3.5 assessing competitiveness Flashcards
interpretation of financial statements
what is the statement of financial position/balance sheet?
a snapshot of the assets and liabilities of a business at a point in time
non-current assets:
(fixed assets)
these are assets used to operate the business
intangible non-current assets:
not physical assets
→ brands and patents (intangible)
tangible non-current assets:
physical assets such as property and equipment (used in the production
process)
current assets:
assets that the business expects to use or sell within the year (inventories, receivables) these can be converted into cash to pay off liabilities
inventories:
the stock the business is holding
receivables:
debts from trade that a business anticipates will be paid within 12 months
current liabilities:
payments due within one year
borrowings/debts
include short term debts (overdrafts, short term loans)
how to calculate net current assets:
total assets - total liabilities = net current assets (the value of a business)
non-current liabilities
debts that a business does
not expect to pay within a year
(long term loans, provisions)
what are provisions?
money put aside in anticipation of bad debt
total equity:
represents how a business has been funded/capital employed (will always balance with net assets)
what do statements of financial position contain?
the financial information required to draw conclusions about the liquidity of the business
what is liquidity?
the ability of a business to meet its short term liabilities with its available assets
what will happen to a business that cannot pay its debts?
it will usually fail very quickly, even if they are profitable
what does a statement of financial position show?
the financial structure of a business at a specific point in time
→ it identifies a businesses assets and liabilities
→ it specifies the capital (money) used to fund the business
what we can find out from a statement of financial position:
-the value of a business (equity)
-the current assets a business owns
-short term liabilities that need to be paid in a year
-the liquidity of a business
-how a business has been financed
-the long-term debts of a business
why are stakeholders interested in the statement of financial position?
to perform ratio analysis and compare performance over time or with other businesses
which stakeholders use the balance sheet?
-shareholders
-managers
-suppliers
-employees
how do shareholders use the balance sheet?
-to identify the asset structure of the business and how their investment has been used
-used to calculate the working capital of the business and determine its solvency
-used to determine the rough value of a business, which helps a judgement on whether their investment is growing
how do managers use the balance sheet?
-to assess the working capital position of the business and determine if there are enough liquid current assets to pay its bills
-information on the capital structure of the business, which helps guide decisions on whether to raise further funds
how do suppliers use the balance sheet?
-to see whether the business will be able to pay its debts
-to support any decisions around credit agreements
-businesses with low levels of working capital may find it difficult to pay short-term debts and so suppliers may offer trade credit, but with stricter terms