Deck 9: Financing and Business Structures

Question 1

Which of the following lists of current liabilities has only current liabilities included?

A) Trade payables, accruals, debentures, bank overdraft, shares
B) Debenture, accruals, money in the bank, trade payables
C) Accruals, trade payables, money in the bank
D) Bank overdraft, trade payables, hire purchase debt and accruals

Answer 1

D

Question 2

The main difference between equity and debt finance is:

A) Debt is always more expensive than equity
B) Debt is repayable at a specified time but equity is not
C) Equity can be used for anything whereas debt has to be used for specific purposes

Answer 2

A

Question 3

Fred who owns his own business pays in an extra £40000 to the business bank account and also transfers his car worth £15000 into the business. He then raises a loan from the bank of £20000 and agrees with the bank manager that he can have an overdraft facility of up to £15000. What is total equity and liabilities at the end of the year?

A) Equity £40000 and liabilities £35000
B) Equity £40000 and liabilities £20000
C) Equity £55000 and liabilities £35000
D) Equity £55000 and liabilities £20000

Answer 3

D

Question 4

Dividends and drawings are exactly the same.

Question 5

A company issues 10000 shares at a price of £3.00 per share. The nominal value of the shares is £1.00 per share. What should be shown in the statement of financial position and the cash flow statement in respect of this transaction?

A) Increase the bank balance of £30000, increase shares £30000 and show a cash inflow of £30000
B) Increase the bank balance of £10000, increase shares £10000 and show a cash inflow of £10000
C) Increase the bank balance of £30000, increase shares £10000, increase the share premium by £20000 and show a cash inflow of £30000
D) Increase the bank balance of £30000, increase shares £10000 and show a cash inflow of £30000
E) Increase the bank balance of £30000, increase shares £10000, increase the share premium by £20000 and show a cash inflow of £10000

Question 6

Debentures are a form of equity capital.

Question 7

An ordinary share and a preference share are simply different names or the same thing

Question 8

The total assets are always equal to the equity capital.

Question 9

Bank overdrafts are the cheapest way of financing short term borrowing.

Question 10

Company A is financed by £60000 equity and £20000 borrowing. Company B is financed by £40000 equity and £40000 borrowing and Company C is financed by £20000 equity and £60000 borrowing. Which is the most highly geared company?

A) A
B) B
C) C

Question 11

The charges relating to operating leases are treated as if the business was renting the asset.

Question 12

Leasing is a classic example of short term financing.

Question 13

Business that are financed solely by equity investment are more risky than those financed by equity and borrowing

Question 14

Company A is financed by £60000 equity and £20000 borrowing. Company B is financed by £40000 equity and £40000 borrowing and Company C is financed by £20000 equity and £60000 borrowing. All equity consists of £1 ordinary shares. Assuming profits before interest are the same in all three companies at £8000 and interest rates are 10% which shareholders will be best off?

A) A
B) B
C) C
D) All are as well off as the others

Question 15

A highly geared business is more susceptible to changes in interest rates.

Question 16

Bank overdrafts are long term liabilities of a business.