Business AS Levels:

Super Definitions Compilation

Units 1-5 (AS Level sections only)

Natanael Kevin
11A
 UNIT 1 - Business and its
environment
Chapter 1: Enterprise
Consumer goods: the physical and tangible goods sold to the general public − they
include durable consumer goods, such as cars and washing machines, and non-durable
consumer goods, such as food, drinks and sweets, that can only be used once.

Consumer services: the non-tangible products sold to the general public − they
include hotel accommodation, insurance services and train journeys.

Capital goods: the physical goods used by industry to aid in the production of other
goods and services, such as machines and commercial vehicles.

Creating value: increasing the difference between the cost of purchasing

bought in materials and the price the finished goods are sold for.

Added value: the difference between the cost of purchasing raw materials and the
price the finished goods are sold for – this is the same as ‘creating value’.

Opportunity cost: the benefit of the next most desired option that is given up.

Entrepreneur: someone who takes the financial risk of starting and managing a new
venture.

Social enterprise: a business with mainly social objectives that reinvests most of its
profits into benefiting society rather than maximising returns to owners.

Triple bottom line: the three objectives of social enterprises: economic, social and
environmental.

TOP TIP:
Some questions may ask you to make references to businesses ‘in your own country’.
You are advised to take a close interest during the business course in the activities of
businesses – new and well established ones – in your country.
Chapter 2: Business structure
Primary-sector business activity: firms engaged in farming, fishing,
oil extraction and all other industries that.

Secondary-sector business activity: firms that manufacture and

process products from natural resources, including computers, brewing,
baking, clothes-making and construction.

Tertiary-sector business activity: firms that provide services to

consumers and other businesses, such as retailing, transport, insurance,
banking, hotels, tourism and telecommunications.

Public sector: comprises organisations accountable to and controlled by

central or local government (the state).

Private sector: comprises businesses owned and controlled by

individuals or groups of individuals.

Mixed economy: economic resources are owned and controlled by both

private and public sectors.

Free-market economy: economic resources owned largely by the private

sector with very little state intervention.

Command economy: economic resources owned, planned and

controlled by the state.

Sole trader: a business in which one person provides the permanent

finance and, in return, has full control.

Limited liability: the only liability – or potential loss – a shareholder has

if the company fails is the amount invested in the company, not the total
wealth of the shareholder.

Private limited company: a small to medium-sized business that is

owned by shareholders who are often members of the same family. This
company cannot sell shares to the general public.

Share: a certificate confirming part ownership of a company and entitling

the shareholder to dividends and certain shareholder rights.
Shareholder: a person or institution owning shares in a limited company.

Public limited company: a limited company, often a large business, with

the legal right to sell shares to the general public – share prices are quoted
on the national stock exchange.

Memorandum of Association: states the name of the company, the

address of the head office.

Articles of Association: this document covers the internal workings and

control of the business – for example, the names of directors and the
procedures to be followed at meetings will be detailed.

Franchise: a business that uses the name, logo and trading systems of an
existing successful business.

Joint venture: two or more businesses agree to work closely together on a

particular project.

Holding company: a business organisation that owns and controls a

number of separate businesses.

Public corporation: a business enterprise owned and controlled by the

state – also known as nationalised industry.

TOP TIP:
PLC are in the private sector of industry, but public corporations are not
Chapter 3: Size of business
Revenue: total value of sales made by a business in a given time period.

Capital employed: the total value of all long-term finance invested in the
business

Market capitalisation: the total value of a company’s issued shares.

Market share: sales of the business as a proportion of total market sales.

Internal growth: expansion of a business by means of opening new

branches, shops or factories (also known as organic growth).

TOP TIP #1: Profit is not a good measure of business size - but it can be
used to assess business performance.

TOP TIP #2: If asked to comment on data showing the sizes of different
business, do remember that if another measure were used, the conclusions
about relative size might be very different.

TOP TIP #3: Many business observers focus only on the benefits of small
businesses. Do remember that large businesses supply most of the world’s
consumer goods and they do so with increasing efficiency and, in most
cases. improving levels of quality.
Chapter 4: Business Objectives
Mission Statement - a statement of the business’s core aims phrased in a
way to motivate employees and to stimulate interest by outside groups.

