Edexcel A Level Business - Theme 2 Key
Concepts Explained
1. Capital:
Question: Define the term 'capital' in the context of business finance.
Explain the fundamental role of capital for a newly established business.
Answer: Capital refers to the money or assets provided by the owners to
start and operate a business. For a new business, it is crucial for funding
initial investments in assets (e.g., equipment, premises), covering start-up
costs (e.g., marketing, legal fees), and providing working capital for day-to-
day operations until revenue streams become consistent.
2. Capital Expenditure:
Question: What is meant by 'capital expenditure'? Provide three distinct
examples of capital expenditure and explain why these are considered long-
term investments.
Answer: Capital expenditure is spending by a business on resources that are
expected to be used repeatedly over a period of more than one year.
Examples include purchasing machinery, constructing a new factory
building, and acquiring vehicles. These are long-term investments because
they provide the business with assets that will contribute to its productive
capacity and generate revenue over several years.
3. Internal Finance:
Question: Explain the concept of 'internal finance'. Discuss two advantages
and one disadvantage of relying primarily on internal sources of finance.
Answer: Internal finance refers to money generated from within the
business itself or from its current owners. Advantages include no interest
charges and the owners retaining control of the business. A potential
disadvantage is that the amount of internal finance available may be limited,
potentially restricting growth opportunities.
4. Retained Profit:
Question: Define 'retained profit'. How can a business effectively utilize
retained profits to support its long-term objectives?
, Answer: Retained profit is the profit a business has made after paying taxes
and dividends to shareholders, which is then reinvested back into the
business. It can be used for various long-term objectives such as funding
expansion projects, purchasing new equipment, investing in research and
development, or strengthening the business's financial reserves.
5. Revenue Expenditure:
Question: What is 'revenue expenditure'? Differentiate between revenue
expenditure and capital expenditure by providing examples of each and
explaining their impact on a business's financial statements.
Answer: Revenue expenditure is spending on business resources that have
already been consumed or will be consumed very shortly, typically within
one year. Examples include raw materials, wages, and utility bills. Unlike
capital expenditure (recorded as assets on the balance sheet), revenue
expenditure is recorded as an expense on the income statement, directly
impacting the business's profitability for a specific period.
6. Sale and Leaseback:
Question: Describe the financial strategy of 'sale and leaseback'. What are
the potential benefits and drawbacks for a business engaging in this practice?
Answer: Sale and leaseback involves a business selling an asset it owns
(e.g., property) to another party and then leasing the same asset back from
the buyer. Benefits can include freeing up capital for other investments and
potential tax advantages. Drawbacks include the loss of ownership of the
asset and the ongoing lease payments.
7. Authorised Share Capital:
Question: Explain the meaning of 'authorised share capital'. Why is it
important for a company to define this limit?
Answer: Authorised share capital is the maximum number of shares that a
company is legally permitted to issue. Defining this limit in the company's
memorandum of association provides flexibility for future fundraising while
also setting a boundary that requires shareholder approval to exceed.
8. Bank Overdraft:
, Question: What is a 'bank overdraft'? Under what circumstances might a
business utilize an overdraft, and what are the key features a business should
consider before agreeing to one?
Answer: A bank overdraft is a short-term borrowing facility where a bank
allows a business to spend more money than it has in its account, up to an
agreed limit. Businesses might use it to manage temporary cash flow
shortfalls. Key features to consider include the overdraft limit, the interest
rate charged on overdrawn amounts, and any associated fees.
9. Capital Gain:
Question: Define 'capital gain' in the context of business ownership. How
does a capital gain differ from other forms of income a shareholder might
receive?
Answer: Capital gain is the profit made when an asset, such as a share, is
sold for a higher price than it was originally purchased for. Unlike dividends
(which are distributions of company profits), capital gain is realized only
when the shareholder sells their shares.
10. Crowd Funding:
Question: Explain the concept of 'crowd funding' as a source of finance.
What are the advantages and disadvantages of using crowd funding
compared to traditional bank loans?
Answer: Crowd funding involves raising finance from a large number of
individuals, typically through online platforms, who invest relatively small
amounts. Advantages can include access to a large pool of potential
investors and marketing benefits. Disadvantages may include the time and
effort required for campaigns and the potential for public scrutiny.
