2.3 Flashcards
Define Statement of comprehensive income
The Statement of Comprehensive Income is an end of year financial statement that shows all of a businesses income and expenses over the previous twelve months
Each type of profit is calculated within the Statement of Comprehensive Income
The previous year’s figures are also shown for comparison purposes
What does each profit show and their Calculations for
Gross profit
Operating profit
Net profit
Gross profit = revenue - cost of sales
The difference between revenue and the costs directly related to production
Operating profit = gross profit - operating costs expenses
The difference between the gross profit and the indirect expenses involved in operating the business
Net profit = operating profit - finance costs
The difference between the operating profit and any Interest paid and received, as well as any One-off costs
how to meausre profitability
(x profit / sales rev) x 100
3 Ways to improve profitability
Raising prices
If costs remain the same this will improve profitability as the difference between the selling price and costs is now greater depends on price elasticity
Reducing variable costs
This may involve purchasing cheaper/alternative resources, negotiating with suppliers or purchasing in bulk
Reducing other expenses
Reducing staffing levels, relocating to cheaper premises or changing utility companies can reduce expenses
Explain the difference between cash and profit
Profit is simply the difference between revenue generated and business costs
Cash is measured by taking into account the full range of money flowing in and out of a busines
What is the Statement of financial position
A summary of a companys assets, liabilities and equity
What are the calculations for
Working Capital
Net assets
Capital (shareholders equity)
Current assets - current liabilities
Total assets - total liabilities
(Share capital + retained earning) - treasury stock
2 Uses of the statement of financial position
Helps obtain external sources of finance
gives insights into a business performance
2 limitations of the Statement of financial position
Can’t compare
Figures may be manipulated
What is the current ratio + calculation and ideal ratio
Indicates a companys ability to meet its short+long term obligations
Current assets/ current liabilities
In between 1.5 to 3
What is the acid test ratio + calculation and ideal ratio
A measure of a business liquidity. Shows the businesses ability to pay short-term obligations using liquid assets
(Current assets- inventorty)/ current liabilities
At least 1:1or above
eg - An acid-test ratio of 1.5:1 means that the company has $1.50 of liquid assets available to cover every $1.00 of current liabilities. This ratio indicates that the company is in a good position to cover its short-term obligations as they come due.
What is meant by the term working capital and how is it calculated
It is the money available to meet the businesses current obligations
Current assets - current liabilities
Explain how the businesses SIZE may have a different effect on how businesses manage working capital
If a business is large, they are likely to have many assets that could be sold if needed allowing more room for liabilities
Explain how the businesses STOCK LEVELS may have a different effect on how businesses manage working capital
If stock levels are high stock should be sold at a reduced price to recieve money which could pay for liabilities
Explain how the businesses DEBTORS AND CREDITORS may have a different effect on how businesses manage working capital
Credit payors should be made to pay so that the business earns the money for what it gave in return
