Unit 3 HL - Depreciation, Ratios, and Financial Planning

Practice flashcards covering Depreciation methods, Financial Ratios, Investment Appraisal (NPV), and Budgeting concepts based on the HL-Unit 3 lecture notes.

Depreciation

Essentially reduces the value of a fixed asset over time by spreading its purchase cost over its useful life.

Straight Line Depreciation

A method involving reducing the value of an asset by a fixed amount each year, starting from the price paid (purchase cost).

Annual depreciation charge (Straight Line)

Calculated as $\frac{purchase\,cost - residual\,value}{expected\,life}$.

Units of Production method

A method that involves calculating depreciation on each unit of output, where depreciation changes yearly based on how much the non-current asset is used.

Depreciation per unit

Calculated as $\frac{Purchase\,cost - Residual\,value}{Expected\,number\,of\,units\,over\,lifetime}$.

Net Book Value

The purchase cost of an asset minus its accumulated depreciation.

Stock Turnover ratio

Measures the number of times, on average, that a firm sells and replenishes its stock as a measure of efficiency in converting stock into sales.

Debtors Day ratio

A measure of efficiency indicating the average number of days it takes the company to collect its debts, calculated as $(\frac{debtors}{revenue}) \times 365$.

Creditor Days Ratio

An indicator of the average number of days it takes the business to settle its debts, calculated as $(\frac{creditors}{cost\,of\,goods\,sold}) \times 365$.

Gearing Ratio

A ratio used to assess a firm's long-term liquidity position, calculated as $(\frac{non-current\,liabilities}{capital\,employed}) \times 100$ or $(\frac{loan\,capital}{capital\,employed})$.

Net Present Value (NPV)

The value of future cash flows that have been 'discounted' in order to demonstrate their present values today.

Discount rates

Used to allow future incomes to be expressed in terms of what their present value is today or to convert future earnings to today's value of money.

Budget

A tool to help financial planning that is used to set out plans for spending over a period of time.

Cost Centre

A part of the business that incurs costs but does not directly contribute to its overall revenue, such as HR, Finance, or Marketing.

Profit centre

Any part of the business that contributes to its overall revenue and has both costs and revenues, such as individual stores.

Variance analysis

A tool used to compare a business' budgeted (planned) expenditure with the actual expenditure over a period of time.

Favourable variance

A situation in variance analysis where financial outcomes were better than expected.

Adverse variance

A situation in variance analysis where financial outcomes turned out worse than expected.