UNITT 3 COMBINED

Adverse variance

This discrepancy in the budget occurs when profit is lower than expected, due to costs being higher than expected and/or revenues being lower than predicted.

Budget

A detailed financial plan for the future, usually involving the expected costs and revenues or a cash flow forecast, for a pre-determined period of time.

budgetary control

The financial methods used to attempt to balance actual outcomes with budgeted outcomes. This is achieved by systematic observations and corrective measures to minimize variances.

Cost Centre

A section or division of a business that has responsibility for its own operational costs. It is held accountable for its departmental expenditure.

Favourable variance

This discrepancy in the budget occurs when profits are higher than expected, due to lower than expected costs and/or higher than predicted revenues.

Organization by function

Arranging the different cost centres of a business based on different functional departments of the organization.

organization by geography

Arranging the different cost centres of a business based on the location of its operations domestically and/or overseas.

Organization by product

Arranging the different cost centres of a business based on what it produces.

profit

Refers to the positive difference between a firm’s total revenues and its total costs for any given period of time.

profit center

A section or division of a business that has responsibility for both costs and revenues generated within the department. It is held accountable for the amount of profit generated.

Variance

Refers to a discrepancy between the planned (budgeted) item of expenditure or revenue and the actual amount.

Variance Analysis

This is the management process of comparing planned and actual costs and revenues, in order to measure and compare the degree of budgetary success.

Zero budgeting

A method of budgeting that requires all budget holders to justify each dollar of spending subject to management approved before the funds are released.

Accounting Rate of Return

Also referred to as the average rate of return, this method of investment appraisal calculates the average annual profit of an investment project expressed as a percentage of the amount of invested.

capital expenditure

A business organization's spending on the purchase or acquisition of fixed assets, e.g. spending on buildings (premises), machinery, equipment and tools.

cumulative net cash flow

The sum of an investment project's net cash flows for a particular year plus the net cash flows of all previous years.

discount rate

Also known as a discount factor, this is the figure used to reduce the future value of money. It is used to establish the present value of cash that is yet to be received by the business. (HL Only)

Discounted Cash Flow

This method of investment appraisal uses a discount rate (the inverse of compound interest) to reduce the value of money received in future years because money loses its value over time. (HL Only)

investment

Capital expenditure with the intention of a financial return on this spending at some point in the future.

Investment appraisal

The formal process of quantifying the financial risks of an investment decision, in order to establish whether the expenditure can be justified from a financial perspective.

Net Present Value (NPV)

A method of investment appraisal that calculates the real value (rather than the absolute value) of an investment project by discounting (adjusting) the actual value of money received in the future. (HL Only)

Payback Period

The investment appraisal method that considers the time it takes for the amount of money invested in a project to be repaid using the proceeds generated from the investment.

Principal

The principal refers to the capital outlay or the original amount spent on an investment project.

Qualitative investment appraisal

Method of investment appraisal used to determine whether a project is worth investing in by using non-numerical techniques, e.g., whether the project aligns with the organization's mission.

Quantitative Investment appraisal

Method of investment appraisal used to determine whether an investment project is worthwhile based on financial analysis, namely, PBP, ARR, and NPV.

bad debt

This occurs when a debtor is unable to pay outstanding invoices to the business. The result is it reduces the cash inflows for the vendor (seller).

Cash

The money a business has, either "in hand" (at its premises) and/or "at bank" (i.e., in its bank account). It is the most liquid of a firm's current assets and is easily accessible.

cash flow

The movement of an organization's cash inflows (cash received from the sale of goods and services) and cash outflows (used to pay for the costs of running the business).

Cash flow forecasting

A quantitative technique used to predict how cash is likely to flow into and out of the business for a particular period of time.

cash flow problems

These are liquidity issues that arise when an organization has insufficient funds to run its business, i.e., when net cash flow is negative.

Cash inflows

Refers to the money coming into a business from earnings (sales revenue) and other sources of finance, such as crowdfunding.

Cash outflows

Refers to the money going out of a business to pay for its costs, such as the purchase of raw materials or the payment of wages and salaries.

Closing balance

Found in a cash flow forecast, this refers to the value of cash held by a business at the end of a trading period (usually on the last trading day of the month).

collateral

Refers to the financial guarantee, using a firm's fixed assets, for the purpose of securing loan capital.

current assets

he short-term assets (belongings) of an organization that can be relatively easy to convert into cash, i.e. cash, stocks (inventory), and debtors.

