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owners, rather than from external lenders or new investors."},{"text":"External finance","correct":false,"explanation":"External finance comes from outside the business, including lenders and new investors. Finance raised internally or from existing owners is called internal finance."},{"text":"Loan finance","correct":false,"explanation":"Loan finance specifically involves borrowing from an external lender and normally requires repayment with interest. The defined category is internal finance."},{"text":"Trade credit","correct":false,"explanation":"Trade credit is an external source provided by suppliers when they allow delayed payment. Money from the business or existing owners is internal finance."}]},{"id":"717d5f3c-c89d-445d-851d-803d51d6f134","cardType":"basic","points":3,"front":"Name the three internal finance sources in this topic.","back":"

Owner’s capital
Retained profit
Sale of assets

","mcqOptions":[{"text":"

Owner’s capital
Retained profit
Sale of assets

","correct":true,"explanation":"The three internal sources covered are investment from existing owners, profit retained within the business, and money raised by selling business assets."},{"text":"

Bank loan
Overdraft
Trade credit

","correct":false,"explanation":"A bank loan, overdraft and trade credit all come from external organisations. The internal sources are owner’s capital, retained profit and sale of assets."},{"text":"

Share issue
Debentures
Mortgage

","correct":false,"explanation":"Share issues, debentures and mortgages raise finance from investors or lenders outside the business. The three internal sources are owner’s capital, retained profit and sale of assets."},{"text":"

Leasing
Hire purchase
Venture capital

","correct":false,"explanation":"Leasing, hire purchase and venture capital are forms of external finance. Internal finance instead comes from owner’s capital, retained profit and sale of assets."}]},{"id":"e36c5b36-c0da-4c88-84f4-4be4312b793d","cardType":"basic","points":1,"front":"When internal finance is used, what is the opportunity cost?","back":"The next best use of the money or asset.","mcqOptions":[{"text":"The next best use of the money or asset.","correct":true,"explanation":"Opportunity cost is the benefit sacrificed from the next most valuable alternative when money or an asset is committed to its chosen use."},{"text":"The selected current use of the money or asset.","correct":false,"explanation":"The selected use is the choice made, not the opportunity sacrificed. Opportunity cost is the next best use forgone when the resource is committed."},{"text":"The original purchase price of the money or asset.","correct":false,"explanation":"Historical cost records what an asset originally cost, whereas opportunity cost concerns the next best use that must now be given up."},{"text":"The current market value of the money or asset.","correct":false,"explanation":"Market value may help measure a sacrificed alternative, but it is not the definition. Opportunity cost is the next best use of the money or asset."}]},{"id":"0af19e03-86c5-4c54-98af-f9ace638507f","cardType":"cloze","points":null,"front":"[ ] is money or resources invested by the business owner(s), such as [ ].","back":"Owner’s capital is money or resources invested by the business owner(s), such as personal savings.","mcqOptions":[{"text":"Owner’s capital is money or resources invested by the business owner(s), such as personal savings.","correct":true,"explanation":"Owner’s capital consists of funds or other resources supplied by existing owners. Personal savings are a common example, especially when establishing a small business."},{"text":"Loan capital is money or resources invested by the business owner(s), such as personal savings.","correct":false,"explanation":"Loan capital is supplied by lenders rather than invested by the business owners, even if personal savings are a valid example of owner’s capital."},{"text":"Owner’s capital is money or resources invested by the business owner(s), such as bank overdrafts.","correct":false,"explanation":"A bank overdraft is borrowing provided by a bank, not a resource invested by an owner. Owner’s capital can instead include personal savings."},{"text":"Retained profit is money or resources invested by the business owner(s), such as trade credit.","correct":false,"explanation":"Retained profit is generated from past trading, while trade credit is supplied externally by suppliers. Owner’s capital is owner investment such as personal savings."