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Finance and Accounts Flashcards

(111 cards)

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1
Q

What is capital expenditure?

A

Finance spent on fixed assets (non-current assets)

Capital expenditure involves long-term investments that are not intended for short-term sale, such as land, buildings, and machinery.

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2
Q

What are the advantages of capital expenditure?

A

Long-term benefits that help to determine the scale of the organization’s operations

Capital expenditure can lead to increased production capacity and efficiency.

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3
Q

What are the limitations of capital expenditure?

A

High costs involved and limited sources of finance available for such an investment

Not all potential opportunities for capital expenditure are feasible due to these limitations.

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4
Q

List three reasons for capital expenditure.

A
  • To add extra production capacity as the business grows
  • To improve efficiency by utilizing the latest technologies
  • To comply with changing legislation and regulations, such as green technologies
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5
Q

What is revenue expenditure?

A

Finance spent on the daily operations of a business

This includes payments for wages, salaries, raw materials, rent, and utility bills.

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6
Q

What is the difference between capital expenditure and revenue expenditure?

A

Capital expenditure is for fixed assets with long-term use, while revenue expenditure is for daily operational costs

Capital expenditure affects the business’s long-term growth, whereas revenue expenditure affects short-term financial health.

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7
Q

What are some examples of capital expenditure?

A
  • Land
  • Buildings
  • Equipment
  • Machinery
  • Commercial vehicles
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8
Q

What are sources of finance?

A

Methods of raising capital for a business, which can be internal or external

Sources of finance can include personal funds, retained profits, loans, and equity finance.

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9
Q

Define internal sources of finance.

A

Money for a business raised from the business’s or owner’s existing assets

These sources do not require repayment.

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10
Q

What are retained profits?

A

Money a company has left at the end of the trading year after paying all costs, expenses, dividends, and taxes

It is the primary source of finance for businesses.

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11
Q

What is an asset?

A

An item or property that has value, owned by a person or business

Assets can be tangible (like land and buildings) or intangible (like patents).

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12
Q

What is equity finance?

A

Funding whereby the provider receives part ownership of the business in exchange for finance

Equity finance does not require repayment and shares risks among investors.

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13
Q

What is a business angel?

A

A successful, wealthy business person who invests in new businesses and provides guidance

Business angels often invest their own money and seek high growth in their investments.

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14
Q

What is venture capital?

A

Financing that pools resources from a group of investors to fund new businesses

Venture capitalists aim to help businesses grow for profitable future exits.

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15
Q

What is debt finance?

A

Money borrowed from a bank or financial institution that must be repaid with interest

Debt finance can include loans and mortgages.

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16
Q

What is microfinance?

A

Providing financial services to individuals with very limited income and assets

Microcredit is a subset of microfinance that includes small loans without collateral.

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17
Q

What is trade credit?

A

A business receiving goods and services immediately but paying for them later

This is typically for a term of 30, 60, or 90 days without interest.

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18
Q

Define fixed costs.

A

Costs of production that a business must pay regardless of output

Examples include rent, interest payments, and advertising expenditures.

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19
Q

Define variable costs.

A

Costs of production that change in proportion with the level of output or sales

Examples include commission earned by sales staff and packaging costs.

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20
Q

What are direct costs?

A

Costs specifically related to an individual project or product output

These can include raw materials and are essential for production.

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21
Q

What is the formula for total costs (TC)?

A

TC = TVC + TFC

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22
Q

Define direct costs.

A

Costs specifically related to an individual project or the output of a particular product.

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23
Q

Give an example of direct costs.

A
  • Raw materials
  • Consultancy costs
  • Solicitor’s fees
  • Telephone bills
  • Postage
  • Photocopying costs
  • Bank charges
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24
Q

What are indirect costs?

A

Costs that cannot be clearly traced to the production or sale of any single product.

