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LC Business Studies > Finance > Flashcards

Finance Flashcards

1
Q

Explain how households and businesses manage finances

A

Both need to manage finances to ensure that they don’t run out of cash (cash flow planning)
Draw up Cash Flow Forecasts/Household Budgets
Plans of the inflows & outflows of cash expected in the future

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2
Q

Give examples of cash inflows for household

A

Wages & Salaries
Social Welfare Payments
Child Benefit
Interest

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3
Q

Give examples of cash outflows for household

A 
Mortgage/Loans
Insurance
Groceries
Clothing
Entertainment
To buy fixed assets
Money to local authority- motor tax and bin charges
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4
Q

Give examples of cash inflows for business

A 
Sales
Debtors payments
Interest
Sale of Fixed Assets
Grants/Loans
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5
Q

Give examples of cash outflows for business

A 
Purchases- Buying stock
Creditors Payments
Buying Fixed Assets
Day-to-Day Expenses
Paying dividends
Cash paid to revenue for taxes
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6
Q

Explain what a cash flow forecast is

A

Written plan in which business sets out its expected future cash receipts and payments over a period of time.
Helps identify if business will have a cash surplus or a cash deficit
Business can then plan out best course of action for their situation

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7
Q

How to deal with expected future deficits by a business under increase cash receipts

A

Use credit control methods-offering discount for prompt payment, debtors pay quickly and more cash
Sell investments- raise cash
Have a sale / reduce the prices of goods being sold- encourage to spend, increasing cash coming

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8
Q

How to deal with expected future deficits by a business under Reduce Cash Payments

A

Spread large payments over a number of months- ex: hire purchase. avoids having large amount cash leave business sat once
Make cutbacks e.g voluntary wage cuts- lower amount of cash leaving the business
Reduce dividends- could offer free shares in business instead

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9
Q

Give four reasons for cash flow forecast by business

A

To avoid cash deficits
To improve financial control
To raise finance
To increase profits

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10
Q

Explain a household budget

A

Written plan in which a family sets out its expected future cash receipts and payments over a period.

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11
Q

What are the three categories of household expenditure

A

Fixed e.g rent
Irregular e.g light & heat
Discretionary e.g holidays

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12
Q

How to deal with expected future deficits by a household under Increase receipts

A

Do overtime / increase hours in work or get part time job to increase wages coming in
Rent a room out in the house to lodger- extra cash received is tax free

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13
Q

How to deal with expected future deficits by a household under Reduce Payments

A

Spread large payments over a number of months- use hire purchase to avoid large amounts of cash leaving at once
Cutback on discretionary spending
Reduce spending on everyday items e.g buying cheaper groceries

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14
Q

Give four reasons a household prepares a budget

A

To avoid cash deficits
To manage its money better
To raise finance
To help maximise investments

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15
Q

Name the three main sources of finance

A

Short term sources
Medium term sources
Long term sources

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16
Q

Explain short term sources of finance

A

Short-term sources finance (borrowings repaid within one year)

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17
Q

Explain medium term sources of finance

A

Medium-term sources of finance (borrowings repaid between 2 and 5 years)

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18
Q

Explain long term sources of finance

A

Long-term sources of finance (borrowings longer than 5 years to repay)

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19
Q

Give four sources of short term finance for a household

A

Bank Overdraft
Creditors
Unpaid (Accrued) expenses
Credit Cards

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20
Q

Give four sources of short term finance for a business

A

Bank Overdraft
Creditors
Unpaid (Accrued) expenses
Factoring debts

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21
Q

Give three sources of medium term finance for a household

A

Personal Loan
Leasing
Hire Purchase

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22
Q

Give three sources of medium term finance for a business

A

Medium-Term Loan
Leasing
Hire Purchase

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23
Q

Give two sources of long term finance for a household

A

House Mortgage

Savings

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24
Q

Give four sources of long term finance for a business

A

Equity Capital
Retained Earnings
Grants
Debentures

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25
Q

Name five factors to consider when choosing a source of finance

A 
Cost
Purpose of loan
Security
Tax implications
Control(Business only)
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26
Q

What do you need when qualifying for a loan

A

Character
Capacity
Collateral (Security)
Credit - Rating

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27
Q

What are the common activities between management in a household and a business

A

Budgeting
Sources of Finance
Controlling
Communications

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28
Q

What are the different activities between management in a household and a business

