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Introduction To Financial Accounting > Sources Of Finance > Flashcards

Sources Of Finance Flashcards

1
Q

What do all businesses need to operate?

A

Finance

Finance can come from internal or external sources.

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2
Q

What is internal finance?

A

Cheaper, more flexible, and quicker to obtain compared to external sources

It does not require agreement from external parties.

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3
Q

Define retained earnings.

A

Profits retained in the business instead of being distributed as dividends.

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4
Q

List three advantages of retained earnings.

A
  • No additional costs (interest or fees)
  • No dilution of ownership or control
  • Reduces scrutiny compared to external funding
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5
Q

List two disadvantages of retained earnings.

A
  • May upset shareholders expecting dividends
  • Timing and amount of future retained profits are uncertain
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6
Q

What is working capital?

A

Current assets minus current liabilities.

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7
Q

Name a key strategy for managing working capital.

A

Reducing inventory levels.

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8
Q

What are the risks of deferring payments to creditors?

A
  • Higher purchase costs
  • Loss of discounts
  • Lower supplier priority
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9
Q

What is an ordinary share?

A

Equity capital representing ownership in the company.

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10
Q

List two key characteristics of ordinary shares.

A
  • Risk capital – dividends are only paid after all claims are met
  • Shareholders control the company via voting rights
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11
Q

What is the main disadvantage of ordinary shares?

A

Dividends are not tax-deductible.

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12
Q

Define loans (borrowings).

A

Agreement to borrow funds with specified terms (interest, repayment dates, and security).

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13
Q

What is a finance lease?

A

Leasing non-current assets instead of outright purchase.

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14
Q

What is a bank overdraft?

A

A flexible form of short-term finance that can be adjusted as needed.

generally low set up cost, but higher interest rates than term loans.
repayable on demand

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15
Q

What is debt factoring?

A

A factor buys the company’s receivables and advances a portion of the debt (around 80%)

interest charged on the advance & service usually costs 2-3% of sales revenue

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16
Q

Define gearing.

A

Proportion of debt capital to equity capital.

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17
Q

What is high gearing?

A

More debt than equity.

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18
Q

What are the characteristics of debt financing?

A
  • Fixed interest obligations
  • Cheaper due to lower risk
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19
Q

What are the characteristics of equity financing?

A
  • Variable dividends dependent on profits
  • Expensive due to higher risk
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20
Q

What is the matching principle in financing?

A

Long-term finance for permanent assets and short-term finance for temporary needs.

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21
Q

What is a key consideration when choosing between long-term and short-term borrowings?

A

Flexibility.

22
Q

True or False: Long-term loans provide stable interest rates over time.

A

True

23
Q

What is critical for effective business decision-making regarding finance?

A

Understanding the sources of finance, their advantages and disadvantages, and their impact on financial structure and risk.

24
Q

What is debt financing?

A

Borrowing money that must be repaid over time, usually with interest.

25
Q

List key features of debt financing.

A
  • Borrowed Capital
  • Fixed Repayment
  • No Ownership Dilution
  • Tax Deduction
26
Q

What is borrowed capital in debt financing?

A

Obtained from lenders such as banks, financial institutions, or through issuing bonds.

27
Q

What does fixed repayment mean in debt financing?

A

The company must repay the principal amount plus interest, regardless of its profitability.

28
Q

True or False: Lenders gain ownership or voting rights in the company under debt financing.

A

False

29
Q

What is a tax deduction in the context of debt financing?

A

Interest paid on debt is often tax-deductible.

30
Q

Name two types of debt financing.

A
  • Bank Loans
  • Bonds/Debentures
31
Q

What are bank loans?

A

Agreements with banks to borrow a fixed amount over a specific period.

32
Q

What are bonds or debentures?

A

Issued to the public, repayable at maturity with periodic interest payments.

33
Q

What is an overdraft?

A

Short-term borrowing facilities with banks.

34
Q

What are mortgages in the context of debt financing?

A

Loans secured against property or assets.

35
Q

List three advantages of debt financing.

A
  • Maintains ownership and control of the company
  • Predictable repayment schedule simplifies financial planning
  • Interest is often tax-deductible
36
Q

What is a disadvantage of debt financing regarding repayment obligations?

A

Fixed repayment obligations increase financial risk.

37
Q

What can happen if a company fails to repay its debt?

A

It can lead to legal action or asset seizure.

38
Q

How can debt financing limit future borrowing capacity?

A

Existing debt obligations may restrict the ability to take on additional loans.

39
Q

What is equity financing?

A

Raising money by selling shares of the business to investors.

40
Q

List key features of equity financing.

A
  • Ownership Sharing
  • No Repayment Obligation
  • Dividends
  • Dilution of Control
41
Q

What does ownership sharing mean in equity financing?

A

Investors who buy shares become part-owners of the company.

42
Q

True or False: Equity financing requires repayment to investors.

A

False

43
Q

What are dividends in equity financing?

A

Profits may be shared with shareholders in the form of dividends.

44
Q

What does dilution of control mean in equity financing?

A

Existing owners may lose some control over business decisions.

45
Q

Name two types of equity financing.

A
  • Ordinary Shares
  • Preferred Shares
46
Q

What are ordinary shares?

A

Common stock issued to investors with voting rights and dividend entitlement.

47
Q

What are preferred shares?

A

Provide fixed dividends but limited voting rights.

48
Q

What is venture capital?

A

Investments from venture capitalists or private equity firms, often in exchange for significant control.

49
Q

List three advantages of equity financing.

A
  • No fixed repayment obligations, reducing financial pressure
  • Attracts investors who may provide valuable expertise and networks
  • Useful for high-risk ventures where debt may be too expensive
50
Q

What is a disadvantage of equity financing regarding ownership?

A

Dilutes ownership and control of the business.

51
Q

True or False: Dividend payments in equity financing are tax-deductible.

A

False

52
Q

What might investors demand in equity financing?

A

A significant share of profits or influence over decisions.

Introduction To Financial Accounting (11 decks)

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