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25
Provide an example of indirect costs.
* Rent * Lighting
26
What is the formula for total variable costs (TVC)?
TVC = AVC x Q
27
What does AVC stand for?
Average Variable Cost
28
What is the formula for average fixed costs (AFC)?
AFC = TFC/Q
29
Define revenue.
The money coming into a business, usually from the sale of goods and/or services.
30
What is the formula for sales revenue?
Sales revenue = Price x Quantity Sold
31
What is profit?
The positive difference between revenues and costs.
32
List types of non-sales revenue.
* Advertising revenue * Transaction fees * Franchise costs and royalties * Sponsorship revenue * Subscription fees * Merchandise * Interest earnings * Dividends * Donations * Subventions
33
What is the purpose of final accounts?
To differentiate stakeholders and ensure all payments and receipts are officially accounted for.
34
What are the two main statements in final accounts?
* Profit and loss accounts (income statement) * Balance sheet (statement of financial position)
35
What does a profit and loss account report?
The revenues and expenses of a business at the end of a specified accounting period.
36
Define gross profit.
Sales revenue - Cost of sales
37
What does COGS stand for?
Cost of Goods Sold
38
What is the formula for net profit?
Net profit = Gross profit - Expenses
39
What are dividends?
The amount of net profit after interest and tax that is distributed to the shareholders.
40
Define retained profit.
The portion of net profit kept by the business for its own use.
41
What does the balance sheet show?
Information on the value of a firm's assets, liabilities, and the capital invested by the owner.
42
What are noncurrent assets?
Items likely to last for more than 12 months.
43
List types of liabilities.
* Noncurrent/long-term liabilities * Current liabilities
44
What is equity?
The value of the business that belongs to the owners.
45
What is the purpose of ratio analysis?
To examine a firm’s financial position and assess its financial performance.
46
Define profitability ratios.
Ratios that examine profit in relation to other figures, such as the ratio of profit to sales revenue.
47
What is the gross profit margin (GPM)?
The value of a firm’s gross profit expressed as a percentage of its sales revenue.
48
What is the limitation of profit and loss accounts?
Only shows historical data, with no guarantee of future performance.
49
What is depreciation?
The decrease in value of noncurrent assets over time.
50
What are the two methods of calculating depreciation?
* Straight line method * Units of production method
51
What is the formula for annual depreciation using the straight-line method?
Annual depreciation = (purchase cost - Residual value)/lifespan
52
What does goodwill represent?
When the value of a firm exceeds its book value, often associated with reputation.
53
What are the limitations of balance sheets?
Static documents and may not include all assets, such as intangible assets.
54
What does gross profit contribute towards?
Paying its expenses
55
What are two ways to raise sales revenue?
* Raising sales revenue * Reducing direct costs
56
What advantage does reducing direct costs provide a firm?
Gains a competitive advantage by having lower prices for price elastic products
57
What happens if the customer is not responsive to price changes?
The business can charge a higher price for price inelastic goods/services
58
What marketing strategies can help increase sales revenue?
* Special promotions * Product extension strategies
59
How can cutting direct material costs impact a good/service?
It can affect the perceived quality
60
What is profit margin?
Percentage of sales turnover turned into overall profit after all production costs are accounted for
61
Why is profit margin a better measure of profitability than GPM?
It accounts for both cost of sales and expenses
62
What does the difference between GPM and profit margin represent?
The expenses
63
What is a key factor in calculating the profit margin ratio?
Profit before interest and tax
64
What is the formula for capital employed?
Equity + noncurrent liabilities
65
What does the Return on Capital Employed (ROCE) measure?
Financial performance of a firm based on the amount of capital invested
66
What is a generally accepted current ratio?
Between 1.5 - 2.0
67
What does a current ratio below 1 indicate?
Potential problems paying back trade creditors and suppliers, and risk of bankruptcy
68
What does the Acid Test Ratio (ATR) measure?
Short-term liquidity position, ignoring stock value
69
What is the acceptable ATR ratio?
At least 1:1
70
What are benefits of ratio analysis?
