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Business > Section 5 - Financial information and financial decisions > Flashcards

Section 5 - Financial information and financial decisions Flashcards

0
Q

What are Cash Inflows

A

Cash inflows are the sums of money received by a business during a period of time (also known as reciepts)

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1
Q

Define Cash Flow

A

The cash flow of a business is the cash inflows and outflows over a period of time

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2
Q

What are Cash Outflows?

A

Cash outflows are the sums of money paid out by a business during a period of time (also known as payments)

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3
Q

What is a Cash Flow Cycle?

A

A cash flow cycle shows the stages between paying out cash for labour, materials, etc. and receiving cash from the sale of goods.

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4
Q

Define Profit

A

Profit is the surplus after total costs have been subtracted from sales revenue.

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5
Q

What is a Cash Flow Forecast?

A

A cash flow forecast is an estimate of future cash inflows and outflows of a business, usually on a month-by-month basis. This then shows the expected cash balance at the end of the month.

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6
Q

What is the Opening Cash Balance? (also known as the Opening Bank Balance)

A

The opening cash balance is the amount of cash held by the business at the start of the month.

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7
Q

Define Net Cash Flow

A

Net cash flow is the difference, each month, between inflows and outflows.

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8
Q

What is the Closing Cash Balance? (also known as the Closing Bank Balance)

A

The closing cash balance is the amount of cash held by a business at the end of each month. This becomes next month’s opening cash balance.

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9
Q

Define Working Capital

A

Working capital is the capital available to a business in the short term to pay for day-to-day expenses.
Working Capital = Current Assets - Current Liabilities

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10
Q

What are Accounts?

A

Accounts are the financial records of a firm’s transactions.

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11
Q

What do Accountants do?

A

Accountants are the professionally qualified people who have responsibility for keeping accurate accounts and for producing the final accounts.

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12
Q

What are Final Accounts?

A

Final accounts are produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business.

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13
Q

What is an Income Statement?

A

An Income Statement is a document that records the income of a business and all costs incurred to earn that income over a period of time (for example one year). It is also known as a profit and loss account.

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14
Q

Define Sales Revenue

A

The sales revenue is the income to a business during a period of time from the sale of goods or services.

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15
Q

Define Cost of Goods Sold

A

The cost of goods sold is the cost of producing or buying in the goods actually sold by the business during a time period.
Cost of Goods Sold = Opening Inventories + Purchases - Closing Inventories.

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16
Q

What is Gross Profit?

A

A gross profit is made when sales revenue is greater than the cost of goods sold.
Gross Profit = Sales Revenue - Cost of Goods Sold
(Note: Gross profit does not make allowance for over head costs or expenses)

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17
Q

What is a Trading Account?

A

A trading account shows how the gross profit of a business is calculated.

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18
Q

What is Net Profit?

A

Net Profit is the profit made by a business after all costs have been deducted from sales revenue.
Net Profit = Gross Profit - Overhead costs

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19
Q

Define Depreciation

A

Depreciation is the fall in value of a fixed asset over time.

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20
Q

What is Retained Profit

A

Retained profit is the net profit reinvested back into a company, after deducting tax and payments to owners, such as dividens.
Retained Profit = Net Profit - Tax - Dividends

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21
Q

What is a Balance Sheet?

A

The balance sheet shows the values of a business’s assets and liabilities at a particular time. Sometime referred to a as ‘statement of financial position’.

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22
Q

What are Assets?

A

Assets are those items of value which are owned by the business. They may be fixed (non-current) or short-term current assets.

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23
Q

Define Liabilities

A

Liabilities are debts owned by the business.

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24
Q

What are Non-Current Assets?

A

Non-current assets are items owned by the business for more than one year. (Not Liquid)

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25
Q

What are Current Assets?

A

Current Assets are owned by a business and used within one year. (Liquid)

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26
Q

What are Non-Current Liabilities?

A

Non-current liabilities are long-term debts owed by the business.

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27
Q

What are Current Liabilities?

A

Current liabilities are short-term debts owed by the business.

28
Q

What is Liquidity?

