Finance Unit 3 HL/SL 3.1-3.4

Sources of Finance (3.1)
1. Capital Expenditure
  1. Money spent to acquire fixed assets in a Business
2. Revenue Expenditure
  1. Money used in a day to day running of the Business
3. Internal Sources of Finance
  1. Personal Funds
    1. A source of finance for sole traders that comes mostly from their own personal savings
  2. Retained Profit
    1. Profit that remains after a Business has paid corporation tax to the government and dividends to its shareholders
  3. Sales of Assets
    1. When a Business sells off its unwanted or unused assets to raise funds
4. External Sources of Finance
  1. Share Capital
    1. Money raised from the sale of shares of a limited company
  2. Loan Capital
    1. Money sourced from financial institutions such as banks with interest charged on the loan to be repaid
  3. Overdrafts
    1. When a lending institution allows a firm to withdraw more money than it currently has in its account
  4. Trade Credit
    1. An agreement between Businesses that allows the buyer of goods or services to pay the seller at a later date
  5. Grants
    1. Funds usually provided by a government, foundation, trust or other agency to Businesses that do not need to be repaid
  6. Subsidies
    1. Financial assistance granted by a government, a NGO, or an individual to support business enterprises that are in the public interest
  7. Debt Factoring
    1. A financial arrangement where the debt factor takes on the responsibility for collecting the debt owed to the Business and provides the Business with a percentage of the owed debt in cash
  8. Leasing
    1. A source of finance that allows a firm to use an asset with having to purchase it by cash
  9. Venture Capital
    1. Financial capital provided by investors to high-risk, high-potential start-up firms or small Businesses
  10. Business Angels
    1. Highly affluent individuals who provide financial capital to small start-up or entrepreneurs in return for ownership equity in their Businesses
5. Short term Finance
6. Medium Term Finance
7. Long Term Finance
8. Factors influences source of Finance
  1. Purpose or use of Funds
  2. Cost
  3. Status and Size
  4. Amount Required
  5. Flexibilty
  6. State of the External Environment
  7. Gearing
Cost and Revenues (3.2)
1. Types of Costs
  1. Fixed Assets
    1. Cost that do not change with the amount of goods or services provided
  2. Variable Cost
    1. Costs that change with the number of goods or services produced
  3. Semi-Variable Costs
    1. Costs comprising both fixed and variable components
  4. Direct Costs
    1. Costs that can be identified with the production of specific goods or services
  5. Indirect Costs
    1. Costs that are not clearly identified with the production of specific goods or services
  6. Revenue
    1. A measure of the money generated from the sale of goods and services
  7. Total Revenue
    1. The total amount of money a firm receives from the sale of goods or services, found by multiplying the price per unit by the number of units sold
Break-even Analysis (3.3)
1. Contribution
  1. Contribution per Unit
    1. The difference between the selling price per unit and variable cost per unit
    2. Contribution per Unit= Price per Unit -Variable cost per unit
  2. Total Contribution
    1. The difference between the total sales revenue and the total variable costs
    2. Total Contribution = Total Revenue - Total Variable Costs
    3. Total Contribution = Contribution per Unit X Number of Units Sold
  3. Profit
    1. Obtained by subtracting total fixed cost from the total contribution
    2. Profit = Total Contribution - Total fixed Costs
2. Break-even
  1. Break-even Chart
    1. A graphical method that measures the value of a firm's costs and revenues against a given level of output
  2. Margin of Safety
    1. Margin of Safety = Current Output - Break-even Output
    2. The output amount that exceeds the break-even quantity
  3. Calculating Break-even Quantity
    1. Break-even Quantity = Fixed Costs/ Contribution per Unit
    2. Total Revenue = Total Costs
    3. A measure of Output where total revenue equals total costs
  4. Profit/Loss
    1. Profit = Total Revenue - Total Costs
    2. The positive difference between Total Revenue and Total Costs
  5. Target Profit
    1. Target Profit Output
      1. The level of output that is needed to earn a specified amount of profit
      2. Target Profit Output = (Fixed Costs +Target Profit) / Contribution per Unit
  6. Break-even Revenue
    1. Break-even Revenue = (Fixed Costs / Contribution per Unit) X Price per Unit
