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business studies > Chapter 22 > Flashcards

Chapter 22 Flashcards

1
Q
A
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2
Q

what does the finance department do?

A

record financial transaction, prepare final accounts and cash flow forecasts, provide information to managers, and make important decisions

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3
Q

what is finance?

A

finance is the capital needed for day to day expenditures of a business

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4
Q

why would capital be needed:

A

start up capital: new companies need to purchase the factors of production in order to make goods to begin trading
expansion: existing businesses may want to expand by new products, new markets, additional assets, or takeover.
increase working capital: capital available to the business in the short term: revenue expenditure (spent on current assets). capital expenditure (spent on noncurrent assets)

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5
Q

what are current assets?

A

items that the business owns (asset) that can be used or sold within a year (short term investment)

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6
Q

what are non current assets?

A

assets that can be used or sold by the business for more than a year (fixed assets). (long term investments)

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7
Q

what is internal source of finance?

A

finance that is obtained by the business themselves, preventing being held accountable by outside sources.

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8
Q

what is external source of finance?

A

finance obtained from sources outside the business.

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9
Q

what are some internal finance sources?

A

retained profit, owners savings, sale of existing assets, sale of inventory

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10
Q

what is retained profit and its advantages and disadvantages?

A

retained profit is the profit that is remaining after taxes and dividends are deducted. this is reinvested into the business.
ADV:
doesn’t have to be repaid, no interest.
DIS:
a new business does not have retained profits, shareholders may get smaller dividends, small business does not have enough profits to do this

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11
Q

what is sales of existing assets and its advantages and disadvantages?

A

assets that are not needed by the business can be sold in exchange for money.
ADV:
makes better use of the capital already invested into the business, no interest or repaying or debts
DIS:
can take time to sell the assets, and this is not possible for a new business as they don’t have surplus assets

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12
Q

what is sales of inventories and its advantages and disadvantages?

A

sales of inventory can reduce inventory levels and storage costs making the business more efficient.
DIS: may disappoint customers if there is low inventory levels of a product which leads to them choosing the competitors.

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13
Q

what is owners savings and its advantages and disadvantages?

A

the money that the owners of the business keep aside for reinvestment and business expansion.
ADV:
no interest, quick availability
DIS:
savings may be low, and increases the risks of the owners

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14
Q

what are some external sources of finance?

A

issue of shares, bank loans, selling debentures, factoring of debts, grants and subsidies, microfinance

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15
Q

what is issue of shares and its advantages and disadvantages?

A

issue of shares is only possible for limited companies. there is no interest and it does not need to be paid back and more capital can be reinvested into the business.
DIS:
shareholders expect dividends, and the company may be too large to control if too many shares are sold

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16
Q

what are bank loans and its advantages and disadvantages?

A

this is a sum of money obtained from a bank that is paid back as well as an added interest
ADV:
quick, and in terms of interest rates, bank loans is the cheapest. large companies are given lower interest rates as they can gain more in return
DIS:
eventually the loan needs to be paid back as well as interest, and security or collateral is needed in which of the business fails to pay back a loan, the bank can force the company to sell their assets.

17
Q

what is selling debentures and its advantages and disadvantages?

A

debentures are certificates given to a debenture holder for the money they lent. this is to be paid within 20-25 years
ADV:
this is a source of long term finance
DIS:
must be repaid, as well as interest which is very high

18
Q

what is factoring of debts and its advantages and disadvantages?

A

a debtor is a customer who owes a business money for a good or service they bought. debt factors are specialist agencies that buy the claims of debtors of firms for cash. the debtor pays the factor.
ADV:
risk of collecting debts is the factors, and there is immediate cash
DIS:
factor also has to earn a profit do the money the business gets is reduced

19
Q

what is grants and subsidies?

A

by outside agencies like the government.
ADV: they don’t need to be repaid
DIS:
may be given with conditions or ‘strings attatched’

20
Q

what is microfinance?

A

providing financial services like small loans to poorer people as the traditional banks do not serve them
WHY: bank can only make little profit from these people so they don’t see it as economically viable, and these people have no security or collateral so it is risky for them to

21
Q

what is short term finance?

A

finance that provides the working capital needed for daily expenditure by the business

22
Q

how to overcome shortage of cash in the short term?

A

overdrafts, trade credit

23
Q

what are overdrafts?

A

these are arranged by banks. the banks allow the business to ‘overdraw’ their account so spending more than what is in their account.
ADV:
the overdraft varies each month with the needs of the business so it is flexible, interest is only paid on the amount withdrawn, and it is cheaper than short term loans
DIS:
interest rates are variable, and the bank can ask for the overdraft to be paid at short notice

24
Q

what is trade credit?

A

this is when a business delays its payments to their suppliers which reduces cash outflows in long run.
DIS:
business may not be given discounts, and suppliers may cancel orders.

25
Q

what are long term methods of gaining more finance?

A

bank loans, hire purchase, leasing, issue of shares

26
Q

what is hire purchase?

A

allows a business to buy a fixed asset over a period of time with monthly payments and interest. but there are high interest rates

27
Q

what is leasing?

A

when a firm can use an asset but doesn’t have to purchase it. but this is costly

28
Q

what are the factors for choosing a source of finance?

A

size of business and legal form, amount of capital required, purpose of capital and time period, see if the business already has existing loans

29
Q

what does a business need to persuade banks for a loan?

A

cash flow forecast, income statement, details of existing loans, residence of security, and business plan

30
Q

what does a business need to persuade shareholders to invest?

A

lower share prices, high dividends, good reputation

business studies (14 decks)

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