Financial Information and Decisions Quiz
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Questions and Answers

What is the main purpose of Start-up Capital?

  • To cover day-to-day operating expenses.
  • To start a new business. (correct)
  • To invest in Research and Development (R&D).
  • To help expand the business.

    • Which of the following is NOT considered an Internal Source of Finance?

  • Owners' Capital
  • Retained Profit
  • Overdraft (correct)
  • Sale of Assets

    • What is a major advantage of Retained Profit as a source of finance?

  • It always provides sufficient funds.
  • It can be easily obtained.
  • It guarantees higher returns.
  • It does not require any repayment. (correct)

    • Which of these is NOT a benefit of Debt Factoring?

    <p>No loss of sales revenue. (D)</p> Signup and view all the answers

    Bank loans are typically considered a Long-term source of Finance.

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

    What is a significant drawback of Leasing?

    <p>It can be more expensive in the long run. (A)</p> Signup and view all the answers

    Government Grants are typically required to be repaid.

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

    What is NOT a cause of Cash Flow problems?

    <p>High sales revenue. (B)</p> Signup and view all the answers

    What is a primary benefit of a Cash Flow Forecast?

    <p>It prevents cash shortages and ensures financial stability. (B)</p> Signup and view all the answers

    What is the main purpose of an Income Statement?

    <p>To show the profit or loss over a specific period. (D)</p> Signup and view all the answers

    What are Current Liabilities?

    <p>Short-term debts like overdrafts and accounts payable. (C)</p> Signup and view all the answers

    Which of these is NOT a component of a Balance Sheet?

    <p>Cash Flow Forecast (C)</p> Signup and view all the answers

    What does the Acid-Test Ratio measure?

    <p>A company's immediate liquidity. (A)</p> Signup and view all the answers

    Financial ratios are used to analyze business performance and highlight strengths and weaknesses.

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

    What is the primary purpose of the Gross Profit Margin?

    <p>To show the percentage of revenue left after paying production costs. (B)</p> Signup and view all the answers

    Flashcards

    Start-up capital

    Money needed to start a business.

    Working capital

    Money used for day-to-day operating expenses.

    Expansion

    Funds required for growth, new equipment, and entering new markets.

    Research and Development (R&D)

    Investments in innovation and new product development.

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    Retained profit

    Profit reinvested back into the business instead of distributed.

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    Sale of assets

    Selling old equipment or property for quick cash.

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    Owners’ capital

    Money invested by owners in sole traders or partnerships.

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    Overdraft

    Bank allows withdrawal beyond account balance.

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    Trade credit

    Suppliers allow delayed payment to help cash flow.

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    Debt factoring

    Selling invoices to a factoring company for immediate cash.

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    Bank loans

    Borrowing from banks with fixed repayments and interest.

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    Leasing

    Renting assets instead of purchasing them outright.

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    Hire purchase

    Buying an asset via installment payments, full ownership after payment.

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    Selling shares (Equity finance)

    Raising money by selling ownership stakes in the company.

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    Government grants

    Free money from the government, often with conditions.

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    Cash flow

    The flow of money in and out of a business.

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    Cash inflows

    Money coming into the business, like sales and loans.

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    Cash outflows

    Money leaving the business for expenses.

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    Cash flow forecast

    Prediction of future cash inflows and outflows.

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    Causes of cash flow problems

    Factors leading to cash flow issues, such as poor sales.

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    Net Profit

    Total profit after all expenses are deducted.

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    Gross Profit

    Revenue minus the cost of sales.

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    Income Statement

    Financial document showing profit or loss over a given period.

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    Balance Sheet

    Financial statement showing a business’s position at a specific date.

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    Fixed Assets

    Long-term assets like land and buildings.

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    Current Assets

    Short-term assets like cash and inventory.

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    Current Liabilities

    Short-term debts payable within a year.

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    Non-current Liabilities

    Long-term debts such as loans or mortgages.

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    Liquidity Ratios

    Measures indicating short-term financial stability.

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    Gross Profit Margin

    Percentage of revenue left after production costs.

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    Net Profit Margin

    Percentage of net profit relative to revenue.

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    Profitability Ratios

    Ratios used to assess a business's profitability.

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    Acid-Test Ratio

    Measures immediate liquidity excluding inventory.

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    Expansion Finance

    Funding needed to grow a business.

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    Owner's Capital

    Investment made by business owners.

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    Forecast

    Predictions of future cash inflows and outflows.

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    Study Notes

    Financial Information and Financial Decisions

    • Businesses need finance for start-up capital (initial funds), working capital (daily expenses), expansion (growth), research & development (innovation), and emergencies.

    Sources of Finance (Internal)

    • Retained Profit: Profits reinvested in the business instead of distributed to owners. This method has no repayment or interest requirements. However, it may not be enough funding.
    • Sale of Assets: Selling existing equipment, vehicles, or land to quickly raise capital, but this isn't always feasible.
    • Owners' Capital: Sole traders and partnerships can use owner investments; no interest is owed but is risky for the owner.

    Sources of Finance (External)

    • Short-Term:
      • Overdraft: Allows a business to withdraw more money than in the account.

    Cash Flow

    • Definition: The movement of money into and out of a business.
    • Cash Inflows: Money coming in (sales revenue, loans, investment).
    • Cash Outflows: Money going out (wages, rent, raw materials).
    • Forecast: A table predicting future cash inflows and outflows. This helps prevent cash shortages and secure financing to plan for future expenses.

    Causes of Cash Flow Problems

    • Poor Sales: Low sales, resulting in less income flow.
    • Late Payments: Customers taking too long to pay.
    • High Fixed Costs: Significant expenses like rent or wages.

    Income Statement

    • Definition: A financial document illustrating a business's profit or loss over a specified timeframe.
    • Key Components: Revenue (sales), cost of sales (direct production costs), gross profit (difference between revenue and cost of sales), expenses (indirect costs), and net profit (overall profit after all expenses).

    Statement of Financial Position (Balance Sheet)

    • Definition: Shows a business's financial standing on a particular date.
    • Components:
      • Assets: What the business possesses: Fixed (long-term assets like land, buildings, machinery) and Current (short-term assets like cash, stock, and accounts receivable).
      • Liabilities: What the business owes: Current (short-term debts like overdrafts and accounts payable) and Non-current (long-term debts like loans, mortgages).
      • Capital/Equity: Money invested by shareholders and retained profits (profits reinvested in the business).

    Financial Ratio Analysis

    • Profitability Ratios: Determine a company's profitability, including gross profit margin (showing the profit based on revenue relative to costs) and net profit margin (overall profit after all expenses).
    • Liquidity Ratios: Assess a business's ability to meet short-term debts, such as the current ratio (comparing current assets and liabilities), and acid-test ratio (comparing current assets minus inventory with current liabilities).

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    Description

    This quiz covers critical aspects of financial information necessary for making informed business decisions. Topics include sources of finance, cash flow, and the importance of retained profits. Test your understanding of financial management and its implications for business success.

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