UNIT 5 - Finance and accounting

Question 1

What are the 3 internal sources of finance?

Answer 1

• Selling of assets
• Profits retained
• Reductions in working capital

Question 2

2 ways of unincorporated business finance

Answer 2

• Microfinance
• crowd funding

Question 3

External sources of finance: Long term (2)

Answer 3

• long term bank loans
• debentures/bonds

Question 4

external sources of finance: medium term (2)

Answer 4

• Hire purchase
• Leasing

Question 5

External sources of finance: Short term (3)

Answer 5

• Trade credit
• Bank overdrafts
• debt factoring

Question 6

Other sources of long-term finance (2)

Answer 6

• grants
• Venture capital

Question 7

What is the break even equation?

Answer 7

fixed cost / contribution per unit (selling price - variable cost)

Question 8

What is the margin of safety?

Answer 8

The amount by which a company’s sales exceed the break-even level of output

Question 9

What are 5 causes of cash-flow problems?

Answer 9

• lack of planning
• Unexpected events
• Poor credit control
• allowing customers too long to pay debts
• expanding too rapidly

Question 10

What are the two profit margin ratios?

Answer 10

• Gross profit margin
• Operating profit margin

Question 11

What are the two liquidity ratios?

Answer 11

• Current ratio
• Acid-test ratio

Question 12

How do you calculate the gross profit margin?

Answer 12

Gross profit/revenue x 100

Question 13

How do you calculate the operating profit margin?

Answer 13

operating profit/revenue x 100

Question 14

How do you calculate a current ratio

Answer 14

Current assets / current liabilities

Question 15

How do you calculate an acid-test ratio?

Answer 15

(Current assets - inventories) / current liabilities

Question 16

What are some methods to increase profit margins?

Answer 16

• reducing direct costs with cheaper materials and wages
• Increasing prices (passing it onto a customer
• Reducing overheads (rent etc.)

Question 17

What are some ways to increase acid-test-ratio?

Answer 17

• Selling fixed assets
• selling inventories for cash
• Increase loans to increase working capital

Question 18

cash vs profit: What is cash?

Answer 18

• cash is king, it is responsible for the day-to-day workings of the business

Question 19

cash vs profit: what is profit?

Answer 19

• Profit is what is retained after all expenses are paid. It is the reward to the business

Question 19

cash vs profit: what is profit?

Answer 19

• Profit is what is retained after all expenses are paid. It is the reward to the business

Question 20

What do profit margin ratios tell us?

Answer 20

• Gross profit tells us how effectively managers have “added value” to cost of sales
• operating profit tells us how well management have converted revenue into profit

management

Question 21

What do liquidity ratios tell us?

Answer 21

• the ability of a firm to pay its short-term debts