Studied by 5 people
Capital Expenditure
Money spent to acquire items in a business that will last for more than a year and can be used over and over again
Fixed Assets
Ex. Machinery, land, equipment, and buildings. Overtime they provide income for the business
Revenue Expenditure
money spent on the day to day running of a business. Ex. Wages, insurance, rent, and raw materials. (Should make sure it does not get high)
Personal Funds
A source of finance for sole traders that comes mostly from their own personal savings
Retained Profit
Profit which remains after a business paid corporation tax to the government and dividends to shareholders
Sale of Assets
When a business sells off its unwanted/unused assets to raise funds.
Share Capital (Equity Capital)
Money raised from the sale of shares of a limited company on the stock exchange.
Loan Capital (Debit Loan)
Money sourced from financial institutions such as banks, with interest charged on the loan to be repaid.
Interest
Cost of borrowing or the reward for saving money in the bank
Overdrafts
When a lending institution allows a firm to withdraw more money than it currently has in its account
Trade Credit
An agreement between businesses that allows the buyer of the goods/services to pay the seller at a later date.
Grants
Funds usually provided by a government, foundation, trust, or other agency to businesses which does not need to be repaid.
Subsidies
Financial Assistance granted by a government, NGO, or an individual to support businesses that are in the public interest
Debt Factoring
a financial agreement where the debt factor takes on the responsibility for collecting the debt owed to the business and provides the business with a percentage of the owed debt in cash
Leasing
A source of finance that allows a firm to use an asset without having to purchase it by cash
Venture Capital
Financial capital proved by investors to high-risk, high potential start ups or small businesses.
Business Angels
Highly affluent individuals who provide financial capital to small startups in return for ownership in their business.
Cost
The total expenditure incurred by a business in order to run its operations
Revenue
Measure of the money generated from the sale of goods/services
Revenue Streams
The income an organization gets from a particular activity
Fixed Cost
Costs that do not change with the amount of goods/services sold. Ex: Rent, insurance, salaries, interest payments
Variable Costs
Costs that change with the amount of goods/services produced. Volume related since they are paid per quantity produced. Ex: Raw materials, packaging, sales commissions, advertisements
Semi-Variable Costs
Costs comprising of both fixed and variable components. They remain fixed for a given level of production and after which they become variable once that level is exceeded.
Direct Cost
Costs that can be identified with the production of specific goods or services
Indirect Costs (Overheads)
Costs that are not clearly identified with the production of specific goods/services, not directly traceable.
Contribution
Amount each unit contributes towards the fixed costs and profits
Total Contribution
Calculated when more than one unit is sold.
Contribution per unit =
Price per unit - variable costs
Profit
The financial gain made by the business
Profit =
TR - TC
Break-even point
When the total costs = the total revenue. This is when the business will not make a profit or a loss.
Margin of Safety
Amount of output by which the output level exceeds the break-even level of output.
Margin of Safety =
current output - breakeven output
Total Revenue
TR = Price x quantity
Target Profit Output (TPO)
The level of output that is needed to earn a specified amount of profit
TPO =
(Fixed costs + Target profit) / CPU
Profit and Loss Account
Second part of the income statement that shows the net profit before interest and tax, net profit before tax, and net profit after interest
Appropriation Account
final part of the profit/loss account that shows how the company's net profit after interest and tax is distributed
Gross Profit
profit made by a company (sales revenue - cost of goods sold)
net profit
he positive difference between a company's gross profit and its expense (gross profit - expenses)
Cost of Goods Sold (COGS)
Cost of producing or purchasing the goods that were sold during that period
Dividends
A sum of the money paid to shareholders which is decided by the board of directors
Stock
unsold goods, raw materials or work-in-progress that the company has in hand at the end of the trading period
Balance Sheet
a statement of the financial position of a business in terms of assets, liabilities and owner's equity at a particular point in time
Assets
all items of value that are owned by the firm, such as cash or buildings
Fixed Assets
Long-term assets that last in a business for more than 12 months (Ex. vehicles, buildings, and machinery)
Current Assets
Short-term assets that last in a business for up to 12 months (Ex. Cash, debtors, stock)
Liabilities
all funds owed by the company to financial and other institutions, such as banks and suppliers
Long-term liabilities
Long-term debts payable after 12 months by the business (Ex. Mortgages)
Current Liabilities
Short-term debts that are payable within 12 months (Ex. creditors, tax, overdraft)
Working Capital
(Net current assets) Helps establish whether a firm can pay its day-to-day running costs
Equity
Shows how the net assets are financed using shareholders' capital and retained profit
Debtors
people who owe money
Creditors
People who lend money
Intangible Assets
assets that do not have physical substance
Depreciation
A decrease or loss in value
Obsolescence
state of being no longer useful or in fashion
Straight-line method
Spreads out the cost of an asset equally over its lifetime by deducting a given constant amount of depreciation
Reducing Balance Method
A method where a predetermine percentage depreciation rate is used and subtracted from the net book value of the previous year
Residual Value
the estimated value of a fixed asset at the end of its useful life
Ratio Analysis
Financial tool used in the interpretation and assessment of a firms financial statements
Profitability Ratios
show a company's overall efficiency and performance
Gross profit margin
(Gross profit) / (sales revenue) x 100
Net profit margin
(Net profit before interest and tax) / (Sales Revenue) *100
Return on Capital Employed (ROCE)
Measures efficiency and profitability of a firms invested capital
Capital Employed
long term liabilities + share capital + retained profit
Liquidity Ratios
the firm's ability to convert its short-term assets into cash
Current Ratio
current assets/current liabilities
Acid Test Ratio
Current Assets - Stock / Current Liabilities
Cash Flow
Money that flows in and out of a business over a given time period
Insolvency
A business can be profitable but have little or no cash
Liquidation
occurs when a business closes and sells its assets to pay creditors
Working Capital Cycle
the period of time between payment for goods supplied to a business and the business receiving cash from their sale
Cash-flow forecasts
Future predictions of a firms cash inflows and outflows over a given period of time
Opening Balance
The amount of money in a business at the start of the month
Closing Balance
The amount of money in a business at the end of the month
Net cash flow
The difference between total cash inflows and total cash outflows
Total Cash Inflows
Summation of all cash inflows during a particular month.
Total Cash outflows
summation of all cash outflows during a particular month
Investment Appraisal
The evaluation of an investment project to determine whether or not it is likely to be worthwhile
Payback Period
Estimates the length of time required for an investment project to pay back its initial cost outlay
Average Rate of Return
Measures the annual net return on an investment as a percentage of its capital cost
Budget
A plan for making and spending money
Break Even Revenue
Amount of revenue needed to cover both fixed and variable costs so that business breaks even
Break even revenue =
FC / (1-(Direct cost/price))
Target price
what price items should be if a company wants B.E. point at a specific number of sales
Target Price
(Total fixed cost/Production unit volume) + Variable Cost per unit.
Final Accounts
Financial records of business transactions, which are needed to provide essential information to groups both within and outside the organization about the financial position and performance of it
Window Dressing
Presenting accounts of a business in the best possible, or most flattering, way which could potentially mislead users of accounts
Note
Flashcard