Unit 3 Flashcard PDF

What does legal tender mean? Money that is accepted by law to buy goods + service What does unit of account mean? Money can be used to place a value of goods and services What does store of value mean? Money has a value and it can be stored for example at the bank then use it in the future What d...

What does legal tender mean? Money that is accepted by law to buy goods + service What does unit of account mean? Money can be used to place a value of goods and services What does store of value mean? Money has a value and it can be stored for example at the bank then use it in the future What does means of exchange mean? Money is used to sell, buy or trade for goods and services Give me 3 benefit to plan expenditure? - a good credit score \- Avoid getting into debt \- Setting financial goals Give me 3 risk to not planning expenditure? - Getting into debt \- poor credit rating \- Not able to save for future What types of feature comes with standard account? - no banking fee \- has bank card + contactless pay \- salaries can be paid directly into the account What types of feature comes with premium account? - Package benefits for example travel insurance \- discounts on goods + services \- interest on credit balance What types of feature does student account has? - Debit card \- Discounts \- Interest fee over draft up to certain limits ( over the limit high interest) What types of feature does basic account has? - no banking fee \- debit card What is the purpose of recording transactions in accounting? To keep track of all money coming into and going out of the business ensuring payments are received and bills/taxes are paid on time Why is management of business a key purpose of accounting? It\'s helps the manager in \- Planning (forecasting financial commitment) \- Monitoring (checking performance and spending) \- Controlling (ensuring sufficient funds are available to cover outgoing) What is compliance in accounting? The responsibility of businesses to follow financial laws and use controls to prevent fraud. How does accounting help in measuring performance? It\'s evaluates financial success through \- gross and net profit \- sales revenue \- expenditure levels \- efficiency in collecting money owed What does control mean in the purpose of accounting? Tracking financial aspects such as Trade receivable ( money owed to the business from sales ) Trade payables ( money the business owes to other companies) What is capital income? Money used to set up a business considered a long term investment Name examples of capital income? - Loan \- Mortgage \- Shares (investments made by shareholders they may receive dividends ) \- Debenture ( bonds issued by companies repaid with interest) \- Owner\'s capital ( Personal saving invested by the owner) What is revenue income? Income received by the business from the sales of goods or services Name examples of revenue income? - Cash sales ( sales paid immediately in cash) \- Credit sales ( sales made on credit and paid later) \- Rent received (income from renting property) \- Interest received ( income earned on savings and lending) \- Commission received ( a percentage earned for selling on behalf of another business \- Discount received ( savings from paying less for goods or services What is capital expenditure? Money spend on acquiring assets (capital items) that the business will use over a long period of time What are the two types of assets in capital expenditure? - Non current assets (tangible) physical items like land or building \- Intangible assets - non physical items like goodwill, patents and trademarks What are non current (tangible) assets? - Land \- Buildings / premises \- Machinery and equipment \- Vehicles \- Fixtures and fitting What are intangible assets? Non physical assets such as \- goodwill ( the reputation and customer base of the business) \- Patents (legal protection for inventions) \- Trademarks ( recognisable symbols or name associated with the business What is depreciation? The reduction in the value of assets over time What are the two methods of depreciation? - Straight line depreciation ( reduces an asset\'s value by the same amount each year over its life) \- Reducing-balance depreciation ( shows higher depreciation in the early years and less in later years) What is revenue expenditure? The day to day cost incurred in running a business Identify examples of revenue expenditure? - Stationery and printing \- Bank charge \- Rent \- Postage \- Wages/salaries \- Marketing costs \- Heating and lighting \- Water \- Insurance premium \- Inventory purchases What is the difference between wages and salaries? Wages - hourly payments to employees Salaries - Fixed annual payments divided into monthly instalments What is the purpose of discounts allowed? To incentivise customers to purchase goods or reward bulk buying by reducing the price What are bank charges? Fees payable on business transaction made through a bank account What are administrative costs in revenue expenditure? - Costs for telephone usage \- Stationery and printing \- Postage What costs are related to utilities in revenue expenditure? - Heating and lighting \- Water supply payments What types of insurance are businesses legally required to have? - Building \- contents \- public