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AS BUSINESS > UNIT 5 - Finance and accounting > Flashcards

UNIT 5 - Finance and accounting Flashcards

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1
Q

Chapter 28 - Business finance

Start-up capital

A

The capital needed by an entrepeneur to start up a business

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2
Q

chapter 28 - Business finance

Working capital

A

The captial needed to pay for raw materials, day-to-day running costs and credit offered to customers. The life-blood.
Current assets - current liabilities

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3
Q

chapter 28 - Business finance

Capital expenditure

A

The purchase of assets that are expected to last for more than one year, such as building and machinery

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4
Q

Chapter 28 - Business Finance

Revenue expenditure

A

Spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock

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5
Q

Chapter 28 - Business finance

Liquidity

A

The ability of a firm to be able to pay its short-term debts

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6
Q

Chapter 28 - Business finance

liquidation

A

When a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors

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7
Q

Chapter 28 - Business Finance

What can happen as a result of too much working capital?

A

Opportunity cost

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8
Q

Chapter 28 - Business finance

What is the working capital cycle, and explain

A

Cash -> materials & stock -> production -> sell on credit (repeat)
The longer each process takes, the more working capital that will be required (eg. the longer creditors take to pay, the more capital is needed before materials and stock can be paid for)

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9
Q

Chapter 28 - Business finance

What are internal sources of finance? (3)

A
  • profits retained within the business
  • Selling of assets
  • Reductions in working captial
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10
Q

Chapter 28 - Business finance

What are the short-term external sourcs of finance

A
  • Bank overdrafts
  • Trade-credit
  • Debt-factoring
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11
Q

Chapter 28 - Business finance

Overdraft

A

Bank agrees to a business borrowing up to an agrees limit as and when required

Different to a loan, as a loan is a fixed amount

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12
Q

Chapter 28 - Business finance

Debt factoring

A

Selling of claims over trade recievables to a debt factor in exchange for immediate liquidity - only a proportion of the value of the debts will be recieved as cash

often has a % loss of credit

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13
Q

Chapter 28 - Business Finance

What is the time frame for short-term finance methods?

A

less than one year

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14
Q

Chapter 28 - Business Finance

What are the medium-term external sources of finance

A
  • Hire purchase
  • Leasing

Expensive options, but free up cash for the business

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15
Q

Chapter 28 - Business Finance

Hire purchase

A

An asset is sold to a company that agrees to pay fixed repayments over an agreed time period - the asset belongs to the company

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16
Q

Chapter 28 - Business Finance

Leasing

A

Obtaining the use of equipment or vehicles and paying a rental charge over a fixed period, this avoids the need for the business to raise long-term capital to buy an asset; ownership remains with the leasing company

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17
Q

Chapter 28 - Business Finance

What is the time period for medium-term finance?

A

3-5 years

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18
Q

Chapter 28 - Business Finance

What are the 2 long-term external sources of finance

A
  • Long term bank loans (don’t have to be repaid for at-least one year
  • Debentures
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19
Q

Chapter 28 - Business Finance

What are bonds/debentures?

A

an agreed time period for investors to get interest on a bond, and eventually money back

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20
Q

Chapter 28 - Business finance

Equity finance

A

permanent finance raised by a company through the sale of shares

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21
Q

Chapter 28 - Business Finance

rights issue

A

Existing shareholders are given the right to buy additional shares at a discounted price

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22
Q

Chapter 28 - Business finance

Advantages to debt finance

A
  • No change in ownership of the company without shares
  • loans will be repaid eventually so no permanent increase to liabilities
  • Banks remain external to the operation of the business
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23
Q

Chapter 28 - Business finance

Advantages to Equity finance

A
  • Permanent - never has to be repaid
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24
Q

