The "Comprehensive IGCSE Business Studies Definitions Handbook" is an indispensable resource designed to support students, in mastering the fundamental concepts of business studies at the IGCSE level. It covers Section 5 of the IGCSE syllabus
IGCSE Business Studies keywords – Section 5 Financial information and decisions
Key terms Definition
Internal finance is obtained from within the business itself.
Internal finance
This is profit kept in the business after the owners have taken their share of the
Retained profit
profits.
Existing assets that could be sold are those items of value which are no longer
Sale of assets required by the business, for example, redundant buildings or surplus equipment
External finance is obtained from sources outside of and separate from the
External finance
business
. Issue of Shares is that the shares of an enterprise or any financial asset are
Issue of shares distributed among shareholders who wish to purchase them. The issuing of
shares is only possible for limited companies.
Debentures These are long-term loan certificates issued by limited companies.
Debt factoring: a debtor is a person who owes the business money for the goods
Factoring of debts they have bought from the business. Debt factors are specialist agents that can
collect all the business’ debts from debtors.
This assistance could be in the form of financial grants, such as a non-repayable
Grants
amount of money paid to the business
Working capital Working capital is the finance needed by a business to pay its day-today costs.
Micro-finance is providing financial services – including small loans – to poor
Micro finance
people not served by traditional banks.
Crowdfunding is funding a project or venture by raising money from a large
Crowdfunding number of people who each contribute a relatively small amount, typically via
the internet
This provides the working capital needed by businesses for day-to-day
Short-term sources
of finance
operations. Shortages of cash in the short term can be overcome in three main
ways.
,Classification: Internal
2
This is finance which is available for more than a year – and sometimes for very
Long-term sources of many years. Usually, this money would be used to purchase long-term fixed
finance assets, to update or expand the business, or to finance a takeover of another
business.
The bank gives the business the right to ‘overdraw’ its bank account (that is,
Overdraft
spend more money than is currently in the account)
This is when a business delays paying its suppliers, which leaves the business in a
Trade credit
better cash position.
This allows a business to buy a non-current (fixed) asset over a long period of
Hire purchase
time with monthly payments which include an interest charge
Leasing an asset allows the business to use the asset without having to purchase
Leasing
it. Monthly leasing payments are made.
Cash flow
The cash flow of a business is the cash inflows and outflows over a period of time
A cash flow forecast is an estimate of future cash inflows and outflows of a
Cash flow forecast
business, usually on a month-by-month basis. This then shows the expected cash
balance at the end of each month
Statement of An income statement is a financial statement that records the income of a
comprehensive business and all costs incurred to earn that income over a period of time (for
income example, one year). It is also known as a profit and loss account.
The revenue is the income to a business during a period of time from the sale of
Revenue
goods or services.
The cost of sales is the cost of producing or buying in the goods actually sold by
Cost of sales/cost of the business during a time period. This includes the cost of the materials used in
goods sold creating the good plus the direct labour costs of producing the good. In a retail
business it will be the cost of the inventory sold by the shop
A gross profit is made when revenue is greater than the cost of sales.
Gross profit formula
Gross profit = Revenue – Cost of sales
Net profit is the profit made by a business after all costs have been deducted
from revenue. It is calculated by subtracting overhead costs from gross pr ofits.
Net profit formula
Retained profit for Retained profit is the net profit reinvested back into a company, after deducting
the year formula tax and payments to owners, such as dividends.
,Classification: Internal
3
Retained Profit = Net Profit – (tax + dividends)
Statement of The statement of financial position shows the value of a business’s assets and
financial
position/balance
liabilities at a particular time. Current assets are owned by a business and used
sheet within one year
Assets are those items of value which are owned by the business. They may be
Current assets
non-current (fixed) assets or (short-term) current.
Non-current assets Non-current assets are items owned by the business for more than one year.
Current liabilities are short-term debts owed by the business, repaid in less than
Current liabilities
one year.
Non-current liabilities are long-term debts owed by the business, repaid over
Non-current liabilities
more than one year
Return on capital
employed (ROCE)
Gross profit margin
Net profit margin
Liquidity Liquidity is the ability of a business to pay back its short-term debts.
Revision questions
1) Expansion of an existing business
2 reasons why a business may
need finance
2) Starting up a business.
1) Retained profit.
What are 3 internal sources of
finance 2) Sale of existing assets
, Classification: Internal
4
3) Selling inventories
Advantage 1: There is no interest to pay – the capital is raised from
within the business.
Advantage 2: It doesn’t have to be repaid unlike for example a loan.
2 general advantages and 2
general disadvantages of using
internal sources of finance
Disadvantage 1: A new business will not have any retained profit.
Disadvantage 2: It takes time to sell assets.
Advantage: These are usually quick to arrange.
What is an advantage and
disadvantage of a bank loan
Disadvantage: A bank loan will have to be repaid eventually and interest
must be paid
Advantage: This is a permanent source of capital which would not have
to be repaid to shareholders
What is an advantage and
disadvantage of issue of shares Disadvantage: Dividends will be expected by the shareholders
Advantage: Debentures can be used to raise very long-term finance, for
example, 25 years
What is an advantage and
disadvantage of a debentures Disadvantage: As with loans, these must be repaid and interest must be
paid
Advantage: The risk of collecting the debt becomes the factor’s and not
What is an advantage and the business’
disadvantage of factoring of
debts
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