3.5

Question 1

Define income statement

Answer 1

Measures business performance (income and costs) over a given period of time. Also known as a profit and loss account.

Question 2

Define balance sheet

Answer 2

A Snapshot of the business assets and its liabilities on a particular day.

Question 3

Who is interested in an income statement?

Answer 3

-Shareholders
-Government
-Employees/Managers

Question 4

Who’s interested in a balance sheet?

Answer 4

-Shareholder
-Managers
-Suppliers & Creditors

Question 5

Define Non-current assets

Answer 5

Items owned by a business for the long term eg machinery and buildings.

Question 6

Define Current assets

Answer 6

Items converted to cash easily eg trade, cash balances and inventories.

Question 7

Define Current liabilities

Answer 7

Money a business owes eg short term borrowing, bank overdrafts.

Question 8

Define Non-current liabilities

Answer 8

Money a business owes in the long term eg bank loan, mortgages

Question 9

What does Gearing measure?

Answer 9

Measures the proportion of a business’ capital provided by debt and the long term funding that comes from debt

Question 10

Define equity?

Answer 10

Amounts invested by owners of the business eg share capital, retained profits

Question 11

Define debt

Answer 11

Finance provided to the business by external parties eg bank loans, other long term debt

Question 12

What is the gearing ratio formula?

Answer 12

Non-current liabilities / Total equity + non current liabilities x100

Question 13

What does a high gearing of 50% mean?

Answer 13

Substantial levels of interest will need to be paid back which means:
-Profit is reduced
-Business is considered risky for further investment
-Difficulties arising further loan capital

Question 14

What does a low gearing on less than 20% mean?

Answer 14

-Less finance comes from debt
-Business may be missing out on oppotunity to access finance
-Banks more likely to approve loan applications
-Unwillingness to take risks may deter investors.

Question 15

Define employee retention

Answer 15

The ability of a business to convince its employees to remain with the business

Question 16

Define labour turnover

Answer 16

The percentage of the workforce that leave a business within a given period

Question 17

What is the formula for labour turnover?

Answer 17

number of employees leaving during period / average number employed during period x100

Question 18

What are some problems of high staff turnover?

Answer 18

-Pressures on remaining staff
-Disruption to production
-Higher costs
-Hard to maintain standards

Question 19

What are some ways to improve staff turnover?

Answer 19

-Effective recruitment / training
-Provide competitive pay
-Job enrichment
-Reward staff loyalty

Question 20

What are some factors affecting staff turnover?

Answer 20

-Type of business
-Pay & other rewards
-Competitor actions
-Opportunities for promotion

Question 21

Formula for labour productivity

Answer 21

output per period (units) / number of employees at work

Question 22

What are some ways to improve labour productivity?

Answer 22

-Measure performance and set targets
-Streamline production process
-Invest in employee training

Question 23

Define absenteeism

Answer 23

Proportion of staff not present at work

Question 24

Formula for absenteeism

Answer 24

number of staff absent during period / number employed during period x100

Question 25

What are some steps to reduce high gearing levels?

Answer 25

-Issue ordinary shares to create further capital
-Retain more profits so less borrowing is needed

Question 26

Steps to increase gearing levels?

Answer 26

-Pay back ordinary shares
-Obtain more loans

Question 27

Rewards of high gearing

Answer 27

-Borrowing can fund expansion which many increase profits allowing a business to pay off loan quickly
-Attractive during growth phase to gain competitive advantage

Question 28

Risks of high gearing

Answer 28

-Borrowing money comes with risk of not being able to afford the repayments
-Interest rates might go up so repayment more expensive

Question 29

What is the formula for return on capital employed?

Answer 29

Operating proft/Capital employed x100

Question 30

What is Return on Capital Employed (ROCE)?

Answer 30

Compares profit made by a business to the amount of capital invested in the business.

Question 31

What are some limitations of ratio analysis?

Answer 31

1. Making comparisons, important to compare like for like so comparisons only useful for firms with significant similarities.
2. Balance sheet might not be representative

Question 32

Strategies to improve employee perofrmance

Answer 32

-Offer financial rewards
-Offer shares in the company
-Consultation
-Empowerment

Question 33

Define Gearing

Answer 33

Shows where a business gets its capital from

Question 34

Gearing ratio formula

Answer 34

Non-current liabilities / Capital employed x100

Question 35

Formula for capital employed

Answer 35

Total equity + NCL

Question 36

Why are shareholders interested in a balance sheet?

Answer 36

Identifies the asset structure and how their investment has been put to use & wether the bussines is growing.

Question 37

Why are Managers interested in a balance sheet?

Answer 37

Used to identify financial position, access working capital to determine if theres enough liquid assets to pay debts

Question 38

Why are suppliers interested in a balance sheet?

Answer 38

Used to judge solvency of the business to determine the risks when offering firms trade credit