Accounting And Finance (steeds)

Question 1

What are the objectives of finance and accounting

Answer 1

The primary objective of Financial Accounting is to reveal the profits and losses of the business and provide a true and fair view of the business

Question 2

Why do businesses need to use accounting and finance

Answer 2

Providing a focus for the entire business. A measure of success of failure for the business. Reduced risk of business failure

Question 3

what is the usefulness of accounting and finance objectives to a business

Answer 3

They provide important information to shareholders and loan creditors, which can help to improve investment interest. The financial statements are used internally by management to manage both the current operations and future activities of the firm.

Question 4

what is the importance of accounting and finance objectives in the achievement of business objectives

Answer 4

-A measure of success of failure for the business.
-Reduced risk of business failure (particularly prudent cash flow objectives)
-Help coordinate the different business functions (all of which require finance) -Provide target to help make investment decisions (investment appraisal)

Question 5

What are the 4 sources of short term finance

Answer 5

-overdraft
-trade credit
-factoring
-hire purchase

Question 6

short term finance: overdraft, with adv and dis

Answer 6

-borrowing money through your current account by taking out more money than you have in the account
-external source of finance
-adv: borrow what you need, quick
-dis: less money to borrow, high interest rates

Question 7

short term finance: trade credit, with adv and dis

Answer 7

-arrangement to buy goods or services on an account without making immediate payment. (Tab)
-external source of finance
-adv: flexibility, seasonal variations, constant supply of goods
-dis: risk of late payment fees, need for credit management

Question 8

short term finance: factoring, with adv and dis

Answer 8

-when companies sell their debts to someone else for cheaper. That person that brought the debt pays it back for cheaper ?
-external source of finance
-adv: make a profit on paying someone’s debt, the company at least gets some of the debt back
-dis: companies loose some of the debt so not as much is payed back

Question 9

short term finance: hire purchase, with adv and dis

Answer 9

-buying assets by paying in instalment over time. You own the product once you have paid of all instalments
-external source of finance
-adv: flexible payments, good if you don’t have all finances
-dis: interest added to every payment, more expensive overall

Question 10

What are the 7 medium to long term sources of finance

Answer 10

-bank loan
-leasing
-debentures
-rationed profit
-shares
-government assistance
-venture capital and business angels

Question 11

medium to long term sources of finance: bank loan, adv and dis

Answer 11

-money loaned with interest by a bank
-external source of finance
-adv: full control of business, grows business, quick source of big finance
-dis: interest rate, won’t always be given it, lengthy application process

Question 12

medium to long term sources of finance: leasing, adv and dis

Answer 12

-transfers the ownership of assets to the lessee (they pay for using it)
-external source of finance
-adv: little or no down payments, less initial cash investment required
-dis: can’t claim capital allowances on the leased assets, may move to put down a deposit.

Question 13

medium to long term sources of finance: debentures, adv and dis

Answer 13

-A debenture is a type of long-term business debt not secured by any collateral.
-external source of finance
-adv: encourages long term funding to grow a business, cost affective
-dis: each company has certain borrowing capacity.

Question 14

medium to long term sources of finance: retained profits, adv and dis

Answer 14

-accumulated net income of the corporation that is retained by the corporation at a particular point in time
-internal source of finance
-adv: cheap, boost value, set aside funding for emergencies
-dis: less shareholders as retaining profits that could be used for dividends

Question 15

medium to long term sources of finance: shares, adv and dis

Answer 15

-unit used as mutual funds, limited partnerships and real estate investment trusts
-external source of finance
-adv: capital gains, bonus shares
-dis: high risk, fluctuations in market price

Question 16

medium to long term sources of finance: government assistance, adv and dis

Answer 16

-official help given to a company in form of money, loans, reduced taxes by the government
-external source of finance
-adv: free money, multiplier effect, doesn’t have to be repaid
-dis: difficult to receive, time consuming

