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business studies > Finance > Flashcards

Finance Flashcards

1
Q

What are the two sources of finance?

A
  1. Internal- within the business
  2. External- from third parties outside the business
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2
Q

What are the advantages and disadvantage of internal sources of finance?

A

-No interest has to be paid
-Affairs of business kept private
-Doesn’t have to be repaid

D: There may not be enough money available

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3
Q

What are the internal sources of finance?

A
  1. Owners investment
  2. Retained profits
  3. Sale of inventory
  4. Sale of fixed assets
  5. Debt collection
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4
Q

What is owners investment?

A

The owners money used to finance the business. Usually used by sole traders of partnerships

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5
Q

What are the advantages and disadvantages of owners investment?

A

A: Cheap form of finance. Doesn’t have to be repaid. Doesn’t attract interest payments.

D: Owners may not have access to additional money. Unlimited liability means sole traders or partnerships owners could lose assets.

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6
Q

What are retained profits?

A

When business owners decide to use some of their annual profits to reinvest back into the business.

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7
Q

What are the advantages and disadvantages of retained profits?

A

A: Cheap form of finance. Doesn’t attract interest repayments. Belongs to owners and doesn’t have to be repaid.

D: Only available if business makes profit. Many businesses withdraw all profits through drawings or dividends.

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8
Q

What is sale of inventory? (E.g Black Friday / January sales)

A

Where businesses require their inventory to be cleared to make way for newer inventory. They host sales to reduce inventory quicker which also raises finance.

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9
Q

What are the advantages and disadvantages of sale of inventory?

A

A: Makes cash available quickly

D: Cash is required for buying more inventory, so it is unavailable to spend on other things.

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10
Q

What is sale of fixed assets? (Non-current assets~selling land/building/machinery)

A

Where a business sells assets that aren’t required anymore to raise finance.

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11
Q

What are the advantages and disadvantages of selling fixed (non-current) assets?

A

A: Raises finance quickly without debt or interest. Can raise large amounts of money.

D: Very few businesses are able to sell valuable assets and continue trading at same level. They no longer have that asset to use in the business.

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12
Q

What is debt collection?

A

Where a business follows up on unpaid bills from customers to raise finance.

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13
Q

What are trade receivables?

A

The amount of money billed to customers that had not yet been paid

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14
Q

What are the advantages and disadvantages of debt collection?

A

A: The business has access to finance immediately.

D: There is no guarantee that discounted offers to pay early will be accepted by customers. Customers may have cash flow problems and unable to pay.

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15
Q

What are the advantages and disadvantages of external sources of finance?

A

A: Large sums of money available. Money available more quickly. Business can carry on trading or expanding as the borrower has the use of item that business needs to raise finance for.

D: More expensive and interest to be paid. Lender requires security incase of non payment.

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16
Q

What are the external sources of finance?

A
  1. Bank loan
  2. Bank overdraft
  3. Additional partners
  4. Hire purchase
  5. Leasing
  6. Mortgage
  7. Trade credit
  8. Government grants
  9. Issue of shares
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17
Q

What is a bank loan?

A

Where bank agreed to lend sum of money to business and business repays over period of time. Plus interest paid

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18
Q

What are the advantages and disadvantages of bank loans?

A

A: Total amount of loan is made available upon agreement and terms of conditions. Interest rate is fixed at start of loan and can’t be changed.

D: Expensive due to high levels of interest. Bank can recall loan if business fail to make repayment when due. Lenders require security, such as private assets for loans.

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19
Q

What is a bank overdraft?

A

A short-term loan to business. Bank agrees to let them spend additional amount of money than available for certain period of time.

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20
Q

What are the advantages and disadvantages of bank overdrafts?

A

A: They meet immediate cash flow requirements of business as business plans overdraft in advance. Helps business pay bills and expenses.(so they can continue trading short-term)

D: Higher interest rates. Can be recalled at any time by banks.

