Grade 10
Chapter 10: Financial function of a business
Introduction:
The bottom line of any business is to earn a profit but there is a greater
emphasis on Triple bottom line reporting:
● People
● Planet
● Profit
Although the community and environment is important, nothing can be done
if there is no profit(revenue). Shareholders of a business are only interested in
the financial performance of the business and if its generating a ROI(return
on investment).
There are 2 basic financial statements:
The Income Statement AKA the Statement of Comprehensive Income
The Balance Sheet AKA the Statement of Financial Position.
Interpretation of the Income Statement and Balance Sheet:
What is the purpose of the Income Statement?
● To calculate the business’ annual Net Profit/ Loss.
● In Sole Traders/ Partnerships the owner/s must pay tax on behalf of the
business.
NET PROFIT= ALL INCOME -
ALL EXPENSES
What is the purpose of the Balance Sheet?
● To show all of the Assets, Liabilities and Owner’s Equity of the
business.
● It must balance:
ASSETS= OWNER’S EQUITY +
LIABILITY
Own vs. Borrowed Capital:
Own Capital:
● Sole Trader: 1 person contributes all the capital.
, ● Partnership: 2-20 people contribute capital & each partner gets a share
of the profit.
● Company: shares are sold to shareholders, who become owners and are
entitled to dividends.
Borrowed capital AKA Foreign Capital
Any money that the business borrows creates a Liability for the business and must be
repaid with Interest. Long- term capital is borrowed on the capital market and short-
term capital is borrowed on the money/ credit market.
Factors to consider when deciding between owned and Borrowed Capital:
The finance period and nature of the assets bought:
● If long-term finance is required preferably use OWN CAPITAL.
● When buying assets with an indefinite lifespan AKA Fixed assets
preferably use a LONG-TERM LOAN
● If the asset has a lifespan of at least 3 years, get a SHORT-TERM
LOAN that isn’t longer than 3 years.
Urgency:
● Obtaining a loan is a fast process in comparison to selling shares.
Especially if the money is needed urgently.
Control:
● Selling more shares allows new shareholders to have an opinion in the
management of the company and can vote at the AGM. (RISK)
● Banks and Creditors don't have a say.
Solvency:
SOLVENT= ASSETS> LIABILITIES
TAKING OUT LOAN JEOPARDISES THE SOLVENCY
Types of Capital: long- term vs Short term:
Long-term Capital AKA Fixed Capital:
The most common source of long-term capital is selling shares or long-term borrowed
capital loan from the bank.
Short-term Capital AKA Working Capital:
Forms of credit in the short-term:
An overdraft: when banks allow the account holder to take more money out of
the account than the person has.
Chapter 10: Financial function of a business
Introduction:
The bottom line of any business is to earn a profit but there is a greater
emphasis on Triple bottom line reporting:
● People
● Planet
● Profit
Although the community and environment is important, nothing can be done
if there is no profit(revenue). Shareholders of a business are only interested in
the financial performance of the business and if its generating a ROI(return
on investment).
There are 2 basic financial statements:
The Income Statement AKA the Statement of Comprehensive Income
The Balance Sheet AKA the Statement of Financial Position.
Interpretation of the Income Statement and Balance Sheet:
What is the purpose of the Income Statement?
● To calculate the business’ annual Net Profit/ Loss.
● In Sole Traders/ Partnerships the owner/s must pay tax on behalf of the
business.
NET PROFIT= ALL INCOME -
ALL EXPENSES
What is the purpose of the Balance Sheet?
● To show all of the Assets, Liabilities and Owner’s Equity of the
business.
● It must balance:
ASSETS= OWNER’S EQUITY +
LIABILITY
Own vs. Borrowed Capital:
Own Capital:
● Sole Trader: 1 person contributes all the capital.
, ● Partnership: 2-20 people contribute capital & each partner gets a share
of the profit.
● Company: shares are sold to shareholders, who become owners and are
entitled to dividends.
Borrowed capital AKA Foreign Capital
Any money that the business borrows creates a Liability for the business and must be
repaid with Interest. Long- term capital is borrowed on the capital market and short-
term capital is borrowed on the money/ credit market.
Factors to consider when deciding between owned and Borrowed Capital:
The finance period and nature of the assets bought:
● If long-term finance is required preferably use OWN CAPITAL.
● When buying assets with an indefinite lifespan AKA Fixed assets
preferably use a LONG-TERM LOAN
● If the asset has a lifespan of at least 3 years, get a SHORT-TERM
LOAN that isn’t longer than 3 years.
Urgency:
● Obtaining a loan is a fast process in comparison to selling shares.
Especially if the money is needed urgently.
Control:
● Selling more shares allows new shareholders to have an opinion in the
management of the company and can vote at the AGM. (RISK)
● Banks and Creditors don't have a say.
Solvency:
SOLVENT= ASSETS> LIABILITIES
TAKING OUT LOAN JEOPARDISES THE SOLVENCY
Types of Capital: long- term vs Short term:
Long-term Capital AKA Fixed Capital:
The most common source of long-term capital is selling shares or long-term borrowed
capital loan from the bank.
Short-term Capital AKA Working Capital:
Forms of credit in the short-term:
An overdraft: when banks allow the account holder to take more money out of
the account than the person has.
