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Finance (AQA GCSE Business Studies Unit 2) (Profit and Loss Accounts (Cost…
Finance (AQA GCSE Business Studies Unit 2)
How Businesses Use Finance
Developing New Goods and Services
Large business develops new products regularly
Pay for scientific research
Market research
Advertising
Introduction new methods of production
New Technology
Train employees
To Pay for a Major Marketing Campaign
Have to raise a large sum for this if sales are dropping
Sources of Finance
Choosing a Suitable Source of Finance
Profitability of the Business
For Retained Profit
If they are doing well the bank is more likely to give them a loan
Assets Owned by the Business
Selling Assets
Easier to get a bank loan or a mortgage
Past history and Future Prospects
Expected to make a profit
Easier to get a bank loan
Good history of Paying Back Loans
Legal Structure of the Business
Only companies can sell shares
Far easier for plc's to sell shares than ltd's becuase they can sell shares on the stock exchange
Amount of finance that has to be raised
Large sum = more than one source of finance
Bank not prepared to lend a large sum
Selling lots of shares = huge loss of control
Retained Profits
(+) No interest payments
(+) Can be a large sum (80-90% of funds raise by large firms)
(-) Only available to successful firms who've made a profit
(-) Shareholders will be disappointed as less will be given to them in dividends
(+) Can be arranged immediately
Selling Assets
(+) No interest payments
(+) May keep assets (if leased back)
(-) Many businesses do not have suitable assets
(-) Leasing assets back means regular payments
Bank Loans and Mortgages
(+) Can be arranged quickly
(+) Allows repayment over a long period
(-) Interest has to be paid
(-) Banks may require an asset as collateral
Selling Shares
(+) No interest repayments
(-) Only available to companies
(-) The owners may lose control of the company
Why Businesses Prepare Financial Statements
The Law
Completing the accounts is a legal requirement under the Companies Acts
If a large company fails to complete these accounts they may
Be fined
Cease Trading
To Help the Business' Managers
Assist the managers in making decisions to improve the business's performance
To Guide Investors
Accounts provide a lot of information
Helps investors judge how safe the investment is and whether the investment will earn a profit
Profit and Loss Accounts
Profit and Loss Accounts
- a financial statement showing a business's revenues and costs and thus its profits or loss over a period of time.
Revenue - Cost of Sales (Variable Costs) =
Gross Profit
Revenue
- the income received by a business by selling its goods or services over the period covered by the profit and loss account
Cost of Sales
- Costs involved in directly supplying the good or services
Wages
Raw materials
Energy Costs
Overheads (Fixed Costs)
- costs that do not change when the level of production changes
Salaries of managers
Insurance costs
Interest on loans
Gross Profit - Overheads (Fixed Costs) =
Net Profit
Gross Profit Margin
= (Gross Profit x 100) /revenue
Net Profit Margin
= (Net Profit x 100) / revenue
Balance Sheets
Balance Sheets
- sets out the assets and liabilities that a business has on a particular day
Asset
- something that is owned by the business
Fixed (Non-current) Assets
- a business will normally keep this type of asset for many years. Fixed Assets create revenue for the business and help it to make money quickly. - Can't be turned into cah quickly
e.g. Shops
Vehichles
Current Asset
- a business can turn this into cash quickly. - These are the assets that the business only expects to have for a short-time (normally less than one year)
e.g. cash
stocks of raw materials
Used by the business to settle debts such as paying for raw materials
Liability
- sum of money that owed by a business to another business or an individual
Current Liabilities
- debts that the business will pay back within a year.
e.g. money owed to suppliers
Tax
Long-term (Non-current) Liabilities
- debts that will be paid back over many years
e.g. Loans
Mortgages
Total equity
- If a company stops trading and sells all of its fixed and current assets and pays back its liabilities, the money left remaining is called the Total Equity and belongs to shareholders
Net Assets = Total Equity
Acid Test Ratio
= (current asset - inventory (Stock))/Current Liabilities
Current Ratio
= Current Assets / Current Liabilities