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21
Q

What are additional partners?

A

Where partnerships can offer a share of the business for additional partners to join. New partners pay agreed amount which raises additional finance.

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22
Q

What are the advantages and disadvantages of additional partners?

A

A: Improves cash flow forecast as partner brings in money. Additional cash is used normally for growth and investment.

D: Additional partner is entitled to share of profits. Partner may not have same business views as existing partners which causes conflict.

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23
Q

What is hire purchase?

A

Buying an asset (car, machinery etc) but not paying for all of it straight away. Business pays deposit and bank pays rest. Business pays bank back money (basically a loan + interest).

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24
Q

What are the advantages and disadvantages of hire purchases?

A

A: Allows business to purchase specific assets without having full finance Immediately. Asset can be used as soon as business pays deposit. Asset belongs to business on final payment.

D: Can be repossessed by lender. Value of asset is significantly reduced by end of agreement.

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25
Q

What is leasing?

A

Used to rent specific assets such as vehicles. Business pays finance company set amount of money over period of time of lease.

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26
Q

What are the advantages and disadvantages of leasing?

A

A: Allows business to use assets without having full finance to buy. Business leases asset till it is no longer required and can be replaced.

D: Always belongs to lender. Does not belong to business on final payment.

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27
Q

What is a mortgage?

A

Loaned by a bank to purchase property or building to extend premises. Usually paid off in 20-40 years with higher interest rates.

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28
Q

What are the advantages and disadvantages of mortgages?

A

A: Business requires the asset but doesn’t have full amount of money needed. Fixed repayments allow easier planning of cash flows.

D: Value of property can increase but can also decrease over life of asset. Business pays lot of interest over full length of mortgage.

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29
Q

What is trade credit? (Buy now pay later)

A

Where businesses can buy from suppliers and have 30 days to pay for them. (No interest charged)

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30
Q

What are the advantages and disadvantages of trade credits?

A

A: Business will be able to sell inventory before paying supplier. Trade credit is free with no interest.

D: If supplier reduces credit terms from 60 days to 30 days, this might cause cash flow issues. Some suppliers charge interest on late payments.

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31
Q

What are government grants?

A

Finance available from government departments in form of grants to businesses to generate employment.

32
Q

What are the advantages and disadvantages of government grants?

A

A: Assists business with employment costs. Grants don’t have to be paid back.

D: Not every business qualifies for conditions attached to grant, may specify location of business in areas of high unemployment.

33
Q

What are issues of shares?

A

Where private limited companies can offer shares to family and friends, or public limited companies can offer shares to general public to raise finance.

34
Q

What are the advantages and disadvantages of issue of shares?

A

A: Companies can raise finances from existing and new shareholders. No interest as money isn’t borrowed. Share capital can be used for growth and investment.

D: Number of shares increase so profits are further divided, lower dividends. Control of company is diluted with increased number of shareholders.

35
Q

What is cash flow?

A

The measurement of cash coming into a business or going out of a business.

36
Q

What is the purpose of cash flow forecasts?

A

-Forward planning
-Reviews businesses performance
-Shows when finance is required
-Shows when loans can be repaid
-Inspires confidence and acts as check on spending
-Supports the firms business plan
-Targets

37
Q

What is the importance of cash flow to a business?

A

-Business will never have shortfall of money to pay cash payments
-Steady flow of cash means business won’t have to borrow money
-Steady cash flow means business can buy stock in bulk and benefit from economies of scale

38
Q

What are the consequences of incorrect cash flow?

A

-Cash shortage
-Business will have to sell assets
-Inventory levels might not be high enough
-May require bank loan/overdraft
-Business survival
-Trading opportunities may be lost
-Purchases timing (may slow growth of business)

39
Q

What are the two documents of financial statements?

A
  1. Income statements
  2. Statement of financial position
40
Q

What is an income statement?

