finance

Question 1

owner’s personal finance

Answer 1

short term
advantages- allows owner to keep control of business and can reduce amount to be borrowed from others.
disadvantage- it can be difficult to withdraw savings once they are invested in the business and there is risk that the owner could lose his savings if the business fail

Question 2

retained profits

Answer 2

short term
advantages- can be used to make larger purchases such as bulk buying
disadvantages- can find it more difficult to grow if it regularly uses retained profits especially to solve short term cash flow problems

Question 3

sale of assets

Answer 3

short term
advantages- money can be raised from the sale of an asset to boost cash flow and money does not need repaid
disadvantages- if the finance is required urgently the business may have to sell the asset for less than it is worth

Question 4

sell and lease back

Answer 4

short term
advantages- money can be raised from the sale of an asset to boost cash flow and the business passes over responsibility for maintaining and renewing the equipment to the leasing company
disadvantages- leasing over a long period of time can be expensive

Question 5

share issues

Answer 5

long term
advantages- large sums of money can be raised through the sales of shares and the money does not need repaid
disadvantages- dividends have to be paid to shareholders and it can be expensive to advertise and organise the sales of shares

Question 6

debentures

Answer 6

long term
advantages- control of the business is retained and can be paid back over a long time
disadvantages- interest must be paid annually even if loss is made unlike with shares dividends are only paid out if profits are made

Question 7

bank overdraft

Answer 7

short term
advantages- usually easy for a business to arrange and allows a business to continue to pay business expenses despite there being no money in its bank account
disadvantages- high interests rates are usually applied by the bank for borrowing money in this way and the overdraft can be withdrawn by the bank at any time and must be repaid

Question 8

trade credit

Answer 8

short term
advantages- allows a business to sell stock at a high price and earn a profit before the bill needs to be paid and it helps the business to keep going when cash flow is poor
disadvantages- discount for prompt payment is lost and suppliers will be reluctant to continue to offer credit if a business does not pay within the agreed credit period

Question 9

debt factoring

Answer 9

short term
advantages- responsibility of the debt is passed on to the factors saving the company time and effort. cash flow is improved by receiving an advanced payment of the debts from the factor.
disadvantages- business has to sell the customer debt for a reduced amount and factoring companies are usually only interested in large amounts of debt

Question 10

grants

Answer 10

long term
advantages- often offered as an incentive and a ay to help a business get started. the money does not need to be repaid
disadvantages- they can be complicated to apply for and can require the business to meet certain requirements. grants are usually one-off payments that are not repeated

Question 11

bank loan

Answer 11

long term
advantages- business can budget for the repayments. purchases of essential equipment can be made in advance and paid back over a number of years.
disadvantages- interest has to be repaid along with the loan amount. small businesses may find it more difficult to secure a loan and often need to pay higher interest rates as they are a greater risk

Question 12

leasing

Answer 12

long term
advantages- business don’t need to spend large amounts of money to purchase equipment needed. leasing company is responsible for maintaining and renewing equipment
disadvantages- do not own the asses it is renting. rental costs can build up over a period of time.

Question 13

hire purchase

Answer 13

long term
advantages- expensive equipment can be bought with only an initial deposit. the asses is owned by the business at the end of the payments
disadvantages- business do not own until the last payment. it can be an expensive form of borrowing if interest rates are high

Question 14

mortgage

Answer 14

long term
advantages- can be aid back over a long period of time. interest rate is lower than a bank loan
disadvantages- interest has to be paid along with loan amount. mortgage provider owns the property until the last repayment is made

Question 15

venture capitalists

Answer 15

long term
advantages- large amounts of investment can be gained by established businesses. venture capitalists are willing to take on more risky investments than banks.
disadvantages -venture capitalists have an equity stake which means control and a share of profits are given up

Question 16

business angels

Answer 16

long term
advantages- business advice is often provided as well as finance. business angels are willing to take a risk on new businesses
disadvantages- business angels have an equity stake which means control and a share of profits are given up. only suitable for smaller amounts of investment for the new business

