Unit 3: Finance And Accounts Flashcards
3.1 what is capital expenditure?
It is the money spent on assets for a business, lasting over a year.
3.1 examples of capital expenditure
Machinery, land, vehicles, computers
They help business’s grow
3.1 what is revenue expenditure?
It is the money spent on daily business operations
3.1 examples of revenue expenditure
Raw materials, insurance, supplies, advertising, and fuel
It’s important for immediate functionality, but doesn’t lead to long-term assets
3.2 what is personal funds? (Internal)
It’s the capital provided by owners from their savings, personal property or retirement funds
(Sole traders commonly use this source of finance)
3.2 What are the advantages and disadvantages of personal funds?
Advantages:
- Maximize his control over the business
- No interest is paid and the money doesn’t have to be paid back
- Show commitment to the investors
Disadvantages:
- Huge risk for the entrepreneur
- Amount is usually limited
3.2 what is retained profit (internal)
It’s the money remaining in a business after all expenses, including tax and dividends to shareholders that have been paid
3.2 What are the advantages and disadvantages of retained profit?
Advantages:
- Cheapest and easiest to get
- Does not have to be used immediately
- No interest is paid
Disadvantages:
- Opportunity cost - money cannot be returned to the owners
- Not possible for a new business or struggling ones
- Eliminates emergency funds
3.2 what is sale of assets? (internal)
In the process of where an established business sells unwanted items, such as machinery, old stock, land, or buildings in order to raise funds for other projects or purposes
3.2 what is share capital (external)
It’s the money raised from the sale of the shares of a public or private limited company (also known as equity capital)
3.2 what are some advantages and disadvantages of share capital
Advantages:
- This is permanent finance and does not need to be repaid
- Cheaper than a loan
- Can raise large amounts of money
Disadvantages:
- Need to pay shareholders dividends
- Could lose some part of the ownership of the company
- Can only be done by public and private limited (private can only share to current shareholders)
3.2 what is a loan capital? (External)
It’s the money borrowed from financial intuitions like banks, with interest payments.
(When used for properties it’s called a mortgage)
3.2 what are some advantages and disadvantages of loan capital
Advantages:
- it can be arranged quickly
- owner still have full control
- Repayment is spread out overtime
- The exact amount needed can be borrowed
Disadvantages:
- interest is changed on the loan
- repayment must be made (even if the company isn’t making money)
- Some businesses might have a hard time getting a loan based on internal and external factors
3.2 what is an overdraft? (External)
It’s when a firm withdraws more money than it has with a pre-set limit.
3.2 what are the advantages and disadvantages of overdraft?
Advantages:
- it’s a very flexible source of finance
- good for short-term cash flow problems
- only pay interest on the amount of the overdraft
Disadvantage:
- must pay interest on the overdraft
- the bank can ask for the money back at short notice
- Normally high interest rates
3.2 what is trade credit
It’s an agreement between businesses where the buyer of goods or services is allowed to pay the seller at a later date (normally within 30-90 days)
