Unit 5 Finance

Question 1

5.2
What is a loan?

Answer 1

A business borrow a sum of money from a bank or another lender

Question 2

5.2
What is an overdraft?

Answer 2

A bank allows a business to spend more money than there is in its current account.

Question 3

5.2
What is crowdfunding?

Answer 3

Money raised by a business by nviting sponsors to contribute money, provide a loan, or buy equity in the business

Question 4

5.2
What is share issue?

Answer 4

Money raised by selling shares of the business

Question 5

5.2
What is Trade credit?

Answer 5

Goods are obtained from another business without immediate payment being made

Question 6

5.2
What is Retained profit?

Answer 6

Money is earned by the business but not paid to the owners

Question 7

5.2
What is sale of assets?

Answer 7

Money is received following the sale of capital items owned by the business

Question 8

5.2
What is owners’ capital?

Answer 8

The owner or owners use their own savings to provide capital for the business

Question 9

5.2
Owners capital -
advantage + disadvantage

Answer 9

Advantage:
-No need to repay the money
-No interest has to be paid

Disadvantage:
-If the owner(s) don’t have enough savings, they will need to use another source of finance

Question 10

5.2
Retained profit -
advantage + disadvantage

Answer 10

Advantages:
-No interest has to be paid
-No cost to raise the finance

Disadvantages:
-Only available to businesses who have profit
-Can be limited amount

Question 11

5.2
Sale of assets -
advantage + disadvantage

Answer 11

Advantages:
-Good if the asset is no longer of use to the business

Disadvantages:
-Can take time to sell asset
-May not be possible to find buyer

Question 12

5.2
Overdraft -
advantage + disadvantage

Answer 12

Advantages:
-Can meet short term cash flow problems
-The size of the overdraft varies monthly and interest is paid only on the amount borrowed

Disadvantages:
-Interest is charged on the daily amount of money the business owns the bank. Can be expensive

Question 13

5.2
Trade credit -
advantage + disadvantage

Answer 13

Advantages:
-Allows the business buying goods to sell to the customer before payment is made to supplier
-The period of credit usually interest free

Disadvantages:
-The goods must be paid for even if they do not sell
-Interest is charged if the credit is not repaid within the time limit

Question 14

5.2
Taking a new partner -
advantage + disadvantage

Answer 14

Advantages:
-A new partner could bring new skills to the business
-No cost to raise finance

Disadvantages:
-The new partner will have a say in how the business is run
-The new partner will be entitled to a share of profits

Question 15

5.2
Loan -
advantage + disadvantage

Answer 15

Advantages:
-Repayment is spread over time
-Business knows the amount to be paid in instalments, helping with budgeting

Disadvantages:
-Interest has to be paid
-Business may need to risk an asset as colateral

Question 16

5.2
Share issue -
advantage + disadvantage

Answer 16

Advantages:
-Money does not have to be paid back
-A lot of finance cna be raised from many investors

Disadvantages:
-Dividends may have to be paid to shareholders
-Shareholders are entitled to have a say in running of the company

Question 17

5.2
Crowdfunding -
advantage + disadvantage

Answer 17

Advantages:
-A lot of money can be raised from contributors
-No security needed for loans

Disadvantages:
-There is no guarantee the business will raise the amount of money it needs
-It takes time and effort to promote the crowdfunding.

Question 18

5.3
What is revenue?

Answer 18

-Income that comes into a business from the sale of products and services
-Calculated by quantity sold x selling price

Question 19

What is the importance of revenue to a business?

Answer 19

If a business wanted to increase revenue they could:
-Increase price of product
-Reduce price to increase sales
-Increase sales by increasing advertising, selling a wider range of products etc.

Question 20

Why does a business want to minimise its costs?

Answer 20

-Increase profits
-Reduce prices to become more competitive without cutting profits
-Save money in order to expand or update machinery

Question 21

How does a business reduce costs?

Answer 21

-Employing new technology instead of workers
-Finding cheaper supplies of materials or goods to sell (have to maintain quality and reliability though)
-Asking a supplier to reduce its prices or asking workers to take a pay cut.

Question 22

Total cost calculation

Answer 22

Total fixed cost + Total variable cost = Total cost

Question 23

Gross profit calculation

Answer 23

Sales (total revenue) - cost of sales = Gross profit

Question 24

Net profit calculation

Answer 24

Gross profit - expenses = net profit

Question 25

Gross profit margin calculation

Answer 25

(Gross profit x 100) ÷ Total revenue = gross profit margin

Question 26

Net profit calculation

Answer 26

(Net profit x 100) ÷ Total revenue = net profit margin

Question 27

If gross profit margin rises...

Answer 27

-Total revenue rose faster than cost of sales -Total revenue fell but cost of sales fell more -Total revenue rose and cost of sales fell

Question 28

If net profit margin rises...

Answer 28

-Gross profit rose faster than expenses -Gross profit has fallen but expenses fell more -Gross profit rose and expenses fell

Question 29

If gross profit margin falls...

Answer 29

-A fall in total revenue and a rise in the cost of sales -A rise in total revenue but a bigger rise in cost of sales -A fall in total revenue but a smaller fall in cost of sales

Question 30

If net profit margin falls...

Answer 30

-A fall in gross profit and a rise in expenses -A rise in gross profit but a bigger rise in expenses -A fall in gross profit but a smaller fall in expenses

Question 31

Calculating ARR

Answer 31

1) Total revenue from investment - cost of the investment = profit over the life of investment 2) Total profit ÷ Life of the investment (years) = Average annual profit 3) (Annual average profit ÷ cost of investment) x 100 = Annual rate of return (ARR)

Question 32

Why do most businesses prepare Profit and Loss accounts?

Answer 32

-The law (legally obliged) -To help the business managers/owners -To gain investors -For employees job security (knowing they won't be made redundant)

Question 33

What is revenue?

Answer 33

The income received by a business from selling its goods and services

Question 34

What is cost of sales?

Answer 34

These are the costs involved directly with supplying the good or service - also known as variable costs

Question 35

What is gross profit?

Answer 35

This is when you subtract the cost of the sales from the sales revenue

Question 36

What is overhead?

Answer 36

These are the general costs of running a business and are sometimes called expenses

Question 37

Advantages of ARR

Answer 37

-provides a percentage return which can be compared with a target return -looks at the whole profitability of the project, key issue for shareholders

Question 38

How do you calculate break even from a table of output, revenue and cost figures?

Answer 38

-Look down the total cost and total revenue columns to see which are equal -This will show you the break-even output

Question 39

How to calculate break even from a graph?

Answer 39

-look where the total revenue line crosses the total cost line -this will show you the break even output

Question 40

Disadvantage of Cash flow

Answer 40

Doesn't take into account external factors that can affect the business (e.g inflation)

Question 41

What is cash flow?

Answer 41

The movement of cash in and out of the business

Question 42

What is cash inflow?

Answer 42

Any money received by a business including: -Revenue -Income -Receipts -Sales

Question 43

What is cash outflow?

Answer 43

Any money spent by the business

Question 44

How to calculate break even

Answer 44

Fixed costs / selling price - variable cost unit = break even

Question 45

What is contribution price?

Answer 45

The gross profit made when taking away the cost of making a product from the selling price

Question 46

What is the margin of safety?

Answer 46

The amount of units you are selling above the break-even point.