Unit 5

Question 1

Start-up capital

Answer 1

the capital needed by an entrepreneur
to set up a business. This includes capital equipment, premises, location.

Question 2

Working capital

Answer 2

the capital needed to pay for raw
materials, day-to-day running costs and credit of ered to
customers. In accounting terms working capital = current
assets – current liabilities.

Question 3

Capital expenditure

Answer 3

the purchase of assets that are
expected to last for more than one year, such as building
and machinery.

Question 4

Revenue expenditure

Answer 4

spending on all costs and assets
other than fixed assets and includes wages and salaries
and materials bought for stock.

Question 5

Liquidity

Answer 5

the ability of a firm to be able to pay its short-
term debts.

Question 6

Liquidation

Answer 6

when a firm ceases trading and its assets are
sold for cash to pay suppliers and other creditors.

Question 7

Overdraft

Answer 7

bank agrees to a business borrowing up to an
agreed limit as and when required.

Question 8

Factoring

Answer 8

selling of claims over trade receivables to a
debt factor in exchange for immediate liquidity – only a
proportion of the value of the debts will be received as cash.

Question 9

Hire purchase

Answer 9

an asset is sold to a company that agrees
to pay fixed repayments over an agreed time period – the
asset belongs to the company.

Question 10

Leasing

Answer 10

obtaining the use of equipment or vehicles and
paying a rental or leasing charge over a fixed period, this
avoids the need for the business to raise long-term capital
to buy the asset; ownership remains with the leasing
company.

Question 11

Equity finance

Answer 11

permanent finance raised by companies
through the sale of shares

Question 12

Long-term loans

Answer 12

loans that do not have to be repaid for
at least one year.

Question 13

Long-term bonds or debentures

Answer 13

bonds issued by
companies to raise debt finance, often with a fixed rate of
interest.

Question 14

Rights issue

Answer 14

existing shareholders are given the right to
buy additional shares at a discounted price.

Question 15

Venture capital

Answer 15

risk capital invested in business start-ups
or expanding small businesses that have good profit potential
but do not find it easy to gain finance from other sources.

Question 16

Crowd funding

Answer 16

the use of small amounts of capital from a
large number of individuals to finance a new business venture.

Question 17

Microfinance

Answer 17

providing financial services for poor and
low-income customers who do not have access to banking
services, such as loans and overdraf s of ered by traditional
commercial banks.

Question 18

Business plan

Answer 18

a detailed document giving evidence
about a new or existing business, and that aims to convince
external lenders and investors to extend finance to the
business.

Question 19

Direct costs

Answer 19

these costs can be clearly identified with each
unit of production and can be allocated to a cost center.

Question 20

Indirect costs

Answer 20

Costs that cannot be identified with a unit of production or allocated accurately to a cost center.

Question 21

Fixed costs

Answer 21

Costs that do not vary with output in the short run

Question 22

Variable costs

Answer 22

Costs that vary with output

Question 23

Marginal costs

Answer 23

the extra cost of producing one more
unit of output.

Question 24

Break-even point of production

Answer 24

the level of output at
which total costs equal total revenue, neither a profit nor a
loss is made.

Question 25

Margin of safety

Answer 25

the amount by which the sales level exceeds the break-even level of output.

Question 26

Break even equation

Answer 26

fixed cost / contribution per unit

Question 27

Contribution per unit

Answer 27

selling price minus the variable cost per unit.

Question 28

Income statement

Answer 28

records the revenue, costs and profit (or loss) of a business over a given period of time.

Question 29

Gross profit

Answer 29

sales revenue less cost of sales.

Question 30

Revenue

Answer 30

the total value of sales made during the trading period

Question 31

Cost of sales

Answer 31

this is the direct cost of the goods that were sold during the financial year.

Question 32

Operating profit

Answer 32

gross profit minus overhead expenses.

Question 33

Profit for the year

Answer 33

operating profit minus interest costs and corporation tax.

Question 34

Dividends

Answer 34

the share of the profits paid to shareholders as a return for investing in the company.