A

A document to summarise the income and expenses related to trading activities for a business for an accounting period

41
Q

What is the importance of an income statement?

A

It summarises costs and profits. Indicates overall profitability of business and allow owner to review financial performance.

42
Q

What is a Statement of Financial Position?

A

A document that shows the value of the businesses assets, liabilities and, net worth at end of trading period.

43
Q

What is the importance of Statement of financial position?

A

It summarises assets, liabilities and capital for business. Indicates overall profitability and solvency of business and allows owner to review financial performance.

44
Q

What is sales revenue?

A

The total sales of products and services over a given period.

45
Q

What is the Cost of sales?

A

How much the stock the business sold cost to buy.

46
Q

What is gross profit?

A

The Difference between sales revenues and cost of sales

47
Q

What are expenses?

A

Running costs of the business e.g rent, electricity

48
Q

What is net profit?

A

The difference between gross profit and total expenses where gross profit is higher than the expenses.

49
Q

How to calculate sales revenue?

A

Selling Price x Quantity of goods sold

50
Q

How to calculate the cost of sales?

A

Opening inventory + Purchases - Closing inventory

51
Q

How to calculate net profit?

A

Gross profit - Expenses

52
Q

What are non-current assets?

A

Assets that are more permanent in the business e.g machinery

53
Q

What are current assets?

A

Assets which can be quickly exchanged for cash. E.g inventory

54
Q

What are non-current liabilities?

A

Liabilities which are borrowed for a longer time. E.g bank loan

55
Q

What are current liabilities?

A

Liabilities which must be paid immediately. E.g overdraft, trade payables

56
Q

What are the owners drawings?

A

Cash or goods withdrawn from business by owner for personal use

57
Q

How to calculate gross profit percentage?

A

Gross profit / Sales revenue
x100

58
Q

How to calculate net profit percentage?

A

Net profit/Sales revenue
x100

59
Q

How to calculate inventory turnover rate?

A

Cost of sales/Average inventory

60
Q

How to calculate average inventory?

A

Opening inventory + closing inventory / 2

61
Q

How to calculate return on capital employed?

A

Net profit/Capital employed
x100

62
Q

How to calculate capital employed?

A

Total assets - Total liabilities

63
Q

How to calculate working capital ratio?

A

Current Assets/Current liabilities

64
Q

What is a break-even chart?

A

An analysis to compare the cost of creating a product to the revenue it will make.

65
Q

What is the break even point?

A

The point at which the costs and revenues are the same, where there is no profit or loss

66
Q

What is profit in breakeven?

A

Total revenue take away total costs

67
Q

What are fixed costs?

A

Costs that are not affected by the quantity of goods produced or sold. (E.g rent) Fixed costs must be paid even if business doesn’t make anything

68
Q

What are variable costs?

A

Costs that vary or change according to level of work being done in business. (E.g wages, electricity)

69
Q

What are the total costs?

A

The total fixed costs and total variable costs

70
Q

What is the total variable cost? (Formula)

A

Variable cost per unit x Number of units made or sold

71
Q

What is the total sales revenue (TSR)?

A

Total income from sale of many units

72
Q

How to calculate the total sales revenue?

A

Number of units sold x Selling price per unit

73
Q

What is the significance of the break-even point?

A

-Shows amount of goods to be sold to make a profit.
-Level of costs which business can afford to cover
-Price that needs to be charged for goods
-How changes in price or costs would affect profits

74
Q

How to calculate break even? (BE)

A

Total fixed costs
———————————————-
(Selling price per unit - Variable cost per unit)

75
Q

What is the margin of safety?

A

The difference between total sales (in units) and the break even point (in units)

76
Q

How to calculate margin of safety?

A

Actual sales - Break-even output

77
Q

What is the significance of margin of safety for a business?

A

-Shows the amount a business sells in excess of its breakeven point
-The bigger the margin of safety, the maximum potential profit that can be made

business studies (3 decks)

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