internal finance

Question 1

capital

Answer 1

the money provided by the owners in a business

Question 2

capital expenditure

Answer 2

the spending on business resources that can be used repeatedly overtime in business operations

Question 3

internal finance

Answer 3

money generated by the business or its current owners

Question 4

retained profit

Answer 4

profit after tax that is reinvested or “ploughed back” into the business

Question 5

revenue expenditure

Answer 5

the spending on business resources that have already been consumed or will be consumed very shortly

Question 6

sales and leaseback

Answer 6

the practice of selling assets, such as property or machinery, and leasing them back from the buyer

Question 7

why is finance needed

Answer 7

• in order for firms to get started with their business
• needing to buy new equipment, raw materials and obtain premises (land and building)
• growth and expansion
• research and development

Question 8

what items fall under capital expenditure

Answer 8

• land
• buildings
• office equipments
• machinery
• a patent or a license
• vehicles
• warehouses
• furniture
• production factories

Question 9

what items fall under revenue expenditure

Answer 9

• raw materials
• fuel
• wages paid to factory workers
• rent
• maintenance and repair of buildings and machines
• interest on loans borrowed

Question 10

what entrepreneurial characteristic is associated with providing own capital

Answer 10

the risk associated with it, usually when setting and starting up a business

Question 11

sources of capital

Answer 11

• owner’s own personal savings

- redundancy payments

Question 12

benefits of retained profit

Answer 12

• it is the cheapest source of finance
• has no financial charges such as interest
• they are very flexible – owners have complete control over how and where the profit is reinvested; it can be accumulated by a business and retained in a bank account, and used any other time when needed
• provide funds for business operations without increasing corporate debt

Question 13

drawbacks of retained profit

Answer 13

• if a business does not properly plan the utilisation of funds, that will lead to careless spending
• there is an opportunity cost if the business cannot get higher returns from the investments
• may lead to shareholder conflict as they will receive low dividends because the profit has been used up
• if a business does not have high profit level margins, retained profit cannot be possible as a source of finance