Unit 5: Financial Information and Decisions

Question 1

start-up capital

Answer 1

the finance needed to launch a new business

Question 2

working capital

Answer 2

the finance needed. y a business to pay its day-to-day costs

Question 3

capital expenditure

Answer 3

money spent on fixed assets that will last for more than a year

Question 4

revenue expenditure

Answer 4

money spent on day-to-day expenses (excluding the purchase of long-term assets)

Question 5

internal finance + examples

Answer 5

finance obtained from within the business itself

• retained profit
• sale of existing assets
• sale of inventory
• owner’s savings

Question 6

external finance+ examples

Answer 6

finance obtained from sources outside of and separate to the business

• selling shares
• bank loans
• grants and subsidies (from government)
• factoring debts

Question 7

short-term finance + examples

Answer 7

the working capital needed for a business to cover its day-to-day expenses

• overdrafts (when a bank allows a business to take out more money than they have in their account)
• trade credit (when a business delays paying its suppliers)
• factoring debts

Question 8

long-term finance + examples

Answer 8

the finance which is available for more than a year

• bank loans
• hire purchase (when a business pays for a fixed asset in monthly installments)
• leasing
• selling shares

Question 9

microfinance

Answer 9

the financial services provided to low-income individuals or groups who are typically excluded from traditional banking. Most microfinance institutions focus on offering credit in the form of small working capital loans

Question 10

crowd-funding

Answer 10

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

Question 11

what are the main factors considered when making financial choices?

Answer 11

amount required, period of time required, size of business, etc.

Question 12

why is cash important to a business?

Answer 12

because cash is a liquid asset, which means that it is immediately available for spending

Question 13

cash flow

Answer 13

the cash inflows and outflows of a business over a period of time

Question 14

cash inflow

Answer 14

the cash that goes into the business

Question 15

cash outflow

Answer 15

the cash that goes out of the business

Question 16

how is a profit made

Answer 16

when the sales revenue is higher than the cost of making the products

Question 17

why is profit important in the private sector?

Answer 17

reward for enterprise, reward for risk, source of finance, indicator of success

Question 18

profit (also known as net profit) formula

Answer 18

sales revenue – cost of making products

Question 19

what is gross profit + formula

Answer 19

the profit calculated before fixed costs are considered

gross profit = sales revenue – cost of goods sold

Question 20

sales revenue

Answer 20

total sales

Question 21

what is retained profit + formula

Answer 21

the profit left after all the payments have been deducted

net profit – tax and dividends

Question 22

assets

Answer 22

items of value which are owned by the business

Question 23

liabilities

Answer 23

debts owed by the business

Question 24

non-current assets

Answer 24

items owned by the business for more than a year

Question 25

current assets

Answer 25

items owned by a business and used within a year

Question 26

non-current liabilities

Answer 26

long-term debts owed by the business

Question 27

current liabilities

Answer 27

short-term debts owed by the business

Question 28

what is profitability?

Answer 28

the degree to which a business or activity yields profit or financial gain.

Question 29

what is liquidity?

Answer 29

the ability of a business to pay back its short-term debts

Question 30

gross profit margin formula + interpretation

Answer 30

(gross profit / sales revenue) x 100

The higher it is, the better.

Question 31

profit margin formula + interpretation

Answer 31

(net profit / sales revenue) x 100

The higher it is, the better

Question 32

return on capital employed formula + interpretation

Answer 32

(net profit / capital employed) x 100

The higher it is, the better the profitability of the business

Question 33

current ratio formula + interpretation

Answer 33

current assets / current liabilities

the higher the current ratio the better (a value above 1 is favourable)

Question 34

acid test ratio formula + interpretation

Answer 34

(current assets – inventories) / current liabilities

the higher the current ratio the better (a value above 1 is favourable)

Question 35

who uses financial accounts and why?

Answer 35

managers use them to make decisions and to control the operations of a business, shareholders, creditors, and government use them to check on the company’s performance, other companies use them to compare performances