Corporate Social Responsibility - applies to those businesses that

consider the interests of the society by taking responsibility for the impact
of their decisions and activities on customers, employees, communities and
the environment.

Management by objectives - a methods of coordinating and motivating

all staff in an organisation by dividing its overall aim into specific targets
for each department, manager and employee.

Ethical code (code of conduct) - a document detailing a company’s

rules and guidelines on staff behaviour that must be followed by all

employees.

Top Tip #1: Remember the slogan SMART

Chapter 5: Stakeholders in a business
Stakeholders: people or groups of people who can be affected by, and
therefore have an interest in, any action by an organisation.

Stakeholder concept: the view that businesses and their managers have
responsibilities to a wide range of groups, not just shareholders (see also
corporate social responsibility).

Corporate social responsibility: the concept that accepts that a

business should consider the interests of society in its activities and
decisions, beyond the legal obligations that it has by taking responsibility
for the impact of its decisions and activities on customers, employees,
communities and the environment.

Top Tips:
 Do not confuse the two terms ‘stakeholder’ and ‘shareholder’.
Stakeholder is a much more broader term that covers many groups,
including, of course, shareholders.
 Many questions involve the conflict of stakeholder objectives.
Remember that it is difficult for a business to meet all of its
responsibilities to all stakeholders at any one time. Compromise
might be necessary – meeting as many stakeholder objectives as
possible or meeting the needs of the most important group in each

situation.
 UNIT 2 - People in organisation
Chapter 10: Management and Leadership
Manager: Responsible for setting objectives, organising resources and motivating staff
so that the organisation’s aims are met.

Leadership: The art of motivating a group of people towards achieving a common

objective

Autocratic leadership: A style of leadership that keeps all decision-making at the

centre of the organisation.

Democratic leadership: a leadership style that promotes the active participation of

workers in taking decisions.

Paternalistic leadership: A leadership style based on the approach that the manager
is in a better position than the workers to know what is best for the organisation.

Laissez-faire leadership: A leadership style that leaves much of the business

decision-making to the workforce - a “hands off” approach and the reverse of the
autocratic style.

Informal leader: A person who has no formal authority but has the respect of
colleagues and some power over them.

Emotional intelligence (EI): The ability of managers to understand their own

emotions, and those of the people they work with, to achieve better business
performance.

TOP TIP: Paternalistic leadership is not part of the Cambridge syllabus; it has been
included here to act as a good contrast to democratic leadership style.
Chapter 11: Motivation
Motivation - the internal and external factors that stimulate people to
take actions that lead to achieving a goal.

Self actualisation - a sense of self fulfilment reached by feeling enriched

and developed by what one has learned and achieved.

Motivating factors (motivators) - aspects of a worker’s job that can

lead to positive job satisfaction, such as achievement, recognition,
meaningful and interesting work and advancement at work.

Hygiene factors - aspects of a worker’s job that have the potential to

cause dissatisfaction, such as pay, working conditions, status and over-
supervision by managers.

Job enrichment - aims to use the full capabilities of workers by giing

them the opportunity to do more challenging and fulfilling work.

Time based wage rate - payment to a worker made for each period of
time worked (e.g one hour)

Piece rate - a payment to a worker for each unit produced.

Salary - annual income that is usually paid on a monthly basis.

Commission - a payment to a sales person for each sale made.

Bonus - a payment made in addition to the contracted wage or salary.

Performance related pay - a bonus scheme to reward staff above

average work performance.

Profit sharing - a bonus for staff based on the profits of the business -
usually paid as a proportion of basic salary.

Fringe benefits - benefits given, separate from pay, by an employer to

some or all employees.

Job rotation - increasing the flexibility of employees and the variety of

work they do by switching from one job to another.
Job enlargement - attempting to increase the scope of a job by
broadening or deepening the tasks undertaken.

Job redesign - involves the restructuring the job - usually with the
employees’ involvement and agreement - to make more work interesting,
satisfying and challenging.

Quality circles - voluntary groups of workers who meet regularly to

discuss work related problems and issues.

Worker participation - workers are actively encouraged to become

involved in decision-making within the organisation.

Team-working - production is organised so that groups of workers

undertake complete units of work.

Top Tip #1: If you are answering a question about motivational theorists,
try to do more than just list their main findings - apply their ideas to the
business situation given.

