business accounting and finance

-measure performance

- reassure stake holders 

- motivate

- give direction

set using past figures, the state of the economy and both statement of financial posiition and income statement.

objectives shoud be SMART

funds for a business 

internal= within the business e.g retained profits and selling assets

external= funds outside the from e.g overdraft or bank loan

short term is 3 years

medium term is 3-10 years

long term is anything over 10 years

overdraft= taken more money out than you have

loan= money borrowed, usually from the bank

factoring= sell debt to debt collecters (last resort)
dont get all money back 

hire purchase= pay in installements pay more than it costs improves cash flow

debenture= loan from an investor they can sell to someone else finance if the bank refuse

- illegal ot manipulate accounts

gaap= (generally accepted accounting practise), set the rules and principles...

> economic entity

> monetry unit

> full disclosure

> actual basis

consistency= produced in same way

going concern= assumes firm is operating as normal

matching= timing of information

materiality= realistic figures have to be met

objectivity= based on facts

prudence= overstating losses

realisation= legal ownership of changes

costs= what a firm pays e.g wages

revenue= sales x price

profit= revenue - costs

total costs= direct + indirect

average cost= total cost % output

average revenue = revenue % sales

contribution = selling price - variable costs

margin of safety= sales - break even

break even= fixed costs % contribution

target level of profit = target profit+ fixed costs                                                             contribution

contribution is how much a sale contributes to a fixed cost

break even is when you cover all costs, dont make profit or loss

margin of safety is the difference between what you need to sell vs what your selling

adv: decision making tool, gives targets, find margin of safety, motivational tool

disad: assumes fixed costs wont change, better to have than not, should be updated regularly 

when fixed costs increase due to an increase in output

pay back period = what you still owe  x12

                            next number down

ARR = profit% no. of years % investment x 100 

Net present value = add all present values - investment

present value= return x discount

budget is a prediction of how much a firm will spend and what they will expect to receive back

eg. sales budget, purchasing budget, production budget, labour budget

budgets can result in being adverse of favourable 

adverse- spent more, recieve less (worse than expected)

favourable- spent less, recieve more (better than expected)

Historical= based on past spending to create budget

adv: quick, easy, something from past to work on

disad: doesnt promote saving, allows you to go over, less likely to stick to

zero based= budget starts at zero have to as when the money is needed, justify why

adv:promotes efficiency, promotes saving

disad= time consuing and creates slow decision making

useful...

> keeps expenditure under control

> encourages controlling costs

not useful...

> only useful if you stick to them and they encourage efficiency

recommendation= use a mixture of the two give a low budget so that decision making is quicker but they have to ask if they need anymore.

> money coming in and out of the business

* profit is the surplus after money has left the business whereas cash flow is money coming in and out, profit is at the end of financial year and cash flow is monthly*

cash flow forecast= to predict future cash flow, can asses where there might be working capital problems.

Useful...

>keeps costs under control

>establish were you will have a problem

>implement strategies on this 

Not useful...

>prediction

>things happen outside the businesses control

is a record of the businesses actual inflows and outflows

a cashflow forecast is a prediciton of the money that will come in and out whereas a cash flow statement is actual

various levels of profit and loss within the financial year.

other than revenue and ratios all calculations are take away

revenue= sales x price

cost of sales = direct costs

gross profit= revenue - cost of sales

expenses = indirect costs

operating costs= expenses - gross profit

net profit (profit for the year)= dividend + retained profit

Useful...

> exsisting and potential shareholder see level of dividend and level of revenue

> directors can make decisions

> can compare to previous years to measure performance (% change)

Not useful...

> have to act on them otherwise is an opportunity cost

> should make strategies to improve on them

Useful...

> exsisting and potential shareholder see level of dividend and level of revenue

> directors can make decisions

> can compare to previous years to measure performance (% change)

Not useful...

> have to act on them otherwise is an opportunity cost

> should make strategies to improve on them

- shows the health of a business on one day, compares assets to liabilites and is a legal requirement.

non current assets= fixed assets (over 12 months)

current assets= used very quickly e.g stock

recievables= debtors e.g customer on credit

payable= creditors e.g suppliers

non current liabilites= what you owe in the long term

net current assets= working capital

net assets= current assets+non current assets- current liabilities + non current liabilites

net current assets= current assets- current liabilities

when fixed assets lose value over time

key terms...

> net book value= cost - amount written off

> residual value= value at end of life

> historic cost= cost at purchase

two methods...

straight line method= initial- residual % life of an asset

reducing balance= continous % taken off each year e.g machinary, stock and vehicles

> makes accounts accurate, true and fair

> potental and exsisting shareholders

in early years it depreciates more

shows if a firm has sufficient cash to pay its debts

current ratio= current assets % current liabilites           . above 1 can pay short term debts

acid test ratio = current asset - stock % current liabilities     .includes inventories

shows the level of profit within the business (all x by 100)

gross profit margin= gross profit % revenue x100

net profit margin= profit before interest and tax % revenue x100

roe= profit for the year % total equity x 100

roce= operating profit % capital employed x 100

show a firms ability to meet its debts and obligations

gearing = non current liabilities % capital employed x 100

interest cover= profit before interest and tax % finance costs

shows how a firm uses its assets and liabilities

stock turnover= inventories % cost of sales x 365

debtor turnover= trade recievables % revenue x 365

creditor turnover=trade payables % cost of sales x 365

non current asset turnover= revenue % non current assets

assess the worth of a share within a paticular business

Dividend per share= dividend % no. of shares in issue

Dividend yeild= dps % share pricex 100

Earnings per share = profit for the year % no. of ordinary shares in issue

Price= share price % eps