7.2 Ratio Analysis Flashcards
Gross profit
Sales revenue-cost of sales
Net profit
Gross profit- total expenses
Internal factors
Owners- making profit, performance
Employees- making profit, job security bonuses
Managers- monitor performance set targets
External factors
Suppliers- can they pay back? Level of sales expected
Bank- should we lend? Can they pay back?
Competitors- benchmarking, ways to improve, comparisons.
Local community- income, ethical?
Potential investors- is it worth investing, what returns?
Income statements and law
Legislation demands production of financial statements specifies information to be included.
Exceptional items
Large (usually one off) financial transactions arising from ordinary trading activities. May be large enough to distort companies income statement.
Extraordinary items
Large transactions outside of normal trading activities. Not expected to reoccur.
Window dressing
Manipulation of financial accounts by a Buisness to improve appearance of its performance.
Methods of window dressing
-overstate brand value
-sales and leaseback
-presentation
-exceptional items
-hiding poor investments
Overstate brand value
Intangible asset therefore very subjective. A Buisness can set their own value for brand therefore boost it.
Sale and leaseback
Common trick for retail businesses who build a shop then sell it to a property group and then lease it back for a monthly rate. Provides huge cash injection (increasing current assets) improve cash flow and liquidity ratios.
Presentation
Financial info can be presented or displayed in different ways to emphasise success or mask failures. Simple tactics such as using distorted scales or not using previous years info can minimise look of failures.
Hiding poor investments/ costs
Downplaying poor investments in fixed assets by understanding the cost and overplaying the asset gained. Delay paying off large bill/ bonuses until account is published.
Balance sheet
Statement of firms financial position detailing its assets and liabilities at a specific point in time.
Purpose of balance sheet
-reporting purposes as part of limited company’s annual accounts
-to help you and other interested parties such as investors, shareholders to assess worth of Buisness at any time
- tool to help analyse and improve management of buisness
Why would shareholders use balance sheet?
To assess Buisness’ potential to generate good returns in the future.
Examine the extent and type of assets available high proportion signifys potential for profit
Why might suppliers use balance sheet
Investigate short-term position of company. May consider cash and other liquid assets to make judgment on whether it will be able to pay bills over time. Helps make decision whether to offer credit.
why might mangers use a balance sheet?
indication of performance of business. may extract info to help them reach a decision on how to raise further capital for future investment. amount of existing loans may be a factor influencing this decision.
non- current assets
assets a business it expects to retain for a year or more.
used regularly and not purchased for resale
e.g. land, property, vehicles
current assets
only retained for a relatively shorty period of time.
calculate: stock+debtors+cash