WACE Business Unit 4: Finance & Human Resources — Flashcards & Quiz

Q1: Compare debt finance and equity finance as sources of business funding.

Debt finance: borrowing money that must be repaid with interest (bank loans, overdrafts, bonds). Advantages: retain ownership and control, interest is tax-deductible. Disadvantages: must repay regardless of profit, increases financial risk. Equity finance: raising funds by selling ownership shares. Advantages: no repayment obligation, reduces financial risk. Disadvantages: dilutes ownership and control, shareholders expect dividends.

Q2: Explain short-term and long-term sources of finance with examples.

Short-term (under 1 year): bank overdraft (flexible, high interest), trade credit (buy now pay later from suppliers), factoring (selling receivables at a discount), short-term bank loan. Long-term (over 1 year): mortgage (secured on property), long-term bank loan, debentures/bonds (fixed interest debt), share issue (equity), retained profits (internal funding), venture capital and leasing.

Q3: What is an income statement and what does it reveal about business performance?

An income statement (profit and loss statement) reports a business's financial performance over a period. Structure: Revenue (sales income) minus Cost of Goods Sold = Gross Profit. Gross Profit minus Operating Expenses (wages, rent, utilities, depreciation) = Net Profit (or Loss). It reveals profitability, cost management effectiveness and whether the business is trading sustainably.

Q4: Describe the balance sheet and explain the accounting equation.

A balance sheet reports a business's financial position at a point in time. It follows the accounting equation: Assets = Liabilities + Owner's Equity. Assets: what the business owns (current: cash, receivables, inventory; non-current: property, equipment). Liabilities: what the business owes (current: accounts payable, short-term loans; non-current: long-term loans, mortgages). Owner's Equity: the owner's residual interest (capital + retained profits).

Q5: What is a cash flow statement and why might a profitable business have cash flow problems?

A cash flow statement reports cash inflows and outflows over a period in three categories: operating activities (day-to-day trading), investing activities (buying/selling assets) and financing activities (loans, share issues, dividends). A profitable business can have cash flow problems due to: credit sales (revenue recorded but cash not received), large capital expenditure, excessive inventory, seasonal variations or rapid growth requiring upfront investment.

Q6: Explain the key profitability ratios and what they measure.

Gross profit margin = (Gross Profit / Revenue) x 100 — measures production efficiency and pricing effectiveness. Net profit margin = (Net Profit / Revenue) x 100 — measures overall profitability after all expenses. Return on equity (ROE) = (Net Profit / Owner's Equity) x 100 — measures how effectively the business uses owner investment to generate profit.

Q7: What are liquidity ratios and why are they important?

Liquidity ratios measure a business's ability to meet short-term financial obligations. Current ratio = Current Assets / Current Liabilities — ideally 1.5:1 to 2:1. Quick ratio (acid test) = (Current Assets - Inventory) / Current Liabilities — a stricter test excluding inventory, ideally above 1:1. Low ratios indicate potential difficulty paying debts; excessively high ratios suggest capital is not being used productively.

Q8: Explain efficiency ratios and their importance in operations management.

Efficiency ratios measure how effectively a business uses its resources. Inventory turnover = COGS / Average Inventory — how many times inventory is sold per year; higher is better. Accounts receivable days = (Receivables / Revenue) x 365 — average days to collect payment; lower is better. Asset turnover = Revenue / Total Assets — revenue generated per dollar of assets; higher indicates better asset utilisation.

Q1: Debt finance involves selling shares to raise capital for the business.

Answer: FALSE

Selling shares is EQUITY finance. Debt finance involves borrowing money (loans, bonds, overdrafts) that must be repaid with interest.

Q2: Interest on debt finance is generally tax-deductible for businesses.

Answer: TRUE

Interest payments on business debt are typically tax-deductible, reducing the effective cost of debt finance. Dividend payments on equity are not tax-deductible.

Q3: An income statement shows the financial position of a business at a specific point in time.

Answer: FALSE

An income statement shows financial PERFORMANCE over a PERIOD of time. A BALANCE SHEET shows financial position at a specific point in time.

Q4: The accounting equation states that Assets = Liabilities + Owner's Equity.

Answer: TRUE

The fundamental accounting equation underpins the balance sheet: Assets (what is owned) = Liabilities (what is owed) + Owner's Equity (residual interest).

Q5: A business that is profitable will always have positive cash flow.

Answer: FALSE

Profit and cash flow are different concepts. A profitable business can have negative cash flow due to credit sales, large capital purchases, excessive inventory or rapid growth.

Financial Statements

The income statement shows profitability over a period, the balance sheet presents financial position at a point in time, and the cash flow statement tracks cash movements. Learn to prepare and interpret each statement, understand the relationship between them, and identify warning signs of financial difficulty.

Ratio Analysis

Financial ratios measure profitability (gross profit margin, net profit margin, return on equity), liquidity (current ratio, quick ratio), and efficiency (inventory turnover, debtor days). Practise calculating each ratio, interpreting results against benchmarks, and explaining what changes in ratios indicate about business performance.

Budgeting and Cash Flow Management

Budgets plan future income and expenditure, while cash flow projections ensure the business can meet its obligations. Understand the difference between profit and cash flow, prepare simple cash flow forecasts, and evaluate strategies for managing cash flow problems including debtor management and credit control.

Sources of Finance

Businesses access finance through internal sources (retained profits, asset sales) and external sources (debt, equity). Compare short-term and long-term financing options, evaluate the advantages and risks of debt versus equity financing, and recommend appropriate funding strategies for different business situations and stages.

What does WACE Business Unit 4 Finance & Human Resources cover?

This topic covers sources of finance (debt vs equity), financial statements (income statement, balance sheet, cash flow), financial ratios (profitability, liquidity, efficiency), HR management (recruitment, selection, induction), motivation theories (Maslow, Herzberg), training, performance management and workplace relations under the Fair Work Act.

How many flashcards are in this set?

This free set contains 20 flashcards and 20 true/false quiz questions covering all key concepts in WACE Business Unit 4 Finance & Human Resources.

Are these flashcards aligned to the SCSA WACE syllabus?

Yes — every flashcard and quiz question is mapped to the SCSA Business Management & Enterprise ATAR Unit 4 syllabus, ensuring relevance to your WACE external examination.