Grade 12 IB Business Exam Review - Finance

Direct Costs

A direct cost is specifically related to an individual project or the output of a particular product; without which the cost would not be incurred. Direct costs are not necessarily related to the level of output

Mortgage

A long term source of finance that requires the borrower to provide property and land as collateral (security guarantee) to the lender in case the borrower defaults on the loan

Balance sheet

Assets and liabilities of business at specific point of time

Current Liability

Can be paid off in a year or less (Short term)

Semi-Variable Costs

Contains an element of both fixed costs and variable costs. The costs tend to change only when production or sales exceed a certain level of output (ex. Internet service providers)

Gross Profit

Gross profit does not take account of expenses (overheads), as it only accounts for direct costs (cost of sales)

Venture Capital

High risk capital invested by specialist finance firms, usually at the start of a business idea, usually in the form of loans and/or shares in the business

Efficiency Ratios

Indicate how well a firm's resources have been used, such as the amount of profit generated from the available capital used in the business

Acid Test Ratio

Measures a firm's ability to meet its short term debts. It ignores stock because not all inventories can be easily turned into cash in a short time frame

Net Profit

Net profit can also be further broken down into net profit before and after interest charges and tax (which are beyond the control of the business)

Long Term Liability

Paid off in a longer period of time (Longer than 1 year)

Internal Public Offer (IPO)

Refers To the original sales of a company's shares on a listed stock exchange, by offering its shares to the general public for the first time

Liquidity Crisis

Refers to a situation where a firm is unable to pay its short term debts, i.e. current liabilities exceeded current assets

Internal Sources of Finance

Refers to the generation of finance from within an organization's own resources and funds (e.g retained profit and the sale assets)

Net Profit Margin

Shows the percentage of sales revenue that turns into net profit, i.e. the proportion of sales revenue left over after all direct and indirect costs have been paid

Liquidity Ratios

The ability of a firm to pay its short term liabilities, such as by comparing working capital to short term debts

Total Cost

This refers to the aggregate amount of money spent on production for any given level of output

Debentures

A long-term source of finance which gives holders a fixed rate of return (interest) but without any ownership or voting rights

Ratio Analysis

A quantitative management tool that compares different financial figures to examine and judge the financial performance of a business. It requires the application of figures found in the final accounts (the balance sheet and the profit and loss account)

Current Ratio

A short term liquidity ratio that calculates the ability of a business to meet its debts within the next 12 months

Unit Costs

Also known as average costs, this concept is calculated by dividing the total costs of production by the levels of output

Price

Also known as the average revenue, this is the amount of money a product is sold for (i.e the amount paid by the customer)

Return on Capital Employed (ROCE):

An efficiency ratio (although it also reveals the firm's profitability) measuring the profit of a business in relation to its size (as measured by capital employed)

Contribution

Contribution refers to the amount of money that remains after all direct and variable costs have been taken away from the sales revenue of a business.

Debt Finance

Debt finance (e.g Bank loans or debentures) refer to interest - bearing external sources of finance that increase the borrower's level of gearing

Equity Finance

Equity finance (share capital) is an internal source of permanent capital that does not bear any interest

Hire Purchase

Source of credit finance that allows firms the chance to use assets without having to pay for them in one lump sum. Once the final repayment has been made, the asset legally belongs to the business

Cash flow statement

Sources of cash inflows of business and where spent

Fixed Costs

The cost of production that a business has to pay regardless of how much it produces (Ex. Rent, interest payments on bank loans)

Revenue Expenditures

The day to day spending required for the running of a business (e.g raw material, wages and utility bills)

Revenue

The money coming into a business, usually from the sale of goods and/or services (known as sales revenue)

Ordinary Shares

The most common type of share issued by a limited company, which gives owners voting rights and dividends based on the company's profit

Capital Expenditure

The spending on items considered as fixed assets, such as: land, buildings, machinery and motor vehicles

Capital Employed

The value of all long term sources of finance for a business, e.g. bank loans, share capital and reserves

Revenue Stream

The various sources of income generated from different business activities (e.g Sponsorship deals, merchandise income, membership fees and royalties)

Current Asset

Things the company owns that is less than a year

Fixed Asset

Things you own that can last over a year

Indirect Costs (Overhead)

Those that cannot be clearly traced to the production or sale of any single product (Ex. Advertising, insurance, security, shipping and postage costs)

Profit and loss account

Trading position of business at the end of a specified accounting period

Variable Costs

Variable costs are the costs of production that change in proportion with the level of output sales. As the output increases, the variable costs increase with it. (Ex. Raw material, commission earned by staff)

Business Angels

Wealthy entrepreneurs who risk their money by investing in small to medium sized businesses that have high growth potential