Finance

Question 1

Working Capital

Answer 1

Money a company has for its everyday expenses and operations.

It’s what’s left after subtracting what it owes in the short term.

Question 2

Purpose of Balance sheet

Answer 2

Reports a company’s assets, liabilities, and shareholder equity at a specific point in time.

Indicates whether a company can generate enough cash to survive a financial crisis.

Question 3

Purpose of profit and loss account

Answer 3

Shows revenue, expenses, and profit or loss of a company over a certain period of time.

Help assess the financial health of business, make decisions where to allocate resources.

Question 4

Cash Flow statement

Answer 4

Breakdown of a company’s inflow and outflow of cash from three main activities: operating activities, investing activities, financing activities.

It provides an overview of a company’s financial strength.

Strong cash flow indicates company capable to expand its business or invest in new projects.

Question 5

DEFINE INCOME and PROFIT

Answer 5

Income is the sum of revenues generated by a company, e.g. income from license sales or service charges.

Profit is calculated after deducting expenses from
revenue (gross profit / net profit).

Question 6

DEFINE NON CURRENT / FIXED ASSETS

Answer 6

Assets purchased for long term use and are not likely to be sold in near future (normally within one year) such as buildings, equipment etc.

Question 7

DEFINE CURRENT ASSET

Answer 7

Any assets which are expected to be converted to cash within one year period.

Cash, Accounts receivables, inventory etc.
are examples of current assets

Question 8

TANGIBLE ASSETS

Answer 8

Any assets that can be touched and seen such as cash, building, equipment etc.

Question 9

INTANGIBLE ASSETS

Answer 9

Intangible assets are long term resources which have value but cannot be touched or seen and does not exist physically.

Some examples may include Brand Name, Reputation (goodwill), Intellectual property (knowledge or
experience)

Question 10

Goodwill

Answer 10

The extra value a company pays for when buying another company. It represents things you can’t touch, like the company’s reputation or customer loyalty.

Listed as an asset on the buyer’s balance sheet.

Question 11

Budget

Answer 11

A plan that outlines how much money you have and how you intend to spend or save it over a specific period, like a month or a year.

It helps you track your income and expenses to ensure you’re spending within your means and reaching your financial goals.

Question 12

Overheads

Answer 12

Ongoing expenses for a business, like rent and utilities, that aren’t directly tied to making products or services.

Question 13

Owner’s equity

Answer 13

Owner’s equity is what’s left for the owner(s) after subtracting what the business owes from what it owns.

It’s like the owner’s share of the business’s value.

Question 14

DIRECT COST

Answer 14

Directly contribute to the production of goods or services. Examples include raw materials, labor wages for workers directly involved in production, and manufacturing equipment.

Question 15

INDIRECT COST

Answer 15

Necessary for the overall operation of the business but are not directly tied to the production process. Examples include rent, utilities, administrative salaries, and office supplies.

Question 16

FIXED COST

Answer 16

Do not fluctuate and remain same regardless of production quantities.

Examples: rent, property tax, depriciation of assets.

Question 17

VARIABLE COST

Answer 17

They fluctuate as the quantity of goods or services produced increases or decreases.

Variable costs typically include items such as raw materials, direct labor wages, and utilities directly related to production.

As production levels rise, variable costs increase, and conversely, they decrease when production levels decrease.

Question 18

Depreciation

Answer 18

• Gradual decrease in asset value over time.
  • Factors: wear and tear, obsolescence, or usage.
  • Method to allocate cost of assets over useful life.
  • Example: Company buys $50,000 truck, 5-year life, $5,000 residual.
  Depreciation per year: ($50,000 - $5,000) / 5 = $9,000.

Records $9,000 as depreciation expense annually.

Question 19

A limited liability company has a corporate legal identity, and its ownership is divided into a number of shares.
Discuss the significance of this in the following situations.
i) The company makes a profit.
ii) The company makes a loss.

Answer 19

i) Profit Situation:
- Profit Distribution:Dividends distributed among shareholders.

• Limited Liability:Shareholders not personally liable beyond investment.
• Growth Potential: Profits can be reinvested for expansion.

ii) Loss Situation:
- Limited Liability: Shareholders not liable beyond investment.

• Risk Management:
  Losses don’t affect personal assets.
• Share Value Impact: Losses may lower share value, but no personal obligation to cover.

Question 20

CURRENT LIABILITIES

Answer 20

These are amounts due to be paid to creditors within 1 year.

EX: overdraft, short term debts

Question 21

NON CURRENT LIABILITIES

Answer 21

These are debts which the business can take more than 1 year to repay.

EX: loan from bank

Question 22

Cash from Operating for cash flow statement

Answer 22

Overheads

Salaries to staff

Insurance

Question 23

Cash from Investing in Cash Flow Statement

Answer 23

Purchase of fixed asset

Sale of fixed asset

equipment sale / purchase

Dividend received

Interest received

Rent received

Question 24

Cash flow from financing

Answer 24

Equity shares

Loan

Debenture

Dividend paid

Tax paid