3.5- Assessing competitiveness Flashcards
What is a profit and loss account
shows firms revenue for time period
-asw as costs associated with generating that revenue
What is a balance sheet
financial document showing businesses assets & liabilities
Name the 2 major documents all companies are required by law to publish
-statement of comprehensive income (profit and loss account) -> shows revenue generated & costs within revenue
-statement of financial position (balance sheet) -> details what business owes, owns, where money came from
What does a balance sheet list
long-term non-current assets
short-term (current) assets
total asset
What is an asset
item owned by a business
What is liquidity
ability of a firm to pay its bills and short-term spending
What are long-term assets
things used over and over again by a business to generate profit
Give 3 examples of long-term assets
-vehicles
-land, buildings
-machinery
Give 3 examples of current assets (short-term) assets
-stock -> value of any inventories of raw materials, partially finished ggods owned by business
-receivables -> money owed to business - by customers who have bought on credit
-cash -> money avaliable in bank -> easily accessed
Name the 3 sources of capital shown on balance sheet
-banks -> loans from banks carry interest - repaid
-shareholders -> when shares are sold -> share capital -> owed back to shareholders
-profits -> retained profit kept in business
Why is a balance sheet good for assessing long-term performance
as if reserves figure is rising over time it shows firm has been consistently profitable
Name the interests of stakeholders: bankers, suppliers, staff in a companies balance sheet
-bankers -> look at relationship between long-term borrowing, total equity
-suppiers -> interested in short-term financial health of business
-staff -> ‘wealth’ of business has ^/ decreased
What is cost of sales
shows cost of making/ buying products
Give the formula for gross profit
revenue - cost of sales = gp
What does gross profit tell us
what is left from revenue once cost of making/ buying goods has been deducted
What is operating profit
shows amount of profit left after deducting normal costs of operating the business
What is the formula or operating profit
gross profit - expenses = op
What is ratio analysis
Name the 3 types of ratio
-profitability -> shows relationship between gp/op/np & rev, assets, capital
-liquidity -> shows ability of a firm to meet its short-term debts
-gearing -> shows proportion of long-term finance in a business that has come from loans
Name the 2 ratios used to work out liquidity
-current ratio -> current assets/ current liabilities
-acid test ratio ->current assets - stock/ current liabilites
shows balance between companies short-term debts and the assets it can use to meet that debt
What is the ideal value for current ratio and why
1.5
-this means business would have £1.50 current assets for every £1 short-term debt -> so enough to cover debts
-if ratio = too low -> firm suffering liquidity crisis -> can’t pay off debts
What is acid test ratio formula
current assets - stock/ current liabilities
What is the ideal value for acid test ratio
1
would mean £1 of cash to cover every £1 of short-term debt
What is capital employed
adds shareholders capital (total equity) to loan capital (long-term liabilities) to work out total long-term finance in business
What is the formula for gearing ratio
long-term liabilities/ capital employed x100
What does gearing ratio tell us
the proportion of assets invested in a business that are financed by long-term borrowing
Why is it bad for a business to have high gearing
higher the gearing means the more a business is borrowing -> ^ risk
Name 3 ways a business could reduce high gearing
-issue more shares
-retain more profits
-repay some loans
Name the 4 profitability ratios
-gross profit margin
-operating profit margin
-net profit margin
-return on capital employed
What is the formula for capital employed
Capital employed = Share capital + retained earnings + long-term liabilities
What is suggested as low gearing
gearing lower than 25%
