Finance Function [10] *G10

Question 1

What are the elements emphasized by triple bottom line reporting

Answer 1

Profit
Planet
People

Question 2

Explain the concept of triple bottom line reporting

Answer 2

*Looking at the issues [people, planet, profit] when reporting on how well the business has performed.
*No business will be able to uplift the community or look after the environment unless it’s making profit.

Question 3

Income statement aka…

Answer 3

Statement of comprehensive income

Question 4

Balance sheet aka

Answer 4

Statement of financial position

Question 5

What is statement of comprehensive income purpose

Answer 5

*used to calculate net profit for the financial year
*all income - all expenses = net profit

Question 6

What is statement of financial position purpose

Answer 6

*Shows all assets, owners equity and liabilities of the business
*Total assets = owners equity + total liabilities

Question 7

Total assets =

Answer 7

Total assets = owners equity + total liabilities

Question 8

Net profit =

Answer 8

Net profit = all income - all expenses

Question 9

Borrowed capital aka

Answer 9

Foreign capital

Question 10

Where to borrow money on long term

Answer 10

Loan from bank

Question 11

Borrow money on short term

Answer 11

Overdraft, short term loan, credit card, trade credit installment sale transactions, leases

Question 12

Long term capital aka

Answer 12

Fixed capital

Question 13

Short term capital aka

Answer 13

Working capital

Question 14

Name the factors that influence the demand for long term vs short term capital

Answer 14

Nature of bs
Size of bs
Stage development
Time production
Rate of stock turnover
Buying and selling terms

Question 15

Explain this factor: nature of the business

Answer 15

Manufacturers need more capital than retailers to buy fixed assets to establish the manufacturing plant.

Question 16

Explain this factor: the size of the business

Answer 16

The bigger the business the more fixed capital it would need to buy machines, equipment, salaries, vehicles, rent, electricity, etc

Question 17

The stage of development

Answer 17

If the business is still expanding l, it would need more fixed capital to buy additional equipment

Question 18

Explain the factor: rate of stock turnover

Answer 18

The higher the stock turnover (fast inventory sold) the less capital needed since there’s a consistent stream of money coming into the business

Question 19

Explain the factor: buying and selling terms

Answer 19

If the business buys inventory for cash but sells on credit, it would need more working capital than a business that sells for cash when selling on credit.

Question 20

What is a budget

Answer 20

A tool that assists the business with planning:
* how much money will be available and * how it should best be spent

Question 21

Name the types of budgets

Answer 21

*Capital
*Cash

Question 22

Explain a capital budget

Answer 22

It’s a budget used to planning fixed capital requirements.
E.g land n buildings, vehicles, equipment

Question 23

Explain a cash budget

Answer 23

A budget used to do short term financial planning.
It plans for working capital requirements to pay *creditors, *finance debtors, *buy inventory for cash, *pay for expenses associated with day to day running, etc

Question 24

What is the purpose of a budget

Answer 24

• A tool for financial planning as it forces the financial manager to think about what’s needed for future.
• Helps with the process of financial decision making bc info Is available when needed
• Amount spent helps with financial evaluation of different departments and the business overall

Question 25

Advantages of selling on credit

Answer 25

• customers don’t always have cash- creates goodwill and loyalty
• increase sales therefore profit
• others bs selling on credit = that bs doesn’t have competitive advantage over

Question 26

Disadvantages of selling on credit

Answer 26

• unpaid accounts = that need to be written off (make and effort to send reminders)
• too much credit = demand pull inflation- increase in demand = bs’sincrease in prices for goods
• more working capital for unpaid debts

Question 27

Advantages of selling for cash

Answer 27

• quick transaction process
• less debt
• no cash flow issues

Question 28

Disadvantages of selling for cash

Answer 28

• more likely to get robbed
• other bs’s with competitive advantage for selling on credit where customers are more likely to purchase goods
• customers don’t always have cash

Question 29

Explain: overdraft

Answer 29

Bank allows account holder to draw more money out of the account than what’s in
[Can only be done on curren/chequw account]

Question 30

Explain: short term loan

Answer 30

A loan for the short term.
*Bank usually asks for some kind of security before granting loan.
*Interest is usually charged

Question 31

Explain: credit card

Answer 31

The bank issues person a credit card used to buy goods and draw cash. *Bank charges holder interest on amount of credit used

Question 32

Where can credit card transactions be done

Answer 32

• straight account - repayment period up to 6 months
• budget facility- repayment period 12 - 60 months

Question 33

What is credit limit

Answer 33

Maximum amount spent on credit card

Question 34

Explain: trade credit

Answer 34

Supplier allows buyer an amount of credit based on their credit worthiness
*open account since it’s open for as long as the buy keeps buying

Question 35

Explain: installment sale transactions

Answer 35

A monthly installment the includes the repayment of the capital amount and interest required.
*If buyer don’t pay, seller can take

Question 36

Explain: leases

Answer 36

Bs pays a monthly installment for the use of the item (vehicle, equipment) but ownership is never transferred to the business

Question 37

Explain: finance period and the nature of assets bought

Answer 37

*Capital obtained by issuing sales is permanent, but borrowed Capital must be repaid
* long term assets should be financed by own Capital but if u can’t u can’t

Question 38

Explain: control

Answer 38

If a business issues more sales, there mores people who can vote for directors at AGM. Consequently, control of company can change hands
* if shareholders by new shares in the ratio same as existing number of sales held, there’s no impact on who controls the business

Question 39

Solvency ratio

Answer 39

*Solvent = assets > liabilities
*Insolvent/bankrupt = assets < liabilities

Question 40

What’s liquidity

Answer 40

The ability of an asset to be converted into cash quickly without any price discount