Finance

Question 1

The Role of the Finance Department

Answer 1

Monitor cash flow to ensure enough money, control costs and expenses, create final accounts and calculate profits, forecast future income, provide financial information for decision making.

Question 2

Financial Stakeholders

Answer 2

Employees (if being paid fairly), Owners (make sure they get return of investment), Government (correct tax paid), Shareholders (decide whether to purchase additional shares, dividend), suppliers (to decide to allow credit)

Question 3

Sources of Finance

Answer 3

Issue additional shares, leasing equipment, venture capitalists

Question 4

Advantages and Disadvantages of Issue Additional Shares

Answer 4

Large amount of Capital generated, shareholders limited liability, finance doesn’t have to be paid bag.
However selling price of shares fluctuate and only a certain number can be issued.

Question 5

Ads and Disads of Leasing

Answer 5

Saves having to outright purchase equipment, can be fixed and changed regularly, however may be more expensive overtime than purchase.

Question 6

Ads and Disads of Venture Capitalists

Answer 6

Can’t get Finance with a poor credit rating, large amounts of capital can be raised. However, not suitable for small sums and may have to give up stake of company.

Question 7

Cash Budgets

Answer 7

It forecasts the money coming in and going out over a period of time (6 months usually).

Question 8

Advantages/Purpose of Cash Budgets

Answer 8

Shows whether business has surplus or defect, shows whether additional finance required, helps control expenses, helps decision making.

Question 9

Cash Flow Problems

Answer 9

Purchasing a large amount of fixed assets, sales revenue not covering costs, customers taking too long to pay, owners taking drawings from profits, customers allowed too long to pay, too much cash tied up in stock.

Question 10

Cash Flow Solutions

Answer 10

Arrange a loan, overdraft, delay equipment purchases, increase marketing activities, offer cash discount to reduce credit sales, agree credit terms with suppliers, increase selling price.

Question 11

Types of Final Accounts (and Purpose)

Answer 11

Trading profit and loss account shows the gross and net profit from the previous 12 months. A balance sheet shows the wealth of a business at a point in time, showing assets and liabilities.

Question 12

What is gross profit?

Answer 12

Sales minus cost of goods sold.

Question 13

What is net profit?

Answer 13

Gross profit minus other expenses (like electricity or rent).

Question 14

Fixed Assets and Current Assets

Answer 14

A fixed asset is items owned by the organisation they plan to keep more than a year, like buildings and equipment. A current asset is items owned for less than a year, like bank cash and stock.

Question 15

Purpose of Ratio Analysis

Answer 15

Used to compare current performance with previous years, used to compare own firms performance to competitors, used to identify changes in performance and help decision making.

Question 16

Gross Profit Percentage

Answer 16

This is the gross profit divided by sales times 100. Measures the profit made from buying and selling stock. Shows the gross profit made for every £1 of sales.

Question 17

Net Profit Percentage

Answer 17

Net Profit divided by Sales times 100. For every £1, how much pence profit do you take home? This is Profit after expenses taken off.

Question 18

Return on Capital Invested

Answer 18

This is net profit divided by capital employed times 100. This is the Percentage return on the money you have invested, increase due to higher sales and lower expenses. Decrease due to lower sales and high expenses.

Question 19

Current Ratio

Answer 19

This is the current assets:current liabilities. It looks at how able a business is to pay its short term debts. The idea ratio is 2:1. Increase due to fewer current liabilities, higher stock or sales.

Question 20

Acid Test Ratio

Answer 20

This is (current assets - stock):(current liabilities). Similar to current ratio but excludes stock as it’s the hardest to turn into cash. A Ratio of 1:1 is considered acceptable.

Question 21

Disadvantages of Ratios

Answer 21

The figures are historic and don’t show future trends, doesn’t take into account external factors, doesn’t look at internal factors like employee motivation, stage of product life cycle isn’t considered.