Finance

Question 1

What does the finance department have to do?

Answer 1

Ensure that adaquate funds are available to the organisation.

Ensure costs are monitored and controlled

Maximise and maintain profit levels.

Question 2

The work of the finance department is?

Answer 2

Calculation and payment of wages and salaries.

Ensuring financial records are kept up to date.

Preperation of budgets.

Paying trade payables and credit control.

Question 3

Advantages of internal sources of finance?

Answer 3

Using retained profits is cheaper than issuing new shares, also avoids administrive costs.
Retained profits also cost nothing.

Question 4

Disadvantages of internal sources of finance?

Answer 4

Re-investing profits may mean less funds are available to pay dividends of shareholders.

Question 5

Advantages of a Bank Overdraft?

Answer 5

Simple to arrange.

Interest is calculated on a daily rate on the amount overdrawn.

Question 6

Disadvantages of a Bank Overdraft?

Answer 6

Can be expensive if used for a long time due to interest charges. If the overdraft limit is exceeded the facility may be withdrawn.

Question 7

Advantages of Debt Factoring?

Answer 7

The factor chases up the unpaid debt, saving the company time and money.

Question 8

Disadvantages of Debt Factoring?

Answer 8

Factors tend to be interested in only large outstanding debts as they can each earn more profit.

The business does not recieve the full amount of the outstanding debt.

Question 9

Advantages of Trade Credit Terms?

Answer 9

When a business can negotiate longer payment terms with suppliers, this can improve their cash flow position.

Question 10

Disadvantages of Trade Credit Terms?

Answer 10

Discounts for the promt payment are lost.

If payment is made outwith the cedit period, suppliers could be reluctant to sell the business more goods on credit.

Question 11

Advantages of Bank Loans?

Answer 11

Repayment is usually made in fixed instalments over a set period, and this makes budgetary control easier.

Question 12

Disadvantages of Bank Loans?

Answer 12

Newly formed or smalles businesses are usually charged higher rates of interest

Question 13

Hire purchase advantages?

Answer 13

The cost of purchase is spread over a period of time, making it possible to purchase fairly expensive assets.

Question 14

Hire purchase disadvantages?

Answer 14

High rates of interest can make this an expensive way of financing the purchase of assets.

Question 15

Advantages of Leasing?

Answer 15

Leasing means that the equipment can be changed on a regular basis and will therefore be up to date.

Question 16

Disadvantages of leasing?

Answer 16

Leasing over a long period of time can be expensive.

The equipment is not owned by the business and therefore is not an asset to them.

Question 17

Advantages of a goverment grant?

Answer 17

Doesn’t need to be repaid.

Usually provided in one lump sum.

Question 18

Disadvantages of a goverment grant?

Answer 18

Only given once.

May be tied to a specific project the business must undertake.

Question 19

Advantages of mortgages?

Answer 19

Repayment is over a long period of time.

Fixed interest rates can be set.

Question 20

Disadvantages of mortgages?

Answer 20

Mortgages are usually secured against a property and failing to meet the payments could mean losing the property,

Usually a 10% deposit is required upfront.

When interest rates are not fixed monthly repayments can vary.

Question 21

Benefits of preparing a cash budget?

Answer 21

It can identify any times that there will be a shortage of money.

It can help regulate expenses

It will clearly show where a business has more cash than expected

It can be used to show potential investors

Can be used to set targets

Question 22

The main items on a cash budget are?

Answer 22

Opening balance

Receipts

Payments

Closing balance

Question 23

What is cash flow?

Answer 23

All the money that comes in and out of the business

Question 24

Its important the business has money so they can?

Answer 24

Pay employees

Purchase supplies

Cover business expenses

Question 25

What are some reasons cash flow problems may occur?

Answer 25

low sales

owner taking too much money out the business

an increase in expenses

customers taking too long to pay their bills

Question 26

What’s the impact of cash flow problems?

Answer 26

unable to pay suppliers meaning stock is not delivered and production stops

no money to invest in future growth

unable to pay expenses

owner may need to reduce their drawings

Question 27

Whats some solutions to cash flow problems?

Answer 27

Find a cheaper supplier - This will reduce the cost of purchase

Sell assets that arent being used effectively - This will make cash available to be used elsewhere in the business

Arrange for extra time to pay bills from supplier - this will allow for time to make the money needed.

Lease machinery or equipment - this will allow the business to spread the cost of equipment over many months.

Question 28

What does an income statement show?

Answer 28

Sales revenue - the amount of money received for selling goods or services

Gross profit - the profit made from buying and selling goods. Gross profit is calculated by deducting cost of sales from sales revenue

Profit for the year - the profit made after all other operating expenses have been deducted from the gross profit

Question 29

Whats the Purpose of an income statement

Answer 29

Shows the profit/loss made by the company from the buying and selling of goods

Can be used to compare gross profit and profit for the year over different years of trading to identify any trends and to aid decision making

comparisons can be made with similar companies in the same industry

can be used to compare expenses and sales over the years or between department to see if there are any areas where they can be minimised or improved

Question 30

Who uses financial information?

Answer 30

Lenders will be looking at the solvency of a business

rivals are interested in monitoring the profits earned by competitors

banks can use them to make lending decisions

government (HMRC) use financial information to calculate tax payments

owners will look at financial statements to help them make decisions

Employees will use them to ensure their jobs are secure