}]},{"id":"6c3866d9-abe8-41dd-9ec8-737bb31772af","cardType":"basic","points":1,"front":"What is the best use of personal savings as a finance source?","back":"Small start-up costs, not major expansion.","mcqOptions":[{"text":"Small start-up costs, not major expansion.","correct":true,"explanation":"Personal savings are normally limited, making them suitable for modest initial expenses but generally inadequate for financing a large-scale expansion."},{"text":"Major expansion costs, not start-up spending.","correct":false,"explanation":"Major expansion commonly requires more finance than an owner’s savings can provide. Personal savings are better suited to small start-up costs."},{"text":"Large acquisition costs, not minor purchases.","correct":false,"explanation":"Acquiring another business usually requires substantial funding beyond an individual owner’s savings. Personal savings are most appropriate for small start-up costs."},{"text":"Large capital projects, not initial expenses.","correct":false,"explanation":"Large capital projects often need significant long-term external finance. The limited amount available from personal savings makes them more suitable for small start-up costs."}]},{"id":"c6b94ddc-4231-4af6-bec6-3ebf7e031f66","cardType":"basic","points":1,"front":"What finance cost do personal savings avoid?","back":"They avoid interest payments.","mcqOptions":[{"text":"They avoid interest payments.","correct":true,"explanation":"Personal savings are the owner’s own funds rather than borrowed money, so the business does not incur interest charges for using them."},{"text":"They avoid corporation tax payments.","correct":false,"explanation":"Using personal savings does not remove a business’s liability for corporation tax on taxable profits. It avoids interest payments because no loan is taken out."},{"text":"They avoid employee wage payments.","correct":false,"explanation":"The source used to finance the business does not remove its obligation to pay employees. Personal savings avoid interest payments associated with borrowing."},{"text":"They avoid supplier payments.","correct":false,"explanation":"Businesses must still pay suppliers for goods and services regardless of whether personal savings are used. The finance cost avoided is interest on borrowing."}]},{"id":"8e18e9e9-9c5b-4079-995b-6b10fcfcb4fa","cardType":"basic","points":2,"front":"Why do personal savings help the owner keep control?","back":"No new shareholder is brought in.","mcqOptions":[{"text":"No new shareholder is brought in.","correct":true,"explanation":"Using the owner’s existing funds does not require selling ownership to another investor, so no new shareholder gains voting rights or influence."},{"text":"An external investor is brought in.","correct":false,"explanation":"Bringing in an external investor would normally dilute the owner’s control through new ownership and voting rights. Personal savings require no new shareholder."},{"text":"A bank representative is given voting rights.","correct":false,"explanation":"Banks do not receive shareholder voting rights when personal savings are used. Control is preserved because no new shareholder is introduced."},{"text":"The owner’s voting rights are transferred away.","correct":false,"explanation":"Using personal savings does not transfer the owner’s voting rights. Instead, the owner retains control because no new shareholder acquires an ownership stake."}]},{"id":"6d84fd67-d3c2-4506-a866-42279eb08640","cardType":"basic","points":1,"front":"Why are personal savings often unsuitable for major expansion?","back":"They are usually limited in amount.","mcqOptions":[{"text":"They are usually limited in amount.","correct":true,"explanation":"Most owners possess only a finite amount of savings, so the funds available may be insufficient for the substantial cost of major expansion."},{"text":"They are usually subject to high interest.","correct":false,"explanation":"Personal savings are owned funds rather than borrowing, so they do not normally carry interest. Their weakness for major expansion is the limited amount available."},{"text":"They are usually repayable at short notice.","correct":false,"explanation":"Personal savings do not normally have a lender demanding repayment at short notice. They are unsuitable for major expansion because their amount is limited."},{"text":"They are usually available only to companies.","correct":false,"explanation":"Sole traders and partnerships can use personal savings as well as company owners. The key limitation is that personal savings are usually modest in amount."}]},{"id":"eb19a6fe-1edf-4ae9-ada2-70375ecc17e2","cardType":"basic","points":1,"front":"If a business funded by personal savings fails, what risk does the owner face?","back":"The owner may lose personal savings.","mcqOptions":[{"text":"The owner may lose personal savings.","correct":true,"explanation":"Personal savings invested in the business are the owner’s own funds. If the business fails, some or all of that invested money may be lost."