Finance

Question 1

Advantages of internal finance

Answer 1

No interest paid
Affairs of business private
Does not have to be repaid

Question 2

Internal sources of finance

Answer 2

Debt collection
Sale of fixed assets
Sale of inventory
Retained profits
Owners investment

Question 3

Advantages of external sources of finance

Answer 3

Larger sums available
Quicker
Borrower has use of asset whike paying for it

Question 4

Disadvantages of external sources

Answer 4

Interest to be paid
Lender requires security

Question 5

External sources

Answer 5

Grants
Trade credit
Mortgage
Hure purchase
Leasing
Share issue
Additional partners
Bank loan/overdraft

Question 6

Advantage of extra partners

Answer 6

New partner contribute capital

Question 7

Disadvantage of extra partners

Answer 7

Partner entitled to share of profits

Question 8

Disadvantage of leasing

Answer 8

Payments math be very high
Asset remains property of lender

Question 9

Advantage of leasing

Answer 9

Business can use asset( up to date equipment)

Question 10

Advantages of hure purchase

Answer 10

Can pay in instalments
Hired till paid off

Question 11

Disadvantage of hire purchase

Answer 11

Total cost of asset is much higher than if bought for cash

Question 12

Advantage of mortgage

Answer 12

Business can use premises from beginning
Will eventually become property of business when payments been made

Question 13

Disadvantage of mortgage

Answer 13

More expensive than if bought for cash

Question 14

Advantage of trade credit

Answer 14

Immediate use of goods(30 days to pay)

Question 15

Advantage of owner’s investment

Answer 15

Private
Doesn’t have to be repaid

Question 16

Disadvantage of owners investment

Answer 16

Not all owners have additional capital

Question 17

Advantage of retained profits

Answer 17

Private
Does not have to be repaid

Question 18

Disadvantage of retained profits

Answer 18

Not all businesses make enough to reinvest profit

Question 19

Advantage of sale of inventory

Answer 19

Raise finance quickly

Question 20

Disadvantage of sale of fixed assets

Answer 20

Small businesses not likely be o have surplus assets

Question 21

Purpose of cash flow forecasts

Answer 21

Forward planning- predicts the level of spending and level of income will have in a period of time
Review performance- it enables a business to compare the forecasted income and spending against actual amounts
Shows when finance will be required- any business wishing to borrow money etc will need to see when this money will be re available

Question 22

Importance of a forecast to a business

Answer 22

Ensures business will not suffer from a shortage of ready money
Business must ensure there is a steady supply of money coming in so that in can pay essential debts
Without adequate cash flow the business could be forced to close because suppliers

Question 23

Consequences of incorrect forecasting

Answer 23

Would cause a shortage of working capital- could not pay essential expenses such as wages
Some of the businesses assets may be sold- could affect production eg machinery sold
Inventory levels may be inaccurate- if sales revenues underestimated sufficient inventory not purchased

Question 24

Importance of income statement and statement of financial position to business

Answer 24

Show accurate value of business

Question 25

Cost of sales

Answer 25

Opening inventory+ purchases - closing inventory

Question 26

Gross profit

Answer 26

Sales revenue - cost of sales

Question 27

Net profit

Answer 27

Gross profit - expenses

Question 28

Non current assets

Answer 28

Assets which are more permanent

Question 29

Current asset

Answer 29

Assets can be exchanged for cash

Question 30

Non current liability

Answer 30

Borrows for a longer time eg bank loan

Question 31

Current liability

Answer 31

Liabilities which must be paid immediately

Question 32

Statement of financial position records

Answer 32

Businesses assets Businesses liabilities Owners capital Wonders drawings Net profit

Question 33

Gross profit %

Answer 33

Gross profit/ sales revenue x 100

Question 34

Net profit %

Answer 34

Net profit / sales revenue x100

Question 35

Inventory turnover rate

Answer 35

Cost of sales / average inventory

Question 36

Return on capital employed

Answer 36

Net profit / capital employed x100

Question 37

Working capital ratios

Answer 37

Current assets / current liabilities

Question 38

Significance of a break even point

Answer 38

Amount of goods which must be sold to make a profit Level of costs business can bear Price which needs to be charged for goods

Question 39

How to work out break even point

Answer 39

Total fixed costs / selling price per unit - variable cost per unit

Question 40

Variable costs

Answer 40

Costs which vary eg electricity

Question 41

Fixed costs

Answer 41

Costs not affected by quantity of goods eg rent

Question 42

What is margin of safety

Answer 42

The amount in which the business sells in excess of its break even point