A level Business OCR > Finance > Flashcards

Finance Flashcards

(56 cards)

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1
Q

investment appraisal

A

the process of analysing whether investment projects are worthwhile

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2
Q

average rate of return

A

looks at the total accounting return for a project to see if it meets the target return, percentage

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3
Q

net cash flow =

A

inflow-outflow

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4
Q

ARR (average rate of return) =

A

average annual return / investment (initial cost) x 100

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5
Q

average annual return =

A

total net profit / no. years

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6
Q

ARR example

A

total investment = 2 000 000
AAR = 3 250 000
(AAR - 2 000 000) / 4 (no. years) = 312 500
312 500 / 2 000 000 x 100 = 15.625

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7
Q

advantages of ARR

A

can be compared with other projects and targets set by the business
looks at the whole profitability of the project which is a key issue for shareholders

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8
Q

disadvantages of ARR

A

takes no account of the time value of money (inflation)
treats profits arising late in the project in the same way as those which may arise earlier

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9
Q

payback period

A

the time it takes for a project to repay its initial investment

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10
Q

how to calculate payback period

A

you will be given a grid with a column that says cumulative cash flow. this is how much is left to pay
count the years but there is a chance it wont be exact years. instead it would be years + months
you should do:
amount to pay back / cash flow = 0.5 x 12 = years + months

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11
Q

advantages of payback period

A

focuses on cash flows
simple calculation, easy to understand
good for markets that change rapidly

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12
Q

disadvantages of payback period

A

ignores qualitative factors of decision making
ignores cashflows after goal has been reached
takes no account of inflation, short term thinking

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13
Q

net present value (NPV)

A

calculates the monetary value now of a projects future cashflows. future cash flows are worth less, use discount factors to bring cash back to their present value

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14
Q

advantages of NPV

A

takes account of inflation
reduces the impact of long term less likely cash flows
looks at all the cash flows involved during the life of the project

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15
Q

disadvantages of NPV

A

doesnt concern external factors
more complicated and less easy to understand
sensitive to initial investment costs

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16
Q

capital structure

A

how a business is financed, often a combination of debt and equity
- finance provided in order for it to operate
- bank loans or other long term loans
equity could be gained by the sale of shares

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17
Q

why would a business want high DEBT

A

interest rates are low - debt is cheap to finance
profits and cashflows are strong so debt can be repaid easily

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18
Q

why a business would want high EQUITY

A

more flexibility, dont have to pay dividends

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19
Q

what may determine a businesses choice of finance

A

GDP
interest rates
business size and structure
cash flow
if theyre already in debt for several loans
amount of time involved
health of economy

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20
Q

fixed costs

A

dont change with output

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21
Q

variable costs

A

can vary and change with output

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22
Q

examples of fixed costs

A

rent
salaries
advertising
insurance

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23
Q

example of variable costs

Study These Flashcards
A

raw materials
piece rates

24
Q

total costs =

Study These Flashcards
A

fixed costs + variable costs

25
marginal costs
this is the cost of producing one additional good
26
profit and loss account
shows the profit and loss made by the business
27
net profit margin =
net profit / revenue x 100
28
costing methods
an act of measuring the effects of any business activity in financial terms
29
standard costings
the cost the business expects the production of a product or service to be. it is a forecast that gives the business a cost target
30
actual cost vs variance
actual cost is how much it costs and the difference is called the variance
31
advantage to standard costing
it can be use to monitor and motivate
32
disadvantage to standard costing
it can be difficult to collect info and figures may need to be assessed
33
cost centers
a specific part of the business where cost can be identified and allocated with ease
34
costs may be allocated by....
location of business sites capital equipment used in each department physical site of the department the individual department the different products that a business produces
35
advantages of cost allocation
motivation of workforce (reduction of costs could lead to a bonus allows to monitor workforce look for better suppliers or production techniques
36
disadvantages of cost allocation
issues collecting data (difficult to separate costs based of department) some costs cant be controlled (e.g oil prices) some departments may see it as unfair causing conflict
37
contribution
what a business needs to achieve from selling products in order to first cover its fixed costs and then make a profit
38
total contribution =
total revenue - variable costs
39
contribution unit =
selling price (per unit) - variable costs (per unit)
40
break even =
fixed costs / contribution per unit
41
break even analysis
used by production management and management accountants it is based on categorising production costs between those which are variable and fixed
42
strengths of break even
how long it takes a start up to reach profitability helps an entrepreneur to gain finance helps understand the risk involved in a start up
43
weaknesses of break even
unrealistic assumptions - costs can change sales are likely to be the same as output variable costs can change most businesses sell more than one product, so break even becomes harder to calculate
44
budgets
a detailed plan for the future concerning the revenues and costs expected over a certain period of time
45
managers use budgets to....
motivate staff improve efficiency monitor performance control income and expenditure
46
variance analysis
involves calculating and investing the differences between actual results and the budget
47
favourable
COSTS below budget REVENUE above target
48
adverse
COSTS above budget REVENUE below target
49
possible causes of favourable variance
stronger demand than expected = higher actual revenue cautious sales and cost assumptions selling prices increased higher than budget better than expected productivity or efficiency
50
main causes of cash flow problems
seasonal demand overtrading - growing the business too fast too much production capacity low profits or worse losses
51
cash flow
cash flow is a dynamic and unpredictable part of life for a business, with cash flow problems often being the reason why businesses fail
52
why produce a cash flow forecast?
advance warning on cash flow shortages make sure the business can pay its employees and suppliers important part of finance control provide reassurance to investors and lenders that business is being managed properly
53
how to manage cash flow problems
1. use reliable cash flow forecasting 2. keep costs under control 3. manage working capital efficiently 4. choose the right source of finance
54
limitations of cash flow forecasting
competitor behaviour forecasts are estimates changes in behaviour
55
depreciation
an accounting estimate of the fall in value of a fixed asset over time
56
A level Business OCR
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