Top Tip #2: Team working might not always be a suitable method to
organise a workforce. Some very good workers do not make effective team
members.

Top Tip #3: You should be able not just to describe and explain the
different methods of financial and non-financial motivation but to suggest
which ones might be suitable in different business situations - and why.
Chapter 12: Human resource
management
Human Resource Management: is a function in organisations designed to maximise
employee performance in service of an employer's strategic objectives.

Recruitment: process of identifying the need for a new employee and attracting suitable
candidates.

Selection: Interviewing, testing and screening candidates to choose the most suitable person.

Job description: detailed list of the key points about the job offering, including key tasks and
responsibilities.

Person specification: a detailed list of the qualities, skills and qualifications that an applicant
should have.

Employment contract: a legal document that sets out the terms and conditions about a
worker's job.

Labour turnover: measures the rate at which employees are leaving an organisation.

Labour turnover rate: number of employees leaving in one year / average number of people
employed x 100%

Training: work-related education to increase workforce skills and efficiency.

Induction training: introductory training programme to make new recruits familiar with the
system and layout of the business.

On-the-job training: Instruction at the place of work on how a job should be carried out.

Off-the-job training: All training undertaken away from the business

Employee appraisal: the process of assessing the effectiveness of an employee judged against
pre-set objectives.

Dismissal: being dismissed from a job due to being incompetent.

Unfair dismissal: ending a worker’s employment with an unfair reason according to the law.

Redundancy: a worker is no longer needed because the job is no longer required.

Work-life balance: ability of employee to balance work and personal life.

Equality policy: practices and processes aimed at achieving a fair organisation where
everyone is treated in the same way and have the opportunity to fulfil their potential.
Diversity policy: practices and processes aimed at creating a mixed workforce and placing
positive value on diversity in the workplace.

TOP TIPS:
 Do not confuse the job description and the person specification.
 The disadvantages of each method of recruitment are the reverse of the advantages of the
other method. For example, a drawback in external recruitment is that it does not give
internal staff a career structure or a chance to progress.
 The precise legal requirement of employment contracts are likely to vary slightly between
different countries. It would be useful for you to research what these legal requirements
are in your own country - but you are unlikely to be examined directly on them.
 One reason commonly given by firms for not training their staff is that these w ell-trained
staff will then be “poached
 UNIT 3 - Marketing
Chapter 16: What is marketing?
Marketing: the management task that links the business to the customer
by identifying and meeting the needs of customer profitably - it does this by
getting the right product at the right price to the right place at the right
time.

Marketing objectives: the goals set for the marketing department to

help the business achieve its overall objectives.

Marketing strategy: long-term plan established for achieving marketing

objectives.

Marketing orientation: an outward-looking approach basing product

decisions on consumer demand, as established by market research.

Product orientation: an inward-looking approach that focuses on

making products that can be made - or have been made for a long time -
and then trying to sell them.

Asset-led marketing: an approach to marketing that bases strategy on

firm’s existing strengths and assets instead of purely on what the customer
wants.

Societal marketing: this approach considers not only the demands of

consumers but also the effects on all members of the public (society)
involved in some way when firms meet these demands.

Demand: the quantity of a product that consumers are willing and able to
buy at a given price in a time period.

Supply: the quantity of a product that firms are prepared to supply at a

given price in a time period.

Equilibrium price: the market price that squares supply and demand for
a product.

Market size: the total level of sales of all producers within a market.
Market growth: the percentage change in the total size of a market
(volume or value) over a period of time.

Market share: the percentage of sales in the total market sold by one
business. This is calculated by the following formula: (firm’s sales in time
period/total market sales in time period) x100

Direct competitor: businesses that provide the same or very similar

goods or services.

USP - unique selling point: the special feature of a product that

differentiates it from the competitors’ products.

Product differentiation: making a product distinctive so that it stand s

out from competitors’ products in consumers’ perception.

Niche marketing: identifying and exploiting a small segment of a larger

market by developing products to suit it.

Mass marketing: selling the same products to the whole market with no
attempt to target groups within it.

Market segment: a subgroup of a whole market in which consumers have

similar characteristics.

Market segmentation: identifying different segments within a market

and targeting different products.or services to them.

