3d-financial document Flashcards
Q: What are the main financial statements used in business?
Income Statement (Profit & Loss Account): Shows a business’s revenue, expenses, and profit over a period.
Balance Sheet (Statement of Financial Position): Shows a business’s assets, liabilities, and equity at a specific point in time.
Cash Flow Statement: Shows how cash moves in and out of the business.
Q: Why are financial statements important?
Help assess profitability, liquidity, and financial health.
Used by investors, lenders, and managers for decision-making.
Essential for tax and regulatory compliance.
Q: What are the key components of an income statement?
Revenue (Sales Turnover): Total income from selling goods/services.
Cost of Sales: Direct costs of producing goods sold.
Gross Profit: Revenue - Cost of Sales.
Operating Expenses: Indirect costs (e.g., wages, rent, marketing).
Net Profit: Gross Profit - Operating Expenses.
Q: What does gross profit indicate?
A: How efficiently a business produces and sells its goods.
Q: What does net profit indicate?
A: The actual profit after deducting all expenses.
Q: What are the key components of a balance sheet?
Assests
Assets: What a business owns.
Fixed Assets: Long-term assets (e.g., buildings, equipment).
Current Assets: Short-term assets (e.g., cash, inventory, receivables).
Q: What are the key components of a balance sheet?
Liabukities
Liabilities: What a business owes.
Current Liabilities: Short-term debts (e.g., supplier payments, bank overdrafts).
Long-Term Liabilities: Long-term debts (e.g., loans, mortgages).
Q: What are the key components of a balance sheet?
Equity
Equity: Owner’s investment + retained profit.
Formula: Assets - Liabilities = Equity
Q: Why is the balance sheet important?
A:
Shows financial position of the business.
Helps investors assess financial stability.
Assists in obtaining loans and investment.
Q: What does a cash flow statement show?
A:
Cash inflows: Money coming into the business.
Cash outflows: Money going out of the business.
Net Cash Flow: Difference between inflows and outflows.
Q: Why is cash flow important?
A:
Ensures the business has enough cash to pay bills and wages.
Helps identify cash shortages or surpluses.
Essential for business survival and growth.
Q: What are the key financial ratios used in business?
Gross profit margin
Profit from sales before expenses
• Why it’s useful:
Shows how well the business controls production or purchase costs.
• Key term – Gross Profit:
Sales Revenue – Cost of Sales
Q: What are the key financial ratios used in business?
Net profit margin
Formula:
(Net Profit ÷ Sales Revenue) × 100
• What it shows:
The % of sales left after all expenses are paid.
• Why it’s useful:
Shows overall profitability. Helps measure how efficiently the business runs.
• Key term – Net Profit:
Gross Profit – Operating Expenses
Q: What are the key financial ratios used in business?
Current Ratio,
• Formula:
Current Assets ÷ Current Liabilities
• What it shows:
If the business can pay its short-term debts using its current assets.
• Why it’s useful:
Measures liquidity. A ratio of 1.5–2 is considered healthy.
• Key term – Liquidity:
The ability to pay short-term debts quickly.
Q: What are the key financial ratios used in business?
Returnon Capital employed
• Formula:
(Net Profit ÷ Capital Employed) × 100
• What it shows:
The % return the business makes on the money invested.
• Why it’s useful:
Helps investors see how efficiently their capital is being used to generate profit.
• Key term – Capital Employed:
Total Assets – Current Liabilities
Q: Why are financial ratios useful?
A:
Help assess business performance and financial health.
Compare performance over time or with competitors.
Assist investors in making informed decisions.
What reaction are used in business
Acid test ration
• Formula:
(Current Assets – Inventory) ÷ Current Liabilities
• What it Shows:
The business’s ability to pay its short-term debts quickly, without selling inventory.
• Why It’s Useful:
• Gives a realistic view of liquidity.
• Useful in emergencies where stock may take time to sell.
• Helps assess financial stability and risk of cash flow problems.
• A ratio of 1 or more means the business can pay off current liabilities easily (good liquidity).
Expense ratio
Formula:
(Total Expenses ÷ Sales Revenue) × 100
• What it Shows:
The percentage of sales revenue used up by the business’s operating expenses.
• Why It’s Useful:
• Measures how efficiently the business controls its costs.
• A lower expense ratio means better cost control and higher profitability.
• Helps identify areas where expenses can be reduced.
• Useful for comparing with competitors or past performance.