liability \- employer liability What is retained profits as internal sources of finance? Profits kept in the business instead of being distributed to owners or shareholder used for reinvestment What are the advantages of retained profits? - does not need to repaid \- no interest payable What are the disadvantage of retained profits? - Not available to new businesses \- may be insufficient if profits are low What are net current assets? Money readily available to the business such as cash or assets quickly convertible to cash What are the advantages of net current assets? - quick way to raise funds \- selling inventory reduce holding cost What are the disadvantages of net current assets? - may have to sell inventory at a lower price \- could impact operations if working capital is reduced too much What is the sale of assets as an internal sources of finance? - Selling vehicles \- buildings \- machinery \- equipment to rise cash What are the advantage of selling assets? - useful for raising funds from surplus or unused assets \- No interest / repayment required What are the disadvantages of selling assets? - Not al businesses have surplus assets to sell \- May take time to sell assets \- Sale price may be lower than the assets actual value What is a loan and what are its advantages and disadvantages? Loan - money borrowed at an agreed interest rate and repaid over time Advantage - Fixed repayments help with budgeting; immediate access to funds. Disadvantages: Interest can be high; lenders may require security; increases cash outflows. What is hire purchase, and what are its advantages and disadvantages? Hire Purchase: Business pays a deposit and makes regular payments for an asset, owning it after all payments are made. Advantages: Access to assets without a large upfront cost; payments spread over time. Disadvantages: More expensive than outright purchase; increases cash outflows. What is leasing, and what are its advantages and disadvantages? Leasing: Renting assets without owning them, with payments made over time. Advantages: No large upfront costs; modern equipment accessible. Disadvantages: The asset is never owned unless an \'option to buy\' is included; can be expensive. What is crowd-funding, and what are its advantages and disadvantages? Crowd-Funding: Raising small amounts from many people online, often in exchange for rewards or discounted pre-orders. Advantages: Good for short-term finance; generates interest in the product. Disadvantages: Funds are not always guaranteed; time-consuming to manage campaigns. What is venture capital, and what are its advantages and disadvantages? Venture Capital: Investment from professional investors in exchange for ownership shares. Advantages: Access to expertise, guidance, and contacts. Disadvantages: Loss of control; investors expect quick returns. What are grants, and what are their advantages and disadvantages? Grants: Government funds provided under specific conditions (e.g., job creation). Advantages: No repayment required; useful for specific projects. Disadvantages: Limited availability; audit requirements; may not be accessible to all businesses. What is debt factoring, and what are its advantages and disadvantages? Debt Factoring: Selling invoices to a third party for immediate cash. Advantages: Quick access to funds; reduces risk of bad debts. Disadvantages: Loss of profit margin; affects relationships with customers. What is trade credit, and what are its advantages and disadvantages? Trade Credit: Buying goods or services and paying for them later. Advantages: Improves cash flow; no interest if payments are made on time. Disadvantages: Requires timely payments; late payment can damage supplier relationships. What is peer-to-peer lending, and what are its advantages and disadvantages? Peer-to-Peer Lending: Small investors lending to businesses through online platforms. Advantages: Accessible to businesses unable to g loans; quick process. Disadvantages: Interest rates can be higher than banks; platform fees may apply. What is Citizens Advice, and what are its advantages and disadvantages? Service: Free, confidential, and impartial advice on financial and non-financial issues. Advantages: Free and accessible. Helpful for low-income individuals. A good first point of contact. Disadvantages: Volunteers may not be financial professionals. May not handle complex financial problems What are Independent Financial Advisers (IFAs), and what are their advantages and disadvantages? Service: Professional advice on financial products like mortgages, pensions, insurance, and investments Advantages: Qualified professionals. Independent and impartial; no commission from products. Regulated by the government Disadvantages: Charge fees for their services. What are price comparison websites, and what are their advantages and disadvantages? Service: Compare features and prices of financial products (e.g., insurance, loans). Advantages: Free and time-saving. Interactive and personalised to the consumer\'s needs. Disadvantages: Requires online access. May not include all suppliers, and some deals may be cheaper directly from the supplier. What are debt counsellors, and what are their advantages and disadvantages? Service: Advice for individuals struggling with debt, including