3.5 Flashcards
Statement of comprehensive income order
-Revenue – total income earned from selling goods/services.
-Cost of Sales – direct costs of producing goods sold
-Gross Profit = Revenue - Cost of Sales.
-Expenses/Overheads – indirect costs like rent, wages, utilities.
-Operating Profit = Gross Profit - -Operating Expenses.
-Profit Before Tax (PBT) – profit after operating profit and any other incomes/expenses.
-Net Profit (Profit for the Year) – profit remaining after tax is deducted.
Stakeholder Interest in the comprehensive Income Statement:
Managers – gross and operating profit and revenue to assess performance and set targets.
Shareholders – profit ,to evaluate profitability and decide on investments and returns in dividens
Employees – profit for reward
Banks/Lenders – to check if the business can repay loans.
Gov - identify tax needed to pay
Order of statement of financial position
Current assets
Current liabilities
Inventory (stock)
Trade receivables
Trade payables
Long-term liabilities
Capital and reserves
Stakeholder Interest in the statement of financial postition
Managers – to check liquidity and level of risk
Shareholders/Investors – to check how investment is spent
creditors– to check whether the business can meet its financial obligations.
Suppliers – to judge whether the business can pay for supplies on time
Define assets,liabilities and equity
Assets – what the business owns:
Current Assets: cash, inventory, receivables (due within 12 months).
Non-current Assets: machinery, buildings, vehicles (long-term).
Liabilities – what the business owes:
Current Liabilities: trade payables, short-term loans (due within 12 months).
Non-current Liabilities: long-term loans, mortgages.
Equity (Capital/Shareholders’ Funds) – the value of the business owned by shareholders:
Geering ratio formula
Gearing Ratio= Non current liabilities / capital employed x100
Capital Employed = Total Equity + Non-Current Liabilities
It shows the proportion of a firms equity that is borrowed
Higher geer= 50% or more= majority of capital is loans = vulnerable to an increase in IR
Low geer= opportunity to borrow more or suggest firm is too risk adverse
ROCE formula
Return on capital employed = operating profit / capital employed x100
Shows how effective the business was able to generate profit from investment placed
Improved by increasing operating profit or decreasing capital employed
Higher ROCE = better use of capital to generate returns.
How ratios help in decision-making:
📌 Gearing Ratio
-High gearing → Greater risk, but could mean aggressive growth strategy.
-Low gearing → Safer, but might mean missed growth opportunities.
Helps in deciding whether to take on more debt or raise funds via equity.
📌 ROCE
-High ROCE → Business is using its capital effectively.
-Declining ROCE → May suggest falling efficiency or profitability.
Helps in evaluating investment decisions, expansion, or cost-cutting needs.
Adv and dis of ratio analysis
ADV of ratio analysis
- Allows businesses to calc and compare trends over time
- Greater insight then financial accounts on its own
- Information can be used against bench mark data
- See performance of business in parts eg HR operations
DIS of ratio analysis
- No qualitative consideration
- Doesnt consider economic conditions
- Decision may not be profitable in SR but be in LR
- Ratios being manipulated= misallocation of resources
Labour productivity formula
Labour Productivity=total output per period of time/ number of employees at work
Higher labour productivity = more output per worker = better efficiency
Labour turnover formula
Labour turnover = number of staff leaving in a year / average number of staff x100
High turnover may indicate low morale, poor management, or better opportunities elsewhere.
Labour retention formula
Labour retention= number of staff staying over a year / average number of staff employed x100
Absenteeism formula
Absenteeism = number of staff absent for period of time / total employees x100
Human resource strategies to increase productivity and retention and to reduce turnover and absenteeism
-financial rewards eg bonuses,commission, performance related pay
-employee share ownership
-consultation strategies- Consultation involves managers obtaining the views of employees when making decisions
-empowerment strategies Empowerment involves providing employees with autonomy and responsibility to make their own decisions and work on their own behalf
