Finance

Question 1

Start up capital

Answer 1

The capital needed by an entrepreneur when first starting a business

Question 2

Working capital

Answer 2

The capital needed to finance the day to day running expenses and pay short-term debts of a business

Question 3

Non currrent assets

Answer 3

Resources owned by a business which will be used for a period longer than one year (e.g buildings and machinery)

Question 4

Capital expenditure

Answer 4

Spending by a business on non-current assets such as machinery

Question 5

Why do businesses need finance?

Answer 5

• To pay day to day expenses of the business (e.g wages, materials etc.)
• Purchasing non current assets (e.g machines)
• Investing in technology
• To finance expansion
• To conduct market research

Question 6

Long term finance

Answer 6

Debt or equity used to finance the purchase of non-current assets of finance expansion plans.

Question 7

Short term finance

Answer 7

Loans or debt that a business expects to pay back within a year

Question 8

Internal sources of finance

Answer 8

Capital which can be raised from within the business itself

• Owners savings
• Retained profits
• Sale of non current assets
• Use of some of the business’s working capital

Question 9

Retained profit

Answer 9

Profit remaining after expenses, tax and dividends have been paid, which is put back into the business

Question 10

External sources of finance

Answer 10

This is capital which is raised from outside the business. External sources of finance are usually divided into short term and long term sources

Question 11

Short term finance

Answer 11

• Overdraft
• Trade credit
• Debt factoring

Question 12

Long term finance

Answer 12

• Loan
• Leasing
• Mortgage
• Debenture

Question 13

Overdraft

Answer 13

An agreement with the bank which allows a business to spend more money than it has in its account up to an agreed limit. The loan has to be repaid within 12 months

Question 14

Trade credit

Answer 14

Where suppliers deliver goods now are are willing to wait for a number of days before payment

Question 15

Factoring

Answer 15

When firms sell their invoices to a factor such as a bank. They do this for cash rather than waiting 28 days to be paid the full amount

Question 16

Debentures

Answer 16

Loans made to a company

Question 17

Mortgage

Answer 17

A special type of loan for buying property where monthly payments are spread over a number of years

Question 18

Cash flow forecast

Answer 18

An estimate of the future cash inflows and outflows of a business

Question 19

Net cash flow

Answer 19

Cash inflow minus cash outflow

Question 20

Interpreting cash flow statements

Answer 20

The most important line on any cash -flow statement is the one containing the closing balance. If a businesses cash flow position is forecast to become negative, they might chose to finance it with an overdraft.

Question 21

How to finance a short-term cash shortage

Answer 21

• Ask trade receivables to pay more for goods more quickly by offering discounts to customers who have good credit
• negotiate longer term credit terms with suppliers
• Delay the purchase of non-current assets
• Find other sources of finance for the purchase of non-current assets

Question 22

Gross profit

Answer 22

The difference between revenue and cost of sales

Question 23

Profit

Answer 23

The difference between revenue and costs

Question 24

Total costs

Answer 24

Cost of sales + expenses

Question 25

Revenue

Answer 25

The amount earned from the sale of products

Question 26

Cost of sales

Answer 26

The cost of purchasing the goods used to make the products sold

Question 27

Expenses

Answer 27

Day to day operating expenses of a business

Question 28

The importance of profit to private sector businesses

Answer 28

- Measure the success of a business - Measure the performance of managers - Decide whether or not to continue making or selling a product - Finance the purchase of non-current assets

Question 29

Income statements

Answer 29

Financial statement which records the revenue, costs and profits of a business for a given period of time

Question 30

Use of income statement

Answer 30

Internal and external stakeholders can use the information when analysing business performance. The most important figure is profit.

Question 31

Balance sheet

Answer 31

An accounting statement that records the assets liabilities and equity of a business at a particular date

Question 32

Assets

Answer 32

Resources that are owned by a business

Question 33

Liabilities

Answer 33

Debts that will have to be paid sometime in the future

Question 34

Current assets

Answer 34

Resources that the business owns and expects to convert to cash before the date of the next balance sheet

Question 35

Trade receivable

Answer 35

The mount of money owed to the business by customers who have been sold goods on credit

Question 36

Trade payable

Answer 36

The amount a business owes to its suppliers for goods bought on credit

Question 37

Non-current liabilities

Answer 37

Debts which will be payable after more than a year

Question 38

Owners equity

Answer 38

The amount owed by the business to its owners (including capital and retained profits)

Question 39

How to interpret financial statements

Answer 39

- Identify its strengths and weaknesses so that it can be decided which, if any, of its policies or strategies née to be changed - Show heather the business is meeting its objectives - Improve future business performance

Question 40

Gross profit margin

Answer 40

Ratio between gross profit and revenue (gross profit/revenue)x100

Question 41

Profit margin

Answer 41

Ratio between profit before tax and revenue (profit/revenue)x100

Question 42

How to improve ratios

Answer 42

Increase denominator | Decrease numerator

Question 43

Liquidity

Answer 43

The ability of a business to pay its short term debts

Question 44

Current ratio

Answer 44

Ratio between current assets and current liabilities current assets/current liabilities

Question 45

Acid test ratio

Answer 45

Ratio between liquid assets and current liabilities (current assets - inventories)/current liabilities

Question 46

Interpreting acid test ratio

Answer 46

A ratio of 1:1 is satisfactory. If it is lower than this there is a risk of the business not having enough cash to pay its short-term liabilities. If it is too high, then cash is being tied up in unprofitable assets.