A

Liquidity is the ability of a business to pay back its short terms debts.

29
Q

What is Capital Employed?

A

Capital Employed is the total long-term and permanent capital invested in a business.
Capital Employed = Non-Current Liabilities + Shareholders’ Equity
This helps figure out a businesses gearing.

30
Q

What does is mean if an asset is Illiquid?

A

Illiquid means that assets are not easily convertible into cash.

31
Q

What is Capital Expenditure?

A

Capital Expenditure is money spent on assets that will last for longer than one year. (Non-current assets) For example, equipment.

32
Q

What is Revenue Expenditure?

A

Revenue expenditure is money spent on day-to-day expenses. For example, rent or wages.

33
Q

Define Insolvency

A

Insolvency is when a business runs out of cash even though it is profitable. (Remember, cash flow is not profit!)

34
Q

Who is the Creditor?

A

During a trade credit transaction, the creditor is owed money by the business. Also known as the accounts payable.
(CREDITORS = SUPPLIERS; DEBTORS = CUSTOMERS)

35
Q

Who is the Debtor?

A

During a trade credit transaction, a debtor owes the company money. (CREDITOR = SUPPLIERS; DEBTOR = CUSTOMERS)

36
Q

Return on capital employed

A

For every dollar put into the business, what proportion of that do you get back. (Out of 100)
Net profit/ Capital employed * 100

37
Q

Gross profit margin

A

For every dollar of sales revenue, how much is gross profit.

Gross Profit/ sales revenue * 100

38
Q

Net profit margin

A

For every dollar of sales revenue you make, how much is net profit.
Net profit/ sales revenue * 100

39
Q

How to check how a business is performing

A

Compare this year with last year

Compare to other businesses

40
Q

Current ration

A

How easily you can pay off short term debts.
Current assets / current liabilities.
If this number is below 1, then it means that you are not able to pay off your short term debts. If this number is above 2, then it means you are not investing enough into the business.

41
Q

Acid test ratio/ liquidity

A

Truer test of liquidity than current ratio because inventory is not included. Inventory cannot always be sold so easily.
(Current assets - inventory) / current liabilities
If this number is below 1, then it means that you are not able to pay off your short term debts. If this number is above 2, then it means you are not investing enough into the business.

42
Q

solvency

A

Solvency is your ability to pay off you short term liabilities. If you can, your business is solvent. If you can’t, your business is insolvent.

43
Q

Reasons for low liquidity ratios

A

Haven’t paid for supplies that have already been used causing debt.
The business has used cash to pay for fixed assets.

44
Q

Limitations of ratio analysis

A

External users will only be able to use published accounts which have less information.
Ratios are based on the past and thus the future is difficult to extrapolate.
The data is affected by inflation and other factors in the long term.
Different companies use different methods of calculation so you may get different answers.

45
Q

What is liquidity?

A

Liquidity is the ability of a business to pay back short term debts. Can also mean the amount of available cash. If a business can’t repay short term debts or overdrafts then it is illiquid.

46
Q

Who uses the data from profitability ratios?

A

Managers - to keep control, help in decision making, to prevent depreciation.
Shareholders - to know whether or not they will be able to make a profit
Creditors - want to know whether or not you are trustworthy to pay back money (CREDITORS IS SUPPLIERS; DEBTORS IS CUSTOMERS)
Banks - want to know if you will be able to pay back long term loans
Government - want to know if your losses will hurt the economy or lead to unemployment.
Workers/ trade unions - want to know if their jobs are secure
Competitors - want to compare their performance or consider takeovers

47
Q

Start up capital

A

the finance needed by a new business to pay for essential fixed and current assets

48
Q

Source of finance: retained profit

A

profit kept in the business after the owners have taken their share of the profits. Also called ploughed back profit. (Internal)
+Doesn’t have to be repaid +No interest
-not available for new businesses -too little for small firms -keeping profits reduces dividens

49
Q

Source of finance: sale of existing assets

A

Existing assets that could be sold are those items of value which are no longer required by the business eg redundant buildings (internal)
+better use of capital +doesn’t increase debt
-may take time to sell asset -not available for new businesses -what kind of business just HAPPENS to have redundant buildings?????

