Finance

What is finance?

How a business funds its activities.

Why is financial management important?

It helps manage costs, risks, and business success.

What are contingencies?

Unexpected events that can cause financial difficulties.

What is accounting?

Recording financial transactions to track business money.

What is the main purpose of accounting?

To provide useful, accurate, and clear financial information.

What is accountability?

Acting in the best interests of the owners (stewardship).

What are financial statements?

Reports that summarise business transactions over time.

What are the three main financial statements?

Cash flow statement, income statement, and balance sheet.

What is a cash flow statement?

A report showing cash inflows and outflows over a period.

Why are cash flow statements important?

They show whether a business can meet its payments.

What is liquidity?

A business's ability to access cash and pay debts when due.

When is a business considered liquid?

When it has enough cash to meet payments on time.

Why do businesses allow credit sales?

To increase sales by giving customers time to pay.

What are cash inflows?

Cash received by the business.

Give examples of cash inflows.

Cash sales, payment of credit sales, and investment income.

What are cash outflows?

Cash paid out by the business.

Give examples of cash outflows.

Stock purchases, wages, insurance

What are operating cash flows?

Cash flows from the main business activities.

What are investing cash flows?

Cash flows from buying or selling assets and investments.

What are financing cash flows?

Cash flows related to borrowing, repaying debt, or raising capital.

What is an income statement?

A report showing revenue, expenses, and profit or loss over a period.

What three things does an income statement show?

Revenue, expenses, and profit or loss.

What are the five main sections of an income statement?

Revenue, COGS, Gross Profit, Expenses, and Net Profit.

What is revenue?

Income earned from sales.

What is net sales?

Sales revenue after discounts and sales returns are deducted.

What is cost of goods sold (COGS)?

The value of stock sold to customers.

Which businesses use COGS?

Businesses that buy goods for resale.

What is opening stock?

Stock held at the beginning of the financial year.

What is closing stock?

Stock held at the end of the financial year.

How is COGS calculated?

Opening Stock + Purchases − Closing Stock.

What is gross profit?

Revenue minus COGS.

Why do service businesses not calculate gross profit separately?

They do not have stock or COGS.

What are expenses?

Costs incurred by the business.

What are selling expenses?

Costs directly related to making sales.

Give examples of selling expenses.

Advertising, wages, commissions

What are administrative expenses?

Costs of running the business.

Give examples of administrative expenses.

Rent, electricity, insurance

What are financial expenses?

Costs related to borrowing money and managing risk.

Give examples of financial expenses.

Interest, lease payments, and dividends.

What is net profit?

Gross profit minus expenses.

What is a balance sheet?

A statement showing assets, liabilities, and owner's equity at a specific point in time.

What is the main purpose of a balance sheet?

To monitor debt, equity, and financial stability.

What are assets?

Items of value owned by a business.

What are current assets?

Assets expected to be used or converted to cash within 12 months.

Give examples of current assets.

Cash, accounts receivable

What are non-current assets?

Assets expected to last longer than 12 months.

Give examples of non-current assets.

Buildings, land, vehicles

What are liabilities?

Debts owed by a business.

What are current liabilities?

Debts due within 12 months.

Give examples of current liabilities.

Credit card debt, bank overdrafts, and accounts payable.

What are non-current liabilities?

Long-term debts due after 12 months.

Give examples of non-current liabilities.

Mortgages, leases

What is owner's equity?

The owner's investment in the business (capital).

What usually happens to owner's equity in a successful business?

It increases over time.

What does the income statement measure?

Financial performance (profit or loss).

What does the balance sheet measure?

Financial position and stability.

What can the balance sheet show about a business?

Whether it can repay debts and whether assets are being used effectively.

Net Cash =

Inflows − Outflows.

Closing Balance =

Opening Balance + Net Cash.

Sales/Revenue =

Price x Quantity

COGS =

(Opening Stock + Purchases) - Closing Stock

Working Capital =

Current Assets − Current Liabilities.

Gross Profit =

sales - COGS

Net Profit =

gross profit - expenses

Asset =

liabilities + owners equity