Eduqas A-Level Business finance and accounting overview quiz quiz

Internal finance comes from within the business; external finance comes from outside

Internal finance always carries interest and must be repaid to outside lenders within a fixed term

External finance is generated by the owners and never has to be repaid to anyone at all

Internal and external finance are simply two names for the same single source of funds

Long-term finance is always cheaper than short-term finance, so it should sensibly be used for every kind of asset a firm buys

The matching principle: a long-lived asset should be funded over its life, not by short-term finance that could be recalled

Company law requires every non-current asset to be funded only by long-term borrowing or share capital

Short-term finance such as overdrafts cannot lawfully be used by limited companies to buy any assets

48

18

12

30

400 units

40,000 units

576,000 units

4,000 units

-3,000

2,000

8,000

44,000

Because of timing, for example customers paying late while the firm pays for stock up front

Because profit and cash are always exactly equal, so a profitable firm holds that profit as cash

Because a firm that records a profit on paper can never actually run short of cash to pay its bills

Because cash flow only ever matters to loss-making firms and is irrelevant once a firm is profitable

25%

40%

60%

250%

0.5

1.0

1.5

2.0

Short-term liquidity, found as current assets divided by current liabilities

Profit earned per unit sold, after variable and fixed costs are deducted

Long-term reliance on debt, as non-current liabilities over capital employed

The speed of stock turnover, measured as inventory divided by cost of sales

1.6 years

5 years

8 years

3.2 years

It accounts for the time value of money, discounting future cash flows to today's value

It is far easier and quicker to calculate than either payback or the accounting rate of return

It deliberately ignores the cost of capital, treating all future cash flows as worth the same today

It needs no forecasts of future cash flows, relying only on the project's initial outlay

Because profit does not matter to a start-up at all, only the number of customers it attracts early on

Because cash flow and profit are identical figures, so setting one objective automatically sets the other

Because a profitable firm can still run out of cash, so ensuring liquidity helps it survive day to day

Because company law requires every newly formed start-up to publish a formal cash-flow objective