Finance 2

Question 1

Sources of finance-large firms

Established firms can get finance from various sources

-retained profits
-Re-invested savings
-fuxed assets
-shares
Debentures
-loans/mortages

Diferent situations need different sources of finance 
1.type of company
2.amount of money needed 
3.length of time
4.cost of the finance
5state of the economy

Answer 1

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Question 2

The trading/profit/loss acount
1.the trading acount-records the firms gross profit/loss

Tunover=another word for revenue/records the value of all products sold in that year

Cost of sales=records how much it cost to make the products sold during the year-direct costs

Gross profit=difference between the revenue from selling the products/direct costs of making it:

Gross profit=revenue-direct costs

2.the profit and loss acount-records all the indirect costs of running the business

Depreciation=buying replacments when they are needed~treated as a business expense

Operatimg profit~money left after paying all the costs of running the business is called operating profit

Netprofit=any interest paid/received.is inclueded~ what is left

3.the appropriation acount
~coloured mauve is only included for limited company acounts

~records where profit has gone to the government as tax-to shareholdera as di idends/or kept in the business as retained profits

Answer 2

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Question 3

The trading,profit and loss acount

Profit and loss acounts show business performance
-can.be used to asses how well a business has performed in that year

Which is useful information for a firm’s stakeholders

Profit and loss acounts are useful to people who have an interest in the firm’s performance

1. existing stakeholders are usually entitled to share of the profits
2. employees will want to know if the business is making a profit/loss
3. governmeng receives corporatiom tx feom the business

Profit/loss acounf is used to calculate how.much tax the business needs to pay

Answer 3

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Question 4

Profitability Ratios

Gross profit margin ignores indirect cots

Gross profit margin-fraction of every pound spent by customers that doesnt go directly towards making a product

Gross profit margin= gross profit ÷ sales(turnover)

Net profit takes all costs into acount

Net profit margin~fraction of every pound spent by customers that the company gets to keep

Net profit margin=net profit÷ sales(turnover)

Answer 4

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Question 5

The balance sheets-net assets

Fixed assets will last for more than 1 year
S
~business has used some money to buy fixed assets-premises/machinery/vehicles

~this figure is what they’re worth on the date of the balance sheet-they’ll have depreciated since they were brought , but that’s all taken care of in the profit and loss account

Current assets last a few months
Order of liquidity:

~stock=the least liquid

~deboters=refers to the value of products sold

~cash=the most liquid

Current liabilities are bills the firm has to pay soon

*net current assets=current assets - current liabilities

Answer 5

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Question 6

The balance sheet-capital employed

Shareholders’ funds came from the firms owners:

1. share capital
2. retained profit/reserves

Longterm liabilities ~more owed to others

Capital employed~total put into the business

Tje balance sheet is useful to stakeholders

Answer 6

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Question 7

Liquidity Ratios
~also called working capital ratio.

~middle part of a balance sheet shows a.firm’s current assets and current liabilitiies

~’current’ menans ‘this year’

~current ratio~compares a firms curremt liabilities with its current assets;shows whether the firm has enough money in(or coming into) the business to pay this year’s debts

Current ratio=current assets ÷ current liabilities

Acid test ratio:
~also called liquis capital ratio

~similar to current ratio but takes slightly more pessimistic view of things
~it assumes that the company won’t be able to turn stock into cash

Acid test ratio=(current assets-stock)÷current liabilties

*the result will be lower than the current ratio /so rulea are different:
~if the acid test ratio is much above 1;you’ve got too much cash lying about~it would be more profitable to invest this money

If igs much below 1, you mighg be in schtuck

Answer 7

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Question 8

Analysing acounts

Ratios need to be used with care
~if you look at the ratios for one year/compare them with ratios for other years~this will help you spot any trends

~if you compare the ratios of two different businesses,make sure that the ratios have been worked out in the same way

Ratios can differ widely between businesses
~different businesses will have different ratios for all sorts of reasons-the most common reason is that they are in different markets

Answer 8

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