Topic 3.1: Introduction to Finance Questions

Define the term capital expenditure.

State one example of capital expenditure and one example of revenue expenditure.

Define the term revenue expenditure.

What is meant by finance in a business context?

State two reasons why businesses need finance.

A business installs a new IT system that it will use for the next five years. Explain whether this spending is capital expenditure or revenue expenditure.

A business is sorting its spending into categories. What does the term capital expenditure mean?

Harlow Print buys a new delivery van and pays its monthly electricity bill. How should each be classified?

Define the term finance.

A café buys a new coffee machine for $4,000 and spends $120 a month on coffee beans. Explain how each of these would be treated in the café’s final accounts.

Outline two purposes of finance for a growing business.

Explain two reasons why a business may need additional finance even when its sales are increasing.

Explain two reasons why it matters whether a business classifies its spending as capital expenditure or revenue expenditure.

A firm repaints its office to keep it looking professional. Identify the type of expenditure and justify your answer.

A case study describes Tessaro Print, a printing firm that has traded profitably for twelve years. It buys paper and ink every week and pays its eight employees every month. Its customers are businesses that pay 60 days after a job is delivered; at any time they owe Tessaro Print about $50 000. Explain one reason why Tessaro Print needs finance to keep running.

Harbour Kayaks rents kayaks to tourists on one beach. It plans to open a second site at Northcove next summer, which needs 30 new kayaks costing $24 000 and a boathouse costing $36 000, both bought before the season starts. Last year Harbour Kayaks made a profit of $15 000. Explain one reason why Harbour Kayaks needs finance to open the Northcove site.

A case study describes Kiln Street Pottery, which Ines Moreau will open in a rented workshop next spring. Before it opens she must buy two kilns and six potter's wheels for $14 000 and pay a rent deposit of $1 500. She will run evening classes and sell her own pots. Three local schools have booked class visits, and they pay for each term's visits at the end of the term. Rent, clay and electricity must be paid every month. Explain two reasons why Kiln Street Pottery needs finance.

A business buys new machinery and also pays for routine servicing of the machinery. Classify each cost.

Brightwater Laundry plans to spend $80,000 on six industrial washing machines that it expects to use for eight years. Explain one reason why Brightwater should pay for this capital expenditure with long-term finance.

Outline one possible effect on a business if it wrongly records capital expenditure as revenue expenditure.