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GCSE AQA Business Unit 2 > Finance > Flashcards

Flashcards in Finance Deck (27)
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Define retained profits

Profits that owners plough back into the firm after they've paid themselves a dividend.


Define re-invested savings

Large, successful firms may have used retained profit from previous yrs to build bank savings or buy stocks and shares.

Can be used to get cash quickly if they need it.


Define fixed assets

Firms can raise cash by selling these (e.g. machinery or buildings) that are no longer in use.

There's a limit to how many assets you can sell.


Define shares

A limited company can issue more shares.

Money raised doesn't have to be repaid to shareholders; more shares means less control for existing owners.


Define debentures

Limited companies issue debentures to the public: they're long-term loans which the firm commits itself to repay with interest - for up to approx. 25 yrs.

People issued w/ debentures don't own any part of the business - they only lend the business money.


Define loans/mortgages

Larger firms may still need to use these which have to be repaid with interest.

More willing to lend it to large firms as there's:
- Less risk of failure
- More assets to use as collateral.


Define income statement

Looks at: profit (or loss) a firm makes in a 1 yr period and revenues and costs.


Define statement of financial position

Looks at:
What a firm is worth at any 1 point in time and
What a firm owns and owes.


Define gross profit

Amount of £ a business has left after it has paid its production costs.


Why do firms produce an income statement?

1) It's a legal requirement for PLCs and Ltds.

2) It summarises all the year's transactions.

3) It shows the financial "health" of the business.

4) Can be used to compare trade this year with trade last year.


What do different stakeholders want?

1) Owners - Know if they're a getting good return for their £.

2) Managers - Responsible to owners for business performance.

3) Customers - Want business to provide quality goods at low prices (value for £).

4) Employees - Know their jobs are secure and pay rises.

5) Creditors - Know business can repay any borrowed £.

6) Government - Know how much profit business makes so it can collect tax.


What is gross profit margin?

Ratio that compares gross profit with sales.

Shows how much gross profit is made for every £1 of sales.

This is the profit that a business makes per £1 off turnover the business is earning.


What is net profit margin?

Ratio that compares net profit with sales.

Shows how much net profit is made for every £1 of sales.

The amount of profit that the business is making for every £1 earned before taxation and interest.


How do you calculate gross / net profit margin?

(GP or NP) / Sales x 100


How do businesses reduce gross profit margin?

1) Reduce cost of sales (VC)

2) Buy cheaper raw materials.

3) Increase revenue (even better if it has no impact on anything else).


How do businesses improve net profit margin?

Decrease expenses.

This is more important than gross profit because it's based on the £ that a business can keep.


Define non-current assets (fixed)

Something of value owned by a business for a long time.


Define current assets

Short term assets used to generate cash and pay bills.


Define non-current liabilites (long term)

A debt a business won't fully repay within a year.


Define current liabilities

A debt which will be repaid within a year.


Why is finance needed?

1) For fixed & current assets.

2) Cash flow

3) Renewal - To renew, update & maintain fixed assets.

4) Expansion


Name some sources of finance for larger businesses

1) Selling unwanted assets

2) New share issue - Raise capital by attracting new shareholders.

3) Loans or mortgage - Banks more willing to offer loans to large businesses at better interest rates.


What does the top and bottom of a
Statement of Financial Position show?

Top - Assets and liabilities (what business owns and owes)

Bottom - Capital: share capital, owners funds, retained profit.


Define liquidity

Ability of a business to pay its debts over coming months.


What are the 2 types of liquidity ratios?

Acid test and current ratio.


What is current ratio?

Compares value of current assets to current liabilities.

Can see if the business has enough cash to pay its short term debts.


What is an acid test?

Shows the business' ability to pay its debts.

Stock isn't a very liquid current asset (can't turn it into cash quickly).