BUSS 3 Key Terms

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Acid-test ratio

A liquidity ratio that looks at whether a business can pay for current liabilities out of cash and near-cash assets (ignores that value of stocks)

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Asset turnover

A ratio that calculates the relationship between revenues and the total assets employed in a business.

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Assets

Amounts owned by, or owed to a business.

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Average rate of return

A measure of the total accounting return from an investment project.

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Balance sheet

The financial statement that provides a snapshot of the assets and liabilities of a business at a particular date.

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Capital expenditure

Expenditure on assets which are intended to be kept in the business (e.g. IT systems, machinery) rather than sold or turned into products.

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Cash flow targets

Specific objectives set by a business for cash-flow generated by a business

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Corporation tax

The tax levied on the profits of companies. The percentage varies depending on the size of the profits earned, typically 20-30%.

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Cost minimisation

A strategy of achieving the most cost-effective way of delivering goods and services to the required level of quality.

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Creditor days

A ratio that estimates the average period (in days) taken to settle amounts owed by a business to suppliers

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Current ratio

A simple and popular measure of liquidity that assess the ability of current assets (e.g. cash, stocks) to finance current liabilities (e.g. trade creditors)

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Debentures

A long term source of finance - a debenture is a form of bond or long term loan issued by a company.

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Debtor days

A ratio that focuses on the average time it takes for trade debtors to settle their accounts. Usually measured in days.

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Depreciation

An accounting estimate of the fall in value of a fixed asset over time.

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Discount factor

The multiplication factor that converts a projected cost or benefit in a future year into its present value.

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Dividend

Amounts paid to shareholders out of the profits earned by a company.

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Dividend yield

A measure of shareholder return - calcuulated by comparing the dividend per share by the share price.

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Fixed assets

Assets such as property, equiptment and vehicles that are intended to be retained and used in a business for more than a year.

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Gearing

A ratio that focuses on the long term financial stability and capital structure of a business. The gearing ratio measures the proportion of assets in a business that are financed by borrowing.

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Going concern

A business that is viabe and able to continue in business for the foreseeable future.

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Goodwill

An intangiable asset that can be included in a balance sheet = the difference betwen the net assets of a business acquired and the price paid for the business.

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Income statement

A financial statement that summaries the trading results of a business over a specfic period - usually one year.

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Investment appraisal

Analyticial techniques to help managment evaluate returns from potentia investments and help chose between competing investments.

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Liabilities

Amounts owed to a business by others.

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Liquidity

The ability of a business to finance required payments to creditors.

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Net present value

The present value of a series of a future net cash flow that will result from an investment, minus the amount of the original investment.

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Operating profit

The profit earned by a business from its entire trading operations - started before financing (e.g. interest) and tax.

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Overtrading

Where a business suffers financial difficulties from expanding too quickly - usually suffering set up losses and increased working capital.

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Payback period

The time it takes for a project to repay its initial investment.

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Profit centres

A seperatey indentifiable part of a business for which it is possible to identify revenue and costs and calulate relevant profit.

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Profit quality

The sustainability of profit from one period to the next, higher quality profit is profit that is likely to be repeated rather than affected by one off items.

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Profitability

The amount of profit earned in a period or rate of profit earned compared with revenue.

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Provisions

Amounts set aside to cover future costs or liabilities (e.g. redundancies, business closures, legal disputes)

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Ratio analysis

Interpretation of financial performance by calculating and intepretating ratios.

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Retained earnings

Profits earned by a business that arer kept in the business rather than distributed as dividends.

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Revenue expenditure

Spending on day to day operation of the business e.g. paying for materials, staff costs, managment salaries and advertising

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Rights issue

The issue of new shares to existing shareholders in order to raise new finance. The new shares are usually offered at a significant discount to the existing share price to encourage take-up

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ROCE

A measure of the percentage return that a business earns from the capital employed in the business. Often referred to as the “primary ratio”.

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Share capital

The amount invested into a company by shareholders

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Stakeholder returns

The rewards earned by shareholders = dividends paid to them and any increase in the value of their shares.

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Stock turnover

A liquidity ratio that looks at how often a business rotates its stock during a year

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Trade creditors

Amounts that a business owes to its suppliers.

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Trade debtors

Amounts that are owed to a business from its customers.

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Working capital

The net amount invested by a business to finance day to day trading usually calcuated as a current assets - current liabilities.

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