},{"text":"The owner may lose supplier credit.","correct":false,"explanation":"Supplier credit is an external source of finance rather than the owner’s personal investment. The direct risk is losing the personal savings committed to the failed business."},{"text":"The owner may lose retained profit.","correct":false,"explanation":"Retained profit belongs to an established business and comes from previous trading. When personal savings fund the business, the owner risks losing those savings if it fails."},{"text":"The owner may lose share dividends.","correct":false,"explanation":"Dividends are payments made to shareholders from profit, not funds invested through personal savings. The owner’s risk is losing the personal savings placed in the business."}]},{"id":"8c2f6c9b-fbfa-4733-a985-ab9707801fab","cardType":"cloze","points":null,"front":"A sole trader has [ ]; owners of a private limited company usually have [ ].","back":"A sole trader has unlimited liability; owners of a private limited company usually have limited liability.","mcqOptions":[{"text":"A sole trader has unlimited liability; owners of a private limited company usually have limited liability.","correct":true,"explanation":"A sole trader is personally responsible for business debts, whereas a private limited company is legally separate and shareholders normally risk only the amount they invested."},{"text":"A sole trader has limited liability; owners of a private limited company usually have limited liability.","correct":false,"explanation":"The mistake is extending the protection of incorporation to a sole trader. Sole traders have unlimited liability, while private limited company shareholders usually have limited liability."},{"text":"A sole trader has unlimited liability; owners of a private limited company usually have unlimited liability.","correct":false,"explanation":"This overlooks the separate legal identity of a private limited company. Its shareholders usually have limited liability, although a sole trader remains personally responsible for business debts."},{"text":"A sole trader has limited liability; owners of a private limited company usually have unlimited liability.","correct":false,"explanation":"The two forms of liability have been reversed. Sole traders have unlimited liability, while shareholders in a private limited company usually benefit from limited liability."}]},{"id":"2cda639f-ae23-4324-a018-7a984ff9d707","cardType":"cloze","points":null,"front":"Retained profit = [ ] - [ ].","back":"Retained profit = profit after tax - dividends paid.","mcqOptions":[{"text":"Retained profit = profit after tax - dividends paid.","correct":true,"explanation":"Retained profit is the portion of profit after tax kept within the business after distributions to shareholders, in the form of dividends, have been deducted."},{"text":"Retained profit = profit before tax - dividends paid.","correct":false,"explanation":"This fails to deduct tax before calculating the amount available for retention. Retained profit is profit after tax minus the dividends paid to shareholders."},{"text":"Retained profit = profit after tax - interest paid.","correct":false,"explanation":"Interest is an expense already included when calculating profit rather than a distribution of profit. Retained profit is profit after tax minus dividends paid."},{"text":"Retained profit = sales revenue - dividends paid.","correct":false,"explanation":"Sales revenue does not account for the business’s costs or tax, so it cannot measure retained earnings. Retained profit is profit after tax minus dividends paid."}]},{"id":"906b3a85-c185-4162-b6bc-82b9397878a8","cardType":"basic","points":1,"front":"Which type of business is retained profit most useful for?","back":"An established, profitable business.","mcqOptions":[{"text":"An established, profitable business.","correct":true,"explanation":"An established, profitable business is likely to have accumulated earnings from previous years, giving it retained profit that can be reinvested as a source of internal finance."},{"text":"A newly formed, pre-revenue business.","correct":false,"explanation":"A newly formed business that has not generated revenue cannot have accumulated profit from earlier trading. Retained profit is most useful to an established, profitable business."},{"text":"An established, loss-making business.","correct":false,"explanation":"Although the business is established, continuing losses reduce or eliminate earnings available for reinvestment. Retained profit is most useful when the business is established and profitable."