Chapter 28 - business finance

Other sources of long-term finance

A
  • Grants
  • venture capital
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25
# Chapter 28 - business finance **Venture capital**
Risk capital invested in business start-ups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources | Often from wealthy individuals
26
# Chapter 28 - Business finance Finance for unincorporated businesses
- Microfinance - crowd funding
27
# Chapter 28 - Business finance **Microfinance**
Providing financial services for poor and low-income customers who do not have access to traditional sources of finance by traditional banks
28
# Chapter 28 - Business finance **Crowd funding**
The use of small amounts of capital from a large umber of individuals to finance a *new business venture*
29
# Chapter 28 - Business Finance **Business plan**
A detailed document giving evidence about a new or existing business, and that aims to convince external lenders and investors to extend finance to the business
30
# Chapter 29 - Costs What are the 5 different cost categories?
- fixed costs - Variable costs - Direct costs - indirect costs - Marginal costs
31
# Chapter 29 - Costs **Direct costs**
These costs can be clearly identified with each unit of production and can be allocated to a cost centre
32
# Chapter 29 - Costs **Indirect costs**
Costs that cannot be idetified with a unit of production or allocated accurately to a cost centre
33
# Chapter 29 - Costs **Fixed costs**
Costs that do not vary with output in the short run
34
# Chapter 29 - Costs **Variable costs**
Costs that vary with output
35
# Chapter 29 - Costs **Marginal costs**
The extra cost of producing one more unit of output
36
# Chapter 29 - Costs **Break-even point of production**
The level of output at which total costs equal total revenue, neither a profit nor a loss is made.
37
# Chapter 29 - costs **Margin of safety**
The amount by which the sales level exceeds the break-even level of output
38
# Chapter 29 - Costs What is the break-even equation?
Fixed costs / contribution per unit
39
# Chapter 29 - Costs **Contribution per unit**
Selling price - variable costs per unit
40
# Chapter 29 - costs Why a break-even analysis is useful (3)
- charts are easy to costruct - decisions can be made on pricing, location and which product would be most useful to engage in - can make comparisons - Provides useful guidelines for management
41
# Chapter 29 - costs limitations of a break-even analysis
- not all costs can be represented in a straight line - No allowance is made for inventory levels - not all costs can be conveniently organised into fixed and variable costs
42
# Chapter 30 - Accounting fundamentals **income statement**
records the revenue, costs and profit (or loss) of a busiess over a given period of time
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# Chapter 30 - Costs **Gross profit**
sales revenue - cost of sales
44
# Chapter 30 - Costs **Revenue**
Selling price x quantity sold = total value of sales made during the trading period
45
# Chapter 30 - Costs **Cost of sales**
(or cost of goods sold) - the direct cost of the goods sold that financial year
46
# Chapter 30 - Costs **operating profit**
Gross profit - overheads
47
# Chapter 30 - costs **Profit for the year**
Operating profit - taxes and interest costs
48
# Chapter 30 - Costs **Divedends**
The share of the profits paid to *shareholders* as a return for investing in the company
49
# Chapter 30 - Costs **Retained earnings**
The profit left *after all deductions*, including dividends, have been made. This can be taken back into the company as an internal source of finance
50
# Chapter 30 - costs **Low quality profit**
one-off profit that cannot be easily repeated or sustained
51
# Chapter 30 - costs **High-quality profit**
Profit that can be repeated and sustained
52
# Chapter 30 - costs **Statement of financial position**
an accounting statement that records the values of a business's assets, liabilities and shareholder's equity at one point in time
53
# Chapter 30 - Costs **shareholders' equity**
total value of assets - total value of liabilities
54
# chapter 30 - Costs **Asset**
An item of monetary value that is owned by the business
55
# Chapter 30 - Costs **liability**
A financial obligation of a business that is required to pay in the future
56
# Chapter 30 - Costs **liability**
A financial obligation of a business that is required to pay in the future
57
# Chapter 30 - costs **Share capital**
The total value of capital that is raised from shareholders by the issue of shares
58
# Chapter 30 - costs **non-current assets**
Assets to be kept and used by the business for *more than 1 year*
59
# Chapter 30 - Costs **Current assets**
Assets that are likely to be turned into cash before the next balance-sheet date
60
# Chapter 30 - Costs **Intangible assets**
Items of value that do not have a physical presence, such as trademarks and *current assets.*
61
# Chapter 30 - costs **Inventories**
Stocks held by the business in the form of materials, work in progress, and finsihed goods
62
# Chapter 30 - Costs **Trade recievables (debtors)**
The value of payments *to be recieved from customers* who have bought goods on credit
63