11. Debenture:
Question: What is a 'debenture'? How does it function as a source of long-
term finance for a business, and what are the typical obligations of the
issuing company?
Answer: A debenture is a long-term loan issued by a company to raise
finance. It represents a debt owed by the company to the debenture holders,
who are entitled to receive regular interest payments and the repayment of
the principal amount on a specified date. The issuing company is obligated
to meet these payment terms.
, 12. Equities:
Question: Explain why 'equities' is another term for an ordinary share. What
fundamental right does holding an equity typically confer upon an investor
in a limited company?
Answer: 'Equities' refers to ordinary shares because these shares represent
ownership equity in a company. Holding an equity typically confers upon
the investor the right to vote on key company decisions at shareholder
meetings and the right to receive a share of the company's profits in the form
of dividends, if declared.
13. External Finance:
Question: Define 'external finance'. Provide three distinct examples of
external sources of finance available to a business and briefly outline the key
characteristics of each.
Answer: External finance refers to money raised for a business from sources
outside of the company and its current owners. Examples include bank loans
(borrowed funds with interest), issuing new shares (selling ownership
stakes), and government grants (non-repayable funds for specific purposes).
14. Issued Share Capital:
Question: What is 'issued share capital'? How does it differ from authorised
share capital, and what does it represent on a company's statement of
financial position?
Answer: Issued share capital is the portion of the authorised share capital
that a company has actually sold to investors. It represents the total value of
shares currently held by shareholders and is recorded as part of shareholders'
equity on the statement of financial position. Authorised share capital is the
maximum limit, while issued share capital is the amount currently in
circulation.
15. Lease:
Question: Describe a 'lease' as a method of acquiring the use of business
resources. What are the potential advantages and disadvantages for a
business choosing to lease an asset rather than purchase it outright?
Answer: A lease is a contractual agreement where one party (the lessor)
grants another party (the lessee) the right to use an asset (e.g., property,
equipment) for a specified period in exchange for regular payments.
Concepts Explained
1. Capital:
Question: Define the term 'capital' in the context of business finance.
Explain the fundamental role of capital for a newly established business.
Answer: Capital refers to the money or assets provided by the owners to
start and operate a business. For a new business, it is crucial for funding
initial investments in assets (e.g., equipment, premises), covering start-up
costs (e.g., marketing, legal fees), and providing working capital for day-to-
day operations until revenue streams become consistent.
2. Capital Expenditure:
Question: What is meant by 'capital expenditure'? Provide three distinct
examples of capital expenditure and explain why these are considered long-
term investments.
Answer: Capital expenditure is spending by a business on resources that are
expected to be used repeatedly over a period of more than one year.
Examples include purchasing machinery, constructing a new factory
building, and acquiring vehicles. These are long-term investments because
they provide the business with assets that will contribute to its productive
capacity and generate revenue over several years.
3. Internal Finance:
Question: Explain the concept of 'internal finance'. Discuss two advantages
and one disadvantage of relying primarily on internal sources of finance.
Answer: Internal finance refers to money generated from within the
business itself or from its current owners. Advantages include no interest
charges and the owners retaining control of the business. A potential
disadvantage is that the amount of internal finance available may be limited,
potentially restricting growth opportunities.
4. Retained Profit:
Question: Define 'retained profit'. How can a business effectively utilize
retained profits to support its long-term objectives?
, Answer: Retained profit is the profit a business has made after paying taxes
and dividends to shareholders, which is then reinvested back into the
business. It can be used for various long-term objectives such as funding
expansion projects, purchasing new equipment, investing in research and
development, or strengthening the business's financial reserves.
5. Revenue Expenditure:
Question: What is 'revenue expenditure'? Differentiate between revenue
expenditure and capital expenditure by providing examples of each and
explaining their impact on a business's financial statements.
Answer: Revenue expenditure is spending on business resources that have
already been consumed or will be consumed very shortly, typically within
one year. Examples include raw materials, wages, and utility bills. Unlike
capital expenditure (recorded as assets on the balance sheet), revenue
expenditure is recorded as an expense on the income statement, directly
impacting the business's profitability for a specific period.
