Revision Guide for Finance Exam

Transcription

1 Revision Guide for Finance Exam Financial Documents Financial Document Purchase Order (what is to be ordered) Delivery Notes (sent with goods - check you have received the correct goods) Goods received note (If problem with your order write it on this note) Invoice (request for payment) Credit Notes (refund for damaged goods/incorrect goods) Statement of account (a summary of your account normally over a month) Remittance advice slips (sent with the cheque match cheque to correct account) Cheque (type of payment) Receipt (proof of payment) Sent by Buyer Buyer Buyer Buyer Types of payment Cheque Useful to pay large amount of money no need to carry large amounts cash (buyer) No cash needs to carried therefore safer to give or post (buyer) Will help cash flow payment is delayed 3 working days to clear cheque (buyer) Businesses face charge (seller) Cheques can bounce if no money available in person s account business will not get paid (seller) Need to carry cheque book around can be inconvenient (buyer) Credit card More secure as customer does not need to carry cash- insurance protection on goods (customer) Defer the payment customer has longer to pay (customer) Wider customer base customers can pay over telephone/internet do not need to take time to visit shop (customer and buyer)

2 Increase sales due to impulse purchases as buyer does not need to carry cash (buyer) Can buy products in different currencies (customer and seller) High interest rates (customer) Business will not receive the total price of the goods sold as will incur a levy, paid to the credit card company (seller) Cost of leasing the credit card equipment, this will increase costs, and reduce profit (seller) Open to fraud may not receive payment from stolen cards 2 advantages of using credit card instead of debit card (unlikely to appear) Purchase is protected Improve cash flow as you have time to pay the credit card company Debit card only difference is that the debit card is using your own money + less protection Cash Business receive money immediately (seller) Business incur no charges (but will require equipment to store cash) (seller) Cannot overspend will reduce chance of overspending (buyer) Flexible for the customer do not need to have a bank account (customer) Security implications keep money in a safe to prevent theft employ security company to transport cash (seller) Forged notes not accepted by the bank lower profits (seller) Other DIS (see ADV of cheque)

3 Online payments e.g. PayPal Saves time not have to travel to the bank or supplier makes business more efficient. (Buyer) More convenient not have to wait for bank to open 24/7 access to the computer (Buyer) More secure/less risk transfer money electronically cash can get lost or stolen. (Buyer/seller) Wider market increases the number of payment methods increase business sales (seller) Direct Debit Guaranteed payment for business (seller) Ensures payment is on time as customer does not need to remember to pay (buyer) Convenient for the buyer (buyer) Business incur charge Standing order same as direct debit but amount does not vary Credit transfer move money from one account to another International payments Transfers done online quick and convenient Revenue Different sources of income into the business. Sometimes called sales or sales revenue Costs Start-up costs costs that occur before the business starts trading

4 (Equipment, vehicles and premises) Running costs Costs the business has to pay regularly whilst trading (stock, wages, electricity/gas bill) Why do costs vary from business to business? Location Size of Business Number of customers and of using ICT/computerised systems Access information quicker saves time and costs All documents will be electronically saved save money on postage costs as can be sent via . Documents look more professional improve customer services charge higher prices for a better service. Train staff to use system will increase costs and will take time reduce profit Computers can breakdown viruses files can corrupt lose customer details Why businesses use Barcodes/readers? Benefits include: Each item has a unique number, which allows shipments to be tracked, so the business knows if the product has reached its final destination. It is quicker and easier to stock control using bar codes than a manual system. This will therefore improve efficiency as all stock is automatically recorded on a system. It will be quicker to observe sales trends as when the information is recorded it transferred to a computer system where the sales can be monitored.

5 Profit and Loss Account A statement that shows gross profit and lists all the expenses of a business, in which net profit can be calculated Key terms shown on a profit and loss account Sales Turnover (sales revenue, total sales) money coming into a business over a period of time. Returns: The value of goods returned to a business Cost of sales: Refers to the actual cost of producing goods or a service. Gross Profit: Sales Turnover Cost of sales Expenses These are everyday costs needed to keep the business operating. Net profit Gross profit Expenses This shows the amount made by a business after all bills have been paid for Example: Turnover (Sales) 50,000 Cost of sales 20,000 Gross Profit 30, Wages 10,000 Lighting/Heating 1,000 Admin 500 Rent 5,000 Advertising 500 Total Expenses 17,000 Net Profit 13,000

6 Balance Sheet Shows the assets and liabilities of a business at a point in time Keywords linked to balance sheets Assets Items/things that are owned by a business 2 types of assets Fixed Assets Owned by the business for longer than one year (they have a continuous use) E.g. Buildings, Machinery, Equipment, Vehicles Current Assets Items owned by the business but can more easily be turned into cash E.g. Cash, Stock, and People that owe the business money (debtors) Liabilities Money owed by the business Current liabilities Debts that need to be paid within one year E.g. overdraft, short term bank loan, paying your suppliers Long term liabilities Debts that need to be paid over a number of years (1-50 years) E.g. bank loan, mortgage Working Capital Is the difference between current assets and current liabilities. Calculation is below (you will need to remember this) Current assets current liabilities

7 Profitability Ratios Works out the level of profit compared to the amount of sales that have been made. Gross Profit Margin How much profit a business has made compared to its sales turnover. It shows how much gross profit is made for every 1 in sales. Higher the percentage the better A business would rather generate a gross profit of 60p for every 1 it earns in sales than 20p Why the GPM could fall Fall in prices charged Rise in cost of sales because rising price of raw materials Sales fall Net Profit margin Works out the amount of profit after expenses Higher the percentage the better! Net profit margin will always be lower than gross profit margin? Why? It takes into account the businesses expenses Why the NPM could fall Increase in expenses e.g utility bills Increased wages Higher bank fees

8 Return on capital employed (ROCE) Works out the amount of net profit that has been made as a percentage of the amount of money used by the business Shows the return on capital invested Example Business A Used 100,000 of capital Business B Used 100,000 of capital Generate net profit of 20,000 Generate net profit of 5,000 Business A is far better at using its money (capital) Higher the percentage the better! Why a decrease in ROCE Poor management decisions Liquidity Ratios Liquidity ratios Used to work out how easily a business is able to pay its expenses Current Ratio Acid Test Ratio (does not include stock as an asset) Important business has money to pay their bills but not too much as this money could be better used in a bank account of reinvested. Ratio should be at least 1 means debts = its income (if it pays its debt there will be nothing left over. Should be between 1.5:1 and 2:1 If below 1.5 could still get into trouble in case of unexpected costs (machinery breaking down) If above 2 means it s holding too much money the money could be invested to expand the business and increase profit.

9 Importance of financial statements to stakeholders Stakeholders Owners (shareholders) Managers Employees Lenders (bank) Government Customers Suppliers Why Interested in Balance sheet and profit and loss account Want to make a return on their investment Secure job, Pay increase, Bonus Secure job, Pay increase Ensure they receive their money back with interest If high risk business will want to charge higher interest rate Ensure they are paying the correct level of tax Want to know if business if secure, so any money paid for goods will result in receiving the goods. Also so they know they can keep using the business. If business is in a strong position they know they will receive any money owed to them. If business expands will order more goods from supplier