topic c Flashcards
(14 cards)
revenue expenditure
day to day costs incurred of a running business
- wages
-utility
-inventory
-rates
-insurances
-interest paid
-discount allowed
- purchases
capital expenditure
assets the business plans to use over a long period of time
- land
- infrastructure
-machinery
depreciation
assets losing value over time
reducing balance method- “loss of value at any rate “
straight line method - “yearly”
annual deprication = assets purchase price- salavage value/ useful life of assest
capital income
long term investment paidedd through money recieved by the business
- loans
-debentures - mortgages
-shares - owners capital
debutnures
long term source of finacne
redeemable repayable on fixed dates
“lowers interest rate”
“longer repayment times”
revenue income
short term payment entering business financail statements
- rent
-commision - discounts
- interest
-sales
accounting
control “tracks out/inflows”
measure “ ensuring stability”
managing “decision making of future “
compliance “ ensures proections”
recording “ allows forecasting “
loans
secured- assets able to be taken away if not repaided
unsecure- not able to been takeaway but an incur financial fines
recording
accumlate, report on financial information about performance, financial position and cashflow of a business
reach decision
easier to chase owed moneu
avoids missing payements
reports to hmrc of transactions
debtuners adv
features
The interest rate is fixed (1) so the company does not
need to worry about increased interest charges (1)
• Only interest is paid until the debenture is redeemed (1)
so lower amounts being paid will improve cash flow (1)
• Repayments / interest payments are fixed (1) which
allows the business to plan finances / budget (
Medium-long term source of finance / borrowing (1)
• Fixed repayments (1)
• Interest is charged/paid (1)
• Repayment date is specified (1)
• Can be secured against non-current assets (1)
• Does not give voting rights (1)
• Usually for large amounts (1)
• Adds to debt of a company (1)
deprication of reducing balance method
Advantages
• More depreciation in the early life of the asset and less in the
later years of the asset’s life, which helps offset greater repair
costs as the vehicles age
• Gives a more realistic valuation of the vehicles as they lose
more value in the earlier years.
• Prevents overstating the vehicles value so would comply with
accounting concepts
• Prevents understating the expense / overstating profits so
would comply with accounting concepts
(6)
• Give greater tax benefit in early years which would help grow the
business
Disadvantages
• Harder to calculate than the straight line method as you
will need to recalculate the expense each year figure based
on the net book value at the end of the previous year
• It is harder to work out what percentage to use to
depreciate over the asset’s lifetime
• Will produce lower profit figures in the early years in the
life of the asset
effects os discount allowed
Increases expenses (1)
• Reduces profit for the year / net profit (1)
• Improves cash flow / liquidity (1)
• Reduces the risk of debts not being paid (1)
importance of contruption per unit
Allows judgements to be made on the selling price based on
contribution – if her most popular product is not selling as well as
expected she may need to reduce the price
• Allows review of variable cost per unit although control of this is
with the supplier
• Allows review of variable cost to decide if they should switch
supplier
• Enables you to calculate break-even point (4 800 for her most
popular flowers)
• Target setting tool based on break-even point e.g. selling 14
bouquets a day of her most popular flowers would achieve break
even
• Helps with overall planning by making predictions
• The contribution per unit will vary for different products i.e. £5 for
her most popular product gives a break-even figure of 4 800 if she
only sold this product (or learner may use £6 (OFR) for potted
plants from Q10)
• Contribution will be affected by sales promotions/trade discounts
• Enables comparison of profitability of different products
• Enables decisions on introducing/discontinuing products
invoice discount effects
Cash flow improves because inflow is immediate rather than
60 days delay e.g. after the first two months Silva’s cash flow
will be £2 112 (£1 008+£1 104) better off than if she did not
do invoice discounting
• Once Silva’s cash flow improves it can stop using invoice discounting
• Profits will be reduced for each month by the amounts payable
to the invoicing discounting company
• The charge of 20% on invoices is expensive – it may be
cheaper to borrow/use an overdraft to reduce expenses
• The improved cash flow could allow Silva to negotiate better
deals by paying its suppliers earlier which would improve
profitability
• May not be accepted as only has limited credit collection
experience so may be seen as risky to the business offering
invoice discounting
• Could be other hidden costs which will further reduce profit
and liquidity
• Customers do not know about the transaction so are
unaffected unlike with debt factoring
