IGCSE FInance Key Terms

Shareholders' equity

Alternative term for owners' equity, but can be used for limited liability companies.

Balance sheet

An accounting statement that records the assets, liabilities and owners' equity of a business at a particular date.

Overdraft

An agreement with the bank which allows a business to spend more money than they have in its account up to an agreed limit. The loan has to be repaid within 12 months.

Cash-flow forecast

An estimate of the future cash inflows and outflows of a business.

Net cash flow

Cash inflow minus cash outflow.

Total cost

Cost of sales plus expenses

Expenses

Day-to-day operating expenses of a business.

Liabilities

Debts of the business that will have to be paid sometime in the future.

Current liabilities

Debts of the business which it expects to pay before the date of the next balance sheet.

Non-current liabilities

Debts of the business which will be payable after more than one year.

Income statements

Financial statement which records the revenue, costs and profits of a business for a given period of time.

Credit sales

Goods sold to customers who will pay for these at an agreed date in the future.

Short-term finance

Loans or debt that a business expects to pay back within one year

Leasing

Obtaining the use of a non-current asset by paying a fixed amount per time period for a fixed period of time. Ownership remains with the leasing company.

Current ratio

Ratio between current assets and current liabilities. This measures the liquidity of a business.

Acid test ratio

Ratio between liquid assets and current liabilities. This ratio measures liquidity without assuming stocks will be sold.

Return on capital employed (ROCE)

Ratio between profit before tax and capital employed

Gross profit margin

Ratio which measures gross profit compared to revenue

Profit margin

Ratio which measures profit compared to revenue

Assets

Resources that are owned by a business.

Current assets

Resources that the business owns and expects to convert into cash before the date of the next balance sheet.

Adding value

Selling a product for more than it cost to produce it

Liquidity

The ability of a business to pay its short-term debts.

Trade payable

The amount a business owes to its suppliers for goods bought on credit.

Revenue

The amount earned from the sale of products.

Owners' equity

The amount owed by the business to its owners; includes capital and retained profits.

Cost of sales

The cost of purchasing the goods used to make the products sold.

Gross profit

The difference between revenue and cost of sales.

Profit

The difference between revenue and total costs.

Trade receivable

amount owed to a business by its customers who bought goods on credit.

debenture

bonds issued by companies to raise long-term finance usually at a fixed rate of interest

Long-term finance

debt or equity used to finance the purchase of non-current assets or finance expansion plans. Long-term debt is borrowing a business does not expect to pay in less than five years

Mortgage

long-term loans used for the purchase of land or buildings

Equity finance

permanent finance provided by the owners of a limited company

Retained profit

profit remaining after all expenses, tax and dividends have been paid. Profit which is ploughed back into the business.

bank loan

provision of finance by a bank which the business will repay with interest over an agreed period of time.

Fixed assets

resources owned by a business which will be used for a period longer than one year, for example, buildings and machinery

Non-current assets

resources owned by a business which will be used for a period longer than one year, for example, buildings and machinery

debt-factoring

selling trade receivables to improve business liquidity.

Micro-finance

small amounts of capital loaned to entrpreneurs in countries where business finance is difficult to obtain. These loans are usually repaid after a relatively short period of time.

Share issue

source of permanent capital available to limited liability companies

Capital expenditure

spending by a business on non-current assets such as machinery or buildings

Start-up capital

the capital needed by an entrepreneur when first starting a business

Working capital

the capital needed to finance the day-to-day running expenses and pay short-term debts of a business

Hire purchase

the purchase of an asset by paying a repayment amount per time period over an agreed period of time. The asset is owned by the purchasing company on completion of the final repayment.