3.5- Assessing competitiveness

Question 1

Define a statement of comprehensive income

What does it contain (8)

Answer 1

Shows whether a business has made a profit or a loss

Revenue- what a business receives from selling goods and services
Cost of sales- the production costs of goods and services
Gross Profit- cost of sales subtracted from revenue
Selling expenses- expenses relating to selling, advertising and distribution costs
Administrative costs- the general overheads of a firm, office salaries and bills.
Operating profit- selling and administrative costs subtracted from gross profits
Finance costs- costs and income of paying back loans and receiving money from lending
Net profit- finance and taxation costs subtracted from operating profits, the sum is the money owed to shareholders

Question 2

Explain stakeholders interest in the statement of comprehensive income (5)

Answer 2

Shareholders- interested in net profit made as a indicator of performance and whether a firm is growing or not.

Managers- will use it to monitor progress and see if targets are met

Employees- will use it when seeking a wage increase, of they see a business is performing well they can argue the firm can afford a pay increase

Suppliers- will use it to check a firm’s creditworthiness when supplying trade credit

Government- require firms to produce the statement to assess how much tax they are owed.

Question 3

Define the statement of financial position (balance sheet)

Answer 3

Provides a summary of a firm’s assets, liabilities and capital

Question 4

Define assets

Answer 4

Are resources that a business owns, divided into current and fixed assets

Question 5

Define liabilities

Answer 5

Are the debts of the business, divided into current and non-current liabilities

Question 6

Define capital

Answer 6

Is the money introduced by the owners of the business, when they buy shares. Another source of funds that can be used to purchase assets

Question 7

What is the relationship a business has between assets and liabilities

Give an example

Answer 7

In all balance sheets the value of assets is equal to the value of liabilities. This is because any increases in total assets must be funded by an equal increase in liabilities.

For example, a firm wanting to buy new machinery may need to obtain a bank loan

Question 8

Explain the types of fixed assets (4)

Answer 8

Goodwill- is an intangible asset, the amount the business is worth above the value of net assets. Exists when a firm has a good reputation and customers that are likely to return

Other intangible assets- include brand names, patents, trademarks and copyrights

Tangible assets- physical assets that a business owns including property and machinery.

Investments- financial assets owned by a firm, like shares in other businesses.

Question 9

Explain the types of current assets (3)

Answer 9

Inventories- refers to stocks of raw materials and finished goods

Receivables- creditors, debts owed to the business

Cash- money held by a firm on the premises or in bank accounts

Question 10

Explain the types of current liabilities (4)

Answer 10

Borrowings- any short term loans or overdrafts taken out by a firm

Payables - are debts owed by a business

Dividends- the amount a business pay’s to shareholders

Current tax- corporation tax and income tax that is owed by a firm to be repaid in 12 months

Question 11

Explain the types of non current liabilities (2)

Answer 11

Other borrowings- money owed by a business that does not have to be repaid within 12 months, mortgages

Retirement pension obligations- companies owe money to past employees

Question 12

Define Equity on a balance sheet

Answer 12

Is the bottom of the balance sheet, showing the amount of money owed to the shareholders

Question 13

Explain stakeholders interest in balance sheets (3)

Answer 13

Shareholders- will be used to analyse the asset structure of the business, showing how the funds raised by the business have been put to use. Also assesses liquidity of a firm.

Managers- will use it to monitor working capital levels to ensure the business does not overspend.

Suppliers- use it to assess the liquidity of a business, not likely to offer trade credit to firms who are not liquidable

Question 14

Define ratio analysis

Answer 14

Is a numerical approach to investigating accounts by comparing two related figures

Question 15

Explain Return on Capital Employed (ROCE) as a ratio analysis

Answer 15

Is the profit of a business as a % of the total amount of money used to generate it. Tax is ignored as a it is outside the businesses control.

Question 16

Give the formula for ROCE

Answer 16

= Operating profit / capital employed (share capital, reserves, equity and non current liabilities) x 100%

Question 17

Define the Gearing ratio

Answer 17

Shows the long term financial position of the business, by comparing the owner’s equity to debt. Demonstrates the degree to which a firm’s activities are funded by shareholders funds versus creditors funds, whether a firm is burdened by loans.