},{"text":"A new, unprofitable business.","correct":false,"explanation":"A new and unprofitable business has no previous earnings to retain and will need another finance source. Retained profit best suits an established, profitable business."}]},{"id":"20d19e59-7d6e-4731-9aa8-39657a9f8c3e","cardType":"basic","points":2,"front":"How does using retained profit avoid dilution?","back":"No new shares are issued, so ownership percentages stay unchanged.","mcqOptions":[{"text":"No new shares are issued, so ownership percentages stay unchanged.","correct":true,"explanation":"Retained profit uses earnings already generated by the business, so no additional equity is sold. Existing shareholders therefore keep the same proportions of ownership and control."},{"text":"More new shares are issued, so ownership percentages stay unchanged.","correct":false,"explanation":"Issuing additional shares can reduce existing shareholders’ ownership percentages unless they buy proportionately. Retained profit avoids dilution precisely because no new shares are issued."},{"text":"No cash dividends are issued, so ownership percentages stay unchanged.","correct":false,"explanation":"Paying or withholding dividends affects shareholder income but does not itself alter ownership percentages. Dilution is avoided because retained profit requires no issue of new shares."},{"text":"No new loans are issued, so ownership percentages stay unchanged.","correct":false,"explanation":"Loans do not normally grant ownership, so avoiding them is not what prevents dilution. Retained profit avoids dilution because the business does not issue new shares."}]},{"id":"5b72e035-d345-4db8-a93c-d4fa9be47995","cardType":"basic","points":1,"front":"Why might retained profit be unsuitable for a fast-growing start-up?","back":"It may have no past profit to retain.","mcqOptions":[{"text":"It may have no past profit to retain.","correct":true,"explanation":"A fast-growing start-up may be new or not yet profitable, so it has little or no accumulated profit from previous trading available to finance expansion."},{"text":"It may have no share capital to retain.","correct":false,"explanation":"Share capital is money invested by shareholders and is not retained profit. The relevant limitation is that a start-up may have no past profit to retain."},{"text":"It may have no loan interest to retain.","correct":false,"explanation":"Loan interest is a finance cost paid to lenders, not earnings available for reinvestment. A start-up may lack retained profit because it has no past profit."},{"text":"It may have no trade credit to retain.","correct":false,"explanation":"Trade credit is delayed payment to suppliers and is an external finance source, not profit. Retained profit may be unavailable because the start-up has no past profit."}]},{"id":"1d6f4ff7-71c0-4bad-9a32-d627420c6f51","cardType":"basic","points":2,"front":"Why may shareholders dislike heavy use of retained profit?","back":"They may receive lower dividends.","mcqOptions":[{"text":"They may receive lower dividends.","correct":true,"explanation":"Keeping a larger proportion of profit within the business leaves less available for distribution to shareholders, so their dividend income may be lower."},{"text":"They may receive higher dividends.","correct":false,"explanation":"Heavy retention reduces the proportion of profit distributed rather than increasing it. Shareholders may object because keeping more profit in the business can mean lower dividends."},{"text":"They may receive lower salaries.","correct":false,"explanation":"Shareholders receive returns mainly through dividends and capital gains, not necessarily salaries. Heavy use of retained profit may concern them because it can reduce dividend payments."},{"text":"They may receive higher interest.","correct":false,"explanation":"Interest is paid to lenders rather than shareholders in their capacity as owners. Shareholders may dislike profit retention because it can result in lower dividends."}]},{"id":"9f88799e-53bf-4ea1-83cd-21a679fec1d4","cardType":"cloze","points":null,"front":"A business can report retained profit but still have weak cash flow if cash is tied up in [ ] or [ ].","back":"A business can report retained profit but still have weak cash flow if cash is tied up in inventory or trade receivables.","mcqOptions":[{"text":"A business can report retained profit but still have weak cash flow if cash is tied up in inventory or trade receivables.","correct":true,"explanation":"Profit and cash flow are different. Unsold inventory absorbs cash, while trade receivables represent credit sales for which customers have not yet paid."