Finance and accounts practice questions.

Which of the following is an INTERNAL source of finance?

• a long-term bank loan
• retained profit
• share issue
• trade credit

Answer: retained profit

Internal finance comes from within the business (retained profit, sale of assets, working capital). Loans, share issues and trade credit are external sources.

Which of the following is a LONG-TERM source of finance?

• overdraft
• trade credit
• mortgage
• debt factoring

Answer: mortgage

A mortgage is repaid over many years, making it long-term. Overdrafts, trade credit and factoring are short-term ways of managing working capital.

What is the main advantage of Net Present Value (NPV) over the payback and ARR methods?

• It is the quickest and simplest method to calculate
• It ignores the size of the initial investment
• It accounts for the time value of money
• It never requires forecasting future cash flows

Answer: It accounts for the time value of money

NPV discounts each future net cash flow to its present value using a discount factor. A positive NPV means the investment earns more than the required rate of return.

A decision rule for NPV states that a stand-alone project should be accepted when:

• NPV is negative
• NPV is positive (greater than zero)
• NPV equals the initial investment
• the discount factor is greater than 1

Answer: NPV is positive (greater than zero)

A positive NPV means the present value of future inflows exceeds the initial cost, so the project adds value at the chosen discount rate.

Which of the following is a source of internal finance?

• bank loan
• retained profit
• bank overdraft
• issuing new shares

Answer: retained profit

Retained profit comes from within the business (past earnings reinvested). Loans, overdrafts and share issues are external sources of finance.

Distinguish capital expenditure from revenue expenditure. Which of the following is an example of capital expenditure?

• Paying staff wages
• Purchasing a delivery van
• Buying raw materials
• Paying the monthly electricity bill

Answer: Purchasing a delivery van

Capital expenditure is spending on long-term fixed assets such as a delivery van; wages, raw materials and utilities are recurring revenue expenditure on day-to-day running costs.