5.1: Business Finance
Name 2 internal sources of finance
Owners' funds, retained profit, working capital, sale of assets
What is cash inflow? Name one example.
Money coming into the business. EX: revenue, loans, share capital
What is the difference of gross profit and net profit? (simple explanation)
Gross profit: Profits only accounting cost of sales
Net profit: Profits after all costs has been paid
Which of these is not a current asset?
Cash, trade payable, inventory, money in the bank
Trade payables
Percentage of sales turned into net profit.
Profit/sales revenue x 100
Name one advantage of hire purchase as a source of finance.
April has an opening balance of $123,000 and a net cash flow of $21,500. What is the opening balance of May?
$123,000 + $21,500 = $144,500
How will using cheaper raw materials help improve the income statement of a business?
Reduces the cost of sales, and hence giving a larger net profit.
What are net assets?
Net assets are the total value of the sum of all of the business' assets.
How does an acid test ratio measure liquidity and why is it more accurate than the current ratio?
Current assets - inventory/current liabilities
It is more accurate as often times businesses does not sell its inventory and hence, technically, can't be measured as liquidity.
Which of these option(s) are not a factor that determines a business' choice of finance: owners' control, gearing, location of business, interest, type of business, amount of workers
Amount of workers, location of business
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What is the difference between an income statement and a cash flow forecast?
What is a net current asset, how can we calculate it and what's another name for it?
A business' short term liquidity, current assets - current liabilities, working capital
What figure do investors usually look at in order to decide if a business is a worthy investment candidate and why?
Return of Capital Employed (ROCE) as this shows how much profit the business was able to generate from its non-current liabilities and equity (potentially from investors/shareholders).
Why is franchising included as a source of finance?
CORRECT JUSTIFICATION:
Reduces the need for large sums of finance to establish and grow the business, as franchising allows the business to use an existing, already established brand to sell its products (after initial fees are paid).
What is the working capital cycle?
Cash -> Buy inventory -> Produce goods -> Sell to customers -> Back to cash.
What is the component (the name) that differentiates a sole trader's income statement and a PLC's income statement? What does it include and its overall function?
Appropriation account: operating profit -> profit before and after tax -> dividends and retained profit.
Shows how profits are allocated to different stakeholders and how much is retained back to the business.
Current assets: inventory, trade receivables, bank balance, cash
Non current liabilities: mortgage, loan payable, debenture
Current liabilities: overdraft, trade payables
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How is the factor of "availability of internal funds" affecting choice of finance connected with the income statement and cash flow of a business?
A business must decide whether or not they are able retain their profits back to the business: analyse its income statement to determine the initial amount of retained profit and dividends and how will increasing the retained profit make investors feel, and analyse the business cash flow to determine if their net cash flow will still be manageable by retaining profits.
What is the closing balance of June with the following conditions:
Opening balance: L L L L L L (...)
Revenue: $300k
Suppliers: $38k
Loan repayments: $92k
Stocks revenue: $150k
Wages: $107k
Opening balance: 0
Net cash flow: $450k - $237k = $213k
Closing balance: 0 + 213k = $213k
With the following requirements, determine how much of the business' profits it can retain? ($ in million)
- Revenue: $320 | Expenses/overheads: $70 | Cost of sales:$130
- Corporation tax of 20%
- The business decides to pay $33 in dividends
- A bank loan of $120, paid over the next 6 years (equal value paid each year)
Revenue: $320
Operating profit: $120
Profit after tax: 100 - 20 = $80
Dividends: $33
Retained profit: $47
Construct a statement of financial position, and by doing so, determine what is wrong.
IT: $70k
Trade receivables: $15k
Debentures: $120k
Inventory: $50k
Machinery: $80k
Shareholders' funds: $50k
Overdraft: $35k
The statement of financial position is not balanced.
Net assets:
($15k + $50k) - ($35k) + ($80k + $70k) = $180k
Capital employed:
$120k + $50k = $170k
Calculate the acid test ratio and determine whether the business should expand knowing this information.
Inventory: $20k
Cash: $45k
Trade receivables: $60k
Trade payables: $80k
Overdraft: $15k
Current assets - inventory/current liabilities
(125 - 20)/95 = 1.1 : 1
Theoretically, the business shouldn't expand as a good ratio is 1.2:1. However, the business is close to a good ratio and hence an argument can be made to expand it.