Chapter 2 Key Terms

A document describing the financial position of a company at a particular point in time. It compares the value of items owned by the company (its assets) with the amounts that it owns (the liabilities).
Balance Sheet
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An account showing the income and expenditure (so profit and loss) of a company over a period of time – usually a year. Both documents are based on historical data and show what has happened in the recent past.
Income Statement
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Items that are owned by an organisation.
Assets
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Resources that can be used repeatedly in the production process, although they do wear out or lose value over time. These are often known as fixed assets. Examples include machinery, land, buildings and vehicles.
Non-Current Assets:
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Short-term items that circulate in a business on a daily basis and can be expected to be turned into cash within one year.
Current Assets
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The provision of financial information to show external users the financial performance of the business – concentrates on historical data.
Financial Accounting
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The creation of financial information for the internal users in a business to predict, plan, review and control the financial performance of the business.
Management Accounting
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Debts owed by an organisation to suppliers, shareholders, investors or customers who have paid in advance.
Liabilities
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Funds provided by shareholders to set up the business, fund expansion and purchase fixed assets.
Total Equity
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Revenue – Cost of Sales. Shows how efficiently a business is converting its raw materials or stock into finished products.
Gross Profit
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The revenue earned from everyday trading activities minus the costs involved in carrying out the activities. It is also gross profit minus expenses.
Operating Profit
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A method of assessing a firm’s financial situation by comparing two sets of linked data.
Ratio Analysis
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Measure the efficiency with which a business makes a profit, in relation to its size.
Profitability Ratios
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Measures the profitability of a business by calculating its operating profit as a % of the capital that a business has at its disposal – its capital employed.
Return on Capital Employed
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Measures the ability of a business to stay solvent (pay its liabilities) in the short term.
Liquidity Ratio
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Measures liquidity by expressing current assets as a ratio to current liabilities.
Current Ratio
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A measure of a firm’s ability to pay its debts on time. A firm that can meet its financial commitments is described as ‘solvent’. A firm that cannot meet its financial commitments is described as ‘insolvent’.
Solvency
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Other cards in this set

Card 2

Front

An account showing the income and expenditure (so profit and loss) of a company over a period of time – usually a year. Both documents are based on historical data and show what has happened in the recent past.

Back

Income Statement

Card 3

Front

Items that are owned by an organisation.

Back

Preview of the front of card 3

Card 4

Front

Resources that can be used repeatedly in the production process, although they do wear out or lose value over time. These are often known as fixed assets. Examples include machinery, land, buildings and vehicles.

Back

Preview of the front of card 4

Card 5

Front

Short-term items that circulate in a business on a daily basis and can be expected to be turned into cash within one year.

Back

Preview of the front of card 5
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