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A-Level Business > 7 - Financial Ratio Analysis > Flashcards

7 - Financial Ratio Analysis Flashcards

1
Q

What Can Financial Data Be Used To Assess?

A

Potential and performance of the business.

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2
Q

What Can The Financial Performance Of A Business Be Assessed Using?
(2 Points)

A

~ Balance sheet.
~ Income statement.

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3
Q

What Is A Balance Sheet?
(2 Points)

A

~ 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.

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4
Q

What Is An Income Statement?

A

A formal financial document that summarises a businesses trading activities and expenses to show whether the business has made a loss or a profit.

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5
Q

What Are Assets?

A

Item of value owned by a business.

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6
Q

What Are Non-Current Assets, Give Some Examples Of Them?
(2 Points)

A

~ Likely to be kept by the business for more than one year.
~ Vehicles, premises and machinery.

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7
Q

What Are Current Assets, Give Some Examples Of Them?
(2 Points)

A

~ Likely to be turned into cash within a year.
~ Inventories, receivables and cash equivalents.

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8
Q

What Are Liabilities?

A

Money the business owes.

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9
Q

What Are Non-Current Liabilities, Give Some Examples Of Them?
(2 Points)

A

~ Debts that the business has more than one year to repay.
~ Bank loans and mortgages.

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10
Q

What Are Current Liabilities, Give Some Examples Of Them?
(2 Points)

A

~ Debts that the business may have to repay within one year.
~ Overdrafts and payables.

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11
Q

What Are The 4 Financial Ratio Analysis Factors?

A

~ Profitability (ROCE).
~ Liquidity (Current Ratio).
~ Gearing.
~ Efficiency Ratios (Payable Days, Receivable Days and Inventory turnover).

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12
Q

What Does Ratio Analysis Allow For?
(4 Points)

A

~ More meaningful analysis of published accounts.
~ Shows the relationship between figures.
~ Used for comparisons over time.
~ Intra and inter business comparisons.

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13
Q

What Is ROCE?
(2 Points)

A

~ Return on capital employed.
~ A measure of how efficiently a business is using capital employed to generate profits.

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14
Q

What Is The Formula For ROCE?

A

Operating Profit / Total Equity + Non-Current Liabilities x 100

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15
Q

What Is Current Ratio?

A

A measure of a businesses ability to survive in the short term.

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16
Q

What Is The Liquidity Ratio Formula?

A

Current Assets / Current Liabilities

17
Q

What Can A Business Do To Improve Liquidity?
(2 Points)

A

~ Increase current assets.
~ Reduce current liabilities.

18
Q

What Is Gearing?

A

Measures what proportion of a business capital is funded through long term loans (Debt).

19
Q

What Is The Formula For Gearing?

A

Non-Current Liabilities / Total Equity + Non-Current Liabilities x 100

20
Q

What Do Efficiency Ratios Assess & Look At?
(2 Points)

A

~ The internal management of a business.
~ Looks at the management of cash and inventory.

21
Q

What Is Payable Days?

A

A measure of how long it takes for a business to pay for supplies it has purchased on credit.

22
Q

Why Would A Business Have A Longer Payable Days Ratio?

A

To ease cash flow problems.

23
Q

Why Would A Business Have A Longer Payable Days Ratio?

A

To ease cash flow problems.

24
Q

What Could A Short Payable Days Result In For A Business?

A

Discounts from suppliers.

25
Q

What Could A Short Payable Days Result In For A Business?

A

Discounts from suppliers.

26
Q

What Is An Ideal Result For Payable Days?
(2 Points)

A

~ 30 - 90 days.
~ Higher is advantageous for the business.

27
Q

What Is The Formula For Payable Days?

A

Payables / Cost Of Sales x 365

28
Q

What Is Receivable Days?

A

A measure of how long it takes for customers to pay the business for goods and services it has payed on credit.

29
Q

Why May A Business Try To Have A Shorter Receivable Days?

A

To ease cash flow problems.

30
Q

What Is An Ideal Result For Receivable Days?

A

Lower the better.

31
Q

What Is The Formula For Receivable Days?

A

Receivables / Sales Revenue x 365

32
Q

What Is Inventory Turnover?

A

Measures how frequently a business turns over its inventory in a year.

33
Q

What Will Inventory Turnover Vary Depending On?

A

The nature of the firm.

34
Q

What Is The Formula For Inventory Turnover?

A

Cost Of Sales / Average Inventory Held

35
Q

What Are The Values Of Financial Ratios When Assessing Performance?
(3 Points)

A

~ Provides a tool for the interpretation of accounts.
~ Structure from which comparisons can be made.
~ Aids decision making.

36
Q

What Are The Limitations Of Financial Ratios When Assessing Performance?
(3 Points)

A

~Possibility that accounts have been window addressed.
~ Need to consider reasons behind ratios.
~ Quantitative information only.

A-Level Business (37 decks)

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