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AA IB Business HL > Unit 3 - Financial Management > Flashcards

Unit 3 - Financial Management Flashcards

(100 cards)

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1
Q

Define the term working capital.

A

Working capital is the finance necessary to manage the day-to-day expenses of a business, such as purchasing inventory, paying suppliers and paying staff.

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2
Q

What does R&D stand for?

A

R&D stands for Research and Development.

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3
Q

What is meant by the term debt servicing?

A

Debt servicing is the repayment of debts such as loans or credit facilities, including interest, over an agreed-upon period.

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4
Q

Define the term capital expenditure.

A

Capital expenditure is business spending on non-current assets that will be used many times and for more than one year.

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5
Q

Define the term revenue expenditure.

A

Revenue expenditure is spending on goods and services that a business uses in the short-term as part of its normal trading activities.

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6
Q

What does the term non-current assets mean?

A

Non-current assets are assets that will be used many times and for more than one year.

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7
Q

Define the term current assets.

A

Current assets are short-term assets that are expected to be converted into cash or used up within one year.

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8
Q

True or False?

Machinery is considered a revenue expenditure.

A

False.

Machinery is considered capital expenditure.

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9
Q

True or False?

Buildings are an example of current assets.

A

False.

Buildings are an example of non-current assets.

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10
Q

Give two examples of revenue expenditure.

A

Examples of revenue expenditure include:

Stock/inventory
Wages and salaries
Utilities
Distribution costs
Fuel
Insurance

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11
Q

True or False?

Rent is considered capital expenditure.

A

False.

Rent is considered revenue expenditure.

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12
Q

What is internal finance?

A

Internal finance is funding that comes from inside the business.

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13
Q

What are the three main sources of internal finance?

A

The three main sources of internal finance are:

Owner’s capital
Retained profit
Sale of assets

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14
Q

What is owner’s capital?

A

Owner’s capital is personal savings or other lump sums invested by a business owner.

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15
Q

What is a sale and leaseback arrangement?

A

A sale and leaseback arrangement is when a business sells an asset, such as a building, for cash, then rents it back from the new owners.

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16
Q

Define the term retained profit.

A

Retained profit is profit generated in previous years that has not been distributed to owners and is reinvested back into the business.

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17
Q

Define the term share capital.

A

Share capital is finance raised from the sale of shares in a limited company through flotation or a rights issue.

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17
Q

What is the key opportunity cost of using internal finance?

A

The key opportunity cost of using internal finance is the inability to use the funds for other purposes once they have been invested in the business.

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18
Q

What is a secured loan?

A

A secured loan is a type of loan typically repaid over five to twenty years, where failure to make repayments can result in the business having to sell non-current assets.

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19
Q

Define the term overdraft.

A

An overdraft is an arrangement for a business to spend more money than it has in its bank account.

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20
Q

What is trade credit?

A

Trade credit is an agreement made with suppliers to buy raw materials, components or stock, which are then paid for at a later date.

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20
Q

What is leasing?

A

Leasing is when an asset is made available to a business in return for regular payments, without the business owning the asset.

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20
Q

What are micro-finance providers?

A

Micro-finance providers are small lenders who make finance directly available to individuals or businesses who would be unable to access finance from anywhere else.

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21
Q

What is crowdfunding?

A

Crowdfunding is a method of finance where businesses access funds provided by a large number of small investors on online platforms.