},{"text":"A business can report retained profit but still have weak cash flow if cash is tied up in inventory or trade payables.","correct":false,"explanation":"Trade payables usually preserve cash because payment to suppliers has been delayed. Cash is instead commonly tied up in inventory and trade receivables."},{"text":"A business can report retained profit but still have weak cash flow if cash is tied up in cash sales or trade receivables.","correct":false,"explanation":"Cash sales provide immediate cash rather than tying it up. Weak cash flow despite reported profit can arise when funds remain in inventory or unpaid trade receivables."},{"text":"A business can report retained profit but still have weak cash flow if cash is tied up in trade payables or cash purchases.","correct":false,"explanation":"Trade payables delay cash outflows, while cash purchases are payments rather than working-capital balances. The usual cash-flow problem is funds tied up in inventory and trade receivables."}]},{"id":"150cf032-4d7a-4e44-9435-8423051272e4","cardType":"basic","points":3,"front":"Calculate retained profit: revenue £900,000, costs £760,000, tax £28,000, dividends £40,000.","back":"£72,000 retained profit.","mcqOptions":[{"text":"£72,000 retained profit.","correct":true,"explanation":"Revenue minus costs gives £140,000 operating profit. Deducting £28,000 tax and £40,000 dividends leaves £72,000 retained within the business."},{"text":"£140,000 retained profit.","correct":false,"explanation":"This subtracts costs from revenue but fails to deduct tax and dividends. Both must be removed from profit, leaving £72,000 retained profit."},{"text":"£112,000 retained profit.","correct":false,"explanation":"This deducts costs and tax but overlooks the £40,000 dividend payment. Dividends reduce the profit retained, so the correct figure is £72,000."},{"text":"£100,000 retained profit.","correct":false,"explanation":"This deducts costs and dividends but omits the £28,000 tax charge. After subtracting costs, tax and dividends, retained profit is £72,000."}]},{"id":"d623aee1-9fc7-402b-8aef-20b6b5235aef","cardType":"cloze","points":null,"front":"Selling stock to customers is normal [ ]; selling surplus assets is a [ ].","back":"Selling stock to customers is normal trading; selling surplus assets is a finance decision.","mcqOptions":[{"text":"Selling stock to customers is normal trading; selling surplus assets is a finance decision.","correct":true,"explanation":"Stock is acquired or produced for routine sale as part of trading. Surplus assets are not ordinary stock, so selling them to raise funds is a finance decision."},{"text":"Selling stock to customers is normal finance; selling surplus assets is a trading decision.","correct":false,"explanation":"This reverses the classifications. Selling stock is part of normal trading, whereas disposing of surplus assets to release funds is a finance decision."},{"text":"Selling stock to customers is normal investment; selling surplus assets is a production decision.","correct":false,"explanation":"Selling stock is a trading activity rather than investment, and disposing of surplus assets raises internal finance rather than producing goods. The correct terms are trading and finance decision."},{"text":"Selling stock to customers is normal production; selling surplus assets is a marketing decision.","correct":false,"explanation":"Production creates goods and marketing promotes their sale, but neither classification fits here. Stock sales are trading, while surplus asset sales are finance decisions."}]},{"id":"5c2f2b42-839d-430e-9460-862c2c791793","cardType":"basic","points":1,"front":"When does sale of assets work well as internal finance?","back":"When the business has unused or underused assets.","mcqOptions":[{"text":"When the business has unused or underused assets.","correct":true,"explanation":"Selling assets works well when they are unused or underused because the business can raise cash without significantly reducing its ability to operate."},{"text":"When the business has essential, fully utilised assets.","correct":false,"explanation":"Selling essential assets that are fully utilised can disrupt operations and reduce capacity. Asset sales work best when the assets are unused or underused."},{"text":"When the business has assets owned by its suppliers.","correct":false,"explanation":"A business cannot normally sell assets that belong to its suppliers. This finance source works when the business owns assets that are unused or underused."},{"text":"When the business has no assets available for sale.","correct":false,"explanation":"Without assets available for disposal, the business cannot raise finance through asset sales. It works well when owned assets are unused or underused."