6. Finance

Question 1

6.1 Key terms - entrepreneur

Answer 1

An entrepreneur is someone who is willing to take the risks involved in starting a new business.

Question 2

6.1 Key terms - Inventories

Answer 2

Inventories are raw materials that have not yet been used or products that have been made, but not sold. These are also called stocks.

Question 3

6.1 Key terms - internal source of finance

Answer 3

An internal source of finance is money that is available from within the business, for example, retained profits from previous years.

Question 4

6.1 Key terms - Owners’ funds

Answer 4

Owners’ funds is money put into a business by its owner or owners.

Question 5

6.1 Key terms - Interest

Answer 5

Interest is a payment made in order to borrow money. It means a business pays back more than it borrows.

Question 6

6.1 Key terms - shareholder

Answer 6

A shareholder is a person or organisation that owns part of a company. Each shareholder owns a
‘share’ of the business.

Question 7

6.1 Key terms - asset

Answer 7

An asset is something that is owned by a business. Examples include land, buildings, vehicles and machinery.

Question 8

6.1 Key terms - Trade credit

Answer 8

Trade credit is a period of time which suppliers allow customers before payment for supplies must be made.

Question 9

6.1 Key terms - external source of finance

Answer 9

An external source of finance refers to money that comes from outside the business, for example, a loan from a bank.

Question 10

6.1 Key terms - collateral

Answer 10

Collateral is an asset that a bank holds as security for the repayment of a loan.

Question 11

6.1 Key terms - Mortgages

Answer 11

Mortgages are loans from banks and building societies that are used to buy land and buildings, such as offices and shops.

Question 12

6.1 Key terms - Building societies

Answer 12

Building societies are organisations that offer a range of financial services. However, their major business is providing savings accounts and lending money for the purpose of buying property.

Question 13

6.1 Key terms - overdraft

Answer 13

An overdraft is a flexible loan which businesses can use, whenever necessary, up to an agreed limit.

Question 14

6.2 Key terms - Cash flow

Answer 14

Cash flow is the money that flows into and out of a business on a day-to-day basis.

Question 15

6.2 Key terms - cash flow forecast

Answer 15

A cash flow forecast is a plan of the expected inflows and outflows to and from a business over a period of time.

Question 16

6.2 Key terms - cash flow statement

Answer 16

A cash flow statement is a record of the cash inflows and outflows that took place over an earlier period of time.

Question 17

6.3 Key terms - Revenue

Answer 17

Revenue is the income that a firm receives from selling its goods or services. It is also referred to as ‘turnover’. It is measured by the number of units sold multiplied by the price.

Question 18

6.3 Key terms - sales

Answer 18

Sales refers to the number of products sold by a business.

Question 19

6.3 Key terms - Costs

Answer 19

Costs are the spending that is necessary to set up and run a business.

Question 20

6.3 Key terms - Fixed costs

Answer 20

Fixed costs are those costs that do not change when a business changes its output.

Question 21

6.3 Key terms - Variable costs

Answer 21

Variable costs are the costs that vary directly with the business’s level of output.

Question 22

6.3 Key terms - Total costs

Answer 22

Total costs are fixed costs plus variable costs.

Question 23

6.3 Key terms - Profit

Answer 23

Profit measures the difference between the values of a business’s revenue (sales) and its total costs.

Question 24

6.3 Key terms - Loss

Answer 24

Loss is the amount by which a business’s costs are larger than its revenue from all sales.

Question 25

6.3 Key terms - Investment

Answer 25

Investment takes place when a business buys an asset, such as a factory, in the hope of making a profit from its use.

Question 26

6.3 Key terms - average rate of return (ARR)

Answer 26

The average rate of return (ARR) compares the average yearly profit from an investment with the cost of the investment and is stated as a percentage.

Question 27

6.3 Key terms - Break-even

Answer 27

Break-even is the level of production at which a business’s total costs and revenue from sales are equal.

Question 28

6.3 Key terms - break-even chart

Answer 28

A break-even chart shows a business’s costs and revenues and the level of production needed to break-even.

Question 29

6.3 Key terms - margin of safety

Answer 29

The margin of safety measures the amount by which a business’s current level of production exceeds its break-even level of output.

Question 30

6.4 Key terms - income statement

Answer 30

An income statement is a financial statement showing a business’s revenues and costs, and thus, its profit or loss over a period of time.

Question 31

6.4 Key terms - balance sheet

Answer 31

A balance sheet sets out the assets and liabilities that a business has on a particular day.

Question 32

6.4 Key terms - Gross profit

Answer 32

Gross profit is a business’s sales revenue minus its cost of sales over a period of time, normally a year.

Question 33

6.4 Key terms - Net profit

Answer 33

Net profit is a business’s sales revenue minus its cost of sales, its overheads and other costs over a period of time, normally a year.

Question 34

6.4 Key terms - liability

Answer 34

A liability is a sum of money that is owed by a business to another business or an individual.

Question 35

6.4 Key terms - financial ratio

Answer 35

A financial ratio compares two figures from a business’s financial statements.

Question 36

6.4 Key terms - Stakeholders

Answer 36

Stakeholders are individuals and organisations that are affected by, and affect, the business.

Question 37

Fixed cost / sales price - variable costs per unit =

Answer 37

break even level of output

Question 38

Actual sales - break even point =

Answer 38

Margin of safety

Question 39

Price x quantity sold =

Answer 39

Revenue

Question 40

Fixed costs + variable costs =

Answer 40

Total costs

Question 41

Revenue - total costs =

Answer 41

Profit