budgeting and creditor negotiations. Advantages: Personalised financial advice. Some offer free online tools and web chat services. Authorised by the FCA (Financial Conduct Authority). Disadvantages: Some counsellors charge fees. What is the Money Advice Service, and what are its advantages and disadvantages? Service: Free government agency providing impartial advice on budgeting and improving finances. Advantages: Online tools and calculators for budgeting. Web chat facility available. Disadvantages: Requires online access. Some individuals may lack confidence using the tools. What are Individual Voluntary Arrangements (IVAs)? Service: An agreement between an individual and creditors to pay off all or part of their debts over time. Advantages: Helps avoid bankruptcy and retain some assets. Disadvantages: Strict terms, and creditors must agree to the IVA. What is bankruptcy, and what are its consequences? Service: A legal declaration that a person cannot pay their debts, requiring them to use assets to pay creditors. Advantages: Clears most debts and offers a fresh start. Disadvantages: Loss of assets. Significant impact on credit rating and financial future. What is a cash flow forecast? A cash flow forecast is a financial document that estimates the expected cash inflows and outflows of a business over a specific period. What are the main components of a cash flow forecast? 1. Cash inflows: Money entering the business (e.g., sales, loans, investment). 2\. Cash outflows: Money leaving the business (e.g., wages, rent, utilities). 3\. Net cash flow: Difference between inflows and outflows (inflows - outflows). 4\. Opening balance: Cash available at the start of the period. 5\. Closing balance: Cash left at the end of the period (opening balance + net cash flow). Why is a Cash Flow Forecast important for a business? Helps with Planning: Ensures that the business has enough cash to meet its obligations, such as paying suppliers and employees. Identifies Cash Shortages or Surpluses: Anticipates when extra funding or savings might be needed. Improves Decision Making: Helps with making informed decisions regarding borrowing, investment, and cost management. Helps Secure Finance: Lenders and investors often require a cash flow forecast to assess a business\'s ability to repay loans. What are the advantages of creating a Cash Flow Forecast? Forecasting Cash Needs: Helps identify periods of potential cash shortages, allowing for proactive actions like arranging credit or adjusting spending. Better Financial Management: Allows businesses to manage their liquidity by understanding when they have cash available for growth or emergencies. Helps in Securing Funding: Shows lenders or investors how the business plans to manage its finances and repay debts. What are the disadvantages of creating a Cash Flow Forecast? Accuracy Issues: Cash flow forecasts rely on estimates and assumptions, which may not always be accurate, especially in unpredictable markets. Time-Consuming: Creating a detailed cash flow forecast can take time, especially for small businesses with limited resources. Requires Regular Updates: Forecasts need to be updated regularly to reflect changes in actual cash inflows and outflows. How can a Cash Flow Forecast be used to avoid cash flow problems? Early Warning System: A cash flow forecast helps identify potential cash shortages ahead of time, allowing the business to take corrective action before it becomes a problem. Effective Budgeting: By understanding expected cash inflows and outflows, businesses can budget more effectively and avoid unnecessary expenditure. Plan for External Funding: If a business sees a cash shortfall in advance, it can plan to apply for loans or seek investment in time to meet obligations. What are common causes of cash flow problems that a business can identify through a Cash Flow Forecast? Late Payments from Customers: Delayed payments can create cash flow shortages. High Overheads: Excessive spending or fixed costs (e.g., rent, salaries) that don\'t align with income levels. Unexpected Expenses: Unforeseen costs, such as equipment breakdowns or legal fees. Seasonal Sales Variations: Businesses may experience periods of low sales, affecting cash inflow. What is the difference between cash flow and profit in a business context? Cash Flow: Refers to the actual movement of money in and out of the business, which is essential for day-to-day operations. Profit: Refers to the difference between revenue and expenses over a specific period, but does not account for cash flow timing (e.g., sales made on credit). What is the formula for total variable cost? variable cost per unit x quantity What is the formula for total cost? Fixed costs + total variable costs What is the formula for total revenue? Selling price x quantity What would you see in a break even chart? - loss \- profit \- revenue \- total costs \- fixed cost \- break even point What does variable / fixed cost means? Variable - cost that changes Fixed - stay the same no matter what What\'s the formula for break even point? Fixed cost divide by selling price - variable costs per unit What the formula for margin of safety formula? Sales - break even output What is a cash flow forecast? A tool used to identify potential cash flow problems, helping businesses plan, monitor, and control spending effectively. What is the format of a cash flow forecast? 