Financial Accounting 8.1

• Why is business finance essential for day-to-day operations?


  It ensures sufficient funds for ongoing expenses like salaries, utilities, and supplies
• Why is business finance important for long-term investments?


  It provides resources to fund large projects like new equipment, infrastructure, or research.
• How does business finance support growth and development?


  By enabling expansion, hiring, marketing, and entering new markets.
• What is the primary goal of budgeting in money management?


  To avoid overspending and allocate resources effectively.
• Why is monitoring cash flow important?


  It ensures financial stability by tracking income and expenses.
• How does money management prepare a business for emergencies or expansion?


  By ensuring funds are readily available when needed.
• What is business finance essential for?


  • Day to day operation
  • Long term investments
  • Growth and development
• What does money management involve?


  • Budgeting to avoid overspending
  • Monitoring cash flow for stability
  • Ensuring funds are available for emergencies or expansion
• What are assets in a business?


  Resources that generate revenue, e.g., a café’s espresso machine used to make drinks.
• What are liabilities in a business?


  Obligations the business must pay, e.g., a loan taken to purchase the espresso machine.
• What is solvency in business finance?


  The ability to meet long-term obligations, e.g., a firm with valuable assets can repay a 10-year loan.
• What is liquidity in business finance?


  The ability to meet short-term obligations, e.g., a business with £5,000 cash but an immediate £10,000 bill may struggle despite being solvent.
• What is capital income?


  long-term or large one-off funds.
• What is an example of Capital Income?


  A startup raises £500,000 from an investor to fund equipment purchases.
• What is revenue income?


  Revenue income refers to regular earnings from operations
• What is an example of revenue income?


  A bakery earning £1,000 daily from bread sales
• What is capital expenditure?


  spending on assets used over time.
• What is an example of capital expenditure?


  Purchasing delivery vans for £100,000.
• What is revenue expenditure?


  Revenue expenditure refers to daily operational costs.
• What is an example of revenue expenditure?


  Paying £200 for electricity and £500 for raw materials.
• Why is liquidity management important?


  Effective liquidity management helps avoid disruptions and ensures timely payments.
• What are the implications of liquidity levels?


  • High Liquidity: Ensures smooth operations.
  • Low Liquidity: May cause delayed payments or penalties.
• How do you calculate Net Current Assets?


  Subtract current liabilities from current assets.
• What is the formula for Net Current Assets?


  Net Current Assets = Current Assets - Current Liabilities
• What is Net Current Assets/Liabilities?


  The difference between current assets and current liabilities.
• What is liquidity?


  The ability of a business to meet its short-term financial obligations.
• How is straight line depreciation on non current assets spread?


  equally over the asset's useful life
• Example of Straight Line Depreciation


  A machine costing £10,000, with a lifespan of 5 years and no residual value, depreciates by £2,000 annually. The value of the machine reduces by £2,000 on the balance sheet each year.
• What are retained profits?


  Retained profits are profits kept within the business instead of being distributed.
• What are net current assets?


  Net current assets are surplus liquid resources used for funding.
• What is an example of net current assets?


  A manufacturer sells excess inventory to raise £10,000 for a short-term project.
• What is the sale of assets?


  The sale of assets involves selling unused property or equipment to generate funds.
• What is owner’s capital?

  Owner’s capital refers to personal funds contributed by the owner(s)
• What is a bank overdraft?


  A bank overdraft is borrowing short-term funds from a bank, usually with an interest charge.
• What is trade credit?


  Trade credit is when suppliers allow deferred payment for goods or services.
• What is hire purchase?


  Hire purchase is buying assets through installment payments over time.
• What is crowdfunding?


  Crowdfunding is raising funds online from many contributors.
• Who are venture capitalists and business angels?


  Venture capitalists and business angels are wealthy individuals or firms that invest in high-potential businesses.
• What are loans?


  Loans are money borrowed from a lender, typically with interest charges
• Why do businesses need sources of finance?


  • paying for expenses
  • expanding the business
  • investing in new products and services
  • starting a new business
  • paying for unforeseen costs