* Assessing likelihood of pay rises * Evaluating job security * Management bonuses assessment * Shareholder return assessment * Evaluating business's ability to repay loans
71
What is a limitation of ratio analysis?
Ratios are historical and do not indicate current or future financial situations
72
What does stock turnover measure?
Number of times an organization sells its stocks within a time period
73
How can businesses improve their debt collection period?
* Imposing surcharges on late payers * Giving incentives for early payment * Refusing further business until payment is made
74
What is the gearing ratio used for?
Assessing an organization’s long-term liquidity position
75
What does insolvency mean?
Inability to settle debts when due due to lack of funds
76
What is the definition of bankruptcy?
Formal declaration of inability to settle debts
77
What is working capital?
Current Assets - Current Liabilities
78
What is cash flow?
Movement of cash into and out of a business
79
What are cash inflows?
Cash that comes into a business during a given period
80
What is net cash flow?
Cash inflows - Cash outflows
81
What can poor cash flow result in?
Missed opportunities for capital expenditure
82
What is overtrading?
Expanding too quickly without sufficient resources
83
What is a common solution for cash flow problems?
* Reducing cash outflows * Improving cash inflows
84
What can high creditor days indicate?
Prolonged repayments that may free up cash but risk financial penalties
85
What can a low stock turnover ratio indicate?
Holding too much stock or inefficient stock management
86
What is the average number of days for debtor days?
Usually between 30-60 days
87
What are qualitative factors that affect financial performance?
* Nature of the business * State of the economy * Social factors
88
What does liquidity ratios measure?
Ability to pay short-term liabilities
89
What is an example of a liquid asset?
Stocks and debtors
90
What are seasonal fluctuations?
Variations in demand for products or services that occur at different times of the year ## Footnote These fluctuations can affect cash inflow.
91
What is investment?
The purchase of an asset with the potential to yield future financial benefits ## Footnote Examples include upgrading computer equipment or purchasing a building.
92
Define investment appraisal.
The quantitative techniques used to calculate the financial cost and benefits of an investment decision.
93
What is net present value (NPV)?
The sum of all discounted cash flows minus the cost of the investment project.
94
What does a positive NPV indicate?
The investment project is worth pursuing on financial grounds.
95
What does a negative NPV indicate?
The investment project is not worth pursuing on financial grounds.
96
What is the formula for calculating NPV?
NPV = Sum of present values - cost of investment.
97
What is the payback period (PBP)?
The amount of time needed for an investment project to earn enough profits to repay the initial cost of the investment.
98
Fill in the blank: The payback period is calculated as _______.
initial investment cost ($) / Contribution per month ($).
99
What is the Average Rate of Return (ARR)?
The average profit of an investment project expressed as a percentage of the amount invested.
100
What is a cost centre?
A department or unit of a business that incurs costs but is not involved in earning any profit.
101
What is a profit centre?
A department or unit of a business that incurs both costs and revenues.
102
List one advantage of using cost and profit centres.
* Increases accountability of managers for their departments' contributions * Helps identify areas of weakness.
103
List one disadvantage of using cost and profit centres.
* Allocating indirect costs can be subjective and difficult to calculate. * The performance of a division can change due to external factors.
104
What is a flexible budget?
A budget that can adapt to changes in the business environment.
105
What is the purpose of budgeting?
To plan for the future and anticipate financial problems before they occur.
106
What is variance in budgeting?
The difference between budgeted figures and actual figures.
107
What is a zero budget?
A budget that sets each budget holder's account to zero, requiring prior approval for any planned expenditure.
108
True or False: Budgets can help control business expenditure.
True.
109
What is one limitation of budgeting?
Budgets set by management who have no direct involvement can cause resentment.
110
What is the role of budgeting in motivation?
Delegation of budgetary control can boost morale and improve teamwork.
111
List two types of budgets.
* Flexible budgets * Incremental budgets.

Business Management (2 decks)

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