8. Internal / Financial Analysis Flashcards
What are Balance Sheets?
Lists of Assets and Liabilities.
What do Balance Sheets represent?
A snapshot of a firm’s finances at a fixed point in time.
What do Balance Sheets show regarding company assets?
The value of all the capital invested in the business.
What is the formula for calculating net assets?
Total fixed and current assets minus total current and long-term liabilities.
What are the two primary components of a Balance Sheet?
- Assets
- Liabilities
What are Assets?
Things the business owns.
What are Non-current Assets?
Assets likely to be kept for more than a year.
What is an example of a Non-current Asset?
Property, machinery, or production equipment.
What happens to Non-current Assets over time?
They often lose value due to depreciation.
What are Current Assets?
Assets that can be converted into cash within the accounting year.
What do Current Assets include?
- Receivables
- Inventories
What are Liabilities?
Debts the business owes.
What are Current Liabilities?
Debts that need to be paid off within a year.
What are examples of Current Liabilities?
- Overdrafts
- Taxes
- Payables
- Dividends
What are Non-current Liabilities?
Debts that will be paid off over several years.
What are Bad Debts?
Debts that debtors won’t ever pay.
What happens to Bad Debts on the Balance Sheet?
They are written off and recorded as an expense.
Fill in the blank: The total current liabilities are deducted from total fixed and current assets to give the value of ‘________’.
assets employed
True or False: Bad debts can be included on the balance sheet as an asset.
False
What does it indicate if a balance sheet doesn’t balance?
Something has gone horribly wrong.
What do brackets mean on a balance sheet?
They indicate negative numbers.
Describe what the non-current assets of a bakery might be.
Examples include ovens, baking equipment, and property.
What is working capital?
The finance available for day-to-day spending
Working capital is crucial for a business’s liquidity.
How is working capital calculated?
Working capital = current assets - current liabilities
Current liabilities include overdrafts, payables, and tax due.
Why is sufficient working capital essential for a business?
Businesses can’t survive without enough working capital to pay liabilities
It is important to collect money quickly to maintain cash flow.
What happens if a business ties up too much working capital in inventories?
They can’t use these to pay current liabilities until turned into cash
Excessive inventories can lead to liquidity issues.
How much cash should a business maintain?
Just enough to pay short-term debts
Too much cash is ineffective for earning profits.
What is the impact of inflation on a business’s cash needs?
Inflation increases costs, requiring more cash
Wages and stock holding costs rise during high inflation.
What is fixed capital or capital expenditure?
Money used to buy non-current assets
Examples include factories and equipment.
Why do businesses need to control their debtors?
To ensure timely payments and maintain cash flow
Unpaid debts can lead to financial difficulties.
What is the importance of managing stock levels?
To meet market demand without overstocking
Appropriate stock levels prevent cash flow issues.
How is stock valued according to accounting conventions?
At cost or net realizable value, whichever is lower
Net realizable value is the amount the company could sell the stock for currently.
What is depreciation?
The decrease in an asset’s value over time
Causes include wear and tear, breakdowns, and obsolescence.
What are the reasons assets lose value?
- Wear and tear
- Breakdowns
- Becoming outdated
Depreciation affects financial statements and asset valuation.
What does a business do to reflect asset depreciation in accounts?
Calculate depreciation each year
This provides a true reflection of what the asset could sell for.
Fill in the blank: The drop in value of a business asset over time is called _______.
depreciation
True or False: Non-current assets do not need financing for capital expenditure.
False
Businesses need capital expenditure for startup, growth, and replacement.
Current ratio
Current assets / current liabilities
Ideal 1.5 -2.0
Liquidity
How easy it is for an asset to be turned to cash
Return on capital employed
Operating profit / total equity + non current liabilities x100
Shows how much money is made by the business
Total equity + non current liabilities also known as what ?
Capital employed
Inventory turnover
Cost of sales / cost of average stock held
Shows the amount of times the stock is all sold out in the year
Receivables / payables days
Receivables/ payables divided by cost of sales X365
Shows amount of days it takes for
Gearing
Shows the ratios of debts of the business
NC liabilities / capital employed x 100
Rewards of high gearing
Extra funds for expansion
And gain a comp advantage
Risk of gearing
Not being able to afford repayments of loans especially when interests are high
Core competences
Unique features that make the business competitive
Hard for competitors to copy
Elkingtons triple bottom line
Includes : profit , people and the planet in a Venn diagram