Question 17

medium to long term sources of finance: venture capital and business angels, adv and dis

Answer 17

-venture capital: investors are employed by a risk capital company (invest other peoples money)
-business angels: individuals who are using their own funds to invest in business they like
-external source of finance
-adv: funding range, no debt financing
-dis: loss of control of business

Question 18

What is meant by internal and external source of finance

Answer 18

-external sources of finance refers to money that comes from outside the business. This may include bank loans or mortgages.
-Internal sources of finance include money raised internally, i.e. by the business or its owners

Question 19

What is an accounting concept

Answer 19

-accounting is a process of control of j expenditure of a business and is the vehicle for the publication of figures. For profit, value and cash

Question 20

What are the 2 categories of accounting

Answer 20

-financial accounting: concentrates with assets, profit and levels of cash within the businesses. This info is issued in the annual report to satisfy external shareholders
-managerial accounting: concentrates on internal records allowing the business to monitor and evaluate performance and set targets in order to achieve its objectives.

Question 21

What is matching in accounting conventions

Answer 21

-dates use to record financial transactions taken place not when payment is made.

Question 22

What is materiality in accounting conventions

Answer 22

Value of business needs to be realistic figure, not calculating every asset

Question 23

What is realisation in accounting conventions

Answer 23

-takes place when the legal ownership changes hand and not when payment is made

Question 24

What is true and fair view of business accounting

Answer 24

requirement in an auditor’s report that the set of accounts or financial statements are true, in that there are no falsehoods, and fair, in that the result accurately reports the condition it wishes to portray

Question 25

What is generally accepted accounting practice (GAAP)

Answer 25

overall body of regulation establishing how company accounts must be prepared in the United Kingdom. Company accounts must also be prepared in accordance with applicable company law.

Question 26

What is consistency in accounting conventions

Answer 26

Accounts produced in the same way

Question 27

What is going concern in accounting conventions

Answer 27

Operating as normal (not in danger of closing)

Question 28

What is objectivity in accounting conventions

Answer 28

Accounts must be realistic and based on facts not opinions and guesses

Question 29

What is prudence in accounting conventions

Answer 29

Is concerned with not overstating the organisation’s financial situation

Question 30

What is the usefulness of accounting conventions to a business

Answer 30

Accounting conventions are important because they ensure that multiple different companies record transactions in the same way. Providing a standardized methodology makes it easier for investors to compare the financial results of different firms

Question 31

What is capital structure

Answer 31

A capital of a business represents teh finance provided to it to enable it to operate over long term. These include:
-debt: finance provided to the business by external parties
-equity: amounts invested by the owners of the business

Question 32

Why do businesses have higher debt and equity

Answer 32

-debt: where interest rates are very low it means there is cheap debt, where profits and cash flows are strong so debt can be paid easily
-equity: where there is greater business risk, where more flexibility reviews (don’t have to pay dividends)

Question 33

What 6 factors affect the choice of finance for a business

Answer 33

-time: how long will it take to generate funds and pay back
-the legal structure: some traders and partnerships cannot issue share and so are restrictive on finance
-quantitive factors: if you have too many loans some banks won’t give anymore out
-qualitative factors
-external factors: the economy
-security: lack of security banks won’t invest

Question 34

What is fixed and variable costs and how to work out total costs.

Answer 34

-Fixed: costs that don’t change in relation to output.
-variable: changes in payments to level of output
-total costs= fixed costs + variable costs

Question 35

What are direct and indirect costs

Answer 35

Direct: direct link between the making of the product. (Wages, electricity, material) fixed costs
Indirect costs: costs associated with the business. Variable costs

Question 36

How to calculate costs of producing 1 product and unit costs

Answer 36

-costs of producing 1 product= unit costs / output
-unit cost= total costs/output

Question 37

What is marginal, social and opportunity costs

Answer 37

-Marginal: Costs of producing an extra unit/ good
-social: cost of society
-opportunity: the loss of other alternatives when one alternative is chosen