Current Liabilities

The short-term debts of a business, which need to be repaid within twelve months of the balance sheet date, e.g., overdrafts, trade creditors and short-term loans from banks.

Debtors

A category of current assets, these are individuals or businesses that owe money to the organization because they have bought products on trade credit, so typically need to pay within 30 and 60 days.

fixed assets

Also known as non-current assets, these are items owned by a business that hold a monetary value and are used over and over again for production purposes.

Liquidity

This refers to the extent to which an organization is able to convert its assets (items of monetary value owned by the business) into cash.

liquidity crisis

A situation that arises when a business is unable to pay its short-term debts. This can eventually lead to bankruptcy.

liquidity position

This is a measure of the extent to which a business has sufficient liquidity to continue its operations and activities.

liquidity problem

Also known as a cash flow problem, this issue occurs when there is a lack of cash in the organization because its cash inflows are less than its cash outflows, i.e., it experiences negative net cash flow.

Net current assets

Also known as working capital, this is shown on a balance sheet to reveal the liquidity position of a business, this is found by using the formula: Current assets - Current liabilities.

Opening balance

Found in a cash flow forecast, this refers to the value of cash held by a business at the start of a trading period (usually the beginning of the month).

overdrafts

A financial service from banks that enable customers to temporarily take out more money than is available in their bank account.

profit

The value of sales revenue after all costs have been accounted for, i.e., the positive difference between a firm's sales revenue and its total costs of production.

sales revenue

The value of goods and/or services sold to customers. It is calculated using the formula: Price × Quantity.

short-term loans

Advances (borrowed funds) from a financial lender, such as a bank, repayable within 12 months.

stocks

Also known as inventories, these are the goods that a business has available for sale, per time period. They are intended to be sold as quickly as possible, to generate cash for the business.

tax

Payment made to the government if the business earns profit after all costs and expenses have been paid.

Trade creditors

The suppliers who have yet to be paid, as they offer the business to buy now but pay later, generally within 30 to 60 days from the time of purchase.

Working Capital

Also known as net current assets, this refers to the cash or other liquid assets available to an organization for its daily operations, such as paying for raw materials, utility bills and staff wages.

working capital cycle

Also referred to as net current assets, this refers to the duration between a business paying for its production costs of a good or service and receiving the cash from customers purchasing the product.

Bankruptcy

Sometimes referred to receivership or corporate liquidation, this means a situation when a person or business declares that they can no longer pay back their debts, so the entity collapses (fails).

Creditor days ratio

The efficiency ratio that measures the average number of days an organization takes to repay its creditors (suppliers who the business has bought products from using trade credit, so have yet to pay for these).

Debtor days ratio

The efficiency ratio that measures the average number of days an organization takes to collect debts from its customers (as they have bought goods and services on trade credit but have yet to pay for these).

Efficiency ratio

Financial planning and decision-making tool to measure how well the resources of a business are used in order to generate income from the firm's capital.

Gearing ratio

The efficiency ratio that measures the extent to which an organization is financed by external sources of finance (i.e. loan capital as a percentage of the firm's total capital employed).

Insolvency

Refers to the situation where a person or a business is unable to meet their bill and other debt obligations. The debts (liabilities) of the individual or organization exceed their assets.

Stock turnover ratio

The efficiency ratio that measures the number of days it takes a business to sell its stock (inventory). The ratio can also show the number of times during any given period of time (usually a year) that the business restocks or replaces its inventory.

Acid test ratio

Also known as the quick ratio, this short-term liquidity ratio measures an organization’s ability to pay its short-term debts without having to sell any stock (inventories).

Capital employed

The value of all sources of finance for a business, including internal and external finance.

Current ratio

A short-term liquidity ratio used to calculate the ability of an organization to meet its short-term debts (within the next twelve months of the balance sheet date).

Gross profit margin (GPM)

A profitability ratio that measures an organization's gross profit expressed as a percentage of its sales revenue. It is also an indicator of how well a business can manage its direct costs of production.

Liquidity

Refers to the ease with which a business can convert its assets into cash without affecting its market value, i.e., it measures a firm's ability to repay short-term liabilities without having to use external sources of finance.

Liquidity ratios

These are financial ratios that examine an organization's ability to pay its short-term liabilities and debts, namely the current and acid test ratios.

Profit

The financial surplus after all costs, including expenses, have been paid.

Profit margin ratio

A profitability ratio that measures a firm's overall profit (after all costs of production have been deducted) as a percentage of its sales revenue. It is also an indicator of how well a business can manage its indirect costs (overhead expenses).

