AVC x Q)
46
Contribution formula
TR - (AVC x Q)
total revenue - total variable costs
47
What are patents?
legal protection given to an inventor of a product to safeguard it from being copied for a certain period of time (average 20 years)
48
What is a copyright?
legal protection given to creative producers (eg music, books, movies, photos, images...), protecting their exclusive right to publish/sell the artistic works
49
What is a registered trademark?
A distinctive mark, sign, or symbol that a company uses for identification
50
What is goodwill?
the intangible value of a company derived from its 'good nature' of business
seen when selling price is higher than value of net assets of a company
51
What is revenue?
the income that a business earns from selling goods and services
52
What are revenue streams?
one specific way that a company generates income
53
What are effects of having multiple and diverse revenue streams?
it becomes more resilient, if revenue from one area declines due to external factors, the business is still earning revenue
54
Why would managers want the final accounts?
- how easily a business can cover its immediate, short and medium term debts, ensuring that the company doesn't become insolvent
- annual profit
- value of assets owned
- amount of money invested by shareholders
55
What is management?
refers to people in the organisation that plan, organise, coordinate and control the business' activities
56
What might owners and shareholders use the final accounts for?
identifying how effectively their money has been invested and how much in dividends they will receive
57
Why might employees be interested in seeing the final accounts?
- to know the financial stability of the business and the security of their jobs
- to be able to negotiate for better wages based on business profits
58
Why would a government be interested in the final accounts?
may wish to assess taxes on business based on profits
assess health of business and if it is able to keep contributing to society, or if it needs supoort
59
Why would a competitor be interested in seeing the final accounts?
to assess the overall financial strength of the company and compare profits for the year of businesses in the same industry
60
Why would banks be interested in seeing final accounts?
to see if the business has the ability to repay loans
61
Why would suppliers be interested in the final accounts?
to assess how effectively the company would be able to pay for goods supplied to it on credit
62
Why would the local community be interested in seeing the final accounts?
assessing if the business is financially stable, able to keep providing jobs, goods, and services necessary
63
The statement of profit or loss is also known as
the income statement
64
The income statement is also known as
the statement of profit or loss
65
What is the statement of profit or loss
a statement that records sale revenues and costs of a business. shows profit or loss generated from a business' trading activities.
determines the net profit and distribution of profit.
66
gross profit (income statement)
sales revenue - COGS
67
profit before interest and tax (income statement)
gross profit - expenses (overheads)
68
net profit is also known as
profit before interest and tax
69
profit before tax (income statement)
profit before interest and tax - interest
70
profit for the period (income statement)
profit before tax - tax
71
retained profit (income statement)
profit for the period - dividends
72
What are the differences in the profit and loss statements for profit and non for profit enterprises?
- profits are recorded as surpluses
- they pay no taxes
- pay no dividends as there are no shareholders
73
balance sheet is also known as
the statement of financial position
74
the statement of financial position is also known as
the balance sheet
75
What is the balance sheet?
set of final accounts that shows the value of a business' assets, liabilities and equity at a specific point in time
76
What is the balance sheet/statement of financial position often referred to as and why?
'snapshot' of a firm's financial position, indicates its financial health
77
What are assets?
possessions of a business that can be liquidated and have monetary value
78
Examples of assets
PP&E, stock, cash...
79
What are liabilities?
debts of a business
80
What are the 2 main things a statement of financial position must show?
- sources of finance (including liabilities and equity)
- uses of finance
81
Why is a balance sheet called a balance sheet?
a firm's uses of finance must match its sources of finance
82
how should you call a balance sheet?
ALWAYS statement of financial position
83
non-current assets =
PP&E (property, plant and equipment) - accumulated depreciation
84
current assets =
cash + debtors + stock
85
total assets =
non-current assets + current assets
86
current liabilities =
bank overdraft + trade creditors + other short term loans
87
tip for remembering structure of statement of financial position
sandwich of current with a side of equity
88
non-current liabilities =
long term borrowings
89
total liabilities =
current liabilities + non-current liabilities
90
equity =
share capital + retained earnings
91
What are non-current assets?
long-term assets - fixed - that are not intended for sale in less than one year
92
What are current assets?
possessions of an organisation with a monetary value but intended to be liquidated in less than one year
93
3 ways that stocks can be categorised?
- raw materials
- work-in-progress
- finished goods
94
Examples of non-current liabilities
Bank loans
Mortgages
Corporate bonds
Debentures
95
What are mortgages?
long term loans used to purchase property, and so the property is used as collateral
96
What are corporate bonds?
debt securities sold to investors, represent a debt obligation that the borrower must repay with interest over a period
no ownership given
97
What are debentures?
long term loans issued by orgs. that borrow money from investors and repay it with interest, depends on borrower's creditworthiness
98
What are the different types of intangible assets?
patents
copyright
registered trademark
goodwill
99
What is an intangible asset?
non-physical items of value owned by a company that have a lifespan of more than 1 year