A

Taxation
Size
Mission
Manpower Planning

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29
Q

Explain liquidated

A

Closed down and sold off

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30
Q

How could a business improve their cash flow forecast- analysis question

A

If seasonal business- have a out of season sale yo encourage customers to buy products
Hire purchase- spread payment for a fixed asset over a time

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31
Q

Explain to avoid cash deficits as a reason a business prepares a cash flow forecast

A

Lets business know in advance when it will run short of money.
Plenty of time to increase cash receipts, reduce payments o arrange bank overdraft to deal with it.
Ensures bills paid on time and does not go bankrupt

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32
Q

Explain to improve financial control as a reason a business prepares a cash flow forecast

A

Can compare its actual receipts and payments against those originally planned
Know whether it is on or off target to achieve to projected net and closing figures and can improve financial control

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33
Q

Explain to raise finance as a reason a business prepares a cash flow forecast

A

Can be used to show investors that business carefully plans out its cash payments and receipts
Convince investors business is properly managed
Encourages them to provide money it needs to expand in future

34
Q

Explain to increase profits as a reason a business prepares a cash flow forecast

A

Lets business know in advance when it is going to have excess cash
Business can make plans to invest this
Can earn extra interest by not leaving cash lying around

35
Q

Explain to avoid cash deficits as a reason a household prepares a cash flow forecast

A

Lets household know in advance when it will run short of money.
Plenty of time to increase income reduce expenditure or arrange bank overdraft to deal with it.
Ensures bills paid on time

36
Q

Explain to manage its money better as a reason a household prepares a cash flow forecast

A

Shows family where they are planning on spending their money- Highlights areas of overspending that can be cut back on

37
Q

Explain to raise finance as a reason a household prepares a cash flow forecast

A

Can be used to show bank manager that family carefully plans out its income and expenditure
Proves family can always pay bills on time
Convince family is properly managed and are good risk
Will grant loans asked for

38
Q

Explain to maximize investments as a reason a household prepares a cash flow forecast

A

Allows it to take action to see how to invest any surplus cash, such as putting it into saving account o earn interest

39
Q

Explain spreadsheet

A

A computer software that is used to do basic maths calculations

40
Q

Explain the advantages of a spreadsheet

A

Performs basic maths calculations quickly and accurately saving time and money
Allows for what if analysis- Once accounts are prepared any numbers can be changed and spreadsheet will instantly recalculate all the answers. Lets business/house know how vulnerable it is to changes in the original forecast

41
Q

Explain bank overdraft as a short term of finance with two advantages and disadvantages

A

Bank allows house/business to pay for things for an amount (up to an agreed limit) even though they don’t have enough money in their current account
Bank pays shop and you pay bank back later with interest
Advan: Interest only paid on amount overdrawn
No security needed
Disadvan: Rate of interest expensive
Must be overdraft free for at least 30 days every year

42
Q

Explain accrued expenses as a short term of finance with two advantages and disadvantages

A

Supplier allows house/business to use it’s services now without immediate payment
After bill is sent showing what is owed for services and sets out a deadline for payment
Advan: No interest- free
No security needed - not at risk if cannot pay back
Disadvan: If take to long to pay you will be cut off- Business/house have no service for a time and may have to pay re-connection fee
Only suitable for certain purchases ex: utility bills

43
Q

Explain credit card as a short term of finance with two advantages and disadvantages

A

Can pay for goods and services with card ex: Visa
Credit card company pays amount to shop and house/business pays credit card company back later
Advan: No interest if bill paid in full on time
Safer than carrying cash- card can be cancelled
Disadvan: If bill not paid in full/on time- high interest
House/business must pay government tax for every card they own

44
Q

Explain factoring as a short term of finance with two advantages and disadvantages

A

Business raises money selling debtors to bank for cash
Factoring with recourse- Business must reimburse bank if debtors sold don’t pay bank
Factoring without recourse- Doesn’t have to reimburse
Advan: No security needed
Ownership of business is not affected
Disadvan: Expensive- bank charge high fee
Only be used by business who sell goods on credit

45
Q

Explain trade credit as a short term of finance with two advantages and disadvantages