1) Opening bank balance. 2\. Itemized receipts (cash inflows). 3\. Total receipts added to the opening balance. 4\. Itemized payments (cash outflows). 5\. Total payments deducted from receipts. 6\. Closing balance = Net cash flow + Opening balance. What causes cash flow problems?. Selling on credit without timely payment, poor planning and monitoring, and lack of funds to restock inventory or cover expenses can lead to financial strain and disrupt business operations. How can a business resolve cash flow problems?. Reduce unnecessary expenses. Encourage debtors to pay quicker. Delay payments to suppliers Set targets and monitor spending. What are the benefits of cash flow forecasts?. Helps predict and plan for cash flow issues. Assists in securing loans or overdrafts. What are the limitations of cash flow forecasts?. May not account for payment delays or sudden expenses. Figures must be accurate and realistic for effectiveness. What is the purpose of break-even analysis in planning? Helps a business determine how many items it needs to sell to cover costs and set prices to ensure profitability. How does break-even help with control? Identifies where costs are increasing, allowing the business to take action to control them. How does break-even aid in target setting? Helps a business set sales, unit cost, and profit targets based on contribution and break-even points. What are the uses of break-even analysis? Planning: Helps set prices and sales goals. Monitoring: Alerts the business to problems like increased costs or declining sales. Control: Allows cost management. Target setting: Supports sales and profit goals. What is contribution per unit, and why is it important? Contribution = Selling price - Variable cost per unit. It helps cover fixed costs and assess whether a product is profitable. What are the limitations of contribution per unit? Low contribution per unit means many sales are needed to cover fixed costs. High contribution on certain products may distort the overall profitability. What factors can cause the break-even point to change? Selling price: Higher price increases total revenue, lower price reduces it. Fixed costs: Increases raise total costs. Variable costs: Higher unit costs shift the total costs line up, lower unit costs shift it down. What should a business do if variable or fixed costs rise? Increase the selling price (if possible). Reduce variable or fixed costs. Boost sales volume to compensate. What the formula for months to break even? Break even divide units produced per month What is the purpose of a Statement of Financial Position (SOFP)? It shows the assets, liabilities, and capital of a business at a specific point in time, helping assess its financial position and strategy. What is the key equation of the statement of financial position? Total Assets = Total Liabilities + Capital. What are the two types of assets? 1. Non-current assets: Long-term resources (e.g., machinery, buildings). 2\. Current assets: Short-term resources (e.g., cash, stock, trade receivables What are liabilities? Debts the business owes. Current liabilities: Short-term debts (e.g., trade payables, overdrafts). Non-current liabilities: Long-term debts (e.g., loans, mortgages). How do you calculate net assets? total assets - total liabilities What is depreciation, and what are the two methods? Depreciation reduces the value of an asset over time. 1\. Straight-line depreciation: Equal reduction each year. 2\. Reducing-balance depreciation: A percentage applied to the asset\'s current value What is the difference between prepayments and accruals? Prepayments: Expenses paid in advance. Accruals: Expenses incurred but not yet paid. How can SOFP help assess business performance? By analyzing: 1\. Liquidity: Can the business cover short-term liabilities? 2\. Profitability: Are the assets generating profit? 3\. Efficiency: How well are debts collected and stock used? What is a prepayment? A payment made in advance for goods or services to be received in the future (e.g., prepaid insurance). What is an accrual? An expense incurred or income earned but not yet paid or received by the end of the accounting period (e.g., services received but not yet paid for). What is a gross profit margin formula? Gross profit/sales revenue x 100 What is the purpose of a Statement of Comprehensive Income? It records a business\'s sales revenue, expenses, and shows the profit or loss made during the financial year. What is Gross Profit? Gross profit is calculated by subtracting the cost of goods sold from net sales revenue. What is Operating Profit? Operating profit is the gross profit minus selling and administrative expenses. What is Net Profit Before Tax? Net profit before tax is calculated by adding any sales of assets or other profits to the operating profit. What is Net Profit After Tax? Net profit after tax is the final profit figure after the business has paid its tax liabilities. What is Loss in the Statement of Comprehensive Income? Loss occurs when expenses exceed income, calculated similarly to profit but with negative results. What is Depreciation and why is it important in the income statement? Depreciation reduces