Unit 3.1 Introduction to finance

Question 1

Define Finance

Answer 1

refers to the various available money that an organisation has to fund its business activities

Question 2

Define Capital expenditure

Answer 2

refers to business spending on non-current assets or capital equipment of a business.These are items of monetary value that have a long-term function for businesses, so can be used repeatedly.

Question 3

Reasons for capital expenditure in businesses(4)

Answer 3

-to add extra production capacity as the business grows
- to improve efficiency by utilising their latest technologies, including IT systems and production technologies
- to replace worn-out, damaged and/or obsolete (outdated) capital equipment and machinery
- to comply with changing legislation and regulations, such as green technologies

Question 4

Challenges of capital expenditure(3)

Answer 4

• High costs involved
• limited sources of finance available for such investments
• some investments are simply not feasible

Question 5

What is revenue expenditure

Answer 5

Revenue expenditure refers to finance spent on the daily operations of a business

Question 6

Characteristics of Revenue expenditure(7)

Answer 6

-Short-term tenure
-Does not add to the value of a firm’s -non-current assets
-Recurring (regular) expenditure
-Provides short-term benefits
-Includes low-cost expenditures
-Expenditure reflected in profit and loss account
-Does not improve operational efficiency

Question 7

Characteristics of Capital expenditure(7)

Answer 7

-Long-term tenure
-Adds to the value of a firm’s non-current assets
-Non-recurring (one-off) expenditure
-Provides long-term benefits
-Represents significant investments in the firm
-Expenditure reflected in the balance sheet
-Improves the firm’s operational efficiency