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Business studies > Unit 19 > Flashcards

Unit 19 Flashcards

1
Q

Q1. What is sale and leaseback?

A

A1. Business sells non-current assets and leases it back from the new owner.

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2
Q

Q2. What are government grants?

A

A2. Funds and financial support provided by governments to businesses to encourage business activities.

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3
Q

Q4. What is working capital?

A

A4. Capital needed to finance day-to-day running expenses.

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4
Q

Q3. What is start-up capital?

A

A3. Capital needed by an entrepreneur when first starting a business.

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5
Q

Q5. What is a non-current (fixed) asset?

A

A5. Resources owned by a business which will be used for a period longer than a year.

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6
Q

Q6. What is capital expenditure?

A

A6. Spending by a business on non-current assets such as machinery and buildings.

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7
Q

Q7. What is long-term finance?

A

A7. Debt or equity used to finance the purchase of non-current assets or expansion plans for more than one year.

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8
Q

Q8. What is short-term finance?

A

A8. Loans or debt a business expects to pay back within a year.

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9
Q

Q9. What is retained profit?

A

A9. Profit remaining after all expenses.

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10
Q

Q10. What is an overdraft?

A

A10. An agreement with the bank that allows a business to spend more money than it has in the bank, which needs to be paid back.

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11
Q

Q11. What are internal sources of finance?

A

A11. Capital that can be raised from within the business itself.

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12
Q

Q13. What is equity finance?

A

A13. Permanent finance provided by owners of a limited company.

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13
Q

Q12. What is a share issue?

A

A12. Source of permanent capital available to limited liability companies.

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14
Q

Q14. What is micro-finance?

A

A14. Small amounts of capital loaned to entrepreneurs for small periods of time.

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15
Q

Q15. What is crowd funding?

A

A15. Financing a business idea by obtaining small amounts of capital from large numbers of people.

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16
Q

Q16. What are trade receivables?

A

A16. Amounts owed to a business by its customers who bought goods on credit.

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17
Q

What is Debt factoring?

A

A17. Selling trade receivables to increase liquidity.

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18
Q

Q19. What is leasing?

A

A19. Obtaining permission to use a non-current asset by paying a fixed amount over time.

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19
Q

Q18. What is a bank loan?

A

A18. Provision of finance by a bank which the business will repay with interest.

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20
Q

Q20. What is hire purchase?

A

A20. Purchase of an asset by paying a fixed repayment amount over a period of time.

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21
Q

Q21. What is a mortgage?

A

A21. A long-term loan used for the purchase of lands or buildings.

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22
Q

Q22. What are debentures?

A

A22. Bonds issued by a company to raise long-term finance.

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23
Q

Q23. What are external sources of finance?

A

A23. Capital raised from outside the business.

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24
Q

Q.24 What are the reasons behind a business to need finance?

A

A.24
1) To set up business.
2) Pay day-to-day expenses.
3) Purchase non-current assets.
4) Invest in latest technology.
5) Expanding the business.
6) Research into new products and markets.

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25
Q

Q.25 What are some internal sources of finance?

A

A.25
1) Retained profit.
2) Sale of non-current assets.
3) Use of working capital.

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26
Q

Q.26 What is the benefit of using retained profit?

A

A.26 No extra cost to the business as this funds are coming from business activities.

27
Q

Q.27 What is the limitation of using retained profit?

A

A.27 Only available when the business is profitable.

28
Q

Q.28 How does sale of non-current asset help as a source of internal funding?

A

A.28 This is done by selling unwanted non-current assets or selling leaseback of non-current assets.

29
Q

Q.29 How does retained profit help as an internal source of finance?

A

A.29 Reinvesting some profits instead of giving it to shareholders.

30
Q

Q.30 What are the benefits of sale and leaseback as a source of internal funding?

A

A.30
1) No direct cost.
2) Profit from unwanted land and buildings.
3) Often raises high amount of money.

31
Q

Q.31 What are the limitations of using sale and leaseback as a source of internal funding?

A

A.31
1) May be difficult to sell.
2) Need to pay annual leasing charges.
3) When leasing agreement comes to an end, business needs to find new premises.

32
Q

Q.32 What are the sources of internal funding from working capital?

A

A.32
1) Cash balances.
2) Reducing inventory levels.
3) Reducing trade receivables.

33
Q

Q.33 Explain how this helps internal funding as working capital: cash balances.

A

A.33 Used to pay day to day expenses, short term debts, and unexpected expenditures.

34
Q

Q.34 Explain how this helps internal funding as working capital: Reducing inventory levels.

A

A.34 Reducing the quantity of raw materials and finished products can lead to less expenses by the businesses in terms of storage.

