BM - Chapter 3.1 - 3.

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1. The acid test is a liquidity ratio that measures a firm's ability 16. Depreciation is the fall in the value of fixed assets over
ratio to meet its short-term debts. It ignores stock time, from wear and tear (due to the asset
because not all inventories can be easily being used) or obsolescence (outdated or out
turned into cash in a short time frame. of fashion).
2. Break-even analysis is a management tool used to 17. Direct costs are costs specifically attributed to the
calculate the level of sales needed to cover production or sale of a particular good or
all costs of production. Thereafter, further service. Direct costs can be traced back to
sales generate a positive safety margin and the product and/or to a cost centre.
hence profit for the business.
18. Efficiency show how well a firm's resources have been
3. Break-even point refers to the position on a break-even ratios used, such as the amount of time taken by the
chart where the total cost line intersects the firm to sell its stock (inventory) or the average
total revenue line, i.e. where TC = TR. number of days taken to collect money from
its debtors.
4. Break-even is the name given to the graph that shows a
chart firm's costs, revenues and profits (or loss) at 19. Efficiency indicate how well a firm's resources have
various levels of output. ratios been used, such as the amount of profit
generated from the available capital used in
5. Break-even refers to the level of output that generates
the business.
quantity neither profit nor loss. It is shown on the x-axis
on a break-even chart. 20. External means getting funds from outside the
sources of organization, e.g. through debt (overdrafts,
6. Business are wealthy entrepreneurs who risk their own
finance loans and debentures), share capital, or the
angels money by investing in small to medium-sized
government.
businesses that have high growth potential.
21. Final are the published annual financial statements
7. Capital is the value of all long-term sources of finance
accounts that all limited liability companies are legally
employed for a business, e.g. bank loans, share capital
obliged to report, i.e. the balance sheet and
and reserves.
the P&L accounts.
8. Capital is investment spending on fixed assets such as
22. Fixed assets are items owned by a business, not intended
expenditure the purchase of land and buildings.
for sale within the next twelve months, but
9. Contribution is the difference between the selling price of a used repeatedly to generate revenue for the
per unit (or product and its variable costs of production, organization, e.g. land, premises and
unit i.e. P - AVC. The surplus goes towards paying machinery.
contribution) fixed costs.
23. Fixed costs are the costs that do not vary with the level of
10. Cost refers to the sum of money incurred by a business in output. They exist even fit here is no
the production output,e.g. the cost of rent, management
process,e.g.thecostsofrawmaterials, wages salaries and interest repayments on bank
and salaries, insurance, advertising and rent. loans.
11. Credit refers to the ability of a business to collect its 24. Gearing measures the percentage of a firms capital
control debts within a suitable timeframe. employed that comes from external sources
12. Creditor is an efficiency ratio that measures the average (long-term liabilities), such as debentures and
days ratio number of days it takes for a business to pay mortgages. Firms that have at least 50%
its creditors. gearing are said to be highly geared.

13. The current is a short-term liquidity ratio that calculates 25. Goodwill is an intangible asset which exists when the
ratio the ability of a business to meet its debts value of a firm exceeds its book value (the
within the next twelve value of the firm's net assets).

14. Debt is a financial service whereby a factor (such as 26. Grants are government financial gifts to support
factoring a bank) collects debts on behalf of other business activities. They are not expected to
businesses, in return for a fee. be repaid by the recipient.

