Unit 6: Finance

Which of the following costs is an example of a variable cost?

• Advertising

• Interest

• Packaging

• Rent

Answer explanation

Packaging is a variable cost because it changes with the level of production. Unlike fixed costs like rent and interest, variable costs fluctuate based on the quantity of goods produced.

Which source of finance could be given to a business to create jobs in areas of high unemployment?

• Government grant

• Mortgage

• Share issue

• Trade credit

Answer explanation

A government grant is a financial aid provided by the government to support businesses, especially in high unemployment areas, to create jobs. Unlike loans, grants do not need to be repaid, making them ideal for job creation.

Which of the following is the correct formula to calculate the margin of safety from a break-even chart?

• Break-even output + planned (or actual) output

• Break-even output / planned (or actual) output

• Planned (or actual) output – break-even output

• Planned (or actual) output – total costs

Answer explanation

The margin of safety is calculated by subtracting the break-even output from the planned (or actual) output. This shows how much sales can drop before reaching the break-even point, making 'Planned (or actual) output – break-even output' the correct formula.

Which of the following is an advantage of trade credit for a business?

• Access to supplies without having to pay immediately.

• Can raise money from equipment that is not being used.

• Money does not need to be paid back.

• Suppliers are responsible for repairs and maintenance.

Answer explanation

The correct choice, 'Access to supplies without having to pay immediately,' highlights a key advantage of trade credit, allowing businesses to manage cash flow effectively while obtaining necessary supplies.

Which of the following is a current liability?

• Cash at bank

• Money owed to suppliers

• Mortgage owed

• Property owned

Answer explanation

Money owed to suppliers is a current liability because it represents short-term obligations that need to be settled within a year. In contrast, cash, mortgages, and property are not classified as current liabilities.

Which of the following is an example of a cash inflow for a business?

• Bank loan repayment

• Raw materials costs

• Rent received

• Wages

Answer explanation

Rent received is a cash inflow as it represents money coming into the business. In contrast, bank loan repayment, raw materials costs, and wages are all cash outflows.

Which source of finance would be appropriate for a business wanting to avoid interest payments?

• Bank loan

• Mortgage

• Overdraft

• Retained profit

Answer explanation

Retained profit is the portion of profit not distributed as dividends, allowing a business to reinvest without incurring interest payments. In contrast, bank loans, mortgages, and overdrafts all involve interest costs.

Which section of a statement of financial position would include long-term loans?

• Current assets

• Current liabilities

• Non-current assets

• Non-current liabilities

Answer explanation

Long-term loans are classified as non-current liabilities on a statement of financial position, as they are obligations that are due beyond one year.

Which of the following is a definition of average rate of return?

• An estimate of the money coming into and going out of a business each month.

• The amount that the current level of production is greater than the expected level of output.

• The average profit for the year as a percentage of the original investment.

• The difference between average revenue and total costs.

Answer explanation

The average rate of return is defined as the average profit for the year as a percentage of the original investment, making this choice the correct definition.

Which source of finance is available to a limited company but not a sole trader?

• Bank loan

• Mortgage

• Overdraft

• Share issue

Answer explanation

A limited company can raise capital by issuing shares, which is not an option for a sole trader. Sole traders rely on personal funds and loans, while limited companies can attract investment through share issues.