Financial Information and Decisions
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Questions and Answers

Which of the following is NOT an internal source of finance for a business?

  • Retained profit
  • Owners' capital
  • Sale of assets
  • Bank loan (correct)

    • Working capital is used for long-term investments like buying new machinery.

    False (B)

    What is the main advantage of using retained profit as a source of finance?

    No repayment or interest is required.

    A ______ is a table that predicts future cash inflows and outflows.

    <p>Cash flow forecast</p> Signup and view all the answers

    Match the following sources of finance with their descriptions:

    <p>Overdraft = Short-term loan from a bank, allowing withdrawals exceeding account balance Trade credit = Suppliers extending payment terms for purchases Leasing = Renting an asset instead of buying it Hire purchase = Buying an asset with installment payments Selling shares = Raising capital by selling ownership stakes in the company Government grants = Free money from the government, usually with conditions</p> Signup and view all the answers

    Which of the following is NOT a cause of cash flow problems?

    <p>Strong customer loyalty (A)</p> Signup and view all the answers

    Increasing sales is a way to reduce cash outflows.

    <p>False (B)</p> Signup and view all the answers

    What is the formula to calculate Gross Profit?

    <p>Revenue - Cost of Sales</p> Signup and view all the answers

    The ______ shows a business's financial position at a specific date.

    <p>Balance Sheet</p> Signup and view all the answers

    Match the following financial ratios with their respective categories:

    <p>Gross Profit Margin = Profitability Ratios Current Ratio = Liquidity Ratios Net Profit Margin = Profitability Ratios Debt-to-Equity Ratio = Solvency Ratios</p> Signup and view all the answers

    What is the ideal current ratio for a business?

    <p>1.5 - 2.0 (A)</p> Signup and view all the answers

    Income Statements are used to assess the profitability of a business.

    <p>True (A)</p> Signup and view all the answers

    What is a key benefit of analyzing financial ratios?

    <p>Assess business performance</p> Signup and view all the answers

    Flashcards

    Start-up capital

    Money needed to start a business.

    Working capital

    Money required for day-to-day operating expenses.

    Retained profit

    Profit reinvested in the business instead of paid out.

    Overdraft

    Bank allows withdrawal exceeding account balance.

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    Debt factoring

    Selling invoices to a factoring company for immediate cash.

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    Cash flow

    The movement of money in and out of a business.

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    Cash flow forecast

    A table predicting future cash inflows and outflows.

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    Government grants

    Free money from the government, usually with conditions.

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    Causes of Cash Flow Problems

    Factors like poor sales or high fixed costs that lead to cash shortages.

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    Solutions to Cash Flow Problems

    Strategies like securing loans and cutting expenses to improve cash flow.

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    Income Statement

    A financial document illustrating a business's profit or loss over time.

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    Revenue

    Total sales income generated by a business.

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    Gross Profit

    Total revenue minus cost of sales; measures profitability from sales.

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    Balance Sheet

    A snapshot of a business's financial position at a specific date.

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    Current Ratio

    A liquidity ratio measuring short-term financial stability, calculated as current assets over current liabilities.

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    Net Profit Margin

    A profitability ratio showing net profit as a percentage of revenue.

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    Study Notes

    Financial Information and Financial Decisions

    • Businesses need finance for start-up capital, day-to-day operating expenses, expansion, research and development, and to cover unforeseen events.

    Sources of Finance

    Internal Sources

    • Retained profit: Profit reinvested in the business instead of distributed to owners. This has no repayment or interest. It may not always be sufficient.
    • Sale of assets: Selling old equipment, vehicles, or land. This is a quick cash injection but may not always be possible.
    • Owners' capital: Owners investing their own money. This has no interest or repayment but it can be risky for owners.

    External Sources

    • Short-term sources (less than 1 year):
      • Overdraft: A bank allows the business to withdraw more money than in the account.

    Cash Flow Forecasting and Working Capital

    • Cash Flow: The movement of money into and out of a business.
      • Cash inflows: Money coming into the business (e.g., sales, loans, investment).
      • Cash outflows: Money leaving the business (e.g., wages, rent, raw materials).
    • Cash Flow Forecast: A table predicting future cash inflows and outflows to prevent shortages and help secure finance.

    Causes of Cash Flow Problems

    • Poor sales.
    • Customers taking too long to pay (late payments).
    • Over-investment in stock.
    • High fixed costs (e.g., rent, wages).

    Solutions to Cash Flow Problems

    • Increase cash inflows (encourage early customer payments, increase sales, secure short-term loans).
    • Reduce cash outflows (cut unnecessary expenses, delay payments to suppliers).

    Income Statements

    • Income Statement: A financial document showing a business's profit or loss over a period.
      • Revenue (Sales Revenue/Turnover): Total sales income.
      • Cost of Sales: Direct costs of producing goods/services sold.
      • Gross Profit: Revenue - Cost of Sales.
      • Expenses (Overheads): Indirect costs like rent, wages, and advertising.
      • Net Profit: Gross Profit - Expenses.

    Statement of Financial Position (Balance Sheet)

    • Balance Sheet: A financial statement showing a business's financial position at a specific date.
      • Assets: What the business owns.
        • Fixed Assets (Non-current): Long-term assets (e.g., land, buildings, machinery).
        • Current Assets: Short-term assets (e.g., cash, stock, accounts receivable).
      • Liabilities: What the business owes.
        • Current Liabilities: Short-term debts (e.g., overdrafts, accounts payable).
        • Non-current Liabilities: Long-term debts (e.g., loans, mortgages).
      • Capital/Equity:
        • Share Capital: Money invested by shareholders.
        • Retained Profit: Profits reinvested into the business.

    Analysis of Accounts

    • Financial Ratios: Used to assess business performance. Key ratios include profitability ratios (Gross Profit Margin, Net Profit Margin), and liquidity ratios (Current Ratio, Acid-test Ratio).
    • Profitability Ratios: Indicate how efficiently a business uses its resources to generate profit.
    • Liquidity Ratios: Indicate a business's ability to meet its short-term obligations.
    • Ratio Analysis: Used to compare performance over time, identify investment opportunities, and identify strengths/weaknesses.

    Other Information

    • Understand the difference between internal and external finance
    • Be able to interpret cash flow forecasts and balance sheets
    • Know how to calculate and interpret financial ratios
    • Be ready to apply knowledge to case studies in exams.

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    Related Documents

    IGCSE Business Studies Unit 5 Review PDF

    Description

    This quiz focuses on financial information and the various sources of finance needed for businesses. It covers internal and external financing options, as well as concepts like cash flow forecasting and working capital management. Test your understanding of these essential financial principles.

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