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Business unit 7 > 7.2 > Flashcards

7.2 Flashcards

Ratio analysis

1
Q

what are exceptional items ?

A

Exceptional items are large(usually one-off)financial transactions arising from ordinary trading activities. However, they may be so large as to risk distorting the company’s income statement.

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2
Q

what are income statements ?

A

demands the financial statements including income statements and specifies information needed in these accounts.

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3
Q

what are extradionary items ?

A

Extraordinary items are large transactions outside the normal trading activities of a business. As a result, they are not expected to recur.

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4
Q

what is window dressing ?

A

the manipulation of finial accounts to improve appearance of performance.

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5
Q

what are methods of window dressing ?

A

sales and leaseback
hiding poor investments
exceptional items
presentation
overstate brand value

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6
Q

what is a balance sheet ?

A

a statement of a firms financial positions detailing assets and liabilities to a specific point.

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7
Q

what is the use of a balance sheet ?

A

-reporting purposes as annual accounts
-help shareholders asses the worth of the business
-analyse and improve your business

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8
Q

what are fixed non current assets ?

A

assets owned by the business that it expects to retain for more than one year or more .

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9
Q

examples of fixed non current assets?

A

land ,property,production and vehicles

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10
Q

what are current assets ?

A

likely to be converted int cash before next balance sheet is made.

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11
Q

what is a liability

A

a liability is a debt owed by the business to organisations or individuals.

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12
Q

what are long term /non current liabilities ?

A

these are debts the business does not expect to be repaid over the period of one year

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13
Q

current liabilities ?

A

represent debts owed due to payment within one year or less

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14
Q

what are net assets ?

A

they are the overall value of a business after you deduct all what they owe.

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15
Q

what are total equity ?

A

money invested by the business into assets from sales or retained profit.

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16
Q

what is depreciation ?

A

reduction of value of an asset over a period of time

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17
Q

why do assets depreciate ?

A

wear and tear
inadequate maintenace
more modern technology

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18
Q

why do firms deprecate assets ?

A

spread costs of the assets
help business show accurate info
allows firms to calculate the true costs

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19
Q

what is working capital ?

A

finance needed to pay for the day to day expenses of a business.

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20
Q

what are factors that influence working capital ?

A

volume of sales
amount of trade credit offered
wether the firms is growing
rate of inflation

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21
Q

what is ratio analysis ?

A

an examination of accounting data by relating one figure to another allows a more meaningful interpretation.

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22
Q

what does ratio analysis provide ?

A

judge a firms financial position in relation to size and performance of competitors.Allows stakeholders to evaluate a business to see if they are worth buying into to. (slide 40)

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23
Q

what are some sorces of ratio analysis ?

A

performance , benchmarks/norms for the industry and the economic environment.

24
Q

what are the three types of ratios?

A

profitability , liquidity and gearing

25
Q

What are profitability ratios?

A

these compare profits against other variables measure success of the business.

26
Q

what does gross profit margin do ?

A

compares the gross profit with the revenue they make.
-higher result the better

27
Q

how can gross profit margin be improved ?

A

by increasing sales and keeping the costs the same

28
Q

Gross profit margin formula ?

A

gross profit /sales revenue x100

29
Q

what does net profit margin do ?

A

compares net profit to revenue generated
higher result the better
considers how all costs have been managed

30
Q

how can net profit margin be improved ?

A

increase in revenue by lowering expenses

31
Q

formulas for net profit margin

A

net profit/sales revenue x100

32
Q

what does ROCE ?

A

compares net profit with the capital invested in it to achieve it.higher result the better

33
Q

how can ROCE be improved?

A

reducing capital employed and increase return

34
Q

what is the ROCE formula ?

A

net profit/capital employed x100

35
Q

what are liquidity ratio ?

A

ratios allow managers to monitor a business cash position ie working capital managed correctly .

36
Q

what is current ration ?

A

it looks at the relationship between assets and liabilities , examine liquidity

37
Q

forumla for Current ratio. ?

A

current assets/current liabilities :1

38
Q

what is the ideal result ?

A

1.5 approx

39
Q

what does it mean if the ratio is too low? (current)

A

not able to pay debts, liabilities outweigh assets

40
Q

what does it mean if the ratio is too high ?(current)

A

too many resources or unproductive assets tied up leads to Money not being invested .

41
Q

what are gearing ratios ?

A

it is the measure of financial health of a business measure level of debt.

42
Q

gearing ratio formula ?

A

long term liabilities /(shareholders funds+long erm liabilities x100

43
Q

what is high gearing?

A

if more than 50% of capital is of loans this can lead to high interest payments and difficult to attract new investments.

44
Q

what is low gearing

A

capital is less than 50 of it is loans /therefore increased interest rates ,easier to attract investors , can’t grow as fast.

45
Q

How can a firm reduce gearing ?

A

using cash to pay debts and issues shares rather than loans

46
Q

how can a firm raise gearing?

A

by increasing long term loans

47
Q

what are efficiency ratios ?

A

measure the effectiveness within the management of the internal operation

48
Q

what does inventory turnover ratio mean ?

A

measures a company success in converting inventories into sales

49
Q

E - inventory turnover ratio ?

A

inventories/cost of sales x365

50
Q

how could a business improve inventory ratio?

A

improve supply chain
reviewing pricing strategy

51
Q

what are receivables ?

A

it calculates the time taken to by a business to collect the money it owes to supplier and other creditors.a lower figure is wanted

52
Q

receivable days formula ?

A

receivables /revenue x365

53
Q

why would inventory turnover rise?

A

increases in sales credit, less trade credit and stricter policies

54
Q

what is payables?

A

they are the time taken by a business to pay money it owes to suppliers or creditors , this improves their liquidity delaying payments.

55
Q

payables formula ?

A

payables / cost of sales x365

56
Q

evaluation of ratio analysis

A

-results from same business over previous years
-results if ratio analysis for other firms of the industry
-results of ratios from firms in other industries .

Business unit 7 (4 decks)

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