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Business > 6.4 Financial statements > Flashcards

6.4 Financial statements Flashcards

1
Q

What is a financial statement?

A

financial statement showing a business’s revenues and costs and so its profits or loss over time

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2
Q

statement of financial position?

A

sets out the assets and liabilities that a business has on a particular day

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3
Q

Why do businesses prepare financial statements?

A

The law, To help a business, To guide investors

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4
Q

What are the components of financial statements?

(6 sections)

A

Revenue, Costs of sales, Gross profit, overheads, operating costs, net profit

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5
Q

What 3 key pieces of information does an income statement show?

A
  • Revenue earned by a business
  • Costs of production that have been paid by a business
  • Amount of profit earned by a business or loss it has made
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6
Q

what is an asset?

A

An asset is something of value that is owned by a business (usually generates profit)

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7
Q

what 2 types of asset are there?

A

current and non-current

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8
Q

what is a current asset?

A

assets the business only expects to keep for a short time. Current assets are used to settle debts such as raw material costs

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9
Q

what is a non-current asset?

A

A business will normally keep this type of asset for many years, this type generates revenue for the business and allows for profits

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10
Q

what is a liability?

A

Amounts owed by a business to other businesses / individuals

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11
Q

what are 2 types of liabilities?

A

current and non-current

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12
Q

what is current liability?

A

debts that a business will pay within a year. For example, money owed to suppliers and tax

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13
Q

what is non-current liability?

A

debts that will be paid back over many years. for example, loans from the bank

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14
Q

what is total equity?

A

part of a company’s money that belongs to the shareholders

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15
Q

what is ‘net assets employed’

A

The value of the assets owned by a business once it has paid its liabilities

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16
Q

why is the statement of financial position balanced?

A

total equity = net assets

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17
Q

why are net assets and total equity directly correlated?

A

The more money put into the business to invest into assets, the more the value of both rises.

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18
Q

What comparisons can be made to interpret financial statements?

A
  • comparisson with previous years
  • comparisson of preformance with competitors
  • profit ratios
  • gross profit margin
  • net profit margin
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19
Q

what can be used from previous years to measure a business’s performance

A
  • revenue from sales of goods and services
  • gross and net profits
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20
Q

why is a comparison with competitors useful?

A

if the business is making profit quicker than competitors can, this shows their progress in comparrison to competition (if they are likely to grow or shink etc)

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21
Q

what are profit ratios?

A

Financial ratios compare two figures from a business’s financial statement. A common figure to compare with profit is revenue.

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22
Q

what equations are used in profit ratios?

A

gross profit and net profit on the income statement. Using these allows us to calculate two profit ratios: gross profit margin and net profit margin

23
Q

what is gross profit margin?

A

This compares a business’s gross profit for a trading period with the revenue figure for the same year.

24
Q

what is net profit margin?

A

Compares a business’s net profit for a trading period with the revenue for the same period

25
Q

what do shareholders and owners look at on financial statements to judge a business?

A
  • level of sales achieved
  • costs the business has had to pay
  • the amount of profit or loss that has been made
26
Q

why do managers look at financial statements ?

A

Assess whether or not their decisions are effective

27
Q

what do suppliers look at on financial statements to judge a business?

A

shows reliability on if they will be paid if the busines makes much profit

28
Q

what do employers look at on financial statements to judge a business?

A

Pay may depend on profit levels and shows job security (is the business stable?)

29
Q

why are financial statements important to stakeholders?

2 main reasons

A

assessing business performance and helping managers effective decsions

30
Q

how do stakeholders assess business performance through financial statements?

A
  • Shows revenue and profits which increases value of the business
  • Show data for several years so trends can be observed
  • conduct ratio analysis to make better judgement by comparing
31
Q

How do financial statements help managers assess decision making

A
  • Find reasons for falling profits and find ways to improve
  • Show whether costs have risen or not and how costs can be cut
  • Can identify decline in sales which equates to decline in profits
32
Q

What is ratio analysis?

A

A method of assessing a firm’s financial situation by comparing two sets of linked data

33
Q

How is ratio analysis formed?

A

Mainly formed by extracting information from financial accounts (Income statement, Balance Sheet)

34
Q

what is ratio analysis used for?

A

Used to draw conclusions about a company’s performance

35
Q

what are the 2 catagories of ratio?

A

profibility ratios and liquidity ratios

36
Q

what does a profitibility ratio measure?

A

measure a firm’s efficiency at achieving profit - relate profit to size of firm, past performance, competitors

37
Q

what is liquidity ratio?

A

examining the ability to meet short-term debts called solvency

38
Q

what are types of profitibility ratios?

A
  • Gross Profit Margin
  • Net Profit Margin
  • Return on Capital Employed (ROCE)
39
Q

what are types of liquidity ratios?

A

current ratios and acid tests

40
Q

what is the equation for the acid test?

A

Current assets - stock / Current liabilities

41
Q

what is the equation for current ratios?

A

Current assets / Current liabilities

42
Q

why are ratios used?

A
  1. To assess how well a business is preforming
  2. To compare performance with a competitor
  3. For owners and lenders to know how successful a business is
43
Q

what is the equation for gross profit margin?

A

gross profit earnings (earnings) / sales revenue (turnover) x100

44
Q

what is the equation for net profit margin?

A

Net profit (earnings) before tax / sales revenue (turnover) x 100

45
Q

what is the issue with GPM?

A

one issue with this is that it ignores overheads: useful to assess control of direct costs and ability to max sales

46
Q

what is NPM a good measure of ?

A

Best measure of quality of profit, sales turnover measures scale of business

47
Q

what is the equation for ROCE?

A

Net profit (earnings) before tax / capital employed (equity) x 100

48
Q

what is ROCE a good measure of?

A

Equity (or Capital Employed) is the best measure of size or scale of operations

49
Q

What are the 4 types of comparisons of statements?

A

Inter firm, intra firm, Comparisons to a standard, Comparisons over time

50
Q

what is an inter firm comparison?

A

between companies (usually with rivals)

51
Q

what is an intra firm comaprison?

A

Within the economy to measure relative efficiencies (improvements/decline)

52
Q

what is a comparison to a standard?

A

Certain levels of performance are recognised - compare to these

53
Q

what is a comparison over time?

A

to register trends in efficiency and allow for exceptional circumstances

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