Finance

Question 1

Advantages and disadvantages of retained profit (internal)

Answer 1

Advantages
No interest must be paid
Do not reduce ownership of organisation

Disadvantages
May upset shareholders as dividend payments lowered due to less profits
If business is struggling they may not have retained profits

Question 2

Advantages and disadvantages of owners capital (internal)

Answer 2

Advantages
Maximises control
No need to repay the money

Disadvantages
Owners may not have enough capital
Not a reliable source as it runs out

Question 3

Advantages and disadvantages of selling assets

Answer 3

Advantages
Raise money from unused equipment
Creates more space for more profitable uses

Disadvantages
May not get full value if sold, may not sell
Might need asset in the future

Question 4

Advantages and disadvantages of a bank loan

Answer 4

Advantages
Repayments are spread over time
No control of the business is lost as there’s no need to provide a share of the business

Disadvantages
May need to risk an asset so the bank has control if it fails
Interest must be paid

Question 5

Advantages and disadvantages of overdrafts (external)

Answer 5

Advantages
Solves short term cash flow problems
Allows emergency purchases

Disadvantages
High levels of interest
Only a short term solution

Question 6

Advantages and disadvantages of new partners (external)

Answer 6

Advantages
May bring new skills
Potential to raise large amounts of money

Disadvantages
New partner entitled to share of the profits
May have different choices for the business and disagree with other partners

Question 7

Advantages and disadvantages of crowdfunding (external)

Answer 7

Advantages
Access to large amount of investors
Fast way to raise finance

Disadvantages
Investors offered a return eg. Free use of product or share in profit
A public request for investment risks your project being copied by competitors

Question 8

Advantages and disadvantages of share issue (external)

Answer 8

Advantages
Finance raised does not need to be paid back
Large sums of money can be raised

Disadvantages
Possible loss of control if more than 50% of shares sold
Paid dividend each year

Question 9

Advantages and disadvantages of trade credit (external) (buy now pay later)

Answer 9

Advantages
Access to goods without immediate payments
No interest

Disadvantages
Short term, must be paid quickly
Danger of losing future credit arrangements if bills are not paid on time

Question 10

Fixed costs definition

Answer 10

Costs that do not change in relation to output eg. Rent, salaries

Question 11

Variable costs definition

Answer 11

Costs which change as a result of changes in output eg. Raw materials, wages

Question 12

Formula for revenue

Answer 12

Revenue = selling price per unit x quantity sold

Question 13

Formula for total costs

Answer 13

Total costs = Total fixed costs + Total variable costs

Question 14

Formula for profit

Answer 14

Profit = Total sales - Total costs

Question 15

Formula for gross profit

Answer 15

Gross profit = Total revenue - cost of sales

Question 16

Formula for net profit

Answer 16

Net profit = total revenue - cost of sales - other expenses

Question 17

Difference between net profit and gross profit

Answer 17

Gross profit, the amount the business makes after direct costs otherwise known as cost of sales.
Net profit, the amount the business generates after all other expenses eg. Rent, heating

Question 18

Formula for gross profit margin

Answer 18

Gross profit margin = Gross profit / sales revenue x100

Question 19

Formula for net profit margin

Answer 19

Net profit margin = Net profit / sales revenue x100

Question 20

Ways to improve gross profit margin

Answer 20

• Lower selling price as this may increase demand, increased revenue
• Increasing price may generate mire revenue if customers want to pay
• Increasing awareness of the product

Question 21

Ways to improve net profit margin

Answer 21

• Cutting costs
• Increase awareness
• Lower expenses

Question 22

Formula for ARR (average rate of return)

Answer 22

ARR = Average profit from the investment / cost of the investment x100

Question 23

Break even graphs

Answer 23

Question 24

Formula for break even point

Answer 24

Break even point in units = Fixed costs / (sales price per unit - variable cost per unit)

Question 25

Advantages and disadvantages of break even in decision making

Answer 25

Advantages
Can be used to establish a margin of safety
Help a business know if it would be worth producing if costs rise

Disadvantages
Business may not sell as many as expected in the forecasts
Price may change if a new competitor enters market

Question 26

Inflow and outflow definitions

Answer 26

Inflows
Money that flows into the business bank account eg. Sales revenue, loans, owners savings

Outflows
Money that’s flows out of the business bank account eg. Rent, wages, electricity

Question 27

Net cash flow formula

Answer 27

Difference between inflows and outflows