7 - Financial Ratio Analysis Flashcards
What Can Financial Data Be Used To Assess?
Potential and performance of the business.
What Can The Financial Performance Of A Business Be Assessed Using?
(2 Points)
~ Balance sheet.
~ Income statement.
What Is A Balance Sheet?
(2 Points)
~ Formal financial document
that summarises the net worth of a business at a given point in time.
~ It balances the net assets with total equity.
What Is Total Equity?
Value of shareholders funds.
What Is Net Assets?
Net worth of all the businesses assets.
What Is Net Current Assets?
Total current assets minus current liabilities.
What Is An Income Statement?
A formal financial document that summarises a businesses trading activities and expenses to show whether the business has made a loss or a profit.
What Are Assets?
Item of value owned by a business.
What Are Non-Current Assets, Give Some Examples Of Them?
(2 Points)
~ Likely to be kept by the business for more than one year.
~ Vehicles, premises and machinery.
What Are Current Assets, Give Some Examples Of Them?
(2 Points)
~ Likely to be turned into cash within a year.
~ Inventories, receivables and cash equivalents.
What Are Liabilities?
Money the business owes.
What Are Non-Current Liabilities, Give Some Examples Of Them?
(2 Points)
~ Debts that the business has more than one year to repay.
~ Bank loans and mortgages.
What Are Current Liabilities, Give Some Examples Of Them?
(2 Points)
~ Debts that the business may have to repay within one year.
~ Overdrafts and payables.
What Are The 4 Financial Ratio Analysis Factors?
~ Profitability (ROCE).
~ Liquidity (Current Ratio).
~ Gearing.
~ Efficiency Ratios (Payable Days, Receivable Days and Inventory turnover).
What Does Ratio Analysis Allow For?
(4 Points)
~ More meaningful analysis of published accounts.
~ Shows the relationship between figures.
~ Used for comparisons over time.
~ Intra and inter business comparisons.
What Is ROCE?
(2 Points)
~ Return on capital employed.
~ A measure of how efficiently a business is using capital employed to generate profits.
What Is The Formula For ROCE?
Operating Profit / Total Equity + Non-Current Liabilities x 100
What Is Liquidity?
A measure of a businesses ability to survive in the short term.
What Is The Liquidity Ratio Formula (Current Ratio)?
Current Assets / Current Liabilities
What Can A Business Do To Improve Liquidity?
(2 Points)
~ Increase current assets.
~ Reduce current liabilities.
What Is Gearing?
Measures what proportion of a business capital is funded through long term loans (Debt).
What Is The Formula For Gearing?
Non-Current Liabilities / Total Equity + Non-Current Liabilities x 100
What Do Efficiency Ratios Assess & Look At?
(2 Points)
~ The internal management of a business.
~ Looks at the management of cash and inventory.
What Is Payable Days?
A measure of how long it takes for a business to pay for supplies it has purchased on credit.
Why Would A Business Have A Longer Payable Days Ratio?
To ease cash flow problems.
Why Would A Business Have A Longer Payable Days Ratio?
To ease cash flow problems.
What Could A Short Payable Days Result In For A Business?
Discounts from suppliers.
What Is An Ideal Result For Payable Days?
(2 Points)
~ 30 - 90 days.
~ Higher is advantageous for the business.
What Is The Formula For Payable Days?
Payables / Cost Of Sales x 365
What Is Receivable Days?
A measure of how long it takes for customers to pay the business for goods and services it has payed on credit.
Why May A Business Try To Have A Shorter Receivable Days?
To ease cash flow problems.
What Is An Ideal Result For Receivable Days?
Lower the better.
What Is The Formula For Receivable Days?
Receivables / Sales Revenue x 365
What Is Inventory Turnover?
Measures how frequently a business turns over its inventory in a year.
What Will Inventory Turnover Vary Depending On?
The nature of the firm.
What Is The Formula For Inventory Turnover?
Cost Of Sales / Average Inventory Held
What Are The Values Of Financial Ratios When Assessing Performance?
(3 Points)
~ Provides a tool for the interpretation of accounts.
~ Structure from which comparisons can be made.
~ Aids decision making.
What Are The Limitations Of Financial Ratios When Assessing Performance?
(3 Points)
~ Possibility that accounts have been window addressed.
~ Need to consider reasons behind ratios.
~ Quantitative information only.