50
Q

source of finance: sale of inventory

A

Selling inventory to reduce inventory. (internal)
+reduces opportunity cost and storage cost
-must be done carefully to avoid disappointing customers
-this is usually done already???

51
Q

source of finance: owners’ savings

A

The owner funneling their own money into the business. (internal)
+available quickly +no interest
- savings too low -increased risk of owner

52
Q

source of finance: issue of shares

A 
Issuing shares (external) (long term finance)
\+permanent source that doesn't have to be repaid +no interest
-Dividends are expected -ownership could change -only available to limited companies
53
Q

source of finance: bank loans

A

A sum of money obtained from the bank (external)
+quick +varying length of time +large companies given low interest rates
-Must be paid back with interest -security or collateral usually required

54
Q

source of finance: selling debentures

A

long term loan certificates issued by limited companies (external) (long term finance)
+very long term (eg 25 years)
-must be repaid with interest

55
Q

source of finance: factoring of debt

A

A debt factor is a special agency that ‘buy’ the claims on debtors for immediate cash. eg a business is owed $100 but needs the money now. A debt factor gives the business $90 but in return receives 10 installments of $10 from debtor. (external) (short term finance)
+immediate cash
+reduce risk of collecting debt
-doesn’t receive 100% value of debts

56
Q

Source of finance: Grants/ subsidies

A

Capital from outside agencies eg the government (external)
+don’t have to be repaid
-often have ‘strings attached’ eg the firm must locate in a certain area

57
Q

source of finance: micro-finance

A

Providing small loans to poor people to set up enterprises in developing countries (commercial banks often avoid this because the profit is so small and customers cannot offer a collateral) (external)

58
Q

Internal finance

A

Finance obtained from within the business itself

Retained profit, sale of existing assets, sale of inventory, owners’ savings

59
Q

External finance

A

Finance obtained from sources outside of an separate from the business
(Bank loans, selling debentures, factoring of debts, grants, microfinance)

60
Q

Short term finance

A

provides working capital needed by the businesses for day-to-day expenses (Overdrafts, trade credit, factoring of debts)

61
Q

Long term finance

A

finance available for more than a year (bank loans, hire purchase, leasing, issue of shares, long term loans, debetures)

62
Q

source of finance: overdrafts

A

When a bank allows a firm to withdraw more finance than they own on the condition that it is paid back (external) (short term finance)
+flexible +interest only paid on amount overdrawn +sometimes cheaper than loans in the short term
-interest rate vary, can be very high -bank can ask for overdraft to be repaid on a short notice

63
Q

Source of finance: trade credit

A

when a business delays paying its suppliers, which gives the business more working capital (short term finance)
+basically an interest free loan (hallelujah!)
-based on trust, if not paid, then supplier may stop offering discounts or stop supplying altogether

64
Q

source of finance: hire purchase

A

Allows a business to buy a fixed asset over a long period of time with monthly payments and interest (long term finance)
+no large cash sum required
-cash deposit required -interest may be high

65
Q

source of finance: leasing

A

allows a firm to use an asset without purchasing it for a regular payment (long term finance)
+no large cash sum required +maintenance carried out by company
-total cost of leasing is higher than purchasing the asset
Occasionally businesses will sell their fixed assets to a leasing company and lease them. This is called sale-and-leaseback. (ikr so creative))

66
Q

How do businesses choose which source of finance to use?

A

Purpose and time period (long vs. short term, fixed vs. current asset); amount needed; legal form and size (big companies generally won’t use owners’ savings and sole traders probably won’t bother applying for grants); control (selling shares); risk and gearing (loan capital will raise the gearing)

67
Q

How can a business owner convince a bank to lend?

A

A cash flow forecast; an income statement; details of existing loans; a collateral; a business plan

68
Q

What convinces shareholders to invest in a business?

A

An increasing share price; high dividends; a good reputation/ plans for future growth; evidence that other businesses are not good to invest in.

Business (7 decks)

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