Chapter 8

Question 0

Sale and leaseback ?

Answer 0

Selling an asset such as the building to a leasing company and paying an annual leasing charge so that it can still be used.
Internal finance .

Question 1

Retained profit ?

Answer 1

Profit that’s kept in the business after dividends and taxes have been paid this is an example of internal finance

Question 2

What is the mortgage

Answer 2

A mortgage is a long term loan used to buy property such as factories or an office space if the business cannot pay back the loan the bank or lender takes over the ownership of the property

Question 3

What are the benefits of using retained profit as a source of finance ?

Answer 3

No interest has to be repaid.

No loss of control of the owners/shareholders.

Question 4

What are the disadvantages of using retained profit as a source of finance?

Answer 4

Many businesses may expand but still not be very profitable. Profits may be to low finance growth

Question 5

What are the benefits of selling unwanted assets as a source of finance?

Answer 5

No interest has to be paid

no loss of control of the business

Question 6

What are the disadvantages of selling unwanted assets as a source of finance?

Answer 6

The business is no longer owns that asset

If the asset is still needed by the business still be a leasing cost

Question 7

What are the advantages of using share issue as a source of finance?

Answer 7

The money raised does not have to be repaid and the interest does not have to be repaid.

Question 8

What are the disadvantages of using share issue as a source of finance?

Answer 8

Dividends has to be paid to shareholders

The original owners may lose control of the business

Question 9

What are the advantages of using a loan as a source of finance?

Answer 9

Overdrafted very flexible-it can be varied on a daily basis up to agreed limit
No loss of control by existing owners
Llower interest rate than overdraft on secured loan

Question 10

What are the disadvantages of taking out a loan as a source of finance?

Answer 10

Interest cost maybe high

Property is used as security - will be given up by the business is the debt cannot be repaid

Question 11

What is the purpose of having financial statements

Answer 11

Whether a profit or loss is being made.
How much cash is flowing into and out of the business.
When suppliers must be paid for goods and when tax must be paid to the government

Question 12

Financial records will include details of ?

Answer 12

Products sold the value of them and which customers have not yet paid.
Goods and services bought by the business the value of them and which suppliers have not yet been paid
Wage and other labour costs
Equipment and other assets purchase

Question 13

Financial statements help share holders answer what two questions ?

Answer 13

Is the business trading at a profit or loss

How much the business is worth

Question 14

What is a profit and loss account?

Answer 14

This shows whether the business made a profit or loss over my last period it is also known as an income statement

Question 15

The profit and loss account contains it’s important pieces of information….

Answer 15

Sales revenue 
Cost of sales 
Gross profit 
Expenses 
Overheads
Netprofit

Question 16

Gross profit margin

Answer 16

This is the percentage of sales revenue that is gross profit.

(Gross profit ~ sales revenue x 100)

Question 17

Net profit margin

Answer 17

The percentage of sales revenue that is no profit

Net profit ~ sales revenue x100

Question 18

How can you increase gross profit margin ?

Answer 18

By increasing the price or reducing the cost of sales this is making a higher profit on each £ of sales

Question 19

What is a balance sheet

Answer 19

Balance sheets show the value of what a company is worth it lists the value of the companies assets and liabilities

Question 20

What are non-current assets

Answer 20

Assets owned by the business of a life span more than a year such as property and equipment

Question 21

Current assets are assets owned by the business that are either in…..or are likely to be turned into cash within a ……

Answer 21

Cash

Year

Question 22

What is meant By the term net current assets

Answer 22

It is the difference between current assets and current liabilities .

Question 23

Current ratio?

Answer 23

(Current assets ~current liabilities)
If the current ratio is more than 1 then it is safe this means that for every £1 of current debts or liabilities the company has over £1 of current assets to pay them back

Question 25

What does acid test ratio show ?

Answer 25

This ratio is a tougher test of liquidity this is always a low result than the current ratio if the acid test ratio is below 0.25 it means that the business has really little cash either in the bank or just about to be received from customers to be used to pay short-term debts.

Question 26

Acid test ratio excludes what?

Answer 26

Stock as stock could take ages to sell so it is not very useful for paying back debts

Question 27

How to calculate acid test ratio?

Answer 27

Debtors+cash ~ current liabilities