Finance

Question 1

Formula for revenue

Answer 1

Quantity x selling price

Question 2

Formula for profit

Answer 2

Revenue - costs

Question 3

Total costs formula

Answer 3

Fixed costs + variable costs

Question 4

Total variable costs formula

Answer 4

Variable cost per unit x quantity

Question 5

Average unit costs

Answer 5

Total costs / output

Question 6

Gross profit formula

Answer 6

Revenue - costs of sales

Question 7

Net profit formula

Answer 7

Gross profit - expenses

Question 8

Gross profit margin formula

Answer 8

(Gross profit /revenue) x 100

Question 9

Net profit margin formula

Answer 9

(Net profit / revenue) x 100

Question 10

Average rate of return percentage formula

Answer 10

(Average annual profit / cost of investment) x 100

Question 11

Break even point formula

Answer 11

Total fixed costs / (selling price per unit - variable costs per unit )

Question 12

Net cash flow formula

Answer 12

Total cash inflow - total cash outflow

Question 13

What are the reasons businesses need to raise finance?

Answer 13

-establishing a new business
-funding and expansion
-operation of business
-recruitment
-marketing

Question 14

List three advantages of using owner’s capital as a source of finance.

Answer 14

• No need to repay
• No interest to pay
• Does not affect ownership and control

Question 15

What is a disadvantage of using owner’s capital?

Answer 15

Owner may not have enough savings.

Question 16

What is retained profit?

Answer 16

Profit that is not distributed to shareholders as dividends.

Question 17

What is trade credit?

Answer 17

When a business buys goods to sell and does not need to pay the supplier for a period of time.

Question 18

What is an overdraft?

Answer 18

An arrangement with a bank that allows a business to spend more money than it has in its account.

Question 19

List two advantages of taking on a new partner.

Answer 19

• The new partner may bring new skills
• No need to repay

Question 20

What is a loan?

Answer 20

A sum of money borrowed for a stated period at an agreed rate of interest.

Question 21

Fill in the blank: Owners’ capital is money from savings ______ the business by the owner(s).

Answer 21

put into

Question 22

What is the main advantage and disadvantage of crowdfunding

Answer 22

New investors can contribute a lot of money to the business, no need to repay
Ownership will be shared if money is raised through investment

Question 23

What type of companies can issue shares?

Answer 23

Limited companies

Question 24

List three sources of short-term finance.

Answer 24

• Owners’ capital
• Sale of assets
• Trade credit

Question 25

List two sources of medium-term finance.

Answer 25

* Bank loan * Retained profit

Question 26

What are the typical time frames for long-term finance?

Answer 26

5 years or more

Question 27

What is advantage of an overdraft

Answer 27

Interest is only paid on the amount owed, meets short term cash flow problems

Question 28

What is the potential disadvantage of using trade credit?

Answer 28

Goods must be paid for even if they do not sell.

Question 29

What is a share issue?

Answer 29

Selling new shares to raise more money.

Question 30

List three sources of long-term finance.

Answer 30

* Owners' capital * Crowdfunding * Share issue

Question 31

What impact does taking on a new partner have on ownership?

Answer 31

The new partner will have a say in the running of the business and a share of the profits.

Question 32

What is one disadvantage of taking a loan?

Answer 32

Interest must be paid.

Question 33

Advantages of trade credit

Answer 33

-no interest if repaid within agreed time limit

Question 34

Disadvantage of an overdraft

Answer 34

Interest is charged for each day which can be expensive

Question 35

What is sale of assets

Answer 35

Goods owned by the business are sold to raise money

Question 36

Advantages and disadvantages of sales of assets

Answer 36

A - no need to repay D - may take time to sell

Question 37

Advantages and disadvantages of retained profit

Answer 37

A- no need to repay D- business may not have made profits

Question 38

Advantages of a loan

Answer 38

Repayment is paid in fixed sums over a period of time and usually paid monthly

Question 39

Advantages and disadvantages of a share issue

Answer 39

A- new investors can contribute a lot of money to business D- shares can only be sold by limited companies

Question 40

Uses of breakeven

Answer 40

-can help business when they are trying to obtain finance to grow and expand -used by businesses to write their business plan -used by businesses that are starting up to work out when they will stop making a loss -work out what happens if price or costs go up

Question 41

Limitations of breakeven

Answer 41

-assumes everything that is made is sold, this is not always the case -doesn’t take into account any sales discounts if customers buy in bulk -break even calculations are only as accurate as the data they are based on

Question 42

What is the difference between cash and profit

Answer 42

Cash = money available in bank account at that moment Profit = forecasted amount when expenses are removed

Question 43

Usefulness of cash flow forecasting in a business

Answer 43

-used as a planning tool -anticipates periods of cash shortage -enables remedies to be put in place for shortages -provides targets

Question 44

Role of finance department

Answer 44

-Support business planning and decision making -influences business activity (whether or not to expand) -raising finance for business

Question 45

Uses of net profit margin

Answer 45

You can compare with gross profit margin and can then identify how significant total costs are

Question 46

What is liquidity

Answer 46

the ability of a business to pay back its short-term debts, e.g. its suppliers