A

Supplier allows business to buy stock without paying now- Bill is sent a while later showing how much is owed for stock and setting out deadline for payment
Advan: No interest charged if paid in full/ on time
Control over business is not affected
Disadvan: If bill paid late - lose out on cash discounts
If you deliberately keep supplier waiting- leaning on trade, business will lose credit rating

46
Q

Explain Hire purchase as a medium term of finance with two advantages and disadvantages

A

Buying an asset, taking delivery of it now but paying for it in installments
Once last installment paid- own the asset
Can end agreement once half HP price has been paid
Advan: No security needed-asset itself is security
For business interest is tax deductible
Disadvan: Interest charged is high- expensive
Pay interest on initial sum borrowed- no reduction for installments

47
Q

Explain Leasing as a medium term of finance with two advantages and disadvantages

A

Rents asset for up to 5 years from finance company
Pay a monthly lease payment for use of asset
At end of lease hands asset back to finance company
Advan: No security /lease payment tax deductible
Can always have up to date equipment
Disadvan: If cannot afford lease payments asset is repossed
May have been cheaper to buy- depends on time

48
Q

Explain personal loan as a medium term of finance with two advantages and disadvantages

A

Household borrows money from bank and pays it back in installments over five years- Installment pay back loan+ interest
Can be fixed rate or variable rate loan
Advan: Rate of interest cheaper than hire purchase
No security needed
Disadvan: Pay interest on initial sum borrowed- no reduction for installments

49
Q

Explain medium loan as a medium term of finance with two advantages and disadvantages

A

Household borrows money from bank and pays it back in installments over five years- Installment pay back loan+ interest
Can be fixed rate or variable rate loan
Advan: Rate of interest cheaper than hire purchase
Interest is tax deductible + control not affected
Disadvan: Security required
If European Central Bank increase interest rate and loan is variable repayments will increase

50
Q

Explain a fixed rate loan

A

Interest rate does not change and repayments remain the same

51
Q

Explain a variable rate loan

A

Interest rate goes up and down as the European central bank increase/ decrease interest rates

52
Q

Explain Mortgage as a long term of finance with two advantages and disadvantages

A

Long term loan used by household to buy their home/extend.
Loan secured on house- If cannot pay back mortgage bank will repossess their house
Monthly repayments can be fixed/variable rate
Advan: Interest is cheapest rate on any loan
Disadvan: If cannot afford monthly payments family will lose their home

53
Q

Explain savings as a long term of finance with two advantages and disadvantages

A

Amount of income family has set aside for future use
Used to buy relatively expensive items
Advan: No borrowing means no interest/security
Disadvan: May take many years to build up savings

54
Q

Explain retained earnings as a long term of finance with two advantages and disadvantages

A

Profits the business has saved up over the years to reinvest into the business
Used to buy relatively expensive items
Advan: No interest or security
Ownership over business sis not affected
Disadvan: Takes year to build up -not for new business
May save a lot of profits and have bad relationship with shareholders- low dividend

55
Q

Explain Grant as a long term of finance with two advantages and disadvantages

A

Sum of money government give business to help pay for things it needs ex: Buildings
They help as want to create jobs and wealth
Permanent source of finance- not repaid
Advan: No interest or security and control not affected
Disadvan: Only get grant subject to strict conditions
Only give business a % of money it needs

56
Q

Explain debentures as a long term of finance with two advantages and disadvantages

A

Long term loan by company secured on it’s assets
Pays back interest on loan annually but loan itself in lump sum at a later date
Interest rate is fixed
Advan: Interest tax deductible and control not affected
Disadvan: Security required
Will increase company’s debt/equity ratio

57
Q

Explain Equity Capital as a long term of finance with two advantages and disadvantages

A

Involves selling some shares to investors for money
Shareholders own part of business and are entitled to one vote per share at company meetings - and part of profit called dividend
Directors decide how much dividend will be if any
Advan:No interest - dividend at directors discretion
Money raised is not repaid and no security
Disadvan: % ownership reduced
Dividends are not tax deductible

58
Q

Explain character as criteria for qualifying for a loan

A

Bank want to establish is business/house is honest and reputable
Bank will ask questions such as
House- How long they have lived at current address and how long have been in current job
Business- How long it has been established and for details of managers/directors

