Influences on Financial Management

Question 1

Entrepreneur

Answer 1

A person who uses initiative to take a calculated risk to start a new business.

Question 2

Retained profit

Answer 2

Net profit that is reinvested into the business. Retained profit is added to equity because it increases the owner’s claim on the assets of a business.

Question 3

Debt finance

Answer 3

Any type of loan that a business obtains that is issued by a promise of repayment on a certain date at a specific rate of interest.

Question 4

Credit card

Answer 4

A card that provides a line of credit to the user. The user can borrow money for payment to a merchant or as a cash advance to the user. A type of buy now, pay later plan.

Question 5

Overdraft

Answer 5

A loan arrangement with the bank to draw more money than is in an account, up to maximum limit. Interest is charged daily on the overdrawn balance.

Question 6

Commercial bill

Answer 6

An agreement to repay the short-term loan plus interest to the lender on a specific date.

Question 7

Factoring

Answer 7

Occurs when a business sells its accounts receivable asset to a specialist factoring firm to create cash inflow for the business.

Question 8

Trade credit

Answer 8

Money owed to a creditor for the purchase of supplies and services that have already been provided.

Question 9

Debentures

Answer 9

A type of long-term debt finance that a business can acquire by offering a prospectus to the general public on the securities exchange. The business is offering an investment opportunity to people who want a higher return from a more risky investment.

Question 10

Fixed charge

Answer 10

Provides security over a specified physical asset.

Question 11

Floating charge

Answer 11

When the security is subject to day-to-day fluctuations, such as inventory.

Question 12

Prospectus

Answer 12

A company’s invitation to investors to buy shares in the company. The prospectus is a brochure that describes the business and indicates what shareholders will receive if they invest by purchasing shares.

Question 13

Lease

Answer 13

A contract allowing the use of another person’s asset (such as land, equipment or services) for a specific period of time and at a set fee.

Question 14

Equity

Answer 14

The owner’s financial claim on the assets of the business. It is the original investment the owner made into the business by contributing capital or buying shares, plus any profit the business makes. Also called proprietorship or proprietor’s funds.

Question 15

Private company

Answer 15

An incorporated business legal structure that has limited liability; however, it cannot advertise to the public for shareholders.

Question 16

Ordinary shares

Answer 16

Provide part-ownership in a public company; shareholders receive a dividend as their share of the business’s profits.

Question 17

Rights issue

Answer 17

Issue of shares that is offered at a special price to existing shareholders in proportion to their current share ownership in that company.

Question 18

Placement

Answer 18

An additional share issue that is offered to specific institutions and specific investors to raise up to 15 per cent of the business’s current capital base.

Question 19

Share purchase plan