(Done) Finance (Paper 2)

Question 1

List the reasons why a business needs finance (5)

Answer 1

• New firms need start-up capital
• New firms often have poor initial cash flow to cover costs
• To cover lack of liquidity from customers delaying payments
• To meet day-to-day running costs
• To expand

Question 2

List the short-term sources of finance

Answer 2

• Trade credit
• Over drafts

Question 3

What is trade credit

Answer 3

• The process of buying items from a supplier and paying for them at a later date

Question 4

Benefit of trade credit

Answer 4

• Provides smaller firms with the time to gather capital to repay the debt

Question 5

Drawbacks of trade credit

Answer 5

• Late repayments can lead to large fees

Question 6

What is an overdraft

Answer 6

• When the bank allows firms to take out more money out of their bank account than it has payed into it

Question 7

Main causes of negative cash flow

Answer 7

• Poor management
• Costs higher than revenue
• Offering customers to long to pay

Question 8

Define Poor management in context of negative cash flow

Answer 8

• Not having specialists in place to deal with finance, procurement or production so problems can’t be predicted or avoided

Question 9

Define the business a making a loss in terms of negative cash flow

Answer 9

• Costs are higher than revenue. could be production costs are high, selling price is too low or the company is making more products than there is demand for

Question 10

Define offering customers to long to pay in context of negative cash flow

Answer 10

• Trade credit agreements are not favourable for the business. Offering 60 day trade credit means waiting two months before any cash inflow comes in

Question 11

4 Main solutions to cash flow problems

Answer 11

• Reschedule payments
• Cut costs
• Use overdrafts
• Find new sources of cash inflow

Question 12

Define Break-Even

Answer 12

• When revenue and costs are the same
• The business is making neither a profit or a loss

Question 13

Define Break-Even point

Answer 13

• An amount of sales that if exceeded will cause profit
• If sales are less than this point, the business makes a loss

Question 14

Define cash in business context

Answer 14

• The money a company can spend immediately

Question 15

Define cash flow

Answer 15

• The flow of cash in and out of the business

Question 16

Define net cash flow

Answer 16

• The difference between cash inflow and cash outflow over a period of time

Question 17

Define credit terms

Answer 17

• The decisions of how long after purchasing a product that the customer has to pay for it

Question 18

List the three main reasons for poor cash flow

Answer 18

• Poor sales - Lack of demand for product
• Over trading - The firm takes on too many orders and has to spend large amounts of capital to compensate for it
• Poor business decisions - Expanding into the wrong markets or developing the wrong products

Question 19

List the main ways to increase cashflow

Answer 19

• Rescheduling payments
• Reducing cash outflow
• Arranging an overdraft
• Finding a new source of finance
• Increasing cash inflow

Question 20

List the three parts to an income statment

Answer 20

• Trading account
• Profit and loss account
• Appropriation account

Question 21

Define gross profit

Answer 21

• Revenue minus how much it costs to make the products sold that year
• The fraction of all money spent to buy products that doesn’t go directly to making profit

Question 22

Features of a trading account

Answer 22

• Records the gross profit or loss of a firm

Question 23

Features of the profit and loss account

Answer 23

• Records the running costs of the business throughout the year

Question 24

Features of the appropriation account

Answer 24

• Only included in the income statements of limited companies
• Record where profit has gone, to taxes, to shareholders or as retained profit

Question 25

Define operating profit

Answer 25

- The amount of profit remaining after paying all the operating costs of the business

Question 26

Define Net profit margin

Answer 26

- The percentage of all money spent by customers that is not turned into retained profit

Question 27

Define fixed assets

Answer 27

- Assets that last longer than one year

Question 28

Define current assets

Answer 28

- Assets that last a few months - Listed in order of liquidity

Question 29

Define net current assets

Answer 29

- Currents assets minus current liabilities

Question 30

Define current liabilities

Answer 30

- All the bills that the firm has not paid

Question 31

Define share capital

Answer 31

- The profit gained when shares were originally issued

Question 32

Define long-term liabilities

Answer 32

- Money debts owed to other people

Question 33

Define capital employed

Answer 33

- The addition of shareholder's funds and long-term liabilities