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Accounting unit 1 > Ch 10 - Finance for small business > Flashcards

Ch 10 - Finance for small business Flashcards

1
Q

What are the types of sources of finance for a business?

A
  • Internal sources
  • External sources
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2
Q

What are internal sources of finance?

A
  • Fund provided by owner
    May include:
  • Owner’s capital
  • Retained profit
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3
Q

What are external sources of finance?

A
  • Funds borrowed from an individual business that is external to the business seeking finance
    eg: term loans, overdraft, leasing
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4
Q

What is proprietor’s capital?

A

Cash contributions from the owner

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5
Q

What are retained profits?

A
  • Profit earned from business’s sales
  • Then re-invested into the business for future
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6
Q

What is trade credit?

A

The purchase of inventory and/or necessary materials to provide service, via credit

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7
Q

What is an overdraft?

A

When the bank allows an entity to withdraw more than the amount that is in the business’ bank account

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8
Q

What is a term loan?

A

Borrowing money usually from a bank to purchase an asset
- long term loans 10-20
- short term loans 2-3 years

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9
Q

What is leasing?

A
  • Alternative to buying an asset
  • Like renting as business never owns asset
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10
Q

What is interest?

A
  • The return paid on a loan
  • The return earned on investment
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11
Q

What are the types of interest?

A
  • Flat rate interest
  • Reducing balance interest
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12
Q

What is flat rate interest?

A

Is interest calculated on the amount borrowed

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13
Q

What is reducing balance interest?

A

Is interest calculated on the amount owing

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14
Q

What is the formula for calculating rate of interest?

A

interest / amount owing = %

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15
Q

What is a credit rating affected by?

A
  • Monthly income
  • Monthly expenses
  • Current credit commitments
  • Previous credit history
  • Statement of assets and liabilities
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16
Q

What accounting reports are usually required for a loan application?

A
  • Budgeted cash flow statement
  • Balance sheet
17
Q

What is gearing?

A

The dependance of a business on borrowed funs, compared to owner’s equity funds

18
Q

How is gearing measured? And what is the formula?

A

Debt ratio
total liabilities / total assets

19
Q

What is a highly geared business

A

Relies heavily on borrowed funds

20
Q

What is a lowly geared business?

A

Relies mainly on owner’s equity funds

21
Q

What are implications of being a highly geared business?

A
  • Higher interest costs
  • Higher loan repayments
  • More risk of financial collapse
22
Q

What is return on investment?

A

Measures the percentage return the owner is earning on the investment made in the business

23
Q

What is the formula for return on investment?

A

ROI = net profit / owner’s equity

Accounting unit 1 (13 decks)

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