Question 38

What is overhead costs and how to calculate

Answer 38

Overhead costs are expenses associated with running a business that can’t be linked to creating or producing a product or service
-overhead rate= indirect costs / direct costs X 100

Question 39

What is revenue and how to calculate

Answer 39

-is the cash that flows into the business from the sales of goods and services
-revenue = price X Sales

Question 40

Calculation of profit

Answer 40

Total revenue-total costs

Question 41

what is the importnace of direct, indirect and overhead costs

Answer 41

Understanding direct costs and indirect costs is important for properly tracking your business expenses. It’s crucial to understand the difference between direct and indirect costs when pricing your products or services.

Question 42

what is the usefulness of cost and profit centres to a business

Answer 42

-Profit centers are crucial to determining which units are the most and the least profitable within an organisation. Specific part of the business which identifies revue and costs
-The main function of a cost center is to track expenses. Cost centres is a specific part of a business where costs can be identified and allocated

Question 43

What is break even and it’s formula

Answer 43

-reach a point in a business venture when the profits are equal to the costs.
-BEP= fixed costs / selling price - variable costs

Question 44

What is margin of safety

Answer 44

-difference between revenue and break even point. When revenue is higher then costs
-formula: MoS: total revenue -break even point

Question 45

What is the impact of break even point on a business

Answer 45

It helps entrepreneurs come up with a pricing strategy that will not only cover costs but will generate a gross profit.

Question 46

How could a business lower their break even point

Answer 46

-decrease the amount of fixed costs
-sell more
-increase price

Question 47

What are the advantages of using break even point in making decisions

Answer 47

-shows how many products need to be sold
-showed if a product is worth selling
-shows the amount of revenue the business will make at each level of output
-decision making tool

Question 48

What are the disadvantages of using break even point in making decisions

Answer 48

-assumes a business will sell stock or all of it
-variable costs could change regularly
-ignores competition
-demand of product or price amount the amount sold
-has to be loads of break even charts

Question 49

How does a business need to increase revenue

Answer 49

-increase the amount of volume sold
-achieve a higher selling point

Question 50

What is costing method

Answer 50

-standard costing: the cost the business expects the production of a product or device to be (it is a forecast that gives the business a cost target)
The actual cost is how much it does actually costs

Question 51

What are the advantages and disadvantages of cost centres

Answer 51

+allows to monitor performance, motivation of workforce, look for new suppliers or better production technique
-issues collecting data, allocation of costs can impact performance of different departments, some costs can’t be controlled.

Question 52

What are the advantages and disadvantages of profit centres

Answer 52

+provided useful insights into where profit is earned within a complex business, supports budgetary control, improved decision making at a local level
-time consuming to set up and monitor, difficulties in allocating costs, may lead to conflicts and competition in different areas of business

Question 53

What is absorption costs

Answer 53

All indirect costs or overheads (fixed) are absorbed by different cost centres. The easiest method is to use the output of each unit or it’s direct costs to allocate the overheads.

Question 54

Allocation of fixed costs is done via either

Answer 54

-divide production
-% if total sales
-% of total production

Question 55

What is the usefulness of costing methods to stakeholders

Answer 55

-shareholders will look at the bottom line
-employees will want a secure well paid job
-managers will make business decisions based on costing methods
-suppliers will be affected by how much a business is prepared to pay for its suppliers.

Question 56

What is contribution

Answer 56

What a business needs to achieve from selling products in order to just cover it’s fixed costs and therefore make a profit

Question 57

What is breakeven

Answer 57

the point at which total cost and total revenue are equal,

Question 58

How to calculate break even output

Answer 58

Fixed costs / contribution per unit

Eg/ 10,000 / 6 = 1667

Question 59

How can contribution be increased

Answer 59

-increasing the selling price per unit
-lowering the variable costs per unit

Question 60

What is target level of profit

Answer 60

Target profit is the expected amount of profit that the managers of a business expect to achieve by the end of a designated accounting period.

