business accounts and debt finance (week 8)

Question 1

what is a trial balance?

Answer 1

shows debit balances in one column and credit balances in another column. the total of each of the two columns should be the same (and this balance).

Question 2

what is an asset?

Answer 2

something a business owns - usually has separate account for each type of asset

Question 3

what is a liability?

Answer 3

something a business owes - usually has separate account for different types of liabilities

Question 4

what is capital?

Answer 4

usually identifiable as an injection of value from an owner or investor rather than money generated by the business

Question 5

what is income?

Answer 5

money earned by the business, usually from a regular source. each main income source will have a separate account

Question 6

what is expense?

Answer 6

money spent by the business. each different type of expense is recorded in a separate account

Question 7

what is a fixed asset?

Answer 7

any asset, tangible (such as building) or intangible (such as trademark) owned by the business which will enable it to make a profit

Question 8

how long must a company hold an asset for it to become a fixed asset?

Answer 8

company must hold it for over a year and provide some long-lasting benefit to the company

Question 9

what is a current asset?

Answer 9

includes cash and items owned by the business which can quickly be turned into cash. they are continually flowing through the business and therefore have a shorter-term nature

Question 10

what is a profit and loss account?

Answer 10

it essentially records the income of a business throughout an accounting period minus expenses incurred in that period, to arrive at a profit (or a loss) figure for the period

Question 11

how do you calculate the ‘gross profit’?

Answer 11

all income from the business - cost of sales = gross profit

Question 12

what does a balance sheet show?

Answer 12

records the position of a business in respect of its asset, liability and capital accounts at a particular date

Question 13

what are the 2 things that a balance sheet shows?

Answer 13

• the net worth or net asset value (NAV) of the particular business (eg, value of assets it has - liabilities it owes). recorded in top half of balance sheet
• the capital invested in the business to achieve that net worth. recorded in bottom half of balance sheet

Question 14

how do you calculate the net asset value (NAV) in a balance sheet?

Answer 14

fixed/non-current assets + net current assets - long term/non-current liabilities = NAV

Question 15

what are the 2 methods of depreciation?

Answer 15

straight line method
reducing balance method

Question 16

what is the straight line method for depreciation?

Answer 16

the charge is spread evenly through the life of the asset

Question 17

what is the reducing balance method for depreciation?

Answer 17

it is done on a % and there is a sharp fall in the previous years

Question 18

what is the calculation for net book value?

Answer 18

cost - accumulated depreciation = net book value

Question 19

what is an accrual?

Answer 19

when a business has had the benefit of something in one accounting period but will not pay for it until the next accounting period

Question 20

what is prepayment?

Answer 20

when a business has already paid for something in the current year but all or part of the costs should be charged as an expense in the next year

Question 21

what does the share premium account show?

Answer 21

it represents the difference between the nominal value of the share and the amount the shareholder paid

Question 22

what is called up share capital?

Answer 22

the amount of nominal value of its shares that the company has required its shareholders to pay

Question 23

what is debt finance?

Answer 23

raising finance for a company by borrowing money usually from a bank or other lenders.

lender takes security over the assets of the borrowing company

Question 24

what are the two different ways that debt finance can be classified as?

Answer 24

1. loan facilities
2. debt securities

Question 25

what is a loan facility?

Answer 25

it is an agreement between a borrower and a lender which gives the borrower the right to borrow money on the terms set out in the agreement

Question 26

what is a term loan?

Answer 26

a loan of money for a fixed period of time, repayable on a certain date - lender cannot demand early repayments unless borrower is in breach of the agreement.

Question 27

what is a revolving credit facility?

Answer 27

loan of money for a specified period of time, but the borrower can repeatedly borrow and re-pay loans up to the agreed max overall amount when it chooses.

Question 28

what is debt security?

Answer 28

debt securities are a way a company can receive money from an external source but in return for finance provided by an investor, the company issues a security acknowledging the investor’s rights.
(eg, a bond)

Question 29

what is representations?

Answer 29

statements of fact as to legal and commercial matters made on signing the loan agreement and repeated periodically during the life of the loan

Question 30

what does ‘security’ mean?

Answer 30

taking temporary ownership, possession or other proprietary interest in an asset to ensure that a debt owed is repaid.

Question 31

what is a fixed charge?

Answer 31

the creditor can control what the security provider can do with the fixed charge asset (usually on assets such as machinery and vehicles)

Question 32

what is a floating charge?

Answer 32

it is not always practical for security providers to undertake not to dispose of its assets - floating charge ‘floats’ over the whole of a class of circulating assets.

Question 33

What document needs to be registered at company’s house to ensure the bank who has granted a loan has effective security?

Answer 33

The security document will need to be registered at company’s house within 21 days beginning with the day after the date of creation of the security