Unit 3 Review - Finance (3.1-3.5 + 3.7)

Which of the following is an example of capital expenditure?  

• Paying wages

• Purchase of land

• Paying suppliers

• Utility bills

Answer explanation

There are two main categories of expenditure: capital expenditure and revenue expenditure. Capital expenditure is used to invest in fixed assets, for example, for the purchase of land or buildings, or for investment in machinery. On the other hand, revenue expenditure is used for the day-to-day running of a company, for example, to pay wages, suppliers and general for operational costs such as utility bills.

Identify the short-term source of finance that involves obtaining goods and services from a supplier and paying for them at a later date. 

• Share Capital

• Loan Capital

• Trade Credit

• Overdraft

A balance sheet is said to balance when:

• Assets = Liabilities

• Net Assets = Equity

• Retained Profit = Equity

• Assets = Profit

Working capital is:

• Current assets less current liabilities

• Fixed assets less current assets

• Current assets less long-term liabilities

• Equity

Answer explanation

Working capital refers to the money a business has to work with within a current ​​cycle – a 12-month period. It is calculated by subtracting the total current liabilities from the total current assets. What remains is the capital that a business has to work within a 12-month period. 

The cost of goods sold (COGS) formula is:

• Opening stock – closing stock

• Purchases + closing stock – sales

• Opening stock + closing stock – sales

• Opening stock + purchases – closing stock

Answer explanation

This is the direct cost of producing or purchasing the goods that were sold during the accounting period. 

Sales revenue minus cost of goods sold (or cost of sales) =

• Net Profit

• Retained Profit

• Gross Profit

• Dividends

Which of the following are examples of intangible assets?

• Patents, copyright, equity

• Patents, copyrights, brand

• Copyrights, brand, depreciation

• Brand, depreciation, equity

Which of the following is a strategy to increase gross profit? 

• Negotiate lower rent

• Reduce the use of office supplies

• Take measures to reduce utilities

• Negotiate lower prices from inventory suppliers

Answer explanation

In order to increase gross profit, a business could either increase revenue, for example through increasing prices, or reduce cost of goods sold, for example through negotiating lower prices from suppliers. Negotiating lower rent, reducing the use of office supplies, and reducing utilities will lower expenses and, therefore, increase profit. 

Ritzy Dance School Ltd has current assets to the value of £75 000 and current liabilities to the value of £50 000. Their inventory of dance wear is worth £5000. Which of the following is their acid test (quick) ratio result?  

• 1.4. : 1

• 1.5 : 1

• .67 : 1

• .71 : 1

Answer explanation

                Acid test (quick) ratio

= (£75 000 − £5000) ÷ £50 000

Carpets Co have an acid test ratio result of 0.8 and a current ratio result of 1.6. Which of the following is most likely to be true in this situation? 

• The company has too much cash in the bank.

• The company is holding too many inventories.

• The company is not holding enough inventories.

• The company’s trade receivables are refusing to pay.

Answer explanation

If a business like Carpets Co has a current ratio result of 1.6, this indicates that it has good liquidity and is likely to be able to pay for its current liabilities. However, its acid test ratio result indicates that it does not have good liquidity. As the acid test ratio does not include inventories as a current asset, this difference shows that Carpets Co holds too many inventories and has too few of the most liquid current assets – cash and trade receivables. It is unlikely that the company has too much cash in the bank, is not holding enough inventories, or that its trade receivables are refusing to pay.