Question 61

What is break even analysis

Answer 61

-technique used by production management.
-it is based on categorising production costs between those which are variable and those that are fixed
-total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume at which the business makes no profit and no loss

Question 62

Calculation of contribution margin ratio

Answer 62

-CMR: total revenue - variable costs /total revenue

Question 63

Formula of margin of safety

Answer 63

current sales - breakeven point / current sales X 100

Question 64

Formula of target level of profit /revenue

Answer 64

Fixed costs + target profit / gross margin

Question 65

What is a stepped fixed cost

Answer 65

step fixed cost is a cost that does not change within certain high and low thresholds of activity, but which will change when these thresholds are breached

Question 66

Evaluate the impact of break even analysis

Answer 66

-demonstrates how many things they must sell in order to make a profit.
-It determines if a product is worth selling or is too dangerous to sell.
-It indicates how much money the company will make at each level of output.
-however, is only an estimate
-assumes a business will sell all of their stock
-variable costs can change

Question 67

How to lower a businesses break even point

Answer 67

-Decreasing the amount of fixed costs/expenses.
-Reducing the variable costs/expenses per unit.
-Improving the sales mix.
-Increasing selling prices without significantly decreasing the number of units sold.

Question 68

What is investment appraisal

Answer 68

-the process of analysing whether investment projects are worthwhile

Question 69

investment appraisal: what is payback and how to calculate

Answer 69

-the time it takes for a project to repay its initial investment (cost of machine) in years and months
-calculation:
Take each years payment off the initial cost. Until the pay off is too much to the remainder debt. Add up how many years it takes to get to this point. The remaining debt divided by the years pay back will give you a decimal of months add that onto the years.
Eg/
Initial cost: £125,000
Year 1: £50,000 (£75,000)
Year 2: £35,000 (£40,000)
Year 3: £60,000.
40,000/60,000= 0.66/ 1month
=2 years 1 month

Question 70

investment appraisal: what is average rate of return and how to calculate it

Answer 70

-looks at the average return of the profit over the life time of the machine
-average profit / cost of machine X 100
Step 1: calculate total profit =total rev-total cost
Step 2: calculate average profit= total profit /life time of machine
Step 3: average profit / cost of machine
X 100

Question 71

investment appraisal: what is net present value and how to calculate

Answer 71

-calculates the monetary value of a project’s future cash flow
-for each year:
Step1:Net return x discount factor (take away % each time) for net present value
Step2: add together for total present values.
Step 3: total present value -cost of machine = net present value

Question 72

What is total present value

Answer 72

The current value of a future sum of money or stream of cash flows given a specified rate of return.

Question 73

investment appraisal: payback adv and dis

Answer 73

-Adv: simple, appropriate when technology is changing rapidly, helpful to analyse cash flow problems, shows speed of return
-Dis: ignores all cash flow after payback period, ignores overall profitability of investment, assumes cash flow is constant

Question 74

investment appraisal: average rate of return adv and did

Answer 74

-adv: focuses on profit rather then payback, easy to compare different investment projects
-Dis:doesn’t take into account timing of cash flows, ignores the value of money, profit in 5 years time will be worth less

Question 75

investment appraisal: net present value adv and dis

Answer 75

-adv: takes into account time and interest rates, returns from different investment options can easily be compared, decision making mechanism
-dis: difficult to calculate, future rate of interest is unpredictable, doesn’t consider external factors

Question 76

What is meant by budget

Answer 76

-A detailed plan for the future concerning the revenues and cost expected over a certain period of time
-businesses have expenditure budgets (what you can spend) and sales budget (amount of money coming into the business)

Question 77

What is a favourable and adverse in sales

Answer 77

-Favourable is when the forecasting sales is lower then the actual sales. So they have more sales then predicted (+ 3000)
-adverse is when the forecast sales is greater then the actual sales

Question 78

What is favourable and adverse in expenditure

Answer 78

-favourable is when the forecasting is higher then the actual expenditure (predicted spending 800 but spent 600)
-adverse is when the actual is more then the forecasting (actual is 1000 and forecasting is 800)

Question 79

What is variance in budget

Answer 79

Variance is the difference between planned and actual numbers (both expenses and revenue).