59
Q

Explain capacity as criteria for qualifying for a loan

A

Want to establish if they have sufficient income to repay loan and interest
House- bank will ask for P60 to gage net/gross income
Business- Bank will ask for audited copy of P and L a/c to see if profits are sufficient to repay installments

60
Q

Explain credit rating as criteria for qualifying for a loan

A

Will want to establish if business/house has good history or taking out loans- were paid in full on time
Will ask if have ever gone bankrupt or defaulted on any loans
Bank’s credit control department will run a credit check on the business/household

61
Q

Explain cost as a factor of choosing a source of finance

A

Should shop around for cheapest source
Cost of source of finance includes interest and additional charges ex: documentation fees
APR shows total cost of borrowing as % of amount borrowed - should compare APR to get best value
Lenders must show APR by law

62
Q

Explain purpose of loan as a factor of choosing a source of finance

A

Loan should never take longer to repay than the life of the asset bought will it.
Short term source- items will have less for 1 year
Medium term source- items to be kept for 2-5 years
Long term source- items for use longer than 5 years

63
Q

Explain security as a factor of choosing a source of finance

A

Must take into account if must put up asset as collateral
Stand to lose the assets pledged as security
Lender only takes asset increase in value or hold value
Must weigh up advantage of source of finance with risk of losing asset (premises/home)

64
Q

Explain tax implications as a factor of choosing a source of finance

A

Must see if they can get tax deduction for interest
Repayments would be reduced
Ex: Business debenture interest is tax deductible but dividend paid on equity shares are not

65
Q

Explain control as a factor of choosing a source of finance

A

See if it involves owner giving away shares in business
Must balance desire for capital with keeping control
Ex: Debenture loan does not involve losing control of business but equity capital does

66
Q

Explain a cheque

A

Written document filled out by account holder which tells bank to deduct sum written out of their account and pay it to person named on the cheque

67
Q

Explain Standing order

A

Account holder instruct bank to take same amount out of their account every period and pay it into the account of the person they name

68
Q

Explain Direct debit

A

DD is when account holder instructs bank to take whatever sum it is told to by a person they name and pay it into that person’s account every period

69
Q

Explain Paypath

A

Employees net wages are paid directly to their bank a/c
Transferred electronically from employer’s account
Safer than being paid/paying by cash and more convenient

70
Q

Explain ATM cards

A

Automated Teller Machine
Allows account holder to withdraw sums of money from their account using a machine in wall of the bank
Need a PIN- personal identification Number to access
With card can check balance and top up phone

71
Q

Explain debit cards

A

Account holder can pay for things without cash on them/cheque
Bank automatically takes money from your account and deposits it in the shop account
Money is taken from bank account there and then

72
Q

Explain bank statements

A

Document you receive from the bank showing all transactions that took place on the account over the period together with balance left in account

73
Q

Explain budgeting as a common activity of household and business management

A

Both plan out cash they expect to receive and spend
Ex: Business draw up cash flow forecast and household draw up household budget
Determines if they will have cash surplus or deficit and can take steps to deal with this

74
Q

Explain sources of finance as a common activity of household and business management

A

Both raise finance- fill out forms to apply for loan

Both must make decisions on most suitable source of finance. Both will try choose one with lowest APR to save money

75
Q

Explain mission as a different activity of household and business management

A

Business is set with aim of producing and selling a product to make a profit
Household does not have this aim. It is a social unit set up for love and support of all members

76
Q

Explain manpower planning as a different activity of household and business management

A

Manpower planing is used by business to make sure that they have the right number of employees to do all jobs needed
Households do not engage in manpower planning

77
Q

Explain Taxation as a different activity of household and business management

A

Business managers must work out taxes it owes
Mus compute the amount themselves and pay this amount over to the revenue
Households do not have to calculate PAYE, income tax or VAT

78
Q

Explain size as a different activity of household and business management

A

Business are larger- owner often hires professional managers to run the business
Households manage themselves

79
Q

Explain controlling as a common activity of household and business management

A

Both engage in management activity of controlling
Business uses stock control to make sure they don’t run out of products to sell
Houses uses stock control to make sure doesn’t run out of food

80
Q

Explain communications as a common activity of household and business management

A

Both use internal and external communications

Both use external communications with banks to arrange loans and with the government to pay taxes and submit tax returns

LC Business Studies (28 decks)

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