Financial Strategies and Accounts Key Terms

Key terms and definitions for the financial accounts and strategies chapter

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  • Created on: 08-01-13 15:09

Financial Strategies and Accounts Key Terms

Financial Aims: the broad, general goals of the finance and accounting function or department within an organisation.

Financial Objectives: the specific, focused targets of the finance and accounting function or department within an organisation.

Financial Strategies: long-term or medium-term plans, devised at senior management level, and designed to achieve the firm’s financial objectives.

Financial Tactics: short-term financial measures adopted to meet the needs of a short-term threat or opportunity.

PESTLE: mnemonic often used to classify the external factors that can influence a business - Political, Economic, Social, Technological, Legal, Environmental.

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Financial Strategies and Accounts Key Terms

Balance sheet: a document describing the financial position of a company at a particular point in time, by comparing the items owned by the company (assets) with the amounts that it owes (liabilities).

Income statement: an account showing the income and expenditure (and thus the profit or loss) of a firm over a period of time (usually a year)

Management accounting: the creation of financial information for use by internal users in the business, in order to predict, plan, review and control the financial performance of the business.

Financial accounting: the provision of financial information to show external users the financial position of the business; it concentrates on historic data.

Assets: items that are owned by an organisation.

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Financial Strategies and Accounts Key Terms

Non-current assets: resources that can be used repeatedly in the production process (owned > 1 year), although they do depreciate in value or wear out. E.g. land, buildings, machinery and vehicles.

Tangible assets: non-current (fixed) assets that exist physically.

Intangible assets: non-current assets that do not have a physical presence, but are nevertheless of value to a firm (e.g. a brand name or patent).

Current assets: short-term items (owned < 1 year) that circulate in a business on a daily basis and can be expected to be turned into cash within 1 year.

Liabilities: debts owned by an organisation to suppliers, shareholders, investors or customers who have paid in advance.

Total equity/ shareholders equity (capital): funds provided by shareholders to set up the business, fund expansion and purchase fixed assets.

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Financial Strategies and Accounts Key Terms

Revenue expenditure: spending on day-to-day items such as raw materials, inventories (stock), wages and power to run the production process.

Capital expenditure: spending on non-current (fixed) assets - those assets used repeatedly in the production process, such as buildings, machinery and vehicles.

Depreciation: the fall in value of an asset over time, reflecting the wear and tear of the asset as it becomes older, the reduction in its economic use or its obsolescence.

Obsolescence: when as asset is still functioning but is no longer considered useful because it is out of date.

Working capital: the day-to-day finance used in business, consisting of current assets (e.g. cash, inventories and receivables) minus current liabilities (e.g. payables, bank overdraft, dividends owed and tax owed).

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Financial Strategies and Accounts Key Terms

Liquidity: the ability to convert an asset into cash without loss or delay.

Liquid assets: items owned by an organisation that can be converted into cash quickly and without a loss of value. The most liquid asset that a business can possess is cash.

Working capital cycle: the inflow and outflow of liquid assets and liabilities within a business. 

Gross profit: revenue minus cost of sales. The gross profit shows how efficiently a business is converting its raw materials or stock into finished products.

Operating profit: the revenue earned from everyday trading activities minus the costs involved in carrying out those activities.

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Financial Strategies and Accounts Key Terms

Earnings per share: how much a shareholder would earn if all of the profit were given to shareholders as dividends. In practice this is unlikely to happen as some profit will be retained in the business. It is an excellent way of measuring how effectively a business is using its shareholders' money to make its profit.

Profit quality: a measure of whether profit is sustainable in the long run. High-quality profit is profit that will continue; low-quality profit arises from exceptional or extraordinary circumstances that are unlikely to continue.

Profit utilisation: the way in which a business uses it profit or surplus.

Trend: the underlying pattern of change shown within a set of numerical data.

Ratio analysis: a method of assessing a firm's financial situation by comparing two sets of data.

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Financial Strategies and Accounts Key Terms

Solvency: a measure of a firm's ability to pay its debts on time.

Receivables (debtors): people who owe the business money.

Creditors (payables): people or organisations that are owed money by the firm.

Dividends: a percentage of the company's profit that is distributed to shareholders as their reward for holding shares and investing into the business.

Retained Profit: the part of the firm's profit that is reinvested in the business rather than distributed to its shareholders.

Debenture: a long-term loan made to a business at an agreed fixed % rate of interest and repayable on a stated date. 

Direct costs: costs that are directly involved with each unit of output.

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Financial Strategies and Accounts Key Terms

Overheads: fixed costs that do not change as output increases. 

Capital Investment: the process of purchasing fixed assets (i.e. non-current assets),such as buildings, machinery or office equipment.

Investment decision making: the process of deciding whether or not to undertake capital investment (the purchase of non-current assets) or major business projects.

Investment appraisal: A scientific approach to investment decision making, which investigates the expected financial consequences of an investment, in order to assist the company in its choices.

Payback period: the length of time that it takes for an investment to pay for itself from the net returns provided by that particular investment.

Average rate of return (ARR): total net returns divided by the expected lifetime of the investment, expressed as a percentage of the initial cost of the investment.

Net present value (NPV): the net return on an investment when all revenues and costs have been converted to their current worth.

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