Question 80

Why do managers use budgets

Answer 80

-control income and expenditure
-establish priorities and set target numerical terms
-sets business objectives
-motivates staff to spend less so they get bonuses
-monitor performance
-

Question 81

What are the principles for good budget control

Answer 81

-managerial responsibilities are clearly defined
-performance is monitored against the budget
-variances are investigated
-corrective action is taken if results differ from forecasting budget

Question 82

Possible causes of favourable variances (positive)

Answer 82

-stronger demand then expected
-selling prices increased higher then budget
-cautious sales and cost assumption
-better then expected productivity

Question 83

Possible causes of adverse variances (negative)

Answer 83

-unexpected events lead to un budgeted costs
-overspends by budget holders
-sales were lower then expected
-market conditions means demand is decreased
-inefficiency in spending

Question 84

Advantages of using variance analysis

Answer 84

-measure performance
-identify variances
-identify inefficiency in production
-allows to spot trends and threats
-can control expenses

Question 85

Disadvantages of using variance analysis

Answer 85

-may be unfavourable due to external influences
-shows there is a cost problem but not where
-only useful if forecasting is accurate
-demotivation if someone is blamed for it

Question 86

What is zero budgeting

Answer 86

-all budgets are set to 0 and managers justify any requirement for funds
-it helps prevent a situation where the same money is given each year
-helps with potential development

Question 87

What is cash flow

Answer 87

-When money comes in and out of the business.

Question 88

Why would a business produce a cash flow forecast

Answer 88

-advanced warning of cash shortage
-makes sure that the business can pay suppliers and employees
-important part of financial control
-provide reassurance to investors

Question 89

What is cash flow forecast

Answer 89

predict the cash that’s going out of your business and coming back in over a specific period.

Question 90

What is cash flow statement

Answer 90

financial statement that provides aggregate data regarding all cash inflows that a company receives from its ongoing operations and external investment sources.

Question 91

What is the purpose for cash flow statement

Answer 91

shows the source of cash and helps you monitor incoming and outgoing money.

Question 92

How to calculate net cash flow

Answer 92

NCF= total cash inflows -total cash outflows

Question 93

How does cash flow statement impact the business

Answer 93

Cash flow also affects your company’s ability to grow. Positive cash flow gives you more capital to spend on expenditures like a new machine or a second location for your business expansion plan. The more cash you bring in, the more freedom you have to reinvest.

Question 94

Evaluate the usefulness of cash flow statement

Answer 94

-is a solid measure of a company’s strength, profitability, and future outlook of a company.
-measures the cash inflows or cash outflows during the given period of time. This knowledge informs the company’s short- and long-term planning
-allows to see if they meet their targets
-shows if a businesses cash flow is positive or it isn’t where they expect it to be

Question 95

How to calculate cash flow

Answer 95

•current assets - current liabilities

Question 96

how does cash flow forecasts impact and help analyse costs and revenue of a business.

Answer 96

Cash flow forecasts are able to provide projected cash income and expenses for businesses. When it’s compared to actual sales and expenses, it will tell you how the business is performing on paper and in terms of real cash. With the help of cash flow forecasts, businesses can identify their financial needs

Question 97

how does cash flow forcastes impact stakeholders

Answer 97

It helps investors and shareholders understand how much money a company is making and spending. They examine the statement to get a good sense of whether a company’s business is financially healthy or headed for trouble.