# Chapter 30 - costs **Accounts payable (creditors)**
Value of debts for goods bought on credit payable to suppliers; also known as *trade payables*
64
# Chapter 30 - costs **Current liabilities**
Debts of the business that will usually have to be *paid within one year*
65
# Chapter 30 - Costs **non-current liabilities**
Value of debts of the business that will be payable after more than one year
66
# Chapter 30 - Costs **Intellectual capital or property**
The amount by which the market value of a firm exceeds its tangible assets less liabilities - an intangible asset
67
# Chapter 30 - costs **goodwill**
arises when a business is valued at or sold for more than the balance-sheet value of its assets
68
# Chapter 30 - Costs **Cash-flow statement**
record of the cash received by a business over a period of time and the cash outflows from the business
69
# Chapter 30 - costs What are the 2 profit margin ratios?
- gross profit margin - operating profit margin
70
# Chapter 30 - costs **Gross profit margin**
Gross profit / revenue X 100 *good indicator to how a manager has added value to the cost of sales*
71
# Chapter 30 - Costs **Operating profit**
Operating profit / revenue X 100
72
# Chapter 30 - costs What are the two liquidity ratios, and what do they tell us?
- Current ratio - Acid-rest ratio *Tell us the ability of a business to pay its short-term depts*
73
# Chapter 30 - costs **Current ratio**
Current assets / current liabilities
74
# Chapter 30 - costs **Acid-test ratio**
Liquid assets / Current liabilitites
75
# Chapter 30 - costs **Liquid assets**
Current assets - inventories
76
# Chapter 30 - costs **Window dressing**
presenting the company accounts in a favourable light - to flatter the business performance
77
# Chapter 30 - costs Limitations to ratio analysis (4)
- Can only highlight a *potential* problem - Must be compared with other businesses to be able to be looked at properly, and this should be done with caution - The four ratios give an *incomplete* overview of a business's financial position - Financial statements and ratios can only measure *qauntitative factors*
78
# chapter 30 - costs 3 ways to increase profit margins
- reducing direct costs - increasing price - reducing overheads
79
# Chapter 30 - costs 3 ways to increase liquidity (ratios)
- sell off fixed assets - sell off inventories - Increase loans
80
# Chapter 31 - forecasting and managing cash flows **Cash flow**
The sum of cash paymets to a business (inflows) - The sum of cash payments (outflows)
81
# Chapter 31 - forecasting and managing cash flows **Insolvent**
When a business cannot pay its short term debts
82
# Chapter 31 - forecasting and managing cash flows **Cash inflows**
Payments in cash recieved by a business, such as those from customers *(trade recievables)* or from the bank eg. by loan
83
# Chapter 31 - forecasting and managing cash flows **cash outflows**
Payments in cash made by a business, such as those to suppliers and workers
84
# Chapter 31 - forecasting and managing cash flows What is profit?
The *reward* to business owners after taking the risk of investing their capital into the business
85
# Chapter 31 - forecasting and managing cash flows Cash vs profit - explain
Having enough cash in the short term is important - as cash payments are always being made. Profit can wait and is more of a *long term* reward
86
# Chapter 31 - forecasting and managing cash flows **Cash-flow forecast**
Estimate of a firm's future cash inflows and outflows
87
# Chapter 31 - forecasting and managing cash flows **Net monthly cash flow**
estimated difference between monthly cash inflows and cash outflows
88
# Chapter 31 - forecasting and managing cash flows **Opening cash balance**
cash held by the business at the* end of the month*
89
# Chapter 31 - forecasting and managing cash flows **Opening cash balance**
cash held by the business at the* beginning of the month*
90
# Chapter 31 - forecasting and managing cash flows **Closing cash balance**
Cash held at the end of the month becomes next month's opening balance
91
# Chapter 31 - forecasting and managing cash flows **Closing cash balance**
Cash held at the end of the month becomes next month's opening balance
92
# Chapter 31 - forecasting and managing cash flows Causes of cash-flow problems (4)
- lack of planning - Poor credit control - Expanding too rapidly - unexpected events
93
# Chapter 31 - forecasting and managing cash flows **Credit control**
monotoring debts to ensure credit periods are not exceeded
94
# Chapter 31 - forecasting and managing cash flows **Bad debt**
Unpaid customers' bills that are now very unlikely to ever be paid
95
# Chapter 31 - forecasting and managing cash flows **Over-trading**
Expanding a business rapidly wihtout obtaining all necessary finance so that a cash-flow shortage develops.
96
# Chapter 31 - forecasting and managing cash flows **Creditors**
Suppliers who have agreed to supply products on credit and who have not yet been paid.
97
# Chapter 31 - forecasting and managing cash flows 2 ways to improve cash-flow
- increase inflow Trade recievables (credit control), sale of assets, debt-factoring, overdrafts - decrease outflows Delay spending on equipment, use leasing

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