Final Accounts (3.4)
1. Purpose of different Stakeholders
  1. Shareholders
  2. Managers
  3. Employees
  4. Customers
  5. Suppliers
  6. The Government
  7. Competitors
  8. Financiers
  9. The Local Community
2. The Main Final Accounts
  1. Profit and Loss Account
    1. Also known as the income statement, shows the records of income and expenditure flows of a Business over a given time period
    2. A) The Trading Account
      1. Gross Profit
        Found by deducting cost of goods sold from sales revenue
        Gross Profit = Sales Revenue - Cost of Sales (Or Goods Sold)
      2. Cost of Sales
        The direct cost of producing or purchasing the goods that were sold during that period
        Cost of Sales = Opening Stock + Purchases - Closing Stock
    3. B) The Profit and Loss Account
      1. Net Profit before Interest and Tax
        The difference between gross profit and expenses
        Net Profit before Interest and Tax = Gross Profit - Expenses
      2. Net Profit before Tax
        Found by subtracting Interest from the Net profit before Interest and Tax
        Net Profit before Tax = Net Profit before Interest and Tax - Interest
      3. Net Profit after Interest and Tax
        Equal to net profit before tax less tax
        Net Profit after Interest and Tax = Net Profit before tax - Corporation Tax
    4. C) The Appropriation Account
      1. Dividends
        A sum of money paid to shareholders decided by the board of directors of a company
      2. Retained Profit
        The amount of earnings left after Dividends and other deductions have been made
        Retained Profit = Net Profit after Interest and Tax - Dividends
  2. Balance Sheet
    1. A financial statement that outlines the assets, liabilities and equity of a firm at a specific point in time
    2. Assets
      1. Resources of value that a Business owns or that are owed to it
      2. Fixed Assets
        Long term assets; Buildings, Equipment, Vehicles, and Machinery
      3. Current Assets
        Short Term assets; Cash, Debtors, and Stock
    3. Liabilities
      1. A firm's legal debts or what it owes to other firms, institutions or individuals
      2. Long-Term
        Long-term debts; Bank Loans and Mortgages
      3. Current Liabilities
        Short Term; Creditors, Overdrafts, short term loans, tax
    4. Working Capital
      1. Also known as Net current assets, helps establish whether a firm can pay its day-to-day running costs
      2. Working Capital = Total Current Assets - Total Current Liabilities
    5. Total Assets less Current Liabilities
      1. Total Assets less Current Liabilities = Fixed Cost + Working Capital
    6. Net Assets
      1. Found by subtracting long-term liabilities from total assets less current liabilities. This is what the Business Owns on the Balance Sheet
    7. Equity
      1. Financed By
        Share Capital
        Retained Profit
      2. Also known as Shareholders' equity, shows how the net assets are financed using shareholders' capital and retained profit
      3. Equity = Retained Profit + Share Capital
      4. Equity = Net Assets
3. Intangible Assets
  1. Patents
    1. Provide inventors with the exclusive rights to manufacture, use, sell or control their invention of a product
  2. Goodwill
    1. The value of positive or favourable attributes that relate to the Business
  3. Copyright Laws
    1. Laws that provide creators with the exclusive right to protect the production and sale of their artistic or literary work
  4. Trademark
    1. A recognizable symbol, work, phrase or design that is officially registered and that identifies a product or Business
4. Depreciation (HL)
  1. The decrease in value of a fixed asset over time
  2. Straight Line Depreciation
    1. A method that spreads out the cost of an asset equally over its lifetime by deducting a given constant amount of depreciation of the asset's value per annum
    2. Annual Depreciation = ( Original Cost - Residual Value ) / Expected useful life of Asset
  3. Reducing Balance Method
    1. A method where a predetermined percentage depreciation rate is used and subtracted from the Net Book Value of the previous year
    2. Net Book value in Year 1 = Cost of Original asset - (Cost of original asset X Rate of Depreciation [%])
      1. Depreciation Rate=1-n√(Residual Value)/(Cost of Fixed Asset)
  4. Residual Value
    1. An estimation of an asset's worth or value over its useful life, also known as scrap or salvage value

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Finance Unit 3 HL/SL 3.1-3.4

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