Edexcel IAL Business Unit 2 – Key
Definitions and Formulas
Internal finance - ANSWER...-Money generated from within the business (e.g. retained
profit, owner's capital).
External finance - ANSWER...-Money sourced from outside the business (e.g. loans,
overdrafts).
Owner's capital - ANSWER...-Personal savings invested by the business owner.
Retained profit - ANSWER...-Profit kept in the business after tax and dividends.
Sale of assets - ANSWER...-Selling business-owned items to raise finance.
Overdraft - ANSWER...-A flexible bank facility allowing a business to spend more than it
has in its account.
Loan - ANSWER...-A fixed amount borrowed from a lender to be repaid with interest
over time.
Share capital - ANSWER...-Money raised by issuing shares in the business.
Venture capital - ANSWER...-Investment from individuals or firms in exchange for equity
and involvement.
Crowdfunding - ANSWER...-Raising small amounts of money from a large number of
people, typically online.
Business angel - ANSWER...-Wealthy individuals who invest personal funds in
exchange for ownership and mentoring.
Leasing - ANSWER...-Renting equipment or property instead of buying it outright.
Trade credit - ANSWER...-Buying goods now and paying for them later.
Grant - ANSWER...-Non-repayable money given by the government or organisations.
Sales forecast - ANSWER...-Predicting future sales volume and revenue.
Consumer trends - ANSWER...-Habits or behaviours of consumers that impact demand.
, Economic variables - ANSWER...-External factors like inflation, exchange rates, and
interest rates that affect planning.
Extrapolation - ANSWER...-Using past data to predict future outcomes.
Revenue - ANSWER...-Income from selling goods or services (Price × Quantity).
Fixed costs - ANSWER...-Costs that do not change with output (e.g. rent).
Variable costs - ANSWER...-Costs that vary with output (e.g. raw materials).
Total costs - ANSWER...-Fixed costs + variable costs.
Contribution per unit - ANSWER...-Selling price minus variable cost per unit.
Break-even output - ANSWER...-The level of sales needed to cover total costs.
Margin of safety - ANSWER...-The amount by which actual sales exceed break-even
sales.
Budget - ANSWER...-A financial plan for expected income and spending.
Variance - ANSWER...-The difference between budgeted and actual figures.
Favourable variance - ANSWER...-When actual results are better than expected.
Adverse variance - ANSWER...-When actual results are worse than expected.
Gross profit - ANSWER...-Revenue minus cost of sales.
Operating profit - ANSWER...-Gross profit minus operating expenses.
Net profit - ANSWER...-Operating profit minus tax and interest.
Profit margin - ANSWER...-Profit as a percentage of revenue.
Liquidity - ANSWER...-A firm's ability to pay short-term debts.
Current ratio - ANSWER...-Current assets ÷ current liabilities.
Acid test ratio - ANSWER...-(Current assets - inventory) ÷ current liabilities.
Statement of financial position - ANSWER...-A snapshot of a firm's assets and liabilities
at a given time.
Definitions and Formulas
Internal finance - ANSWER...-Money generated from within the business (e.g. retained
profit, owner's capital).
External finance - ANSWER...-Money sourced from outside the business (e.g. loans,
overdrafts).
Owner's capital - ANSWER...-Personal savings invested by the business owner.
Retained profit - ANSWER...-Profit kept in the business after tax and dividends.
Sale of assets - ANSWER...-Selling business-owned items to raise finance.
Overdraft - ANSWER...-A flexible bank facility allowing a business to spend more than it
has in its account.
Loan - ANSWER...-A fixed amount borrowed from a lender to be repaid with interest
over time.
Share capital - ANSWER...-Money raised by issuing shares in the business.
Venture capital - ANSWER...-Investment from individuals or firms in exchange for equity
and involvement.
Crowdfunding - ANSWER...-Raising small amounts of money from a large number of
people, typically online.
Business angel - ANSWER...-Wealthy individuals who invest personal funds in
exchange for ownership and mentoring.
Leasing - ANSWER...-Renting equipment or property instead of buying it outright.
Trade credit - ANSWER...-Buying goods now and paying for them later.
Grant - ANSWER...-Non-repayable money given by the government or organisations.
Sales forecast - ANSWER...-Predicting future sales volume and revenue.
Consumer trends - ANSWER...-Habits or behaviours of consumers that impact demand.
, Economic variables - ANSWER...-External factors like inflation, exchange rates, and
interest rates that affect planning.
Extrapolation - ANSWER...-Using past data to predict future outcomes.
Revenue - ANSWER...-Income from selling goods or services (Price × Quantity).
Fixed costs - ANSWER...-Costs that do not change with output (e.g. rent).
Variable costs - ANSWER...-Costs that vary with output (e.g. raw materials).
Total costs - ANSWER...-Fixed costs + variable costs.
Contribution per unit - ANSWER...-Selling price minus variable cost per unit.
Break-even output - ANSWER...-The level of sales needed to cover total costs.
Margin of safety - ANSWER...-The amount by which actual sales exceed break-even
sales.
Budget - ANSWER...-A financial plan for expected income and spending.
Variance - ANSWER...-The difference between budgeted and actual figures.
Favourable variance - ANSWER...-When actual results are better than expected.
Adverse variance - ANSWER...-When actual results are worse than expected.
Gross profit - ANSWER...-Revenue minus cost of sales.
Operating profit - ANSWER...-Gross profit minus operating expenses.
Net profit - ANSWER...-Operating profit minus tax and interest.
Profit margin - ANSWER...-Profit as a percentage of revenue.
Liquidity - ANSWER...-A firm's ability to pay short-term debts.
Current ratio - ANSWER...-Current assets ÷ current liabilities.
Acid test ratio - ANSWER...-(Current assets - inventory) ÷ current liabilities.
Statement of financial position - ANSWER...-A snapshot of a firm's assets and liabilities
at a given time.
