Finance Key Terms

Question 1

Objectives

Answer 1

A specific result that a person/business aims to achieve within a time frame and with available resources

Question 2

Corporate objectives

Answer 2

A realistic goal set by a company that often influences its internal strategic decisions

Question 3

Functional objectives

Answer 3

Set for each major function and are designed to ensure that the corporate objectives are achieved

Question 4

Aims

Answer 4

An attempt to reach a certain goal. A specific goal or purpose

Question 5

Strategies

Answer 5

A method or plan chosen to bring about a desired future, such as achievement of a goal or solution to a problem

Question 6

Tactics

Answer 6

Means by which a strategy is carried out

Question 7

Balance sheet

Answer 7

A document describing the financial position of a company at a particular point in time. It’s done by comparing the items owned by the organisation (its assets) with the amounts that it owes (its liabilities)

Question 8

Income statement

Answer 8

An account showing the income and expenditure (the profit or loss) of a firm over a period of time (usually a year)

Question 9

Management accounting

Answer 9

The creation of financial information for the use by internal users in the business, in order to predict, plan, review and control the financial performance of the business

Question 10

Financial accounting

Answer 10

The provision of financial information to show external users the financial position of the business/it concentrates on historical data

Question 11

Assets

Answer 11

Items that are owned by an organisation

Question 12

Non-current assets

Answer 12

Resources that can be used repeatedly in the production process, although they do wear out or lose value. For example, land, building, machinery and vehicles

Question 13

Tangible assets

Answer 13

Non-current (fixed) assets that exist physically

Question 14

Intangible assets

Answer 14

Non-current assets that do not have a physical presence, but are nevertheless of value to a firm. For example, a brand name or patent

Question 15

Current assets

Answer 15

Short term items that circulate in a business on a daily basis and can be expected to be turned into cash within a year

Question 16

Liabilities

Answer 16

Debts owed by an organisation to suppliers, shareholders, investors or customers who have paid in advance

Question 17

Total equity

Answer 17

Funds provided by shareholders to set up the business, fund expansion and purchase fixed assets

Question 18

Revenue expenditure

Answer 18

Spending on day to day items such as raw materials, inventories (stock), wages and power to run the production process

Question 19

Capital expenditure

Answer 19

Spending on non- current (fixed) assets - those assets used repeatedly in the production process, such as buildings, vehicles and machinery

Question 20

Depreciation

Answer 20

The fall in value of an asset over time, reflecting the wear and tear of the asset as it becomes older, the reduction in its economic use or its obsolescence

Question 21

Obsolescence

Answer 21

When an asset is still functioning but it’s no longer considered useful because it is out of date

Question 22

Working capital

Answer 22

The day to day finance used in a business, consisting of current assets (cash and inventories) minus current liabilities (bank overdraft and tax owed)

Question 23

Liquidity

Answer 23

The ability to convert an asset into cash without loss or delay

Question 24

Liquid assets

Answer 24

Items owned by an organisation that can be converted into cash quickly and without a loss of value. The most liquid asset that a business can possess is cash

Question 25

Gross profit

Answer 25

Revenue minus cost of sales. The gross profit shows how efficiently a business is converting its raw materials or stock into finished products

Question 26

Operating profit

Answer 26

The revenue earned from everyday trading activities minus the costs involved in carrying out those activities

Question 27

Profit quality

Answer 27

A measure of whether profit is sustainable in the long run. High quality profit is profit that will continue, low quality profit arises from exceptional circumstances that are unlikely to continue

Question 28

Profit utilisation

Answer 28

The way in which a business uses its profit or surplus

Question 29

Trend

Answer 29

The underlying pattern of change shown within a set of numerical data

Question 30

Ratio analysis

Answer 30

A method of assessing a firms financial situation by comparing two sets of linked data

Question 31

Solvency

Answer 31

A measure of a firms ability to pay its debts on time. A firm that can meet its financial commitments is described as solvent. A firm that cannot meet its financial commitments is described as insolvent

Question 32

Trading profit

Answer 32

The difference between the incomes received from an organisations normal activities and the expenditure it incurs in operating

Question 33

Retained profit

Answer 33

The part of a firms profit that is reinvested in the business rather than distributed to shareholders

Question 34

Ordinary share capital

Answer 34

Money given to a company by shareholders in return for a share certificate that gives them part ownership of the company and entitles them to a share of the profits

Question 35

Loan capital

Answer 35

Money received by an organisation in return for the organisations agreement to pay interest during the period of the loan and to repay the loan within an agreed time

Question 36

Debenture

Answer 36

A long term loan made to a business at an agreed fixed percentage rate of interest and repayable on a stated date

Question 37

Bank loan

Answer 37

A sum of money provided to a firm or an individual by a bank for a specific, agreed purpose

Question 38

Bank overdraft

Answer 38

When a bank allows an individual or organisation to overspend its current account in the bank up to an agreed limit and for a stated time period

Question 39

Profit centre

Answer 39

An identifiable part of an organisation for which costs and revenue can be calculated

Question 40

Investment decision making

Answer 40

The process of deciding whether or not to undertake capital investment (the purchase of non-current assets) or major business projects

Question 41

Investment appraisal

Answer 41

A scientific approach to investment decision making, which investigates the expected financial consequences of an investment, in order to assist the company in its choices

Question 42

Payback period

Answer 42

The length of time that it takes for an investment to pay for itself from the net returns provided by that particular investment

Question 43

Average rate of return

Answer 43

Total net returns divided by the expected lifetime of the investment (usually a number of years), expressed as a percentage of the initial cost of the investment

Question 44

Net present value

Answer 44

The net return on an investment when all revenues and costs have been converted to their current worth