Finance (unit 3) Flashcards
What is capital expenditure?
- 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
What is revenue expenditure
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
What happens if a business spends all their finance on capital expenditure
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
what happens if a business spends all their finance of revenue expenditure
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
What is fixed cost?
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
What is variable cost?
Cost that changes with the level of output (rent, wages) they increase as production or sales rise.
What is direct cost?
costs that are specifically linked to goods or services (eg: shampoo for hair salons)
What is indirect cost?
costs that are not directly linked to producing goods and services (eg: utility bills, rent, insurance)
what is total revenue
the total income eared from selling goods or services
TR = P x Q
what is average revenue?
Total income earned per unit sol. price per product
AR = TV / Q = P
what is revenue streams?
the different sources from which a business earns money (eg: sales revenue)
What is the formula for variable cost?
cost per unit x number of units produced
What is the formula for fixed cost?
FC = total cost of production - variable cost per unit x number of units produced
how to calculate total cost
TC = fixed cost + variable cost
how to calculate contribution margin
CM = price per unit - variable cost per unit
What is internal sources of finance:
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
give advantages and disadvantages of using personal funds in internal sources of finance
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
what is retained profit?
(internal sources of finance)
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
what are advantages and disadvantages of retained profit
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
what is fixed selling assets and its 3 rules
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
what are advantages and disadvantages of fixed selling assets?
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
what is revenue and its formula
It is the income made from the selling of a product.
Total revenue = total quantity x total roce
what is non current assets
Long term investments that a company cannot quickly turn into cash (buildings and machinery)
what are current assets
Investments that can be turned into cash within 1 year (eg: cats and supplies)
what are non current liabilities?
Long term debts/obligations that a company is required to pay off within MORE than a year (eg: loans and mortgages)
what are current liabilities?
Short term debts or obligations that a company must pay off within a year (eg: short term loans)
define the term lease
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