6. Sale and Leaseback:
Question: Describe the financial strategy of 'sale and leaseback'. What are
the potential benefits and drawbacks for a business engaging in this practice?
Answer: Sale and leaseback involves a business selling an asset it owns
(e.g., property) to another party and then leasing the same asset back from
the buyer. Benefits can include freeing up capital for other investments and
potential tax advantages. Drawbacks include the loss of ownership of the
asset and the ongoing lease payments.
7. Authorised Share Capital:
Question: Explain the meaning of 'authorised share capital'. Why is it
important for a company to define this limit?
Answer: Authorised share capital is the maximum number of shares that a
company is legally permitted to issue. Defining this limit in the company's
memorandum of association provides flexibility for future fundraising while
also setting a boundary that requires shareholder approval to exceed.
8. Bank Overdraft:
, Question: What is a 'bank overdraft'? Under what circumstances might a
business utilize an overdraft, and what are the key features a business should
consider before agreeing to one?
Answer: A bank overdraft is a short-term borrowing facility where a bank
allows a business to spend more money than it has in its account, up to an
agreed limit. Businesses might use it to manage temporary cash flow
shortfalls. Key features to consider include the overdraft limit, the interest
rate charged on overdrawn amounts, and any associated fees.
9. Capital Gain:
Question: Define 'capital gain' in the context of business ownership. How
does a capital gain differ from other forms of income a shareholder might
receive?
Answer: Capital gain is the profit made when an asset, such as a share, is
sold for a higher price than it was originally purchased for. Unlike dividends
(which are distributions of company profits), capital gain is realized only
when the shareholder sells their shares.
10. Crowd Funding:
Question: Explain the concept of 'crowd funding' as a source of finance.
What are the advantages and disadvantages of using crowd funding
compared to traditional bank loans?
Answer: Crowd funding involves raising finance from a large number of
individuals, typically through online platforms, who invest relatively small
amounts. Advantages can include access to a large pool of potential
investors and marketing benefits. Disadvantages may include the time and
effort required for campaigns and the potential for public scrutiny.
11. Debenture:
Question: What is a 'debenture'? How does it function as a source of long-
term finance for a business, and what are the typical obligations of the
issuing company?
Answer: A debenture is a long-term loan issued by a company to raise
finance. It represents a debt owed by the company to the debenture holders,
who are entitled to receive regular interest payments and the repayment of
the principal amount on a specified date. The issuing company is obligated
to meet these payment terms.
, 12. Equities:
Question: Explain why 'equities' is another term for an ordinary share. What
fundamental right does holding an equity typically confer upon an investor
in a limited company?
Answer: 'Equities' refers to ordinary shares because these shares represent
ownership equity in a company. Holding an equity typically confers upon
the investor the right to vote on key company decisions at shareholder
meetings and the right to receive a share of the company's profits in the form
of dividends, if declared.
13. External Finance:
Question: Define 'external finance'. Provide three distinct examples of
external sources of finance available to a business and briefly outline the key
characteristics of each.
Answer: External finance refers to money raised for a business from sources
outside of the company and its current owners. Examples include bank loans
(borrowed funds with interest), issuing new shares (selling ownership
stakes), and government grants (non-repayable funds for specific purposes).
14. Issued Share Capital:
Question: What is 'issued share capital'? How does it differ from authorised
share capital, and what does it represent on a company's statement of
financial position?
Answer: Issued share capital is the portion of the authorised share capital
that a company has actually sold to investors. It represents the total value of
shares currently held by shareholders and is recorded as part of shareholders'
equity on the statement of financial position. Authorised share capital is the
maximum limit, while issued share capital is the amount currently in
circulation.
15. Lease:
Question: Describe a 'lease' as a method of acquiring the use of business
resources. What are the potential advantages and disadvantages for a
business choosing to lease an asset rather than purchase it outright?
Answer: A lease is a contractual agreement where one party (the lessor)
grants another party (the lessee) the right to use an asset (e.g., property,
equipment) for a specified period in exchange for regular payments.