Question 18

Give the formula for the gearing ratio

Answer 18

= Non current liabilities / Capital employed x 100%

Question 19

Explain the limitations of ratio analysis (4)

Answer 19

Caution must be taken with comparisons - comparing ratio’s between businesses is difficult where firms operate in different industries , that require different amounts of capital.

The quality of final accounts- ratio analysis is only useful if accounts are accurate, inflation can distort comparisons between periods.

Qualitative information is ignored- there are qualitative factors that can affect the performance of the business.

Window dressing- firms can manipulate their accounts legally to present different financial pictures

Question 20

Explain Financial rewards as a strategy to increase productivity and retention, and reduce turnover and absenteeism

Answer 20

Following Taylor’s theory, increased financial rewards will lead to increased motivation for employees to work. This makes workers want to remain at the firm and be productive as they feel valued.

Question 21

Explain Employee Share Ownership as a strategy to increase productivity and retention, and reduce turnover and absenteeism

Answer 21

If businesses offer employees a share of ownership they will feel they are responsible for the operations of the business, so remain at the firm and are highly productive.

Question 22

Explain Consultation Strategies as a strategy to increase productivity and retention, and reduce turnover and absenteeism

Answer 22

Employees are more likely to be productive and motivated if they are involved in decision making .

Question 23

Explain Empowerment strategies as a strategy to increase productivity and retention and reduce turnover and absenteeism

Answer 23

Involves granting employees more authority in the workplace to create a positive working environment where employees are motivated and productive.

Question 24

Explain the different types of consultation strategies (3)

Answer 24

Psuedo Consultation - where management makes a decision and informs employees

Classical Consultation - involves employees having a influence on management decisions

Integrative Consultation - where employees and management come to a joint decision

Question 25

Explain the different types of empowerment strategies (4)

Answer 25

Training - equips staff with the skills to undertake new tasks

Provide the necessary resources - empower staff by giving them the resources and information needed to undertake complex tasks.

Hand over authority- to be empowered an employee must have control of decision making.

Inspire confidence and give feedback - if employees are empowered they need to feel confident and be given feedback on how to improve.

Question 26

Define Ethics

Answer 26

Are the standards of behaviour and moral principles that govern a person’s behaviour and the way they conduct activities

Question 27

Explain the Business actions which go against ethics (5)

Answer 27

Environment - many firms exploit the environment and cause damage and pollution.

Animal rights - some firms use animals to test products and pollute the environment, leading to a loss of animal habitats and life.

Workers in developing countries - many MNC’s pay very low wages to workers due to the lack of a minimum wage

Corruption- in certain countries businesses bribe governments to bypass legislation

Product availability - in some countries businesses charge higher prices for a essential product and service.

Question 28

Define the codes of practice

Answer 28

Are statements about how employees in a business should behave in particular circumstances where ethical issues arise.

Question 29

Explain the pay and rewards of ethical issues

Answer 29

There is often a conflict between the high salaries earned by senior managers in comparison to subordinates, creating income inequality.
Firms often pay large bonuses to bankers, regardless of how well the firm is doing.
Firms pay large sponsorships, like Nike’s $21 million endorsements to Ronaldo, but have also been involved in force labour scandals in Malaysia

Question 30

Define Corporate Social Responsibility

Answer 30

Is a business approach that contributes to sustainable development by delivering social, economic and environmental benefits to all stakeholders.

Question 31

What does being a corporate social responsible firm involve (6)

Answer 31

Reduced negative environmental impact

Positive regard for human rights

Ethical trading policies

Using sustainable resources

Positive links with community

Reduced climate change

Question 32

What are the advantages of a CSR approach from a business (6)

Answer 32

Customers become more loyal and repeat purchases occur

Employees feel proud to work for the firm so are more productive and motivated

Increased investment as investors seek to invest in CSR firms

Good reputation and word of mouth marketing

Improved relationships with the local community

Suppliers will want to supply to the firm as they can also gain a good brand image

Question 33

What are the disadvantages of being a CSR firm

Answer 33

Fad - there is the possibility that consumers will lose interest in CSR and will move on

Cost - being a CSR firm will lead to a higher cost of production, puts the firm at a disadvantage if competitors are not being CSR