Question 17

gross profit margin formula

Answer 17

gross profit divided by sales(turnover) multiply by 100

Question 18

profit mark-up formula

Answer 18

gross profit divided by costs of goods sold multiply by 100

Question 19

net profit margin formula

Answer 19

net profit divided by sales(turnover) multiply by 100

Question 20

return on capital employed formula

Answer 20

net profit before interest and tax divided by capital employed multiply by 100

Question 21

rate of stock turnover formula

Answer 21

costs of goods sold divided by average stock

Question 22

average stock formula

Answer 22

opening stock plus closing stock divided by 2

Question 23

current ratio formula

Answer 23

current assets divided by current liabilities

Question 24

acid test formula

Answer 24

current assets subtract stock divided by current liabilities

Question 25

3 types of ratio

Answer 25

profitability efficiency liquidity

Question 26

types of profitability ratios

Answer 26

gross profit margin profit mark up net profit margin

Question 27

types of efficiency ratios

Answer 27

return on capital employed | rate of stock turnover

Question 28

types of liquidity ratios

Answer 28

``` current ratio (working capita ratio) acid test (quick ratio) ```

Question 29

Describe factors affecting sources of finance

Answer 29

-short term finance required -long term finance required -interest rates -payback term Size and type of organisation

Question 30

Name users of a financial statement

Answer 30

- owner - employees - inland revenue - trade unions - competitors - investors - lenders

Question 31

Describe an income statement

Answer 31

Calculates the profit from buying and selling and the profit made after expenses are deducted from gross profit

Question 32

Give the definition for revenue

Answer 32

The amount of money made from selling goods/services (sales)

Question 33

Define the term costs of sales

Answer 33

The amount of money spent on selling goods. This is calculated by opening inventory plus purchases minus closing inventory

Question 34

Define the term gross profit

Answer 34

The profit made from buying and selling. This is calculated by revenue minus cost of sales

Question 35

Define the term expenses

Answer 35

The running costs incurred throughout the year

Question 36

Define the term profit for the year

Answer 36

The profit made after the expenses are deducted from the gross profit

Question 37

Describe a statement of financial position

Answer 37

The statement of financial shows the items a business own, the items they owe and the overall value of the business

Question 38

Define the term non-current assets (fixed assets)

Answer 38

Items owned for a period of more than one year

Question 39

Define the term current assets

Answer 39

Items owned for a period of less than one year

Question 40

Define the term current liabilities

Answer 40

Items owed for a period of less than one year

Question 41

Define the term working capital

Answer 41

The ability to pay short term debts. This is calculated by current assets minus current liabilities

Question 42

Define the term total net assets

Answer 42

The overall value of the business. This calculated by non current assets plus working capital

Question 43

Describe a cash budget

Answer 43

Need to be prepared to help organisation remain liquid. Liquidity refers to the cash flow situation in an organisation. Organisations need to remain liquid in order to have the fund to pay off their debts

Question 44

Describe cash flow problems

Answer 44

- too much money tied up in stock - too many credit sales - too long a payment period for credit sales - not enough credit purchases - increasing expense costs - to many drawings by owners - not enough sales revenue - too many unpaid debts

Question 45

Describe why cash budgets are used

Answer 45

- to predict a positive cash flow situation (surplus) - to predict a negative cash flow situation (deficit) - to allow investment to be planned during a surplus - to allow action to be taken to avoid deficit - to be compared with actual figures and used to measure the performance of individual departments

Question 46

Define the term opening balance

Answer 46

The amount of cash available at the start of the month

Question 47

Define the term total receipts

Answer 47

The total cash received during the month

Question 48

Define the term cash available

Answer 48

The amount of cash available to spend. This is calculated by the opening balance plus total receipts

Question 49

Define the term total payments

Answer 49

The total amount of cash spent during the month

Question 50

Define the term closing balance

Answer 50

The amount of cash available at the end of the month. This is calculated by cash available minus total payments

Question 51

Describe why ratio analysis is used

Answer 51

- compare the performance of the business with previous years or to their competitors - compare against industry averages - highlight areas of the business that need attention - highlight trends to aid future decision making

Question 52

Describe the limitations of ratio analysis

Answer 52

- information is historical so is not relevant to the current or future position - ratios do not take into account of external or internal factors - ratios do not take into account product developments - it is difficult to find competitions of the exact type and size to make valid comparisons

Question 53

Describe gross profit percentage

Answer 53

This measures the percentage of profit made from buying and selling. The higher the percentage the better

Question 54

Describe the profit for the year percentage

Answer 54

The measures the percentage of profit made once expenses are deducted from gross profit. The higher the percentage , the better

Question 55

Describe the return on capital employed ratio

Answer 55

This measures the percentage of investment that is returned to investors such shareholders. The higher the percentage, the better

Question 56

Describe the current ratio

Answer 56

Measures the ability of a business to pay back short term debts

Question 57

Describe the acid test ratio

Answer 57

Measures the ability of a business to pay back short term debts in a crisis situation. By removing stock from the equation, the business can assess their cash flow without including the least liquid current asset

Question 58

Describe the rate of stock turnover ratio

Answer 58

Measures the amount of times a business re-stocks during the year.

Question 59

Describe uses of technology in finance

Answer 59

- spreadsheets can be used to prepare financial statements which allow accuracy and can save time - presentation software can be used to engage audiences when presenting information - email can circulate financial information quickly