Unit 2 Assessment - Finance Flashcards
Describe a short term source of Finance
Debt Factoring is a short term source of Finance which involves selling invoices to a debt Factoring company.
It can save time and money spent chasing unpaid invoices however the organisation does not receive the full amount of the invoice.
Describe a medium term source of Finance
Hire purchase is a medium term source of Finance which involves paying a deposit for items and the rest is paid in instalments.
Item can be received immediately without paying in full however interest could make the item expensive.
Describe a further medium term source of Finance
A bank loan is a medium term source of Finance, it involves borrowing a lump sum of money from a bank which is repaid in instalments with interest added.
It is repaid in fixed instalments which means it is easy to plan and budget however interest is paid on top of the capital borrowed.
Describe a long term source of Finance
A mortgage is a long term source of finance, it is a special type of loans used to purchase property and land.
There is a lower rate of interest than other bank loans however assets can be repossessed if having financial difficulties.
Purpose of the Income Statement
The purpose of preparing the income statement is to show how the business has performed over the period, it shows the profits and losses made in the last 12 months.
Define Sales Revenue
Income earned over a period of time from selling goods.
Define Gross Profit
Difference between sales value and the cost of sales and trading activities.
Define Profit for the Year
Amount of money left after all expenses have been deducted from the sales revenue received.
Purpose of the Statement of Financial Position
It shows the assets and liabilities at this point in time.
Define non-current assets
Last for more than one year, e.g buildings and equipment.
Define current assets
Will be used up within one year, e.g stock and cash.
Define current liabilities
Must be repaid within the year, e.g creditors and overdrafts.
Define working capital
Ability of the business to pay off it’s current liabilities with it’s current assets.
Profitability Ratio - Gross Profit
Formula + definition
GP ~ Sales X 100
Measures the profitability gained on the trading activities of the organisation (I.e difference between buying/selling goods)
Profitability Ratio - Profit For The Year
Formula + definition
PFY ~ Sales X 100
Measures profitability of organisation once all expenses have been deducted.
