Finance Unit 3 HL/SL 3.1-3.4

Finance Unit 3 HL/SL 3.1-3.4

1. Sources of Finance (3.1)

   • Capital Expenditure
     • Money spent to acquire fixed assets in a Business
   • Revenue Expenditure
     • Money used in a day to day running of the Business
   • Internal Sources of Finance
     • Personal Funds
       • A source of finance for sole traders that comes mostly from their own personal savings
     • Retained Profit
       • Profit that remains after a Business has paid corporation tax to the government and dividends to its shareholders
     • Sales of Assets
       • When a Business sells off its unwanted or unused assets to raise funds
   • External Sources of Finance
     • Share Capital
       • Money raised from the sale of shares of a limited company
     • Loan Capital
       • Money sourced from financial institutions such as banks with interest charged on the loan to be repaid
     • Overdrafts
       • When a lending institution allows a firm to withdraw more money than it currently has in its account
     • Trade Credit
       • An agreement between Businesses that allows the buyer of goods or services to pay the seller at a later date
     • Grants
       • Funds usually provided by a government, foundation, trust or other agency to Businesses that do not need to be repaid
     • Subsidies
       • Financial assistance granted by a government, a NGO, or an individual to support business enterprises that are in the public interest
     • Debt Factoring
       • 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
     • Leasing
       • A source of finance that allows a firm to use an asset with having to purchase it by cash
     • Venture Capital
       • Financial capital provided by investors to high-risk, high-potential start-up firms or small Businesses
     • Business Angels
       • Highly affluent individuals who provide financial capital to small start-up or entrepreneurs in return for ownership equity in their Businesses
   • Short term Finance
   • Medium Term Finance
   • Long Term Finance
   • Factors influences source of Finance
     • Purpose or use of Funds
     • Cost
     • Status and Size
     • Amount Required
     • Flexibilty
     • State of the External Environment
     • Gearing

2. Cost and Revenues (3.2)

   • Types of Costs
     • Fixed Assets
       • Cost that do not change with the amount of goods or services provided
     • Variable Cost
       • Costs that change with the number of goods or services produced
     • Semi-Variable Costs
       • Costs comprising both fixed and variable components
     • Direct Costs
       • Costs that can be identified with the production of specific goods or services
     • Indirect Costs
       • Costs that are not clearly identified with the production of specific goods or services
     • Revenue
       • A measure of the money generated from the sale of goods and services
     • Total Revenue
       • 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

3. Break-even Analysis (3.3)

   • Contribution
     • Contribution per Unit
       • The difference between the selling price per unit and variable cost per unit
       • Contribution per Unit= Price per Unit -Variable cost per unit
     • Total Contribution
       • The difference between the total sales revenue and the total variable costs
       • Total Contribution = Total Revenue - Total Variable Costs
       • Total Contribution = Contribution per Unit X Number of Units Sold
     • Profit
       • Obtained by subtracting total fixed cost from the total contribution
       • Profit = Total Contribution - Total fixed Costs
   • Break-even
     • Break-even Chart
       • A graphical method that measures the value of a firm's costs and revenues against a given level of output
     • Margin of Safety
       • Margin of Safety = Current Output - Break-even Output
       • The output amount that exceeds the break-even quantity
     • Calculating Break-even Quantity
       • Break-even Quantity = Fixed Costs/ Contribution per Unit
       • Total Revenue = Total Costs
       • A measure of Output where total revenue equals total costs
     • Profit/Loss
       • Profit = Total Revenue - Total Costs
       • The positive difference between Total Revenue and Total Costs
     • Target Profit
       • Target Profit Output
         • The level of output that is needed to earn a specified amount of profit
         • Target Profit Output = (Fixed Costs +Target Profit) / Contribution per Unit
     • Break-even Revenue
       • Break-even Revenue = (Fixed Costs / Contribution per Unit) X Price per Unit

4. Final Accounts (3.4)

   • Purpose of different Stakeholders
     • Shareholders
     • Managers
     • Employees
     • Customers
     • Suppliers
     • The Government
     • Competitors
     • Financiers
     • The Local Community
   • The Main Final Accounts
     • Profit and Loss Account
       • Also known as the income statement, shows the records of income and expenditure flows of a Business over a given time period
       • A) The Trading Account
         • Gross Profit
           • Found by deducting cost of goods sold from sales revenue
           • Gross Profit = Sales Revenue - Cost of Sales (Or Goods Sold)
         • 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
       • B) The Profit and Loss Account
         • Net Profit before Interest and Tax
           • The difference between gross profit and expenses
           • Net Profit before Interest and Tax = Gross Profit - Expenses
         • 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
         • 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
       • C) The Appropriation Account
         • Dividends
           • A sum of money paid to shareholders decided by the board of directors of a company
         • Retained Profit
           • The amount of earnings left after Dividends and other deductions have been made
           • Retained Profit = Net Profit after Interest and Tax - Dividends
     • Balance Sheet
       • A financial statement that outlines the assets, liabilities and equity of a firm at a specific point in time
       • Assets
         • Resources of value that a Business owns or that are owed to it
         • Fixed Assets
           • Long term assets; Buildings, Equipment, Vehicles, and Machinery
         • Current Assets
           • Short Term assets; Cash, Debtors, and Stock
       • Liabilities
         • A firm's legal debts or what it owes to other firms, institutions or individuals
         • Long-Term
           • Long-term debts; Bank Loans and Mortgages
         • Current Liabilities
           • Short Term; Creditors, Overdrafts, short term loans, tax
       • Working Capital
         • Also known as Net current assets, helps establish whether a firm can pay its day-to-day running costs
         • Working Capital = Total Current Assets - Total Current Liabilities
       • Total Assets less Current Liabilities
         • Total Assets less Current Liabilities = Fixed Cost + Working Capital
       • Net Assets
         • Found by subtracting long-term liabilities from total assets less current liabilities. This is what the Business Owns on the Balance Sheet
       • Equity
         • Financed By
           • Share Capital
           • Retained Profit
         • Also known as Shareholders' equity, shows how the net assets are financed using shareholders' capital and retained profit
         • Equity = Retained Profit + Share Capital
         • Equity = Net Assets
   • Intangible Assets
     • Patents
       • Provide inventors with the exclusive rights to manufacture, use, sell or control their invention of a product
     • Goodwill
       • The value of positive or favourable attributes that relate to the Business
     • Copyright Laws
       • Laws that provide creators with the exclusive right to protect the production and sale of their artistic or literary work
     • Trademark
       • A recognizable symbol, work, phrase or design that is officially registered and that identifies a product or Business
   • Depreciation (HL)
     • The decrease in value of a fixed asset over time
     • Straight Line Depreciation
       • 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
       • Annual Depreciation = ( Original Cost - Residual Value ) / Expected useful life of Asset
     • Reducing Balance Method
       • A method where a predetermined percentage depreciation rate is used and subtracted from the Net Book Value of the previous year
       • Net Book value in Year 1 = Cost of Original asset - (Cost of original asset X Rate of Depreciation [%])
         • Depreciation Rate=1-n√(Residual Value)/(Cost of Fixed Asset)
     • Residual Value
       • An estimation of an asset's worth or value over its useful life, also known as scrap or salvage value