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Business As > 3.7.2- Value of financial ratios > Flashcards

3.7.2- Value of financial ratios Flashcards

1
Q

What is ratio analysis

A

Involves the comparison of financial data to gain insights into business performance

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2
Q

What is an income statement

A

A financial statement that repots a company’s financial performance over a specific accounting period

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3
Q

What is a balance sheet

A

A statement of the assets, liabilities and capital of a business or other organisation at a particular point in time

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4
Q

What is a statement of financial position

A

Alternative name for balance sheet

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5
Q

What is a consolidad balance sheet

A

The total balance sheet for a business

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6
Q

What is gross profit

A

Sales revenue - direct costs/ cost of sales/ variable costs

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7
Q

What is operating profit

A

Gross profit - operating expenses/ fixed costs/ indirect costs

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8
Q

What is profit for the year

A

Operating profit- taxation and other finance costs

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9
Q

What are current assets

A

Within a year

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10
Q

What are non-current assets

A

After a year

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11
Q

What are examples of non-current assets

A

Land
Property
machinery
logo/ brand name

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12
Q

What are examples of current assets

A

Stock
debtors
cash in bank

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13
Q

What are liabilities

A

A company’s legal financial debts and or obligations

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14
Q

What are examples of current liabilites

A

Overdraft
short term bank loan
creditiors

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15
Q

What are examples of non-current liabilites

A

Mortgage
long-term loan
debenture repayment

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16
Q

What is total equity

A

The total amount invested by the business/ shareholders

usually through retained profits

17
Q

Why does a balance sheet “blance”

A

Because every financial transaction results in an equal change in assets or liabilities- concept of “double entry”

18
Q

Where does the information for ratio analysis come from? - income statements

A

Revenues
cost of sales
gross profit
operation profit
profit for the year

19
Q

Where does the information for ratio analysis come from? - balance sheets

A

Current assets
current liabilities
inventories
trade receivables + payables
long term liabilities
capital + reserves

20
Q

What is working capital

A

Measures the amount of money available to a business to pay its day-to-day expenses

Working capital = current assets - current liabilities

21
Q

What is depreciation

A

The reduction of the value of an asset over a period of time

22
Q

What is a group income statement

A

Many companies get taken over and form a group of businesses

each company within a group retains a separate legal entity

group is legally obliged to produce a group income statement and balance sheet

23
Q

Income statements and the law

A

Legal requirement
companies must disclose exceptional items (large one off financial transactions regarding trading- eg set up cost of expanding into different country
and extraordinary items - ( large transactions outside normal trading)

24
Q

What are they key stages in ratio analysis

A

gather data
calculate ratios
interpret results
take action

25
Q

Limitations of ratio analysis

A

one data set is not enough
reliability of data?
based on the past
comparability

26
Q

Why might ratio data not be entirely reliable

A

Financial info involves making subjective judgements

different businesses have different accounting polices potential for manipulation of accounting info

27
Q

What is the importance of effective comparison

A

one ratio is rarely enough

need to compare with competitors

need to analyse over time (trends)

circumstances change over time

markets and industries change

different economic + market conditions

28
Q

What ratios dont tell you

A

competitive advantages
quality
ethical reputation
future prospects
changes in the external environment

29
Q

What is the formula for gross profit margin

A

gross profit/ revenue X 100

30
Q

What is the formula for operating profit margin

A

operating profit/ revenues X100

31
Q

What is return of capital employed
(ROCE)

A

A financial ratio that measures a company’s profitability and the efficiency with which its capital is employed.

32
Q

Calculation for Return of captial employed

A

operating profit/ (total equity + non-current liabilities) X100

33
Q

What is a current ratio

A

Liquidity is determined by the relationship between current assets and current liabilities.

Shows how well a business can deal with their short term obligations.

Current assets/ current liabilities

34
Q

What are payable days

A

The average length of time taken by a business to pay amounts it owes

35
Q

Calculation of payable days

A

payables/ cost of sales X 365

36
Q

What are receivable days

A

The average length of time taken by customers to pay amounts owed

= Receivables / sales rev X 365

Business As (14 decks)

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