Sources of Finance
What is an internal source of finance that comes from previous profits?
Retained profit
What type of cost stays the same regardless of output?
Fixed Cost
Which statement shows income and expenses over time?
Profit & Loss
Gross Profit Margin formula?
(Gross Profit ÷ Sales Revenue) × 100
What does the payback period measure?
How quickly an investment recovers its cost
What is a short-term external source of finance that allows temporary negative bank balance?
Overdraft
What is the formula for total revenue?
Selling price × Quantity sold
explain one difference between a profit and loss account and a balance sheet.
Profit and loss = performance over time; Balance sheet = position at a point in time.
Company A has a gross profit margin of 45%; Company B has 25%. Give one possible reason for this difference.
Company A may have lower cost of sales or higher selling prices (better efficiency or premium pricing).
Which investment method considers the time value of money?
Net Present Value (NPV)
Name one advantage of using trade credit.
Improves short-term cash flow / allows delay in payments
If a business sells 500 unit at $20 each, what is the total revenue?
500*200=10000
What is another name for the Balance Sheet?
Statement of Financial Position
Why might a business have a high gross profit margin but a low net profit margin?
High overhead or operating expenses reducing overall profitability.
If an investment costs £10,000 and generates £2,500 per year, what is the payback period?
4 years
Which source of finance involves selling shares in the company?
Share capital
A business sells 2,000 units at £15 each. Fixed costs are £5,000, and variable costs per unit are £7. Calculate the total profit.
Revenue = £30,000; Total cost = £5,000 + £14,000 = £19,000; Profit = £11,000
A business’s assets total £150,000 and liabilities total £90,000. What is the capital (owner’s equity)?
Assets – Liabilities = £60,000
Two firms have the same ROCE, but one has a much higher current ratio. What might this reveal about their efficiency?
The higher-liquidity firm may be less efficient, holding excess working capital despite similar profitability.
A project costs £30,000. It earns profits of £5,000, £6,000, and £9,000 over three years. Calculate the Average Rate of Return (ARR).
Average profit = (5,000 + 6,000 + 9,000) ÷ 3 = £6,667. ARR = (6,667 ÷ 30,000) × 100 = 22.2%
What is the main disadvantage of using a bank loan as a source of finance?
Interest must be paid
A business has fixed costs of £12,000 and a contribution per unit of £8. How many units must it sell to achieve a target profit of £4,000?
(Fixed costs + Target profit) ÷ Contribution = (£12,000 + £4,000) ÷ £8 = 2,000 units
A business’s total assets are £120,000. Its capital is £70,000, and long-term liabilities are £30,000. Calculate current liabilities.
Assets = Capital + Long-term liabilities + Current liabilities → £120,000 = £70,000 + £30,000 + X → X = £20,000
A business has current assets of £25,000 and current liabilities of £20,000. It uses £5,000 to pay off a short-term loan. How does this affect its current ratio?
Before = 25,000 ÷ 20,000 = 1.25:1; After = 20,000 ÷ 15,000 = 1.33:1 → liquidity improves slightly.
A project has cash inflows of £10,000 in Year 1, £12,000 in Year 2, and £15,000 in Year 3. The cost is £30,000. Calculate the payback period (in years and months).
After 2 years, £22,000 recovered; £8,000 left. Year 3 adds £15,000 → 8,000 ÷ 15,000 = 0.53 years ≈ 2 years 6 months