3.5- Managing Change Flashcards
What is a statement of comprehensive income
This document shows if the business has made a profit or a loss during the year
Key info on a profit and loss account (SOCI)
Revenue
Gross profit
Expenses
Operating profit
What is revenue
Revenue is money into the business through ordinary trading.
Formula for sales revenue is Q xP
What is gross profit
Revenue – cost of sales
What is operating profit
GP-expenses
Operating profit is a true measure of how much profit (or loss) the business has made over the year
What’s costs of sales
Cost of sales, or cost of goods is the direct costs to make the goods that have been sold; raw materials , wages, labour
What are expenses
Expenses are costs not involved in producing the goods; advertising, promotion, wages of admin staff
What are shareholders interests
want to know the final profit figure which dividends will be paid out on
What are investors interests
want to know the profitability of the business – is it worth investing or will it be a risk
What is a statement of financial position
This document shows what the business owns and owes on one day of the year.
• It is often described as a snapshot of the business.
A =L +C
• Where assets = liabilities plus capital
Information on a balance sheet
Current assets
• Non-current assets
• Current liabilities
• Long-term liabilities
What are current assets
Current assets are items that the business owns that will pay the business in under 1 year. Three things fall into this category:
Stock
Debtors
Cash
What are non current assets
Fixed assets are items that a business owns but that will pay the business back after 1 year
E.g
Machinery
Vehicles
Property
What are current liabilities
These are items that the business owes, that need to be paid by the business, within 1 year
E.g materials
What are long term liabilities
These are items that the business needs to pay, but that is not due for total payment within one year
E.g a loan
What is a ratio in business
A ratio measures a company’s ability to meet financial obligations.
Current ratio formula
Current assets/ current liabilities
What is a current ratio
Also known as working capital ratio
Ideal around 2:1
the business might not have enough working capital to cover all their bills
• They may be over borrowing or over trading and will have cash flow problems
What is the acid test ratio formula
Current assets - inventory / current liabilities
What is the acid test ratio
The acid test ratio is also known as the quick ratio and is the most commonly used ratio to judge the financial health of a business
A result of less than 1:1 means that the current assets do not meet their current liabilities and they will struggle to pay their bills
What is the gearing ratio formula
Non current liabilities/ capital employed x 100
What is the gearing ratio
The gearing ratio looks at the long-term finance of the business and where it comes from
• A result of over 50% means the business is highly geared, most of the money comes from loans, this is very risky for a potential investor
• A result of less than 50% means the business is low geared and most of the money comes from the owners, a better risk for an investment
What is the ROCE ratio formula ( return on capital employed)
Operating profit / capital employed x 100
What does ROCE (return on capital employed) mean ?
Return on Capital employed is a measure of the profitability of the business
The higher the ROCE figure the better
• Demonstrates how hard the business made the money invested work
What are the limitations of using ratios when looking at balance sheets
The balance sheet is just a snapshot of the business on one day, if the ratios are based on this figure, then it’s a ratio of just one day in the business and as markets are dynamic figures could change
• The ratios are only as good as the information provided in the balance sheet and the profit and loss
Ratios must be seen in an industry context. In some supermarkets the current ratio is very low as the stock is sold so fast , so a low current ratio or acid ratio would not be a worry
