3.5- Assessing competitiveness Flashcards
Define a statement of comprehensive income
What does it contain (8)
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
Explain stakeholders interest in the statement of comprehensive income (5)
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.
Define the statement of financial position (balance sheet)
Provides a summary of a firm’s assets, liabilities and capital
Define assets
Are resources that a business owns, divided into current and fixed assets
Define liabilities
Are the debts of the business, divided into current and non-current liabilities
Define capital
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
What is the relationship a business has between assets and liabilities
Give an example
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
Explain the types of fixed assets (4)
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.
Explain the types of current assets (3)
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
Explain the types of current liabilities (4)
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
Explain the types of non current liabilities (2)
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
Define Equity on a balance sheet
Is the bottom of the balance sheet, showing the amount of money owed to the shareholders
Explain stakeholders interest in balance sheets (3)
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
Define ratio analysis
Is a numerical approach to investigating accounts by comparing two related figures
Explain Return on Capital Employed (ROCE) as a ratio analysis
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.
Give the formula for ROCE
= Operating profit / capital employed (share capital, reserves, equity and non current liabilities) x 100%
Define the Gearing ratio
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.
Give the formula for the gearing ratio
= Non current liabilities / Capital employed x 100%
Explain the limitations of ratio analysis (4)
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
Explain Financial rewards as a strategy to increase productivity and retention, and reduce turnover and absenteeism
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.
Explain Employee Share Ownership as a strategy to increase productivity and retention, and reduce turnover and absenteeism
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.
Explain Consultation Strategies as a strategy to increase productivity and retention, and reduce turnover and absenteeism
Employees are more likely to be productive and motivated if they are involved in decision making .
Explain Empowerment strategies as a strategy to increase productivity and retention and reduce turnover and absenteeism
Involves granting employees more authority in the workplace to create a positive working environment where employees are motivated and productive.
Explain the different types of consultation strategies (3)
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
Explain the different types of empowerment strategies (4)
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.
Define Ethics
Are the standards of behaviour and moral principles that govern a person’s behaviour and the way they conduct activities
Explain the Business actions which go against ethics (5)
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.
Define the codes of practice
Are statements about how employees in a business should behave in particular circumstances where ethical issues arise.
Explain the pay and rewards of ethical issues
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
Define Corporate Social Responsibility
Is a business approach that contributes to sustainable development by delivering social, economic and environmental benefits to all stakeholders.
What does being a corporate social responsible firm involve (6)
Reduced negative environmental impact
Positive regard for human rights
Ethical trading policies
Using sustainable resources
Positive links with community
Reduced climate change
What are the advantages of a CSR approach from a business (6)
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
What are the disadvantages of being a CSR firm
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
