2.1.1 Internal finance

Question 1

Asset:
Types:

Answer 1

Things of value
E.g. stock, machinery
1) current asset (bank balance)
2) fixed asset (land/building)

Question 2

Liability:
Types:

Answer 2

Something that costs the business
E.g. wages, rent (owed), taxes
1) current (short term debts)
2) fixed (mortgages)

Question 3

Return of assets:

Answer 3

Indicator of how profitable a company is relative to its total assets

Question 4

Working capital:

Answer 4

-finance available for the day to day running of the business

money that you have left after you have paid your short- term debts –
-money to ‘play around with’, or a contingency

Question 5

High working capital

Answer 5

Pay supplier cash on delivery 
Hold high inventory levels 
Grant customers 45 days credit 
Low cash flow 
Low return of assets (how profitable a company assets are in generating revenue)

Question 6

Low working capital

Answer 6

45 days credit from suppliers 
‘Just in time’ inventory levels 
Customers pay cash on delivery 
High cash flow
High return of assets

Question 7

Capital:

Answer 7

Amount of cash/other assets owned
accumulated wealth of business (assets - liabilities)
Can also mean stock/ownership

Question 8

Capital intensity:

Answer 8

Using more machines than people

‘Becoming more capital intensive’

Question 9

Sources of finance:

Types:

Answer 9

Options available to a business seeking to raise funds = support future business actions

1) internal (within business) e.g retained profit
2) external (outside business) e.g loans, selling shares

Question 10

Capital expenditure:

Answer 10

• Spending on business resources

- used repeatedly over a period of time e.g buildings, equipment

Question 11

Revenue expenditure:

Answer 11

Spending in business resources that have already been consumed or will be very shortly e.g. raw materials, packaging

Question 12

Internal source of finance:

Answer 12

Capital generated by business/current owners

Question 13

Need sources of finance for:

Answer 13

Investing in product development
Running (utilities)
Start up
Expansion/growth

Question 14

Equity:

Answer 14

amount of money that would be returned
to a company’s shareholders
if all of the assets were liquidated

Question 15

Owners capital or Shareholders Equity or personal savings

Answer 15

money:
business owners (if sole proprietorship or partnership) or shareholders (if it is a corporation)
invested in their businesses.

Money invested by the business owner such as personal savings

Question 16

Retained profit:

Answer 16

net income that is kept within its accounts
rather than paid out to shareholders

left after all costs to the business have been paid, is re-invested into business growth

Question 17

Sale of assets:

Answer 17

selling something that the business owns,

no longer needed,
old machinery or property

Question 18

Current assets:

Answer 18

cash from sales, receivables, stock/inventory

business owns = turned into cash quickly…

Question 19

Current liabilities:

Answer 19

-things a business owes =needs to pay in next 12
months

e.g. overdraft (business goes into a negative balance on their bank account & creditors)

Question 20

Working capital equation

Answer 20

Current assets - current liabilities

Question 21

4 Internal SOF

Answer 21

1. Personal savings/owners capital
2. Sale of assets
3. Retained profit
4. Improved use of working capital

Question 22

Personal savings/owners capital

Answer 22

From owner
+ control, quick, profit loss

-failure risk

Question 23

Sale of assets

Answer 23

Sell owned no need
+maintenance cost

-tax on sale, start up =not lot of assets

Question 24

Retained profit

Answer 24

Left after costs, reinvested
+ no interest

-not enough/not have it

Question 25

Improved use of working capital

Answer 25

Reducing current liabilities/increasing current assets = money
+ efficient

-not enough as start up