Section 8 - Finance

Question 1

What are the 2 profitability tests?

Answer 1

• Gross profit margin

- Net profit margin

Question 2

How do you work out gross profit margin?

Answer 2

gpm = (gross profit / sales) x 100

Question 3

How do you work out net profit margin?

Answer 3

npm = (net profit / sales) x 100

Question 4

Which profitability test is a better indicator of business performance?

Answer 4

Net profit margin

Question 5

What are the advantages of producing an income statement?

Answer 5

• Easily identify problems in the business
• Decide if merger/takeover
• Accurately calculate tax
• Identify trends
• Compare to different businesses
• Helps secure a loan
• Indicator for shareholders
• Compare to previous years, performance/progress

Question 6

What are the disadvantages of producing an income statement?

Answer 6

• Requires a professional to do it, cost
• Time consuming
• Different types of profit can be misleading
• Can be difficult to classify direct + indirect costs

Question 7

What is an asset?

Answer 7

• Something a business owns

- e.g. building, office furniture, equipment, vehicles, stock

Question 8

What is a liability?

Answer 8

• Something a business owes

- e.g. loans, trade credit

Question 9

What is capital (or financed by)?

Answer 9

Money provided by owners

Question 10

What is a current asset?

Answer 10

Short term assets that can be turned into cash within 12 months e.g. stock

Question 11

What is a non current asset?

Answer 11

Resources used often that are difficult to turn into cash. Usually owned for a long period of time (>12 months) e.g. equipment

Question 12

What is a non current liability?

Answer 12

Debts due to be repaid after more than 12 months e.g. mortgage

Question 13

What is a current liability?

Answer 13

Debts due to be repaid within 1 year e.g. overdraft

Question 14

On a balance sheet, what 2 thing must be equal?

Answer 14

Net assets + total equity

Question 15

On a balance sheet, how do you work out net current assets?

Answer 15

current assets - current liabilities

Question 16

On a balance sheet, how do you work out net assets?

Answer 16

non current assets + net current assets - non current liabilities

Question 17

What is a balance sheet?

Answer 17

A statement showing a business’ assets + liabilities

Question 18

What is a ratio?

Answer 18

A technique for analysing a business’s financial performance by comparing 1 piece of financial info w// another

Question 19

What is a liquidity ratio?

Answer 19

Measures business’s performance by examining its ability to pay short term debts using current assets. All figured for liquidity ratios are found in a balance sheet

Question 20

What does it mean if an asset is said to be liquid and why are they important?

Answer 20

• Can be turned into easily cash

- Important for firms to be able to meet their debts

Question 21

What are the two liquidity ratios?

Answer 21

• Current ratio

- Acid test ratio

Question 22

How do you work out the current ratio?

Answer 22

(current assets / current liabilities):1

Question 23

What is the ideal current ratio?

Answer 23

2:1

Question 24

What does the current ratio show?

Answer 24

How many assets you have for each liability

Question 25

How do you work out the acid test ratio?

Answer 25

([current assets - stock] / current liabilities):1

Question 26

What is the ideal acid test ratio?

Answer 26

1:1

Question 27

What does it mean if the acid test ratio is less that 1:1?

Answer 27

Will be unable to pay you debts

Question 28

How can an established firm raise finance?

Answer 28

• Retained profit (reinvesting profit after paying themselves dividends)
• Reinvested saving (bank savings/buying shares)
• Selling fixed assets (no longer in use)
• Shares
• Debentures (loans from the public)
• Loans/mortgages

Question 29

What factors affect which source of finance a growing business go for?

Answer 29

• Type of company (e.g. not all have fixed assets etc.)
• Amount of money needed
• Length of time finance needed for
• Cost of finance
• State of the economy (if poor public unlikely to invest)