Finance

Question 1

There are 3 main financial documents you need to know, one looks backwards, one records the current financial position of the business and one predicts the future. Name them.

Answer 1

Profit and Loss Account looks back
Balance Sheet is the present position
Cash Flow forecast looks fortward

Question 2

Define a cash flow forecast

Answer 2

A prediction of the cash in and the cash out of a business over time

Question 3

Define a balance sheet

Answer 3

A snapshot of the assets and liabilities in a business at a particular point in time

Question 4

Define a profit and loss account

Answer 4

A financial record of the profit or loss made in the previous year by the business after all costs have been taken away from the income sources

Question 5

What are the 3 sections of a profit and loss statement?

Answer 5

Trading Account, Profit and loss account, appropriation account

Question 6

The Trading Account summarises the Gross Profit, how is this worked out?

Answer 6

Revenue - Cost of Sales

Question 7

How is Cost of Sales worked out?

Answer 7

Opening Stock - Closing Stock + stock purchased

Question 8

The Profit and Loss account summarises the Net Profit, how is this worked out?

Answer 8

Gross Profit - Operating Costs

Question 9

Give examples of operating costs

Answer 9

Admin, marketing, utilities, rent

Question 10

The Appropriation Account summarises what happened with any profit made. What are the 2 options?

Answer 10

Retained Profit (ie banked for next year) and Shareholder dividends

Question 11

If opening stock is £100, £200 stock is bought and £50 stock is left. What was the cost of sales?

Answer 11

£250

Question 12

In a cash flow forecast, what happens to the closing balance each month?

Answer 12

It is carried forward to the opening balance the following month

Question 13

In a cash flow forecast, how do you work out the net cash flow each month?

Answer 13

Cash in - cash out

Question 14

Why does a negative balance cause a business problems?

Answer 14

The business is unable to pay the bills and this can cause the business to go bankrupt and stop operating

Question 15

Give suitable sources of short term finance for a business with cash flow problems

Answer 15

Overdraft, Trade credit, not family and friends

Question 16

What is gross profit margin and how do you work it out?

Answer 16

The proportion of gross profit that is made on each sale. Gross profit/sales x 100

Question 17

What is net profit margin and how do you work it out?

Answer 17

The proportion of net profit that is made on each sale. Net profit/sales x 100

Question 18

How does a business improve a gross or net profit margin?

Answer 18

reduce cost of sales if it is a low GPM or reduce operating costs if it is a low NPM.

Question 19

What is the break even point?

Answer 19

The number of sales when the revenue is exactly the same as the total costs

Question 20

What is the formula for the break even point?

Answer 20

Fixed costs/contribution

Question 21

What is contribution?

Answer 21

Selling price - variable costs in other words the amount left over of each sale that pays the variable costs

Question 22

If selling price is £10 and variable costs is £2, what is the contribution?

Answer 22

£8

Question 23

When drawing a break even chart, which line is a horizontal line no matter how many sales are made?

Answer 23

fixed cost

Question 24

Which two lines of the break even cross to show the break even point?

Answer 24

Total Revenue and Total Costs

Question 25

Where is the profit and loss shown on the break even chart?

Answer 25

Using the break even cross over point, the profit is the area to the right below total revenue and above total costs and the loss is to the left of the cross over point

Question 26

How do you work out total revenue?

Answer 26

price x quantity sold

Question 27

How do you work out total costs?

Answer 27

Fixed costs + variable costs

Question 28

On a balance sheet, which 2 numbers always are identical, in other words they “balance”

Answer 28

Net Assets Employed = Capital Employed

Question 29

What is an asset and a liability?

Answer 29

Asset is owned by the business, liabilities are owed by the business

Question 30

What is the difference between current and fixed?

Answer 30

Current is used within 1 year eg stock, fixed uses a time frame of more than 1 year eg equipment

Question 31

Give 3 current assets and 2 fixed assets

Answer 31

current: stock, debtors and cash. Fixed: buildings, equipment

Question 32

Give 2 current liabilities and 1 long term liability:

Answer 32

current: creditors and overdraft. long term: mortgage

Question 33

What is the margin of safety?

Answer 33

The predicted level of production greater than the break even point

Question 34

If a business wished to reduce the break even point of production, how could it do this?

Answer 34

Reduce fixed cost, increasing selling price or reduce variable costs

Question 35

What information is in a business plan?

Answer 35

The planned objectives, strategies, financial forecasts, competition

Question 36

Give 3 stakeholders who are interested in a business plan and state their interest?

Answer 36

the business owner to monitor his/her progress
the bank manager to decide if to lend
the investor to decide if to buy shares