the value of assets over time, and adjustments for depreciation can affect profit by lowering asset values. What are Prepayments and Accruals in the income statement? Prepayments: Expenses paid in advance (e.g., rent for a future period). Accruals: Expenses incurred but not yet paid (e.g., phone bills). How can external factors like inflation affect the income statement? Inflation can impact expenses and revenue, making interpretation of profit or loss more complex. Why is it important to analyze a statement of comprehensive income over several years? To identify trends in turnover, costs, and profits, as one year\'s statement alone may not provide a clear picture of business performance. What\'s the formula for straight line depreciation? asset purchase price - estimated salvage value / estimated useful life of asset What\'s the formula for net assets? current assets + fixed assets - current liabilities What does the Net Profit Margin measure? It measures the profit made by the business after all expenses have been deducted, showing the efficiency and profitability of the business. What is the mark up formula? Gross profit / cost of goods sold x 100 How do you calculate the Net Profit Margin? Net Profit Margin = (Net Profit ÷ Revenue) × 100 Why is the Net Profit Margin considered a more accurate measure than Gross Profit Margin? Because it takes into account all expenses, not just the cost of goods sold, providing a clearer picture of overall business efficiency. What does Return on Capital Employed (ROCE) measure? It measures the return on capital as a percentage of the capital employed, showing how efficiently a business uses the money invested to generate profit. How do you calculate Return on Capital Employed (ROCE)? ROCE = (Net Profit Before Interest and Tax ÷ Capital Employed) × 100 What is the formula for capital employed? Total equity + non current liabilities What is the current ratio formula? current assets / current liabilities What is the liquid capital ratio formula? (Current Assets - Inventory) / Current Liabilities What does the Current Ratio measure, and why is it important for a business? The Current Ratio (also known as the working capital ratio) measures a business\'s assets compared to its liabilities. It shows whether a business is being managed properly and can pay off its short-term debts. What is the ideal Current Ratio, and what happens if a business has less than 1:1? The ideal Current Ratio is 1.5:1. If a business has less than 1:1, it may struggle to pay its debts as it will not have sufficient current assets to cover current liabilities. What is the Liquid Capital Ratio and why is it different from the Current Ratio? The Liquid Capital Ratio (also known as the Liquidity Ratio or Acid Test Ratio) removes inventory from the calculation since inventory may be hard to quickly turn into cash to pay a debt. It focuses on more liquid assets. What is the ideal Liquid Capital Ratio, and what does it indicate? The ideal Liquid Capital Ratio is 1:1. If a business has less than this ratio, it may have problems paying off its current liabilities and could face liquidity issues. What is the formula for trade receivable days? Trade receivable credit sales x 365 What is the formula for inventory turnover? Average inventory / cost of sales x 365 What is the formula for average turnover? Average inventory = opening inventory + closing inventory /2 What does the Trade Receivable Days ratio measure, and how do you interpret the results? Definition: Measures the average number of days it takes for a business to collect payments from its customers after issuing invoices. Interpretation: High value: Could indicate the business is struggling to collect debts or has weak credit control. Low value: Suggests efficient collection of debts, with customers paying faster. Comparison with industry: If the value exceeds industry standards (e.g., 30 days), it may signal cash flow problems. What does the Trade Payable Days ratio measure, and how do you interpret the results? Measures the average number of days it takes for a business to pay its creditors (suppliers). What does the Inventory Turnover ratio measure, and how do you interpret the results? Measures the average number of days a business holds its inventory before selling it or turning it into cash. Interpretation: High value: Indicates that inventory is turning over quickly, meaning the business is selling products fast. Low value: Could signal overstocking, slow-moving inventory, or obsolete products, tying up capital unnecessarily. Industry Context: Businesses with perishable goods typically have lower turnover days. What are the limitations of financial ratios? Averages: Ratios are based on averages, which may hide differences in performance within the business. No Solutions: Ratios highlight problems but don\'t explain the causes or provide solutions. Data Changes: Ratios use data that may be outdated and no longer accurate. Accounting Practices: Different accounting methods can distort ratios, making comparisons misleading. Difficult Comparisons: It\'s hard to compare ratios with competitors due to different accounting practices. Context Matters: Poor performance doesn\'t always mean failure - some businesses may be investing or in a competitive market.