Finance Definitions Chunk 3

Question 1

PLEMF?

Answer 1

Planning and Implementing, Limitations of Financial Reports, Ethical Issues, Monitoring and Controlling, Financial Ratios

Question 2

What Aspects Are Used to Judge Financial Needs? BCSAS?

Answer 2

Business Size, Current Objectives, Stage of Business Cycle, Available Finance, Skills

Question 3

Define Financial Controls and Provide 2 Examples

Answer 3

The policies and procedures that ensure the plans of the business will be achieved in the most efficient way E.g. Clear authorisation and responsibility of tasks E.g. Control of cash through cash registers, cash banked daily

Question 4

Advantages of Debt Finance

Answer 4

Readily Available, Interest Payments Tax Deductible

Question 5

Disadvantages of Debt Finance

Answer 5

Regular repayments, Expensive

Question 6

Advantages of Equity Finance

Answer 6

No repayments, Cheaper

Question 7

Disadvantages of Equity Finance

Answer 7

Lower Profits, Ownership Diluted

Question 8

Matching the Terms and Source of Finance to the Business Purpose

Answer 8

Should match the term of the loan with the economic lifetime

Question 9

What does a Cash Flow Statement Show?

Answer 9

• Ability to pay debts on time
• Identifies trends and predicts potential change
• If external finances required

Question 10

What is on an Income Statement?

Answer 10

• Operating income earned from main function
• Operating expenses e.g. Inventories, Services
• Main Operation Expenses e.g. Advertising, Rent

Question 11

Liquidity Ratio

Answer 11

Current Ratio Current Assets ÷ Current Liabilities Industry Average- 2:1

Question 12

Gearing Ratio

Answer 12

Debt to Equity Ratio Total Liabilities ÷ Total Equity x 100 • Ratio less than 100% indicates business has low risk, low gearing and high solvency/stability • Ratio of more than 100% indicates business is high risk, has high gearing and low solvency/stability

Question 13

Profitability Ratio/s

Answer 13

Gross Profit Ratio Gross Profit ÷ Sales x 100 Net Profit Ratio Net Profit ÷ Sales x 100 Return On Equity Ratio Net Profit ÷ Total Equity x 100

Question 14

Efficiency Ratio/s

Answer 14

Expense Ratio Total Expenses ÷ Sales x 100 Accounts Receivable Turnover Ratio Sales ÷ Accounts Receivable

Question 15

Limitations of Financial Reports NNCDTV?

Answer 15

Normalised Earnings, Notes to Financial Statements, Capitalising Expenses, Debt Repayments, Timing Issues, Valuing Assets

Question 16

What is on a Balance Sheet?

Answer 16

• Gives a ‘snapshot’ of the current financial position of the business