Financial information and decisions

Question 1

Start-up capital

Answer 1

The capital needed by an entrepreneur when first starting a business

Question 2

Working capital

Answer 2

The capital needed to finance the day-to-day running expenses and pay the short-term debts of a business

Question 3

Non-current (fixed)

Answer 3

Resources owned by a business which will be used for a period longer than a year, for example buildings and machinery

Question 4

Capital expenditure

Answer 4

Spending by a business on non-current assets such as machinery and buildings

Question 5

Long-term finance

Answer 5

Debt or equity used to finance the purchase of non-current assets or finance expansion plans. Long-term debt is borrowing a business does not expect to repay in less than five years

Question 6

Short-term finance

Answer 6

Loans or debt that a business expects to pay back within one year

Question 7

Retained profit

Answer 7

Profit remaining after all expenses, tax and dividends have been paid and which is put back into the business

Question 8

Overdraft

Answer 8

An agreement with the bank which allows a business to spend more money than it has in its account up to an agreed limit

Question 9

Trade receivables

Answer 9

Amount owed to a business by its customers who bought goods on credit

Question 10

Bank loan

Answer 10

Provision of finance by a bank which the business will repay with interest over an agreed period of time

Question 11

Leasing

Answer 11

Obtaining the use of a non-current asset by paying a fixed amount per time period for a fixed period of time. Ownership remains with the leasing company

Question 12

Hire purchase

Answer 12

The purchase of an asset by paying a fixed repayment amount per time period over an agreed period of time

Question 13

Mortgage

Answer 13

A long-term loan used for the purchase of land or buildings

Question 14

Debenture

Answer 14

A bond issued by a company to raise long-term finance usually at a fixed rate of interest

Question 15

Share issue

Answer 15

A source of permanent capital available to limited liability companies

Question 16

Equity finance

Answer 16

Permament finance provided by the owners of a limited company

Question 17

Micro-finance

Answer 17

Small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain

Question 18

Crowd-funding

Answer 18

Financing a business idea by obtaining small amounts of capital from a large number of people, most often using the internet and social media networks

Question 19

Cash-flow forecast

Answer 19

An estimate of the future cash inflows and outflows of a business

Question 20

Net-cash flow

Answer 20

Cash inflow minus cash outflow

Net-cash flow = cash inflow - cash outflow

Question 21

Liquidity

Answer 21

The abillity of a business to pay its short-term debts

Question 22

Credit sales

Answer 22

Goods sold to customers who will pay for these at an agreed date in the future

Question 23

Gross profit

Answer 23

The difference between revenue and cost of sales

Gross profit = revenue - cost of sales

Question 24

Profit

Answer 24

The difference between revenue and total costs

Profit = gross profit - expenses

Question 25

Total cost

Answer 25

Cost of sales plus expenses

Total cost = cost of sales + expenses

Question 26

Revenue

Answer 26

The amount earned from the sale of products

revenue = selling price x quantity sold

Question 27

Cost of sales

Answer 27

The cost of purchasing the goods used to make the products sold

Question 28

Expenses

Answer 28

Day-to-day operating expenses of a business

Question 29

Income statement

Answer 29

A financial statement which records the revenue, costs and profits of a business for a given period of time

Question 30

Statement of financial position

Answer 30

An accounting statement that records the assets, liabilities and owner’s equity of a business at a particular date

Question 31

Assets

Answer 31

Resources that are owned by a business

Question 32

Liabilities

Answer 32

Debts of the business that will have to be paid sometime in the future

Question 33

Non-current (fixed) assets

Answer 33

Resources that a business owns and expects to use for more than a year

Question 34

Current assets

Answer 34

Resources that the business owns and expects to convert to cash before the date of the next financial position

Question 35

Trade receivables

Answer 35

The amount of money owed to the business by customers who have been sold goods on credit

Question 36

Current liabilities

Answer 36

Debts of the business which it expects to pay before the date of the next statement of financial position

Question 37

Trade payables

Answer 37

The amount a business owes to its suppliers for goods bought on credit

Question 38

Non-current liabilities

Answer 38

Debts of the business which will be payable after more than one year

Question 39

Owner’s equity

Answer 39

The amount owed by the business to its owners; includes capital and retained profits

Question 40

Shareholder’s equity (funds)

Answer 40

Alternative term for owner’s equity, but can only be used by limited liability companies

Question 41

Gross profit margin %

Answer 41

Ratio between gross profit and revenue

Gross profit margin = gross profit/revenue x 100

Question 42

Profit margin %

Answer 42

Ratio between profit before tax and revenue

Profit margin = profit/revenue x 100

Question 43

Adding value

Answer 43

Selling a product for more than it costs to produce it

Question 44

Return on capital employed (ROCE)

Answer 44

Ratio between profit before taxt and capital employed

ROCE = profit/capital employed x 100

Question 45

Current ratio

Answer 45

Ratio between current assets and current liabilites

current ratio = current assets/current liabilities

Question 46

Acid test ratio

Answer 46

Ratio between liquid assets and current liabilities.

Acid test ratio = (current assets - inventories)/current liabilites