Question 35

Retained earnings (profit):

Answer 35

the profit after all deductions, including dividends, have been made, this is ‘ploughed back’ into the company as a source of finance.

Question 36

Low-quality profit

Answer 36

one-of profit that cannot easily be repeated or sustained.

Question 37

High-quality profit

Answer 37

profit that can be repeated and sustained.

Question 38

Statement of financial position (balance sheet)

Answer 38

an accounting statement that records the values of a business’s assets, liabilities and shareholders’ equity at one point in time.

Question 39

Shareholders’ equity

Answer 39

total value of assets – total value of liabilities.

Question 40

Asset

Answer 40

an item of monetary value that is owned by a business.

Question 41

Liability

Answer 41

a financial obligation of a business that it is required to pay in the future.

Question 42

Share capital

Answer 42

the total value of capital raised from shareholders by the issue of shares.

Question 43

Non-current assets

Answer 43

assets to be kept and used by the business for more than one year. Used to be referred to as ‘fixed assets’.

Question 44

Intangible assets

Answer 44

items of value that do not have a physical presence, such as patents, trademarks and current assets.

Question 45

Current assets

Answer 45

assets that are likely to be turned into cash before the next balance-sheet date.

Question 46

Inventories

Answer 46

stocks held by the business in the form of materials, work in progress and finished goods.

Question 47

Trade receivables (debtors)

Answer 47

the value of payments to be received from customers who have bought goods on credit.

Question 48

Current liabilities

Answer 48

debts of the business that will usually have to be paid within one year.

Question 49

Accounts payable (creditors)

Answer 49

value of debts for goods bought on credit payable to suppliers; also known as ‘trade payables’.

Question 50

Non-current liabilities

Answer 50

value of debts of the business that will be payable after more than one year.

Question 51

Intellectual capital or property

Answer 51

the amount by which the market value of a firm exceeds its tangible assets less liabilities – an intangible asset.

Question 52

Goodwill

Answer 52

arises when a business is valued at or sold for more than the balance-sheet value of its assets.

Question 53

Cash-flow statement

Answer 53

record of the cash received by a business over a period of time and the cash outflows from the business.

Question 54

Gross profit margin

Answer 54

This ratio compares gross profit (profit before deduction of overheads) with revenue. Formula: (gross profit/revenue) × 100

Question 55

Operating profit margin

Answer 55

This ratio compares operating profit (formerly this ratio was referred to as the net profit margin) revenue Formula: (Operating Profit/Revenue) x 100

Question 56

Current ratio

Answer 56

current assets/current liabilities

Question 57

Acid-test ratio

Answer 57

liquid assest/ current liabilities

Question 58

Liquid assets

Answer 58

current assets – inventories (stocks)

Question 59

Window-dressing

Answer 59

presenting the company accounts in a favorable light – to flatter the business performance.

Question 60

Cash flow

Answer 60

the sum of cash payments to a business (inflows) less the sum of cash payments (outflows).

Question 61

Insolvent

Answer 61

when a business cannot meet its short-term debts.

Question 62

Cash inflows

Answer 62

payments in cash received by a business, such as those from customers (trade receivables) or from the bank, e.g. receiving a loan.

Question 63

Cash outflows

Answer 63

payments in cash made by a business, such as those to suppliers and workers.

Question 64

Cash-flow forecast

Answer 64

estimate of a firm’s future cash inflows and outflows.

Question 65

Net monthly cash flow

Answer 65

estimated difference between monthly cash inflows and cash outflows.

Question 66

Opening cash balance

Answer 66

cash held by the business at the start of the month.

Question 67

Closing cash balance

Answer 67

cash held at the end of the month becomes next month’s opening balance.

Question 68

Credit control

Answer 68

monitoring of debts to ensure that credit periods are not exceeded.

Question 69

Bad debt

Answer 69

unpaid customers’ bills that are now very unlikely to ever be paid.

Question 70

Overtrading

Answer 70

expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow shortage develops.

Question 71

Creditors

Answer 71

suppliers who have agreed to supply products on credit and who have not yet been paid.