Consumer profile: a quantified picture of consumers of a firm's

products, showing proportion of age groups, income levels, location, gender
and social class.

TOP TIPS:
 You may need to do some simple calculations about market growth
and market share - it is a good idea to use a calculator to help you do
this.
 is very important to understand that a firm’s market share can fall
even though its sales are rising. This will happen if the total market
sales are increasing at a faster rate than one firm’s sales.
Chapter 17: market research
Market research: the process of collecting, recording and analysing data
about the customers, competitors and the market.
Primary research: the collection of first-hand data that is directly related
to a firm’s needs.
Secondary research: collection of data from second-hand sources.
Qualitative research: research into the in-depth motivations behind
consumer buying behavior or opinions.
Quantitative research: research that leads to numerical results that can
be presented and analysed.
Focus groups: a group of people who are asked about their attitude
towards a product, service, advertisement or new style of packaging.
Sample: the group of people taking part in a market research survey
selected to be representative of the target market overall.
Random sampling: every member of the target population has an equal
chance of being selected.
Systematic sampling: every nth item in the target population is selected.
Stratified sampling: this draws a sample from a specified sub-group or
segment of the population and uses random sampling to select an
appropriate number from each stratum.
Quota sampling: when the population has been stratified and the
interviewer selects an appropriate number of respondents from each
stratum.
Cluster sampling: using one or a number of specific groups to draw
samples from and not selecting from the whole population, e.g., using one
town or region.
Open questions: those that invite a wide-ranging or imaginative
response–the results will be difficult to collate and present numerically.
Closed questions: questions to which a limited number of pre-set
answers are offered.
Arithmetic mean: calculated by totaling all the results and dividing by
the number of results.
Mode: the value that occurs most frequently in a set of data.
Median: the value of the middle item when data have been ordered or
ranked. It divides the data into two equal parts.
Range: the difference between the highest and lowest value.
Inter-quartile range: the range of the middle 50% of the data.
Chapter 18: The marketing mix – product
and price

Marketing mix: the four key decisions that must be taken in the effective
marketing of a product.

Customer relationship management (CRM): using marketing

activities to establish successful customer relationships so that existing
customer loyalty can be maintained.

Brand: an identifying symbol, name, image or trademark that

distinguishes a product from its competitors.

Intangible attributes of a product: subjective opinions of customers

about a product that cannot be measured or compared easily.

Tangible attributes of a product: measurable features of a product that

can be easily compared with other products.

Product: the end result of the production process sold on the market to
satisfy a customer need.

Product positioning: the consumer perception of a product or service

compared with its competitors.

Product portfolio analysis: analysing the range of existing products of a

business to help allocate resources effectively between them.

Product life cycle: the pattern of sales recorded by a product from launch
to withdrawal from the market and is one of the main forms of product
portfolio analysis.

Consumer durable: manufactured product that can be reused and is

expected to have a reasonably long life, such as a car or washing machine.

Extension strategies: these are marketing plans to extend the maturity

stage of the product before a brand new one is needed.
Price elasticity of demand (PED): measures the responsiveness of
demand following a change in price: PED = % change in quantity
demanded / % change in price.

Mark-up pricing: adding a fixed mark-up for profit to the unit price of a
product.

Target pricing: setting a price that will give a required rate of return at a
certain level of output/sales.

Full-cost pricing: setting a price by calculating a unit cost for the product
(allocated fixed and variable costs) and then adding a fixed profit margin.

Contribution-cost pricing: setting prices based on the variable costs of

making a product in order to make a contribution towards fixed costs and
profit.

Competition-based pricing: a firm will base its price upon the price set
by its competitors.

Dynamic pricing: offering goods at a price that changes according the

level of demand and the customer’s ability to pay.

Penetration pricing: setting a relatively low price, often supported by

strong promotion, in order to achieve a high volume of sales.

Market skimming: setting a high price for a new product when a firm
has a unique or highly differentiated product with low price elasticity of
demand.
Chapter 19 - The marketing mix - promotion and
place

Promotion: The use of advertising, sales promotion, personal selling, direct mail, trade fairs,
sponsorship, and public relations to inform consumers and persuade them to buy.

Promotion mix: The combination of promotional techniques that a firm uses to sell a product.

