Finance (unit 3)

Question 1

What is capital expenditure?

Answer 1

• it is a business spending on non current assets or capital equipment
• it is a long term investment on assets and will lead to an increase of productivity and efficient.
• this leads to an increase of earning capacity of a business;

eg: buildings , cars, tools and machinery

Question 2

What is revenue expenditure

Answer 2

a business’s spending on its everyday and regular operations. these expenses must be paid to keep a business running

eg: utility bills, salaries to employees, raw material suppliers, delivery costs

Question 3

What happens if a business spends all their finance on capital expenditure

Answer 3

If a business spends their money on only capital expenditure, it will make the business at risk as they will not be able to afford daily payments to sustain operating the business = Finance is limited

Question 4

what happens if a business spends all their finance of revenue expenditure

Answer 4

If a business spends all their only on only revenue expenditure they will not be able to expand or sustain their growth as they will not be able to afford fixed assets, therefor putting them at risk. = finance is limited

Question 5

What is fixed cost?

Answer 5

Costs that do not change with the level of output (eg:. rent, insurance) they must be paid regularly, no matter how much the business produces or sells

Question 6

What is variable cost?

Answer 6

Cost that changes with the level of output (rent, wages) they increase as production or sales rise.

Question 7

What is direct cost?

Answer 7

costs that are specifically linked to goods or services (eg: shampoo for hair salons)

Question 8

What is indirect cost?

Answer 8

costs that are not directly linked to producing goods and services (eg: utility bills, rent, insurance)

Question 9

what is total revenue

Answer 9

the total income eared from selling goods or services

TR = P x Q

Question 10

what is average revenue?

Answer 10

Total income earned per unit sol. price per product

AR = TV / Q = P

Question 11

what is revenue streams?

Answer 11

the different sources from which a business earns money (eg: sales revenue)

Question 12

What is the formula for variable cost?

Answer 12

cost per unit x number of units produced

Question 13

What is the formula for fixed cost?

Answer 13

FC = total cost of production - variable cost per unit x number of units produced

Question 14

how to calculate total cost

Answer 14

TC = fixed cost + variable cost

Question 15

how to calculate contribution margin

Answer 15

CM = price per unit - variable cost per unit

Question 16

What is internal sources of finance:

Answer 16

Finances that come within the organization by using personal assets and funds. it has no financial help from a 3rd party.

3 types: personal funds, retained profit, the sale of assets

Question 17

give advantages and disadvantages of using personal funds in internal sources of finance

Answer 17

Advantages:
1. the money does not need to be repaid
2. their is no interest charge
3. partners have a higher change of borrowing money as it shows commitment to the business venture

Disadvantages:
1. personal funds are not always sufficient
2. partners and sole traders are at higher risk of losing all their money if the business fails

Question 18

what is retained profit?
(internal sources of finance)

Answer 18

It is portion of a company’s profit that is kept in the Business for reinvestment rather than distributing it to shareholders.

aka: ploughed back profit

Question 19

what are advantages and disadvantages of retained profit

Answer 19

Advantages:
1. it does not have interest charters
2. it is a permanent source of finance (it does not need to get repaid)
3. flexible use of retained profit

Disadvantages:
1. less dividends are paid to shareholders
2. new businesses do not have retained profit so it is not a possible source of finance

Question 20

what is fixed selling assets and its 3 rules

Answer 20

When a busniess sells non current assets to raise funds such as buildings and vehicles

rules:
1. must be used over 12 months
2. must be repeatedly used
3. must generate income

Question 21

what are advantages and disadvantages of fixed selling assets?

Answer 21

Advantages:
1.raises large sums of money quickly
2. frees up working capital , giving the busniess funds without borrowing costs
3. no borrowing or interest cost

Disadvantage:
1. can be time consuming to find a buyer
2. low resale value
might not get a “fair value” from buyers
4. only for established busniesses

Question 22

what is revenue and its formula

Answer 22

It is the income made from the selling of a product.

Total revenue = total quantity x total roce

Question 23

what is non current assets

Answer 23

Long term investments that a company cannot quickly turn into cash (buildings and machinery)

Question 24

what are current assets

Answer 24

Investments that can be turned into cash within 1 year (eg: cats and supplies)

Question 25

what are non current liabilities?

Answer 25

Long term debts/obligations that a company is required to pay off within MORE than a year (eg: loans and mortgages)

Question 26

what are current liabilities?

Answer 26

Short term debts or obligations that a company must pay off within a year (eg: short term loans)

Question 27

define the term lease

Answer 27

it is a contract where a business rents equipment for a period of time. The business pays regular payments to the owner but does not own the equipment