Business, Unit 2- Finance

Question 0

If you need to raise funds to cover a large cost, which source of finance should you use?

Answer 0

Loan or mortgage

Question 1

If you need to raise funds to cover a small cost, which source of finance should you use?

Answer 1

Retained profits or savings

Question 2

What is gross profit?

Answer 2

Revenue - direct costs

The different between the revenue from selling the product and the direct costs of making it.

Question 3

What is turnover another word for?

Answer 3

Revenue

The value of all products sold

Question 4

What does a trading account record?

Answer 4

It records the firm’s gross profit or loss

Question 5

What does a profit and loss account record?

Answer 5

It records all the indirect costs of running the business.

Doesn’t include the costs of buying assets for the firm’s time, but does include costs of using and replacing them

Question 6

What does the appropriation account record? And who uses them?

Answer 6

It records where the profit has gone, e.g. To the government as tax, to shareholders as dividends or kept in the business as retained profit.
It is only used by limited companies.

Question 7

How are profit and loss accounts useful for a firm’s stakeholders?

Answer 7

Shareholders- usually entitled to a share of the profits (the share dividend). Potential shareholders look at how much profit the business makes to help them decide if they should invest or not

Employees- want to know if the business is making a profit or a loss. If they are profitably there is the prospect of a pay rise. A loss gives the idea of a redundancy.

Government- gets corporation tax. The profit and loss account is used to calculate how much tax the business needs to pay.

Question 8

What does a gross profit margin show? How do you calculate it?

Answer 8

The fraction of every pound spent by customers that doesn’t go directly towards making a product.
Gross profit / sales (turnover

Question 9

What does net profit margin show? How do you calculate it?

Answer 9

The fraction of every pound spent by customers that the company gets to keep (after all costs have been paid)
Net profit / sales (turnover)

Question 10

What does a balance sheet show?

Answer 10

It records where the business got its money from, and what it has done with it

Question 11

How long do fixed assets normally last for?

Answer 11

More than a year.

Question 12

How long do current assets usually last for?

Answer 12

A few months.

Question 13

What is the equation for net current assets (working capital)?

Answer 13

Current assets - current liabilities

Question 14

What is the equation for net assets?

Answer 14

Fixed assets + net current assets

Question 15

What are debtors?

Answer 15

Debtors refers to the value of products sold- usually on credit- that haven’t been paid for yet by customers.

Question 16

There are 5 different factors that influence which sources of finance are available to a particular business, and which it should actually use, what are these?

Answer 16

1. Type of company:
   • Some types might not have fixed assets available to sell
   • Only limited companies can issue shares.
2. Amount of money needed:
   • A company wouldn’t issue moe shares to buy a toaster
3. Length of time:
   • It wouldn’t be a good idea to take out a mortgage because a customer is a week late paying an invoice.
4. Cost of the finance:
   • Some sources, e.g. Bank loans and overdrafts, are more expensive than others, due to interest.
5. State of the economy:
   • If interest rates are right, people are more reluctant to invest in businesses. Loans and mortgages also become more expensive for the business.

Question 17

What are creditors?

Answer 17

The opposite of debtors. Money the firm owes to its suppliers. Also includes unpaid tax and any unpaid dividends.

Question 18

Why is the balance sheet useful for stakeholders?

Answer 18

They use it to asses the businesses’ financial health.

Question 19

What are current liabilities?

Answer 19

Bills the firm has to pay soon. Any payments the firm will have to make within one year of the date on the balance sheet.

Question 20

What are long term liabilities?

Answer 20

Any debts that take more than one year to repay- bank loans and debentures.

Question 21

What is capital employed?

Answer 21

What you get when you add shareholders’ funds to long term liabilities. Equal to net assets because it shows where the money to fund came from.

Question 22

Why is a balance sheet useful to stakeholders?

Answer 22

They use a balance sheet to asses the financial health of a business.
The net assets figure can show this: a business whose net assets are growing each year is probably healthy. Low net assets= unhealthy.

Question 23

What does a current ratio do? What is the equation?

Answer 23

It compares a firm’s current liabilities with its current assets. It shows whether the firm has enough money in (or coming into) the business to pay this year’s debts.

Current ratio = current assets / current liabilities.

Question 24

What figure is an ideal current ratio?

Answer 24

Ideally the figure should be around 1.5, showing the firm should be able to pay its bills easily.

Question 25

What does it mean if the current ratio is below 1?

Answer 25

It means the firm owes more than it has. It shouldn’t be a problem if the firm has more money coming in soon.
The more below 1 the figure is, the less likely it is the firm will be able to pay its bills.

Question 26

What does it mean if the current ratio is above 2?

Answer 26

The firm probably has too much money, and should invest more in the business.

Question 27

What is the acid test ratio? What is the equation?

Answer 27

It assumes that the company won’t be able to sell its stock during the year.
Acid test ratio = (current assets - stock) / current liabilities.

Question 28

What does it mean if the acid test ratio is much above 1?

Answer 28

The firm has too much money lying about, it would be more profitable to invest this money.