15. Debtor days is an efficiency ratio that measures the average 27. Gross profit is the difference between the sales revenue of
ratio number of days it takes for a business to a business and its direct costs incurred in
collect the money owed from debtors. making or purchasing the products that have
been sold to its customers.
28. Gross is a profitability ratio that shows the percentage 41. Net profit is the surplus (if any) that a business makes
profit of sales revenue that turns into gross profit. after all expenses have been paid for out of
margin gross profit.
(GPM)
42. Net profit shows the percentage of sales revenue that
29. The refers to the purchase cost of a particular fixed margin (NPM) turns into net profit, i.e. the proportion of
historic asset. sales revenue left over after all direct and
cost indirect costs have been paid.
30. Indirect are costs that do not directly link to the 43. the ...
costs (or production or sale of a specific product, e.g. organization,
overheads) rent, wages of cleaning staff, and lighting. e.g. through
personal
31. Initial refers to a business converting its legal status
funds,
public to a public limited company by floating
retained
offering (selling) its shares on a stock exchange for the
profits and the
(IPO) first time.
sale of assets.
32. Intangible are fixed assets that do not exist in a physical
44. Overdrafts allow a business to spend more than the
assets form, e.g. goodwill, copyrights, brand names
amount in its bank account, up to a
and registered trademarks.
predetermined limit. They are the most
33. Interna means getting funds from within flexible form of borrowing in the short term.
sources of Venturecapitalishigh-risk capital invested by
45. Price refers to the amount of money a product is
finance venture capital
sold for, i.e. the sum paid by the customer.
34. Leasing is a form of hiring whereby a contract is agreed
46. Profit is the positive difference between a firm's
between a leasing company (the lessor) and the
revenue and its costs. On a break-even
customer (the lessee). The lessee pays rental
chart, profit is shown at all levels of output
income to hire assets from the lessor, who is the
beyond the break-even quantity.
legal owner of the assets.
47. Profitability examine profit in relation to other figures,
35. Liquid are the possessions of a business that can be
ratios e.g. the GPM and NPM ratios. These ratios
assets turned into cash quickly without losing their
tend to be relevant to profit-seeking
value, i.e. cash, stock and debtors.
businesses rather than for not-for-profit
36. Liquidity refers to a situation where a firm is unable to organizations.
crisis pay its short-term debts, i.e. current liabilities
48. The profit and is a financial record of a firm's trading
exceed current assets.
loss account activity over the past 12 months, consisting
37. Liquidity look at the ability of a firm to pay its short- (or income of three parts: the trading account, the P&L
ratios term liabilities, such as by comparing working statement ) account and the appropriation account.
capital to short- term debts.
49. Ratio analysis is a quantitative management tool that
38. Loan refers to medium to long-term sources of compares different financial figures to
capital interest-bearing finance obtained from examine and judge the financial
commercial lenders. Examples include performance of a business. It requires the
mortgages, business development loans and application of figures found in the final
debentures. accounts (the balance sheet and the profit
39. The margin is the difference between a firm's level of and loss account).
of safety demand and its break-even quantity. A positive 50. Reducing is a method of depreciation that reduces the
(MOS) MOS means the firm can decrease output (sales balance value of a fixed asset by the same
volume) by that amount without making a loss. method percentage each year throughout its useful
A negative MOS means the firm is making a life. This is the more realistic method to use.
loss,
51. The residual of an asset is an estimate of the scrap or
40. Net assets show the value of a business by calculating the value disposal value of the asset at the end of its
value of all its assets minus its liabilities. This useful life.
figure must match the equity of the business in
its balance sheet.
52. Retained is the value of surplus that the business 64. Sources of is the general term used to refer to where or
profit keeps using within the business after paying finance how businesses obtain their funds, such as
corporate taxes on its profits to the from personal funds, retained profits, loans
government and dividends to its and government grants.
shareholders.
65. A special occurs when a customer places an order at a
53. Retained is the amount of net profit after interest, tax order price that differs from the normal price
profit and dividends have been paid. It is then decision charged by the business,
reinvested in the business for its own use.
66. The stock ratio measures the number of times a business
54. Return on is an efficiency ratio (although it also reveals turnover sells its stocks within a year. It can also be
capital the firm's profitability) measuring the profit of expressed as the average number of days it
employed a business in relation to its size (as measured takes for a firm to sell all of its normal
(ROCE) by capital employed). inventory.
55. Revenue is the money that a business collects from 67. Straight line method - is a method of depreciation that
the sale of its goods and services. It is reduces the value of a fixed asset by the same
calculated by multiplying the unit price of value each year throughout its useful life. This
each product by the quantity sold. is a relatively easier method to calculate.
56. Revenue refers to spending on the day-to-day running 68. Subsidies are funded by the government to lower a firm's
expenditure of a business, such as rent, wages and utility production costs as output provides extended
bills. benefits to society, e.g. farmers are often
provided with subsidies to stabilise food
57. Revenue refers to the money coming into a business
prices.
stream from its various business activities, e.g.
sponsorship deals, merchandise, membership 69. Total is the unit contribution (P - AVC) multiplied by
fees and royalties. contribution the quantity of sales (Q), i.e. total contribution
= (P - AVC) XQ. It is, essentially, a firm's gross
58. Sale-and- is a source of external finance involving a
profit.
leaseback business selling a fixed asset (such as its
computer systems or a building) but 70. Total costs are the sum of all variable costs and all fixed
immediately leasing the asset back. In costs of production,
essence, the lessee transfers ownership to
71. Trade credit allows a business to 'buy now and pay later'.
the lessor, but the asset does not physically
The credit provider does not receive any cash
leave the business.
from the buyer until a later date (usually allow
59. Semi variable costs - are those that have an between 30-60 days).
element of both fixed costs and variable
72. The trading is the first section of the P&L account, showing
costs, e.g. power and electricity or salaried
account the difference between a firm's sales revenue
staff who also earn a commission.
and its direct costs of trading, i.e. it shows the
60. Share capital is the money raised from selling shares in a gross profit of a business.
limited liability company, from its initial
73. Variable are costs of production that change in
public offering (IPO) and any subsequent
costs proportion to the level of output, e.g. raw
share issues.
materials and piece-rate earnings of
61. Share capital refers to the amount of money raised through production workers.
the sale of shares. It shows the value raised
74. Venture is high-risk capital invested by venture capital
when the shares were first sold, rather than
Capital firms, usually at the start of a business idea.
their current market value.
The finance is usually in the form of loans
62. Shareholders' show the equity of the owners, i.e. the share and/or shares in the business venture.
funds capital invested by the owners and the
75. Window refers to the legal act of creative accounting
retained profit and reserves that have been
dressing by manipulating financial data to make the
accumulated.
results look more flattering.
63. Share issue exists when an existing public limited
(also known company raises further finance by selling
as a share more of its shares.
placement )