Knowledge checks for Theme 2: Managing business activities
Internal finance knowledge check
1. What is the difference between revenue expenditure and capital expenditure?
Revenue expenditure- spending on business resources that have already been consumed or
will be shortly.
Capital expenditure- spending on business resources that can be used repeatedly over a
period.
2. Give three examples of capital expenditure a farmer might undertake.
A company vehicle, a cutting machine, and a new factory.
3. What is meant by capital?
Capital is the money provided by the owners in a business. It is an example of internal
finance.
4. State one advantage of using retained profit as a source of finance.
It is the cheapest source of finance, with no financial charges such as interest and
administration.
5. State two advantages of using the sale of assets to raise finance.
The established business may be able to sell some unwanted assets to raise finance.
The money can be spent to reward shareholders and expand the business overseas.
6. State two disadvantages of using internal finance.
Internal finance can be limited- a business may not be sufficiently profitable to use retained
profit or may not have unwanted assets to sell. Also, the current owners may not have any
personal resources to contribute.
Internal sources of finance are not tax-deductible. If external finance is used, the interest
paid on a loan or leasing charges for assets, for example, can be treated as a business cost
and offset against tax.
,External finance knowledge check
1. What is meant by external finance?
Money raised from outside the business.
2. What is the difference between crowd funding and peer-to-peer lending?
P2PL- where individuals lend to other individuals without prior knowledge of them, on the
internet.
Crowd funding- where many individuals (the crowd) invest in a business or project on the
internet, avoiding the use of a bank.
3. State two reasons why a business angel would invest in a business.
Many like the excitement of the risk involved or being part of a new or developing business.
Some are looking for investment opportunities for their unused income.
4. Bank overdrafts are flexible. What does this mean?
A bank overdraft means that a business can spend more money than it has in its account. In
other words, they go ‘overdrawn’. The bank and the business will agree on an overdraft limit
and interest is only charged when the account is overdrawn. The amount by which a
business goes overdrawn depends on tis needs at the time. This means that bank overdrafts
provide a flexible source of funding to businesses.
5. What is the main advantage of an unsecured bank loan for a business, when raising
finance?
Unsecure loans mean that the lender has no protection if the borrower fails to repay the
money owned. This means that the business has no obligation to pay the money back and
therefore can raise finance easily.
6. What is the difference between an ordinary share and a preference share?
Ordinary shares- These are called equities. They are the riskiest type of share since there is
no guaranteed dividend. All ordinary shareholders have voting rights.
Preference shares- The owners of these shares receive a fixed rate of return when a
dividend is declared. They carry less risk because shareholders are entitled to their dividend
before the holders of ordinary shares.
7. What is meant by a capital gain?
The profit made from selling a share for more than it was bought.
8. State two advantages of leasing as a method of finance.
No large sums of money are needed to buy the use of equipment.
Maintenance and repair costs are not the responsibility of the user.
9. How might a business use trade credit as a method of finance?
,Paying for goods and services using trade credit is an interest-free way of raising finance.
The business delaying payment to their suppliers means that they can use the money for
other business ventures.
10. What sort of businesses might venture capitalists look to interest in?
Typically, they invest in businesses after the initial start-up and often prefer technology
companies with high growth potential.
, Liability knowledge check
1. What is the difference between limited and unlimited liability?
Limited liability- a legal status that means shareholders can only lose the original amount
they invested in a business.
Unlimited liability- a legal status which means that business owners are liable for all
business debts.
2. State two implications of limited liability for a business.
If a limited company collapses, the owners’ private assets are fully protected
Investors are more willing to buy shares in limited companies because they precisely
know the extent of their liability
3. Why might a business with unlimited liability sometimes find it easier to raise
finance than one with limited liability?
This is because lenders will be reimbursed if a business default. Unlimited liability
businesses are often seen as more credible. This is because owners are encouraged to be
more cautious since their personal assets are at risk.
4. How is a limited liability business most likely to raise capital?
Share capital- The sale of shares allow limited companies to raise very large amounts
of capital. Share capital is provided by the owners of the business from their own
resources. Once shares are purchased, the money raised is not normally repaid to
shareholder, so the capital remains in the business for as long as it is trading.
Debentures- This loan capital can be very long term- up to 30 years.
Retained profit- Some very large companies have hundreds of millions of pounds in
cash reserves, which have accumulated over the years.
Venture capitalists- They invest larger amounts of finance than business angels and
have larger shares.
Business angels- They will normally take a share in the business, but this does not
mean they will avoid sole traders and partnership.
5. What is a rights issue?
Issuing new shares to existing shareholders at a discount.
6. Which sort of business is likely to issue debentures?
Public limited companies can raise large amounts of money by selling debentures.
7. What is undercapitalisation?
Undercapitalised- a business not raising enough capital when setting up.