Above-the-line-promotion: A form of promotion that is undertaken by a business by paying

for communication with consumers.

Advertising: Paid-for communication with consumers to inform and persuade. Eg: Tv and
cinema advertising.

Below-the-line promotion: Promotion that is not a directly paid-for means of

communication, but based on short-term incentives to purchase.

Sales Promotion: Incentives such as special offers or special deals directed at consumers or
retailers to achieve short-term sales increases and repeat purchases by consumers.

Personal Selling: A member of the sales staff communicates with one consumer with the aim
of selling the product and establishing a long-term relationship between company and
consumer.

Sponsorship: Payment by a company to the organisers of an event or team/individuals so that

the company name becomes associated with the event/team/individual.

Public relations: The deliberate use of free publicity provided by newspapers, TV and other
media to communicate with and achieve understanding by the public.

Branding: The strategy of differentiating products from those of competitors by creating an

identifiable image and clear expectation about a product.

Marketing and promotion budget: The financial amount made available by a business for
spending on marketing/promotion during a certain time period.

Channel of distribution: This refers to the chains of intermediaries as a product passes

through from producer to final consumer.

Internet (online) marketing: Refers to advertising and marketing activities that use the
Internet, email, and mobile communications to encourage direct sales via electronic commerce.

E-commerce: The buying and selling of goods and services by businesses and consumers
through an electronic medium.

Viral marketing: The use of social media sties or text messages to increase brand awareness
or sell products.
Integrating marketing mix: The key marketing decisions complement each other and work
together to give customers a consistent message about the product.

TOP TIP: You may be asked to recommend and evaluate a marketing strategy for a product. As
with actual businesses, the best results come to those who suggest a fully integrated marketing
mix, clearly aimed at achieving a set marketing objective.

When writing about promotion of a product, try to consider the marketing objectives of the
business. Is the promotion being used likely to help achieve these objectives?

Spending huge amounts of promotion will never guarantee the success of a product - the
promotion has to match the marketing objectives and integrate well with the rest of the
marketing mix.

Do not confuse ‘place’ or ‘distribution’ decisions with transportation methods. Place is about
how and where the product is to be sold to a customer - Transportation is about how the product
is to be physically delivered.
 UNIT 4 - Operations and project
management
Chapter 22: The nature of operations
Added value: the difference between the cost of purchasing raw materials and the price the fi
nished goods are sold for – this is the same as ‘creating value’.

Intellectual property: an intangible asset that has been developed from human ideas and
knowledge.

Production: converting inputs into outputs − the level of production is the number of units
produced during a time period.

Productivity: the ratio of outputs to inputs during production, e.g., output per worker per time
period.

Efficiency: producing output at the highest ratio of output: input.

Effectiveness: meeting the objectives of the enterprise by using inputs productively to meet
consumer needs.

Labour intensive: a high level of labour input compared with capital equipment.

Capital intensive: a high quantity of capital equipment compared to labour input.

T OP T IP:
Don’t think that operations management is only for manufacturing business. Business
providing service, such as banks and bicycle-repair shops, must also plan to use
resources productively and effectively.
Chapter 23: Operations planning

Operational planning: preparing input resources to supply products to meet expected demand.

CAD – computer-aided design: the use of computer programs to create two- or three-
dimensional (2D or 3D)
graphical representations of physical objects.

CAM – computer-aided manufacturing: the use of computer software to control machine tools
and related
machinery in the manufacturing of components or complete products.

Operational flexibility : the ability of a business to vary both the level of production and the range
of products
following changes in customer demand.

Process innovation: the use of a new or much improved production method or service-delivery
method.

Job production: producing a one-off item specially designed for the customer.

Batch production: producing a limited number of identical products – each item in the batch
passes through one

Flow production: producing items in a continually moving process.

Mass customisation: the use of flexible computer-aided production systems to produce items to
meet individual

Optimal location: a business location that gives the best combination of quantitative and
qualitative factors.

Quantitative factors (business location): these are measurable in financial terms and will have
a direct impact on either the costs of a site or the revenues from it and its profitability.

Qualitative factors: these are non-measurable factors that may influence business decisions

Multi-site locations: a business that operates from more than one location.

Off shoring: the relocation of a business process done in one country to the same or another
company in another

T rade barriers: taxes (tariffs) or other limitations on the free international movement of goods
and services.

