7.2

Question 1

what are exceptional items ?

Answer 1

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.

Question 2

what are income statements ?

Answer 2

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

Question 3

what are extradionary items ?

Answer 3

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

Question 4

what is window dressing ?

Answer 4

the manipulation of finial accounts to improve appearance of performance.

Question 5

what are methods of window dressing ?

Answer 5

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

Question 6

what is a balance sheet ?

Answer 6

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

Question 7

what is the use of a balance sheet ?

Answer 7

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

Question 8

what are fixed non current assets ?

Answer 8

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

Question 9

examples of fixed non current assets?

Answer 9

land ,property,production and vehicles

Question 10

what are current assets ?

Answer 10

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

Question 11

what is a liability

Answer 11

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

Question 12

what are long term /non current liabilities ?

Answer 12

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

Question 13

current liabilities ?

Answer 13

represent debts owed due to payment within one year or less

Question 14

what are net assets ?

Answer 14

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

Question 15

what are total equity ?

Answer 15

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

Question 16

what is depreciation ?

Answer 16

reduction of value of an asset over a period of time

Question 17

why do assets depreciate ?

Answer 17

wear and tear
inadequate maintenace
more modern technology

Question 18

why do firms deprecate assets ?

Answer 18

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

Question 19

what is working capital ?

Answer 19

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

Question 20

what are factors that influence working capital ?

Answer 20

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

Question 21

what is ratio analysis ?

Answer 21

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

Question 22

what does ratio analysis provide ?

Answer 22

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)

Question 23

what are some sorces of ratio analysis ?

Answer 23

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

Question 24

what are the three types of ratios?

Answer 24

profitability , liquidity and gearing

Question 25

What are profitability ratios?

Answer 25

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

Question 26

what does gross profit margin do ?

Answer 26

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

Question 27

how can gross profit margin be improved ?

Answer 27

by increasing sales and keeping the costs the same

Question 28

Gross profit margin formula ?

Answer 28

gross profit /sales revenue x100

Question 29

what does net profit margin do ?

Answer 29

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

Question 30

how can net profit margin be improved ?

Answer 30

increase in revenue by lowering expenses

Question 31

formulas for net profit margin

Answer 31

net profit/sales revenue x100

Question 32

what does ROCE ?

Answer 32

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

Question 33

how can ROCE be improved?

Answer 33

reducing capital employed and increase return

Question 34

what is the ROCE formula ?

Answer 34

net profit/capital employed x100

Question 35

what are liquidity ratio ?

Answer 35

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

Question 36

what is current ration ?

Answer 36

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

Question 37

forumla for Current ratio. ?

Answer 37

current assets/current liabilities :1

Question 38

what is the ideal result ?

Answer 38

1.5 approx

Question 39

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

Answer 39

not able to pay debts, liabilities outweigh assets

Question 40

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

Answer 40

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

Question 41

what are gearing ratios ?

Answer 41

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

Question 42

gearing ratio formula ?

Answer 42

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

Question 43

what is high gearing?

Answer 43

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

Question 44

what is low gearing

Answer 44

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

Question 45

How can a firm reduce gearing ?

Answer 45

using cash to pay debts and issues shares rather than loans

Question 46

how can a firm raise gearing?

Answer 46

by increasing long term loans

Question 47

what are efficiency ratios ?

Answer 47

measure the effectiveness within the management of the internal operation

Question 48

what does inventory turnover ratio mean ?

Answer 48

measures a company success in converting inventories into sales

Question 49

E - inventory turnover ratio ?

Answer 49

inventories/cost of sales x365

Question 50

how could a business improve inventory ratio?

Answer 50

improve supply chain reviewing pricing strategy

Question 51

what are receivables ?

Answer 51

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

Question 52

receivable days formula ?

Answer 52

receivables /revenue x365

Question 53

why would inventory turnover rise?

Answer 53

increases in sales credit, less trade credit and stricter policies

Question 54

what is payables?

Answer 54

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

Question 55

payables formula ?

Answer 55

payables / cost of sales x365

Question 56

evaluation of ratio analysis

Answer 56

-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 .