CH29 - Sources Of Finance

Question 1

What is Retained earnings?

Answer 1

Profit after tax which is retained by a company rather than paid out to shareholders dividends

Question 2

What is the sale of unwanted assets?

Answer 2

Established companies often find assets that are no longer fully employed these could be sold to raise cash

Question 3

What is working Capital?

Answer 3

Capital needed to pay for raw materials, day to day running costs

Question 4

What is the process of selling and leaseback of non current assets ?

Answer 4

Sale of non-current assets that they intend to use but which they do not need own. These assets can be sold and leased back to the company, will raise capital but the lease payment will become an additional fixed cost.

Question 5

What is a bank overdraft?

Answer 5

A credit that a bank agrees can be borrowed by a business up to an agreed limit as and when required

Question 6

What is trade credit?

Answer 6

Delaying payment to suppliers for goods and services , suppliers become trade payables / creditors

Question 7

What is debt factoring?

Answer 7

The selling of goods on credit, creates trade receivables

Question 8

What is hire purchase?

Answer 8

Company purchases an assets and agrees to pay fixed repayments over an agreed period of time . Assets belongs to purchasing company until final payment

Question 9

What is leasing?

Answer 9

Obtaining the uses of an asset and apaying a leasing charge over a fixed period, avoiding the need for a business to raise long-term capital to buy the asset . The asset is always owned by the leasing company

Question 10

What is a long term bank loan?

Answer 10

Loans that do not have to be repaid for at least one year

Question 11

What are debentures?

Answer 11

Long term bonds issued by companies to raise debt finances, often with a fixed rate of interest

Question 12

What is a business mortgage?

Answer 12

Long-term loans to companies purchasing a property for business premises with the property acting a s collateral security on the loan

Question 13

What is share (or equity) capital?

Answer 13

The total value of capital raised from shareholders by the issue of shares

Question 14

What is venture capital?

Answer 14

Risk capital invested in a business star-ups or expanding small business that have good profit potential but do not find it easy to gain finances form other sources

Question 15

What is micro finance?

Answer 15

Providing financial services for poor and low-income customers who do not have access to the banking services, such as loans and overdrafts, offered by traditional commercial banks

Question 16

What is crowd funding?

Answer 16

The use of small amounts of capital from a large numbers of individuals to finance a new business venture

Question 17

What are 3 examples of internal source of finance?

Answer 17

Retained earnings
Sale of unwanted assets
Working capital
Sale and lease back of non-current assets

Question 18

What are 3 examples of external sources of finance?

Answer 18

Bank overdraft
Trade credit
Long term bank loan
(Business Mortgage)

Question 19

Advantage of retained earnings

Answer 19

Represent a permanent source of finances after being re-invested into the business

Question 20

Advantage and disadvantage of Sale of unwanted assets

Answer 20

AD - No direct cost to the business , no increase in liabilities or debt and no risk of losing control

DIS - If used for expansion can slow down overall business growth

Question 21

Advantage and disadvantage of Working Capital

Answer 21

AD - No direct cost to the business , no increase in liabilities or debt and no risk of losing control

DIS - If used for expansion can slow down overall business growth

Question 22

Advantage and disadvantage of Sale and leaseback of non-current assets

Answer 22

AD - No direct cost to the business , no increase in liabilities or debt and no risk of losing control

DIS - Will be an additional charge for leasing
If used for expansion can slow down overall business growth

Question 23

Advantage and disadvantage of a Bank Overdraft

Answer 23

AD - Cover costs if customers do not pay on time or large delivery needs paying

DIS - Carries high interest and bank can call in the overdraft and force the firm to pay it back

Question 24

Advantage and disadvantage of Trade Credit

Answer 24

AD - Delay the payment to suppliers leaving the business with capital - Can allow business to stay afloat for longer

DIS - Payment is required and not free, discounts for quick payments are often lost if the business takes too long to pay its suppliers

Question 25

Advantage and disadvantage of Debt Factoring

Answer 25

AD - Helps business stay afloat if they are failing

DIS - Longer period of time, the more money the business needs to find to carry on trading - small amount of profit is given to the credit loan firms

Question 26

Advantage and disadvantage of Hire Purchase

Answer 26

AD - Avoids making a large initial cash payment to buy asset

DIS - The asset is owned by the purchasing company until final payment, interest rates can be higher than a bank loan - Payments have to be made

Question 27

Advantage and disadvantage of Leasing

Answer 27

AD - The risk of using unreliable or outdated machinery is reduced as the machine is not owned by the business. The risk of not finding a buyer if it needs to be sold is not on the business.

DIS - The business will never own the asset unless a payment is made to buy the asset outright

Question 28

What are Capital Goods?

Answer 28

Physical goods to aid in production

Question 29

What is capital expenditure?

Answer 29

Purchase of non-current assets expected to best for more than one year

Question 30

What are non-current assets?

Answer 30

Long term assets of a business which are not expected to be sold in the next year
(TANGIBLE & INTANGIBLE & DEFERED TAX )

Question 31

What are current assets

Answer 31

Short term assets of business which are likely to be turned into cash in the next year
(INVENTORIES & TRAD/OTHER RECIVABLES & CASH)

Question 32

What are non-current liabilities ?