35
Q

Q.35 Explain how this helps internal funding as working capital: Reducing trade receivables.

A

A.35 Offering customers discounts on trade receivables to encourage customers to pay for trade receivables faster.

36
Q

Q.36 What is the advantages of debt financing?

A

A.36 Does not change company ownership.

37
Q

Q.37 What is the disadvantage of debt financing?

A

A.37 Increases business cost.

38
Q

Q.38 What is the advantage of equity financing?

A

A.38 Does not have to be repaid.

39
Q

Q.39 What is the disadvantage of equity financing?

A

A.39 Dilutes ownership of company.

40
Q

Q.40 What are the factors influencing the choice of finance/

A

A.40
1) Size of business.
2) Amount required.
3) Length of time.
4) Existing borrowing.

41
Q

Q.42 How does this affect choice of finance: Amount required.

A

A.42 Large capital amounts require debentures, small amounts can be gotten from banks.

42
Q

Q.41 How does this affect choice of finance: size of business.

A

A.41 Smaller businesses find it harder to borrow from banks or lenders.

43
Q

Q.43 How does this affect choice of finance: Length of time.

A

A.43 Long-term finance can be acquired through shares issues, but for short-term, overdraft is better.

44
Q

Q.44 How does this affect choice of finance: Existing borrowing.

A

A.44 Business with existing borrowing may find it difficult to borrow further from banks and lenders.

45
Q

Q.45 Why do unincorporated businesses find it difficult to raise finance easily?

A

A.45
1) Cannot raise capital through sale of assets.
2) Only small projects are financed.
3) Often considered by lenders to be of high risk.

46
Q

Q.47 Explain how short term finances can be collected with overdrafts.

A

A.47 Withdrawal of a sum of money that is greater than what the business has at hand from the bank.

47
Q

Q.46 What are the short term sources of external finance?

A

A.46
1) Overdrafts.
2) Trade receivables.
3) Delaying payment.
4) Debt factoring.

48
Q

Q.48 Explain how short term finances can be collected with trade receivables.

A

A.48 Supplier lending money for the cost of goods at an agreed period.

49
Q

Q.49 Explain how short term finances can be collected with debt factoring.

A

A.49 Selling trade receivables to another company for a discounted amount to provide the business with immediate cash.

50
Q

Q.50 What are the limitations of delaying payment in order to get short term external finances?

A

A.50
1) Discount offered from supplier may be lost.
2) Supplier may refuse to make further purchases.
3) If delayed payment occurs, supplier may want payment before delivery.

51
Q

Q.51 What are long term sources of external finance?

A

A.51
1) Bank loan.
2) Leasing.
3) Hire purchase.
4) Mortgage.
5) Debenture.
6) Issuing shares.

52
Q

Q.52 Explain how business gets long term external finance from a bank loan.

A

A.52 Amount borrowed is offered with fixed or variable rate of interest. This cannot be done by small businesses due to being seen as high risk by banks.

53
Q

Q.53 Explain how business gets long term external finance from leasing.

A

A.53 Business pays fixed amount over a set period of time and returned to original owner at the end of lease term.

54
Q

Q.54 Explain how business gets long term external finance from hire purchase.

A

A.54 Business will own the asset after all payments spread over time have been made and is responsible for maintenance while being used.

55
Q

Q.55 Explain how business gets long term external finance from Mortgage.

A

A.55 Used mainly for land of buildings. Interest is charged on amount borrowed.

56
Q

Q.56 Explain how business gets long term external finance from debenture.

A

A.56 Type of bond the business sells in order to raise large sums of money.

57
Q

Q.57 Explain how business gets long term external finance from issuing shares.

A

A.57 Capital is raised from the selling of shares and does not have to be repaid unless the business stops trading.

58
Q

Q.58 What are the alternate sources of capital?

A

A.58
1) Micro-finance.
2) Crowd-funding.

59
Q

Q.59 How does micro-finance help as a source of capital?

A

A.59 Small loans paid within 6 months or a year.

60
Q

Q.60 How does crowd funding help with capital?

A

A.60 Idea for a project published on the internet or social media along with details about amount of finance needed.

61
Q

Explain how delaying payment works as an external source of finance.

A

Delaying payment will allow a business to have more liquidated funds for longer time.

62
Q

Explain how overdrafts help as a short term source of external finance.

A

Withdrawal of a sum of money that is greater than what the business has at hand from the bank.

63
Q

Explain how debentures help as a source of long term finance?

A

Type of bond the business sells in order to raise large sums of money.

64
Q

What are the things a business can do with unwanted non-current assets to raise finances?

A

(1) Sales of unwanted assets.
(2) Sale and leaseback.

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