Section 5

Question 1

Start-up capital

Answer 1

Capital needed by an entrepreneur to set up a business

Question 2

Working capital

Answer 2

Capital needed to pay for raw materials, day-to-day running costs and credit offer to customers

Working capital = current assets - current liabilities

Question 3

Capital expenditure

Answer 3

Purchase of assets that are expected to last for more than one year. Used to bring income into the business

Question 4

Revenue expenditure

Answer 4

Spending on all costs and assets other than fixed assets and includes wages, salaries and materials for the stock

Question 5

Liquidity

Answer 5

The ability of a firm to be able to pay its short-term debts

Question 6

Liquidation

Answer 6

When a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors

Question 7

Overdraft

Answer 7

Bank agrees to a business borrowing up to an agreed limit as and when required

Question 8

Factoring

Answer 8

Selling of claims over trade receivables to a debt factor in exchange for immediate liquidity – a proportion of the value of debts will be received as cash

Question 9

Hire purchase

Answer 9

An asset is sold to a company that agrees to pay fixed repayments over an agreed time period

Question 10

Leasing

Answer 10

Obtaining the use of equipment and paying a rental/leasing charge over a fixed period
Avoids the need for the business to raise long-term capital to buy an asset

Question 11

Equity finance

Answer 11

Permanent finance raised by companies through the sale of shares

Question 12

Long-term loans

Answer 12

Loans which do not need to be re-paid for at least one year

Question 13

Long-term loans/bonds/debentures

Answer 13

Bonds issued by companies to raise debt finance, often with a fixed rate of interest

Question 14

Rights issue

Answer 14

Existing shareholders are given the right to buy additional shares at a discounted price

Question 15

Venture capital

Answer 15

Risk capital invested in business start-ups or expanding small businesses that have good profit potential but do not find it easy to guide finance from other sources

Question 16

Micro finance

Answer 16

Providing financial services for poor and low income customers who do not have access to banking services such as loans/overdraft

Question 17

Crowdfunding

Answer 17

Use of small amounts of capital from large numbers of individuals to finance a new business venture 

Question 18

Business plan

Answer 18

Detail document giving evidence about a new/existing business that aims to convince external lenders and investors to extend finance

Question 19

Direct cost

Answer 19

Costs which can clearly be identified with each unit of production and can be allocated to a cost centre

Question 20

Indirect costs

Answer 20

Costs that cannot be identified with a unit of production/allocated accurately to a cost centre

Question 21

Fixed cost

Answer 21

Costs that do not vary with output in the short run

Question 22

Variable cost

Answer 22

Costs that vary with output

Question 23

Marginal cost

Answer 23

Extra cost of producing one more unit of output

Question 24

Break even point

Answer 24

Level of output at which total costs equal to total revenue – neither a profit or a loss is made

Question 25

Margin of safety

Answer 25

Amount by which the sales level exceeds the breakeven level of output

Question 26

Contribution per unit

Answer 26

Selling price – variable cost per unit

Question 27

Income statement

Answer 27

Records the revenue, costs and profit/loss of a business over a given period of time

Question 28

Gross profit

Answer 28

Sales revenue – cost of sales

Question 29

Revenue

Answer 29

Total value of sales made during the trading period

Question 30

Cost of sales

Answer 30

Direct costs of goods that are sold during the financial year

Question 31

Operating profit/Net profit

Answer 31

Gross profit – overhead expenses

Question 32

Profit for the year

Answer 32

Net profit – interest costs and corporation tax

Question 33

Dividends

Answer 33

The share of the profits paid to shareholders as a return for investing in the company

Question 34

Retained earnings

Answer 34

Profit left after all deductions, including dividends 

Question 35

Low quality profit

Answer 35

Once off profit that cannot easily be repeated or sustained

Question 36

High quality profit

Answer 36

Profit that can be repeated and sustained

Question 37

Statement of financial position

Answer 37

Accounting statement that records the values of a business assets, liabilities and shareholders equity at one point in time

Question 38

Shareholders equity

Answer 38

Total value of assets – total value of liabilities

Question 39

Share capital

Answer 39

Value of capital raise from shareholders by the issue of shares

Question 40

Intangible asset

Answer 40

An assets value that do not have physical presence

Question 41

Goodwill

Answer 41

Arises when a business is valued at or sold for more than the balance sheet value of its assets

Question 42

Cash flow statement

Answer 42

Record of the cash received and outflow over a period of time

Question 43

Gross profit margin

Answer 43

Gross profit Sales revenue. X100 High margin = high gross profit

Question 44

Profit margin

Answer 44

Net profit Sales revenue. X100 High margin = high net profit

Question 45

Operating/net profit margin

Answer 45

Net profit | Sales revenue. X100

Question 46

Liquidity

Answer 46

The ability of a firm to pay short-term debts

Question 47

Current ratio

Answer 47

Current assets. : Current liabilities Current liabilities. Current liabilities Should be 1.5/2:1

Question 48

Acid test ratio

Answer 48

Current assets – inventory. : Current liabilities Current liabilities. Current liabilities Should be 0.5/1:1

Question 49

Window dressing

Answer 49

Presenting the company accounts in a favourable light – to flatter the business performance ~ selling assets right before releasing account ~ reducing depreciation

Question 50

Cash flow

Answer 50

Sum of cash payments to business – sum of cash payments

Question 51

Insolvent

Answer 51

Business is unable to meet its short-term debts

Question 52

Cash flow forecast

Answer 52

Estimate of a firms future cash inflows and outflows

Question 53

Net monthly cash flow

Answer 53

Estimation of a firms future from its inflows and outflows

Question 54

Opening cash balance Closing cash balance

Answer 54

Cash held by the business at the start of the month Cash held by the business at the end of the month; to become the next months opening balance

Question 55

Credit control

Answer 55

Monitoring of debts to ensure that credit period are not exceeded

Question 56

Bad debt

Answer 56

Unpaid customers bills which are unlikely to ever be paid

Question 57

Overtrading

Answer 57

Expanding a business rapidly without obtaining all of the necessary finance so that a cash flow shortage develops

Question 58

Return on capital employed – ROCE

Answer 58

Measures efficiency of capital to generate profit Net profit Capital employed. X100

Question 59

Semi variable cost

Answer 59

Includes elements of both fixed and variable costs

Question 60

Trade credit

Answer 60

Delaying payments of bills for goods/services received