Ratio analysis

A quantitative management planning and decision-making tool, used to analyse and evaluate the financial performance of a business. These can be further categorised as profitability, liquidity, and efficiency ratio analysis.

Return on capital employed (ROCE)

A profitability ratio that measures a firm's efficiency and profitability in relation to its size (as measured by the value of the organization's capital employed).

Accumulated Depreciation (HL Only)

This refers to the accrued value of non-current assets, most of which fall in value over time due to depreciation.

Assets

The possessions owned by a business, which have a monetary value, e.g., buildings, land, machinery, equipment, inventories, and cash.

Balance Sheet

Also known as the statement of financial position, this set of final accounts shows the value of a firm’s assets, liabilities, and the owners’ investment (or equity) in the business, at a particular point in time.

Cash

This refers to the money an organization has either "in hand" (at its premises) and/or "at bank" (i.e., in its bank account). It is the most liquid type of current assets.

Copyrights

These intangible assets give the registered owner the legal rights to creative pieces of work, such as the works of authors, musicians, conductors, playwrights (scriptwriters) and directors.

costs of sales (COS)

These are the direct costs of production, such as the cost of raw materials, component parts, and direct labour.

Creditors

Also known as trade creditors, this refers to the suppliers that allow a business to purchase goods and/or services on trade credit.

current Assets

Short-term assets belonging to an organization which will last in the business for up to 12 months, e.g., cash, debtors, and stock (inventory).

Current Liabilities

These are the short-term debts of a business, which need to be repaid within twelve months of the balance sheet date. Examples include bank overdrafts, trade creditors, and other short-term loans.

Debtors

A type of current asset, referring to individual or business customers that owe money to the organization as they have bought goods or services on trade credit, i.e., they need to pay within 30 and 60 days.

Depreciation (HL Only)

The fall in the value of a fixed asset over time, mainly due to wear and tear (usage) and obsolescence.

Dividends

These are the payments from a company's profit (after interest and tax) paid to the shareholders (owners) of the company. The amount of dividends paid to an individual shareholder depends on the number of shares held by the individual.

Equity

Refers to the value of the owners' stake in the business, i.e., what the business is worth at the time of reporting the balance sheet.

Expenses

These are a firm's indirect costs of production, e.g., rent, management salaries, marketing campaigns, accountancy fees, bank interest charges, travel expenses, utilities, repairs and maintenance, and general insurance.

Final accounts

These are the published accounts of an organization, made available to and used by different stakeholders, e.g., managers, employees, shareholders, sponsors, financiers, and investors.

finished goods

These are the final products of a business, ready to be sold to customers.

fixed assets

The long-term assets (possessions) of an organization that have a monetary value and are used repeatedly but are not intended for resale within the next twelve months, e.g. property and equipment.

Goodwill

The reputation and established networks (know-how) of an organization, which adds to a firm's monetary value.

Gross Profit

This refers to the profit from a firm's everyday trading activities. It is calculated by the formula: Sales revenue - Cost of sales.

illiquid assets

These items of value, owned by the business, cannot be sold quickly, are difficult to sell, and/or cannot be sold easily without incurring a significant loss in value.

intangable assets

Non-physical fixed assets that are valuable to a firm's survival and success, such as brand value, goodwill, copyrights, trademarks, and patents.

intangible property rights

Abbreviated as IPRs, these are a firm's fixed, intangible assets with a monetary value, comprised of goodwill, patents, copyrights and trademarks.

Liabilities

The debts of a business, i.e., the money owed to others, e.g., money owed to financiers, trade creditors, and the government (for tax).

Net assets

Refers to the overall value of an organization’s assets after all its liabilities are deducted. It is calculated by the formula: total assets minus current liabilities minus non-current liabilities.

Non-current assets

Also known as fixed assets, this refers to the long-term assets or possessions of an organization with a monetary value but are not intended for resale within the next twelve months of the balance sheet date.

Non-current liabilities

Also known as long-term liability, this refers to debt owed by a business which will take longer than a year (from the balance sheet date) to repay.

Overdrafts

This financial service allows customers to temporarily take out more money than is available in their bank account.

Patents

The official rights given to a business to exploit an invention or process for commercial purposes.

profit and loss account

Also known as the income statement, this shows a firm’s profit (or loss) after all production costs have been subtracted from the organization’s revenues, each year. It is also known as the statement of profit or loss or income statement.

Profit after interest and tax

Also referred to as profit for period, this section of the P&L account shows the actual value of profit earned by the business after all costs have been accounted for.