Scale of operation: the maximum output that can be achieved using the available inputs
(resources) – this scale
Economies of scale: reductions in a fi rm’s unit (average) costs of production that result from an
increase in the

Diseconomies of scale: factors that cause average costs of production to rise when the scale of
operation is increased.

Enterprise resource management (ERM): the use of a single computer application to plan the
purchase and use of resources in an organisation to improve the efficiency of operations.

Supply chain: all of the stages in the production process from obtaining raw materials to selling to
the consumer – from point of origin to point of consumption.

Sustainable: production systems that prevent waste by using the minimum of non-renewable
resources so that levels of production can be sustained in the future.

T OP T IP: When answering questions about economics of scale, make sure your is
applied to the business specified in the questions.
Chapter 24: Inventory management
Inventory (Stock): Materials and goods required to allow for the production and supply of
products to the customer.

Economic order quantity: The optimum or least-cost quantity of stock to re-order taking
into account delivery costs and stock-holding costs.

Buffer inventories: The minimum inventory level that should be held to ensure that
production could still take place should a delay in delivery occur or should production rate
increase.

Re-order quantity: The number of units ordered each time.

Lead time: The normal time taken between ordering new stocks and their delivery.

Just-in-time: This inventory-control method aims to avoid holding inventories by requiring

supplies to arrive just as they are needed in production and completed products are produced to
order.

TOP TIPS: Remember to apply your answer to the business in the question of the case study
when writing about inventories and inventory - handling systems - for example. if the business
sells toys, it is likely to hold high inventories of toys at festival times.

Any question about JIT that involves discussing how appropriate it is in different business cases
should lead to an answer that considers the potential drawbacks of the approach as well as its
more obvious benefits.

Y ou will not be asked to calculate the optimum order size but it is advised that your remember
the cost of running out of them - and apply these to the business in the question.
 UNIT 5 - Finance and accounting
Chapter 28: Business finance
Start-up capital: the capital needed by an entrepreneur to set up a business

Working capital: the capital needed to pay for raw materials, day -to-day running
costs and credit offered to customers. In accounting terms working capital = current
assets - current liabilities.

Capital expenditure: the purchase of assets that are expected to last for more than
one year, such as building and machinery.

Revenue expenditure: spending on all costs and assets other than fixed assets and
includes wages and salaries and materials bought for stock..

Liquidity: the ability of firm to be able to pay its short-term debts.

Liquidation: when a firm ceases trading and its assets are sold for cash to pay
suppliers and other creditors.

Overdraft: bank agrees to a business borrowing up to an agreed limit as and when

required.

Factoring: selling of claims over trade receivables to a debt factor in exchange for
immediate liquidity - only a proportion of the value of the debts will be received as cash.

Hire purchase: an asset is sold to a company that agrees to pay fixed repayments over
an agreed time period - the asset belongs to the company.

Leasing: obtaining the use of equipment of vehicles and paying a rental or leasing
charge over a fixed period, this avoids the need for the business to raise long term-
capital to buy the asset; ownership remains with the leasing company.

Venture capital: risk capital invested in business start-ups or expanding small

businesses that have good profit potential but do not find it easy to gain finance from
other sources.
Microfinance: providing financial services for poor and low-income customers who do
not have access to banking services, such as loans and overdrafts offered by traditional
commercial banks.

Crowdfunding: the use of small amounts of capital from a large number of individuals
to finance a new business venture.
Business plan: a detailed document giving evidence about a new or existing business,
and that aims to convince external lenders and investors to extend finance to the
business.

TOP TIPS: When answering case study questions, you should analyse what type of
legal structure the business has and what sources if finances are available to it.

You should be able to recommend appropriate sources of finance for businesses needing
capital for different reasons.
Chapter 29: Costs
Direct costs: these costs can be clearly identified with each unit of
production and can be allocated to a cost centre.
Indirect costs: costs that cannot be identified with a unit of production or
allocated accurately to a cost centre.
Fixed costs: costs that do not vary with output in the short run.
Variable costs: costs that vary with output.
Marginal costs: the extra cost of producing one more unit of output.
Break-even point of production: the level of output at which total
costs equal total revenue.
Top tip: Not all direct costs are variable costs. A juice machine will be a
direct cost, but its cost does not depend on the number of fruits juiced by
the machine.
Margin of safety: the amount by which the sales level exceeds the break-
even level of output.
Contribution per unit: price less direct cost per unit.
TOP TIP:
break-even chart will only be accurate for a limited amount of time
(changes in cost, market, conditions)
Chapter 30: Accounting information

Top Tip #1: It is important to learn the new terms and forms of layout as
these will be the one used by the company accounts that you will study
during the course. Where it aids understanding, both the old terms and the
new ones.

