Finance
What's covered
Key facts
A balance sheet shows assets, liabilities, and capital at a single point in time — it does not show profit over a period.
On a cash-flow forecast a figure in brackets, e.g. (£375), means a negative amount — an outflow or a deficit. The brackets stand in for a minus sign and must be subtracted, not added.
ARR stands for Average Rate of Return.
Cost of sales is sometimes called cost of goods sold (COGS) — the direct cost of producing or buying the items sold.
An angel investor is an individual who invests in a start-up in return for equity — often a wealthy ex-entrepreneur bringing capital plus experience.
Banks and other lenders use financial statements to decide whether to lend money — they're judging creditworthiness.
Cash flow and profit are not the same. Profit is revenue minus costs over a period; cash is money actually held. A business can be profitable but cash-poor.
ARR = (average annual profit ÷ initial investment) × 100. Over 5 years, £20,000 profit on £50,000 = £4,000/yr ÷ £50,000 = 8%.
Gross profit margin shows trading efficiency — how much of each £ of revenue is left after the direct cost of the goods sold.
A bank loan must be repaid with interest over an agreed term — typical GCSE example is a 5-year term loan secured against business assets.
Sample questions
A taste of the 90 questions in this topic, answers marked. Sign up to practise the full set with spaced repetition.
Which is shown on a balance sheet?
- ✓Assets, liabilities and capital
- •Cash inflows and outflows by month
- •Gross profit and net profit only
- •Yearly revenue and total cost of sales
Which is a cash outflow for a typical business?
- ✓Paying wages to staff
- •Receiving a bank loan transfer
- •Receiving payment from customers
- •Selling goods to a new client
What does ARR stand for in business finance?
- •Adjusted Return Ratio
- •Annual Revenue Ratio
- •Asset Reinvestment Rate
- ✓Average Rate of Return
What item appears at the very top of an income statement?
- •Cost of sales
- •Gross profit
- •Net profit
- ✓Total revenue
Which is an internal source of finance?
- •Bank loan
- ✓Retained profit
- •Share issue
- •Trade credit
Why is comparing this year's profit margin to last year's useful?
- •It exempts the firm from any audit requirement
- •It guarantees the firm wins more new customers
- •It removes the need to file any tax return
- ✓It reveals whether profitability is rising or falling
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