3.7.2 Flashcards
what are the 6 main features of an income statement?
- cost of goods sold
- gross profit
- rent
- operating cost
- exceptional expenses and income
- net profit
what does it mean by goods sold?
direct costs associates with the production of sales
what does it mean by gross profit? definition and Equation
profit - direct cost
indication of success of trading activity
what does it mean by rent?
indirect/operating costs
what does it mean by operating costs? definition and equation
direct and indirect costs - profit
what does it mean by exceptional expenses and income?
expenses or incomes not associates with the direct activity if the business
what does it mean by net profit/profit of the year?
what the business has left over after tax is deducted
what are the 7 main features of a balance sheet?
- non-current assets
- current assets
- current liabilities
- net current assets
- non-current liabilities
- net assts
- total equity
what does it mean by non-current assets?
owned for over a year, fixed assets?
land, machinery
what does it mean by current assets?
assets expected to be used or sold within a year
inventories/debtors
what does it mean by current liabilities?
payments due within a year
what does it mean by net current assets? definition and equation
current assts - current liabilities
working capital available
what does it mean by non-current liabilities?
debts not expected o be payed within a year
what does it mean by net assets?
total assets - total liabilities
the value of the business
what does it mean by total equity?
always the same as net assets
re[resents how it has been financed
what are the 4 types of financial ratio?
- profitability ratio
- efficiency ratio
- liquidity ratios
- gearing ratio
what is profitability ratio?
key measure of success when comparing profit to revenue and investment.
what are the profitability ratios?
profit margin ratios
ROCE
what are profit margin ratios? what are the there types of profit margins?
comparing profit o revenue generated over a period of time.
gross profit margin, operating profit margin, net profit margin
what is ROCE ratio? what if the equation for capital employed? what is the equation for ROCE?
compared operating profit with the amount of capital employed by the business.
capital employed = total equity + any non current liabilities.
operating profit/capital employed
what is the efficiency ratio?
gives an indication of how well parts of the business is being managed.
what is a type of efficiency ratio?
Payables days ratio
Receivables days ratio
Inventory turnover ratio
what is liquidity ratio?
assesses the ability of a business to pay its debts
what is a type a of liquidity ratio?
current ratio
what is current ratio? definition and equation
compared current assets to current liabilities, this shows if the business has enough working capital to pay its short term debts]
current assets/current liabilities
what does gearing ratio do?
assesses the extent to which a business is based on borrowed finance.
what is a type of gearing ratio?
gearing ratio
what is getting ratio?
how the business has raised long term finance
how do you interpret current ratio?
e.g. expresses as 2:1, means £2 current assets to £1 current liabilities
how do you interpret gearing ratio?
highly geared means more than 50% of capital in he form of a loan. Business is vulnerable to increased interest rates
low geared have opportunity to borrow funds to expand
what three things are financial ratio used for?
- performance as a trend
- the economic environment
- benchmarkerss and industry average
what does benchmarkers and industry average mean?
manufacturers have lower operating profit margins. business needs to know the industry
what is inventory turnover ratio? definition and equation
measures the success of turning inventory into revenue
it compares the value of inventory with the sales achieved
cost of goods sold/average inventories held
how do you interpret inventory turnover ratio?
the lower the number the more efficient
ratio only really apply’s to manufacturers
perishable goods?
what are receivable days ratio? definition and equation
the time it takes for the business to revive its debts owed
(receivables/revenues) x 365
how do you interpret a receivables days ratio?
the shorter the period the quicker they have cash
trade credit links to a long waiting period
what is a payables days ratio? definition and equation
calculates how long it takes for the business to pay its creditors
(payables/cost of sales) x 365
how do you interpret a payables days ratio?
the longer the period the longer they have a lot of short term cash.
can damage relationships and can make future deals difficult
what are the 4 main categories financial accounts are used by?
- managers
- potential investors and lenders
- shareholders
- government
what do managers use financial accounts for?
assess performance and efficiency
what do shareholders use financial accounts for?
assess possible dividends
what do governments use financial accounts for?
calculate tax liability
what do potential investors and lenders use financial accounts for?
assess businesses security and liquidity
what are 4 benefits of ratio analysis?
- can compare and calculate trends
- greater insight into financial accounts
- information can be used against benchmarkers data
- assess performance of other functional areas
what are 3 limitations of ratio analysis?
- no account for qualitative issues like brand issues
- no account for impact of long-term decisions
- economic climate
What 5 stakeholders are interested in profitability ratios?
- Shareholders
- Creditors
- Managers
- Competitors
- Employees
What 3 stakeholders are interested in liquidity ratios?
- Creditors
- Suppliers
- Managers
What 3 stakeholders are interested in gearing ratios?
- Shareholders
- Managers
- Creditors
What 4 stakeholders are interested in efficiency ratios?
- Shareholders
- Managers
- Employees
- Competitors
What is the equation for gearing?
(Non-current liabilities/capital employed) x 100