Internal finance knowledge check
1. What is the difference between revenue expenditure and capital expenditure?
Revenue expenditure- spending on business resources that have already been consumed or
will be shortly.
Capital expenditure- spending on business resources that can be used repeatedly over a
period.
2. Give three examples of capital expenditure a farmer might undertake.
A company vehicle, a cutting machine, and a new factory.
3. What is meant by capital?
Capital is the money provided by the owners in a business. It is an example of internal
finance.
4. State one advantage of using retained profit as a source of finance.
It is the cheapest source of finance, with no financial charges such as interest and
administration.
5. State two advantages of using the sale of assets to raise finance.
The established business may be able to sell some unwanted assets to raise finance.
The money can be spent to reward shareholders and expand the business overseas.
6. State two disadvantages of using internal finance.
Internal finance can be limited- a business may not be sufficiently profitable to use retained
profit or may not have unwanted assets to sell. Also, the current owners may not have any
personal resources to contribute.
Internal sources of finance are not tax-deductible. If external finance is used, the interest
paid on a loan or leasing charges for assets, for example, can be treated as a business cost
and offset against tax.
,External finance knowledge check
1. What is meant by external finance?
Money raised from outside the business.
2. What is the difference between crowd funding and peer-to-peer lending?
P2PL- where individuals lend to other individuals without prior knowledge of them, on the
internet.
Crowd funding- where many individuals (the crowd) invest in a business or project on the
internet, avoiding the use of a bank.
3. State two reasons why a business angel would invest in a business.
Many like the excitement of the risk involved or being part of a new or developing business.
Some are looking for investment opportunities for their unused income.
4. Bank overdrafts are flexible. What does this mean?
A bank overdraft means that a business can spend more money than it has in its account. In
other words, they go ‘overdrawn’. The bank and the business will agree on an overdraft limit
and interest is only charged when the account is overdrawn. The amount by which a
business goes overdrawn depends on tis needs at the time. This means that bank overdrafts
provide a flexible source of funding to businesses.
5. What is the main advantage of an unsecured bank loan for a business, when raising
finance?
Unsecure loans mean that the lender has no protection if the borrower fails to repay the
money owned. This means that the business has no obligation to pay the money back and
therefore can raise finance easily.
6. What is the difference between an ordinary share and a preference share?
Ordinary shares- These are called equities. They are the riskiest type of share since there is
no guaranteed dividend. All ordinary shareholders have voting rights.
Preference shares- The owners of these shares receive a fixed rate of return when a
dividend is declared. They carry less risk because shareholders are entitled to their dividend
before the holders of ordinary shares.
7. What is meant by a capital gain?
The profit made from selling a share for more than it was bought.
8. State two advantages of leasing as a method of finance.
No large sums of money are needed to buy the use of equipment.
Maintenance and repair costs are not the responsibility of the user.
9. How might a business use trade credit as a method of finance?
,Paying for goods and services using trade credit is an interest-free way of raising finance.
The business delaying payment to their suppliers means that they can use the money for
other business ventures.
10. What sort of businesses might venture capitalists look to interest in?
Typically, they invest in businesses after the initial start-up and often prefer technology
companies with high growth potential.
, Liability knowledge check
1. What is the difference between limited and unlimited liability?
Limited liability- a legal status that means shareholders can only lose the original amount
they invested in a business.
Unlimited liability- a legal status which means that business owners are liable for all
business debts.
2. State two implications of limited liability for a business.
If a limited company collapses, the owners’ private assets are fully protected
Investors are more willing to buy shares in limited companies because they precisely
know the extent of their liability
3. Why might a business with unlimited liability sometimes find it easier to raise
finance than one with limited liability?
This is because lenders will be reimbursed if a business default. Unlimited liability
businesses are often seen as more credible. This is because owners are encouraged to be
more cautious since their personal assets are at risk.
4. How is a limited liability business most likely to raise capital?
Share capital- The sale of shares allow limited companies to raise very large amounts
of capital. Share capital is provided by the owners of the business from their own
resources. Once shares are purchased, the money raised is not normally repaid to
shareholder, so the capital remains in the business for as long as it is trading.
Debentures- This loan capital can be very long term- up to 30 years.
Retained profit- Some very large companies have hundreds of millions of pounds in
cash reserves, which have accumulated over the years.
Venture capitalists- They invest larger amounts of finance than business angels and
have larger shares.
Business angels- They will normally take a share in the business, but this does not
mean they will avoid sole traders and partnership.
5. What is a rights issue?
Issuing new shares to existing shareholders at a discount.
6. Which sort of business is likely to issue debentures?
Public limited companies can raise large amounts of money by selling debentures.
7. What is undercapitalisation?
Undercapitalised- a business not raising enough capital when setting up.