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22
What are business angels?
Business angels are wealthy individuals who specialise in making investments in start-up or expanding businesses.
23
What is a mortgage?
A mortgage is a long-term secured loan, typically used by a business to purchase buildings, land, or large items of capital equipment.
24
What is short-term finance used for?
Short-term finance is used to meet unexpected costs or to pay bills and suppliers, typically for amounts needed for less than a year.
25
What is long-term finance used for?
Long-term finance is used to purchase non-current assets such as buildings and other types of capital equipment, typically for large sums required for a significant period of time.
26
What is meant by the term flotation?
Flotation is the process of selling shares in public limited companies for the first time.
27
Define the term gearing.
Gearing refers to the level of debt a business has in relation to its equity.
28
What is the most appropriate type of lending to purchase land or property?
A mortgage is the most appropriate type of lending to purchase land or property.
29
What are variable interest rates?
Variable interest rates can be increased or decreased during the borrowing term.
30
What is a credit score?
A credit score is the assessment of a borrower that determines whether they are approved for credit, such as loans.
31
Define the term fixed costs.
Fixed costs are those that do not change as the level of output changes.
32
What are variable costs?
Variable costs are those that vary directly with the output.
33
State two examples of fixed costs for a retail business.
Examples of fixed costs for a retail business include: Rent Utilities Salaries Insurance Bank loan repayments
34
What are direct costs?
Direct costs are related to the production of a particular product and vary directly with output.
35
What are indirect costs?
Indirect costs are costs that cannot be allocated easily to the production of a particular product.
36
State another term for indirect costs?
Another term for indirect costs is overheads.
37
Give an example of a variable cost for a construction business.
Examples of variable costs for a construction business include: *Raw materials, such as bricks and cement *Components, such as kitchen units or radiators *Employee wages
38
Define the term sales revenue.
Sales revenue is the value of units sold by a business over a period of time.
39
State the equation to calculate sales revenue.
sales revenue = quantity sold x selling price
39
What is a revenue stream?
A revenue stream is a source of revenue other than sales.
39
What are subscription fees?
Subscription fees are regular, ongoing fees that allow users to access a product or service.
40
How is the average selling price calculated?
average selling price = sales revenue / number of items sold
41
What is the purpose of financial accounts?
Financial accounts detail the financial performance of a business over a trading period.
42
What does the statement of profit or loss show?
The statement of profit or loss shows the income and expenditure of a business over a period of time, usually a year, and the amount of profit made.
43
What are the three sections of the statement of profit or loss?
The three sections of the statement of profit or loss are: The trading account The profit and loss account The appropriation account.
44
What is calculated in the trading account?
In the trading account, the cost of sales is deducted from sales revenue to calculate the gross profit.
45
Define the term gross profit.
Gross profit is the difference between sales revenue and cost of sales.
46
What is deducted from gross profit in the profit and loss account section?
In the profit and loss account section, expenses are deducted to determine profit for the period.
47
What does the appropriations account show?
The appropriations account shows how profits are distributed for the period.
48
What stakeholder group is particularly interested in dividend payments?
Shareholders are particularly interested in dividend payments, as well as revenues, costs and profits earned and business growth.
49
How is profit before interest and tax calculated?
Profit before interest and tex = Gross Profit - Expenses
50
What is the formula used to calculate net assets?
Total assets - Total liabilities
51
Define the term current assets.
Current assets are assets that can be easily converted into cash within one year, such as cash, debtors, and stock.
52
What are non-current assets?
Non-current assets are long-term assets that are not easily convertible to cash, such as property, plant, and machinery.
53
What are liquid assets?
Liquid assets are those current assets that are available to meet immediate financial obligations, such as cash.
54
What are intangible assets?
Intangible assets are non-physical items owned by a business, such as patents or goodwill, that cannot be held or touched.
55
What is meant by the term brand value?
Brand value is the reputation, recognition and features such as brand name, logos and slogans associated with a brand that can be quantified and recorded in the statement of financial position.
56
What is goodwill?
The quantifiable value of a company's reputation, customer base and brand, which often represents the premium paid when one business takes over or merges with another business.
57
Define the term depreciation.
Depreciation is the accounting recognition that the value of non-current assets falls over time due to wear and tear.
58
State the two common methods of calculating depreciation?
The two common methods of calculating depreciation are: *Straight line depreciation *Units of production depreciation.
59
What is the formula for calculating annual depreciation using the straight line method?
annual depreciation = historical value - residual value / life expectancy
60
61
Define the term residual value.
Residual value is the scrap value of an asset at the end of its useful life.
62
What is accumulated depreciation?
Accumulated depreciation is the total amount of depreciation for an asset since its initial purchase.
63
What is the units of production depreciation method?
The units of production method depreciates an asset based on its usage or production output during an accounting period.
64
What is the formula for calculating depreciation per unit in the units of production method?
historic cost - residual revenue / expected units over the asset's lifetime
65
Define the term gross profit margin.
Gross profit margin is the proportion of revenue that is turned into gross profit, expressed as a percentage.
66
What is the formula to calculate the gross profit margin?
(gross profit / sales revenue) x 100
67
Define the term profit margin.
The profit margin is the proportion of revenue that is turned into profit before interest and tax, expressed as a percentage.
68
What is the formula to calculate the profit margin?
(profit before interest and tax / sales revenue) x 100
69
What is the return on capital employed?
The return on capital employed is a measure of how effectively a business uses capital invested to generate profit, expressed as a percentage.
70
What is the formula to calculate return on capital employed?
(profit before interest and tax / capital employees) x 100
71
What is meant by the term liquidity?
Liquidity is the cash and other current assets businesses have available to quickly pay bills and meet short-term financial obligations.
71
How is capital employed calculated?
non - current liabilities + equity
71
State two ways a business may reduce its overhead costs.
Overhead costs may be reduced by: Reducing staffing levels Relocating to cheaper premises Changing utility companies Reducing administration costs
72
State one way the gross profit margin can be increased.
The gross profit margin can be increased by: Increasing the value of sales to increase sales revenue Increasing the volume of sales to increase sales revenue Reducing direct costs
73
What is the formula to calculate the current ratio?
current assets / current liabilities
74
How does the acid test ratio differ from the current ratio?
The acid test ratio is a more precise way to measure liquidity than the current ratio, excluding stock from current assets.
75
What is the formula to calculate the acid test ratio?
current assets - stock / current liabilities
76
What are drawings?
Drawings are amounts of money withdrawn from a business by its owners.
77
State one drawback of selling assets such as machinery or property, to improve liquidity?
Drawbacks of selling assets to improve liquidity include: *It will worsen the balance sheet position of the business *Assets are no longer available for a business to use
77
77
In the UK, what does a current ratio of 2:1 mean?
A current ratio of 2:1 means a business has £2 of current assets to cover each £1 of short-term debt.
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AA IB Business HL (5 decks)

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