3.5

Question 1

Statement of comprehensive income: income statement?

Answer 1

This measures the business’ performance (income and costs) over a given period of time, usually one year

Question 2

Statement of comprehensive income: statement of financial position?

Answer 2

A snapshot of the business’ assets (what it owns or is owed) and it’s liabilities (what it owes) on a particular day

Question 3

Statement of comprehensive income: cash flow statement?

Answer 3

Shows how the business has generated and disposed of cash and liquid funds during a specific period

Question 4

Stakeholder interest in the income statement: shareholders

Answer 4

How much profit is our business making?

How much profit can be distributed to us in dividends?

Question 5

Stakeholder interest in the income statement: competitors

Answer 5

What is the profit and profitability?

Is the business more efficient or does it add more value?

Question 6

Stakeholder interest in the income statement: government

Answer 6

How much tax should this business pay on its profits?

Question 7

Stakeholder interest in the income statement: employees

Answer 7

How secure is the business in terms of product or loss?

If bonuses are based on profit, has it been active?

Question 8

Statement of financial position: income statement

Answer 8

This measures the business’ performance over a given period of time, usually one year

Question 9

Statement of financial position

Answer 9

A snapshot of the business’ assets (what it owns or or owed) and its liabilities (what it owes) on a particular day

Question 10

Statement of financial position: cash flow statement

Answer 10

Shows how the business has generated and disposed of cash and liquor during a specific period

Question 11

What is gearing?

Answer 11

Measures the proportion of a business’ capital provided by debt

Question 12

What is the capital structure of a business?

Answer 12

Capital of a business represents the finance provided to it to enable it to operate over the long term. Two parts: equity and debt finance

Question 13

What is equity and debt finance?

Answer 13

E: amounts invested by the owners of the business
D: finance provided to the business by external parties

Question 14

Reasons for higher equity

Answer 14

Where there is greater business risk

Where more flexibility required

Question 15

Reasons for higher debt

Answer 15

Where interest rates are very low = debt is cheap to finance
Where profits and cash flows are strong; so debt cab be repaid easily

Question 16

Benefits to calculating the gearing ratio

Answer 16

• a useful measure the financial health of a business
• focuses on the level of debt in the financial structure of a business
• a high gearing ratio can mean higher risk of business failure

Question 17

Gearing formula

Answer 17

Non current liabilities/ total equity + non current liabilities x 100

Question 18

High and Low gearing

Answer 18

gearing ratio of 50%+ is normally said to be high
gearing ratio of less than 20% is low
the level of acceptable gearing depends on the business and industry

Question 19

Benefits of high gearing

Answer 19

Less capital required to be invested by the shareholders
Debt can be a relatively cheap source of finance compared with dividends
Easy to pay interest if profits and cash flows are strong

Question 20

Benefits of low gearing

Answer 20

Less risk of defaulting on debts
Shareholders rather than debt providers “call the shots”
Business has the capacity to add debt if required

Question 21

What is ROCE?

Answer 21

ROCE tells us what returns (profits) the business has made on the resources available to it

Question 22

Why is ROCE useful?

Answer 22

• evaluate the overall performance of the business
• provide a target return for individual projects
• benchmark performance with competitors

Question 23

Formula for ROCE

Answer 23

Operating profit (or net profit) / Total equity + non current liabilities x 100

Question 24

Evaluating ROCE

Answer 24

• ROCE will vary between industries; particularly important in capital intensive industries
• ROCE is based on a snapshot of a business’ balance sheet
• Comparisons over time and with key competitors are most useful

Question 25

What is ratio analysis?

Answer 25

Involves the comparison of financial data to gain insights into business performance

Question 26

Limitations of ratios

Answer 26

• one data set is not enough- ratio over time is much better
• how reliable is financial data?
• based on past- not a predictor of the future
• comparability

Question 27

Why might the financial data used in ratios not be reliable?

Answer 27

• financial info involves making subjective judgements
• different businesses have different accounting policies
• potential for manipulation of accounting info

Question 28

Reasons for employee retention

Answer 28

• retirement/ maternity/ death/ long term illness
• unsuitability
• changes in strategy (e.g closure of locations)

Question 29

What is labour turnover?

Answer 29

Measures the percentage of the workforce (employees) that leave a business within a given period.

Question 30

Formula for labour turnover

Answer 30

Number of employees leaving during period/ Average number employed during period x 100

Question 31

Factors that affect labour turnover

Answer 31

Working conditions
Employee loyalty
Pay and other rewards
Quality of communication in business

Question 32

What does high labour turnover lead to?

Answer 32

Higher costs:

• higher recruitment and training
• cost of temporary staff
• increased pressure on remaining staff
• disruption to production
• harder to maintain standards of quality and customer service

Question 33

How to improve or minimise labour turnover?

Answer 33

• effective recruitment and training
• provide more competitive pay and incentives
• job enrichment and empowerment
• reward staff loyalty

Question 34

Factors that influence labour productivity

Answer 34

• extent and quality of fixed assets (e.g equipment)
• skills, ability and motivation of workforce
• external factors (reliability of suppliers)

Question 35

Formula for labour productivity

Answer 35

output per period/ number of employees at work

Question 36

How to improve labour productivity?

Answer 36

• measure performance and set targets
• invest in capital equipment
• invest in employee training
• improve working conditions

Question 37

Issues with raising labour productivity

Answer 37

• potential trade off with quality
• potential for employee resistance
• employees may demand higher pay for their improves productivity

Question 38

What is absenteeism?

Answer 38

An employee’s intentional or habitual absence from work

Question 39

Issues with absenteeism

Answer 39

Significant business cost: sickness absence costs UK businesses around £600 for each worker per year

Question 40

Formula for absenteeism

Answer 40

Number of staff absent during period/ Number employed during period x 100

Question 41

Formula for absenteeism (focuses on no. of working days lost)

Answer 41

Number days taken off for unauthorised absence (during period) / Total days worked by workforce over the period x 100

Question 42

How to tackle absenteeism?

Answer 42

• understand the causes
• set targets and monitor trends
• have a clear sickness and absence policy
• provide rewards for good attendance

Question 43

What is empowerment?

Answer 43

Involves giving people greater control over their working lives