Ch. 3 finance and accounts

Finance: needed for starting up a new business or to fun existing firms

Capital expenditure: spending on fixed assets and capital equipment of a business

example: expenditure on buildings, equipment and tools

(also known as investment expenditure)

Revenue expenditure: need for business to finance their daily and routine operations

example: finance to pay for the purchase of raw materials, paying bills

source of finance: where a business gets its money from

internal source of finance: within the business using its own resources

eg. personal funds, retained profit

Retained profit: amount of a business net income that is kept within its accounts rather than paid to shareholders

surplus reinvested in the business rather than being distributed to shareholders in the form of dividends

acts as internal source of finance (funds belong to owner)

(part of equity)

Sales of assets: when you sell or transfer the assets of your company, rather than shares or stock

can sell some of their fixed assets to raise finance

helps business dispose fixed assists that are no longer needed

sales of assets can compromise the firm’s ability to raise working capital

Surplus: money that you have left when you sell more than you buy or spend less than you receive

External finance: comes outside of the organization via external stakeholders

used when a business is unable to generate sufficient finance from its internal sources

2 main kinds of external source of finance: share capital and loan capital

Share capital: money a company raises from selling shares

Initial public offer(IPO): when shares in a limited liability company are sold for the very first time

the value of share capital is based on the value of shares when they are first sold (not current market price of shares)

limited liability can raise finance by selling additional share capital

if shares are sold this is done via stock exchange without the company being directly involved- original share cpaital is not affected only share of ownership change fee

Stock market: place for buying and selling shares in public limited companies

Loan capital: borrowing funds from financier such as a commercial bank

eg. bank loans and overdrafts