Term
Finance
What is finance?
Answer
Definition
The management of money including how businesses obtain, use, and monitor funds.
The core functions and the consequence of poor financial planning.
Key terms defining a business's fundamental economic structure.
Understanding how expenses are classified relative to output volume.
Finding the point where total revenue equals total costs (no profit or loss).
A standard hierarchy for calculating the various levels of profit.
Predicts cash inflows and outflows over time to avoid shortages.
Managing cash flow can involve controlling costs, inventory, delaying payments, and arranging overdraft facilities.
Liquidity is the ability to meet short-term debts. These ratios measure this ability.
Ratio Insight: The Current ratio is ideal around 1.5 to 2.
What is finance?
The management of money including how businesses obtain, use, and monitor funds.
What is the role of accounting and finance?
To provide financial information like reports and forecasts for planning and decision-making.
What can a lack of finance cause in a business?
Business failure, bankruptcy, liquidation, or administration.
Define current assets.
Cash or items quickly convertible to cash, like inventory and receivables.
What are non-current assets?
Long-term investments such as buildings and equipment.
Differentiate current and non-current liabilities.
Current liabilities are debts due within a year; non-current liabilities are long-term debts.
What is capital?
Money invested by owners or retained profits in a business.
What is the difference between cash and profit?
Cash is money available immediately; profit is total income minus expenses, including non-cash items.
What are fixed costs?
Costs that do not change with output, like rent and salaries.
What are variable costs?
Costs that vary with output, like materials.
How do you calculate total cost?
Total cost = Fixed costs + Variable costs.
What is the break-even point?
The point where total revenue equals total costs, with no profit or loss.
What is contribution per unit?
Price minus variable cost per unit.
How do you calculate break-even quantity?
Fixed costs ÷ Contribution per unit.
What does gross profit represent?
Revenue minus cost of goods sold.
What is the purpose of budgeting?
To forecast income and expenditure, allocate resources, control spending, and motivate staff.
What does a favourable variance indicate?
Actual profit or revenue is higher than budgeted.
What is liquidity?
The ability to meet short-term debts.
How is the current ratio calculated?
Current assets ÷ Current liabilities.
What does the acid test ratio measure?
It measures liquidity excluding inventory: (Current assets - inventory) ÷ Current liabilities.