}]},{"id":"2af98896-abb6-4067-8e13-aeed0fc835f1","cardType":"basic","points":1,"front":"Why are asset sales often a one-off finance source?","back":"An asset can only be sold once.","mcqOptions":[{"text":"An asset can only be sold once.","correct":true,"explanation":"Once ownership of an asset has been transferred to a buyer, the business no longer possesses it and cannot sell it again to generate further finance."},{"text":"An asset can only be valued once.","correct":false,"explanation":"Assets can be valued repeatedly as market conditions and accounting estimates change. Asset sales are one-off because the business can sell each asset only once."},{"text":"An asset can only be used once.","correct":false,"explanation":"Most business assets provide productive use over many periods rather than on one occasion. The finance is one-off because an asset can only be sold once."},{"text":"An asset can only be insured once.","correct":false,"explanation":"Insurance policies can be renewed or replaced throughout an asset’s life. Asset-sale finance is one-off because ownership can be transferred by the business only once."}]},{"id":"7503f6a2-d1a3-4722-965b-9cc96f13886b","cardType":"basic","points":1,"front":"What operational problem can selling an essential asset cause?","back":"It can reduce capacity.","mcqOptions":[{"text":"It can reduce capacity.","correct":true,"explanation":"An essential asset contributes to producing goods or delivering services. Selling it can therefore reduce the maximum output the business is capable of achieving."},{"text":"It can increase capacity.","correct":false,"explanation":"This reverses the likely operational effect. Removing an essential productive asset usually reduces the business’s maximum possible output rather than increasing it."},{"text":"It can reduce share capital.","correct":false,"explanation":"Selling an asset does not cancel shares or directly reduce share capital. The operational problem is that losing essential equipment can reduce productive capacity."},{"text":"It can increase trade credit.","correct":false,"explanation":"Trade credit arises when suppliers allow delayed payment, not from disposing of an asset. Selling an essential asset can instead reduce the business’s operating capacity."}]},{"id":"9e668d55-3599-4cf0-90f4-e31bdf9e4c1b","cardType":"cloze","points":null,"front":"Net proceeds = [ ] - [ ].","back":"Net proceeds = sale price - selling costs.","mcqOptions":[{"text":"Net proceeds = sale price - selling costs.","correct":true,"explanation":"Net proceeds are the cash remaining from an asset disposal after costs such as commission, advertising and legal fees have been deducted from the sale price."},{"text":"Net proceeds = purchase price - selling costs.","correct":false,"explanation":"The original purchase price is irrelevant to the cash received from the disposal. Net proceeds equal the current sale price minus the associated selling costs."},{"text":"Net proceeds = sale price - purchase price.","correct":false,"explanation":"Subtracting purchase price from sale price helps calculate a gain or loss, not net proceeds. Net proceeds are sale price minus selling costs."},{"text":"Net proceeds = selling costs - sale price.","correct":false,"explanation":"This reverses the subtraction and would usually produce a negative figure. Net proceeds are found by deducting selling costs from the sale price."}]},{"id":"a60a2c6d-b766-497b-8162-e47bc0029cd0","cardType":"basic","points":2,"front":"Calculate net proceeds: sale price £60,000, selling costs 2% of sale price.","back":"£58,800 net proceeds.","mcqOptions":[{"text":"£58,800 net proceeds.","correct":true,"explanation":"Selling costs are 2% of £60,000, which equals £1,200. Deducting £1,200 from the sale price gives net proceeds of £58,800."},{"text":"£61,200 net proceeds.","correct":false,"explanation":"This adds the £1,200 selling costs instead of deducting them. Costs reduce the amount received, so net proceeds are £60,000 minus £1,200, giving £58,800."},{"text":"£58,000 net proceeds.","correct":false,"explanation":"This treats the 2% selling cost as £2,000. Two per cent of £60,000 is £1,200, so the correct net proceeds are £58,800."},{"text":"£48,000 net proceeds.","correct":false,"explanation":"This deducts 20% rather than 2%, making the selling costs ten times too large. Deducting the correct £1,200 gives net proceeds of £58,800."}]}]}],"examCountdown":{"examDate":"2027-05-13","paperLabel":"Paper 1"},"heading":"Internal finance","title":"Internal finance Flashcards","topbar":{"backHref":"/a-level/business/edexcel/flashcards"},"topicSidebar":"$L38"}]}],"topicId":"5150e02e-d5e6-5a3a-a975-0044abec8066","walled":"$L39"}],"$L3a","$L3b"]