Top Tip #2: Questions that involve the interpretation or analysis of

accounts will use the statement of financial position format. The horizontal
format will not be used.

Top Tip #3: Many questions will ask for methods of increasing
profitability of a business. If the question needs an evaluative answer, it is
very important that you consider at least one reason why your suggestion
might not be effective.

Top Tip #4: When commenting on ratio results, it is often advisable to

question the accuracy of the data used and the limitations of using just a
limited number of ratio results in your analysis.

Income statement - records the revenue, costs and profit (or loss) of a
business over a given period of time.

Gross profit - equal to sales revenue less cost of sales

Revenue (sales turnover) - the total value of sales made during the
trading period = selling price x quantity sold

Cost of sales - this is the direct cost of the goods that were sold during the
financial year.

Operating profit (net profit) - gross profit minus overhead expenses.

Profit of the year (profit after tax) - operating profit minus interest
costs and corporation tax.

Dividends - the share of the profits paid to shareholders as a return for

investing the company.
Retained earnings (profit) - the profit left after all deductions,
including dividends, have been made, this is ploughed back into the
company as a source of finance.

Low-quality profit - one-off profit that cannot be easily be repeated or

sustained.

High-quality profit - profit that can be repeated and sustained.

Statement of financial position (balance sheet) - an accounting

statement that records the values of a business’ assets, liabilities and
shareholders’ equity at one point in time.

Shareholders’ equity - total value of assets - total value of liabilities

Asset - an item of monetary value that is owned by the business.

Liability - a financial obligation of a business that is is required to pay in

the future.

Share capital - the total value of capital raised from shareholders by the
issue of shares.

Non-current assets - assets to be kept and used by the business for more
than one year. Used to be referred as fixed assets.

Intangible assets - items of value that do not have a physical presence,

such as patents, trademarks and current assets.

Current assets - assets that are likely to be turned into cash before the
next balance sheet date.

Inventories - stocks held by the business in the form of materials, work in

progress and finished goods.

Trade receivables (debtors) - the value of payments to be received from

customers who have bought goods on credit.

Current liabilities - debts of the business that will have to be paid within
one year.
Accounts payable (creditors) - value of debts for goods bought on
credit payable to suppliers, also known as trade payables.

Non-current liabilities - value of debts of the business that will be

payable after more than one year.

Intellectual capital or property - the amount by which the market

value of a firm exceeds its tangible assets less liabilities - an intangible
asset.

Goodwill - arises when a business is valued at or sold for more than the
balance sheet value of its assets.

Cash flow statement - record of the cash received by a business over a

period of time and the cash outflows from the business.

Gross profit margin - ratio that compares gross profit (profit before
deduction of overheads) with revenue. gross profit margin = (gross profit /
revenue) x 100

Operating profit margin - ratio that compares operating profit revenue.

operating profit margin = (operating profit / revenue) x 100

Liquidity - the ability of a firm to pay its short term debts.

Current ratio = current assets / current liabilities

Acid test ratio = liquid asset / current liabilities

Liquid assets = current assets - inventories (stocks)

Window dressing - presenting the company accounts in a favourable

light - to flatter the business performance.
Chapter 31: Forecasting and managing
cash flows
Cash flow: the sum of cash payments to a business(inflows) less the sum
of cash payments(outflows).

Liquidation: when a firm ceases trading and its assets are sold for cash to
pay suppliers and other creditors.
Insolvent: when a business cannot meet its short-term debts.
Cash in flows: payments in cash received by a business, such as those
from customers or from the bank, e.g., receiving a loan.
Cash outflows: payments made by the business.
Top tip: Cash must always be in hand because payments are always being
made. Profit can wait.
Top tip: Forecasts are not actual accounts, they are estimates.