Question 98

Usefulness of cash flow forecast to a business

Answer 98

-Cash flow forecasting is important because it enables businesses to make informed strategic decisions by having an accurate picture of what their cash position looks like in the future.
-gives an aim of where a business should be
-however, if cash flow into business is low it doesn’t say why
-it might be affected by outside circumstances which can affect the forecast
-forecast may be wrong

Question 99

what are the strategies of overcoming forecast cash flow problems

Answer 99

-Obtain a business credit card. Having access to different lines of funding can help cushion your cash flow.
-Request a deposit or partial payment.
-Lease instead of buy.
-Maintain a cash flow forecast.

Question 100

What is working capital

Answer 100

the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities

Question 101

What is the working capital cycle

Answer 101

-Working Capital Cycle is the time it takes to convert net current assets and current liabilities into cash.
-cash ➡️raw materials ➡️finished goods ➡️account receivables ➡️cash

Question 102

What is an income statement

Answer 102

Measures the performance over a given time period. It shows profit loss made by the business.

Question 103

What is contained within an income statement

Answer 103

-revenue, expenses, and net income.
-The components of the income statement include: revenue; cost of sales; sales, general, and administrative expenses; other operating expenses, non-operating income and expenses, gains and losses, non-recurring items, net income

Question 104

How to calculate profit, gross profit, operating profit and net profit.

Answer 104

-profit= money in -money out
-gross profit= revenue -costs of goods
-operating profit= revenue - operating costs - costs of goods - expenses
-net profit= gross profit - operating expenses -taxes

Question 105

Usefulness of an income statement to the business

Answer 105

-progress can be monitored by management and can set targets and make decisions
-figures can be used to carry out ratio analyses
-provides other stakeholders with valuable information

Question 106

What is included in assets

Answer 106

-current = stock
-non current = fixed, machinery ect

Question 107

What is the statement of financial position

Answer 107

This is a snapshot of the business assets (what it owns or is owed) and it’s liabilities (what it owes) on a particular day of financial period

Question 108

What are the two sides of a balance sheet: what is included in the balance sheet

Answer 108

Net assets:
-non current assets
-current assets
-current liabilities
-non current liabilities
Shares capital:
-shares capital
-reserves (profit)

Question 109

What is non current assets and net assets

Answer 109

-Non-current assets are assets and property owned by a business that are not easily converted to cash within a year.
-Net assets are the value of a company’s assets minus its liabilities

Question 110

What is inventory, receivables, payables

Answer 110

-inventory: current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a company has accumulated.
-receivables: refer to the money a company’s customers owe for goods or services they have received but not yet paid for.
-payables: Accounts payable include short-term debt owed to suppliers

Question 111

What is shareholders equity

Answer 111

Shareholders’ equity is the amount that the owners of a company have invested in their business.

Question 112

What is the usefulness of statement of financial position for a business

Answer 112

-one way to issue shares
-shows if the business is in a financially good position
-helps if a business wants more funding (bank loans)
-shows if they need more funds to keep running

Question 113

What is depreciation

Answer 113

-is the drop in value of an asset over time mainly as a result of wear and tear

Question 114

What is the need for the provision of depreciation

Answer 114

A depreciation provision allows a company to account for the gradual decline in the value of its fixed assets over time, thus allowing the company’s financial statements to accurately reflect the current value of its investments in those assets.

Question 115

How to calculate net book value

Answer 115

Costs of machine -depreciation

Question 116

How to calculate straight line of depreciation

Answer 116

Initial costs -residual value / life of assets

Question 117

What is straight line depreciation

Answer 117

The value of the asset is reduced equally per year over its lifetime.

Question 118

What is residential value

Answer 118

Value of product at the end of its life once the depreciation has been deducted

Question 119

What is reducing balance in depreciation

Answer 119

Reducing balance depreciation is a method to help you calculate the rate of depreciation of an asset when it’s expensed at a percentage.

Question 120

How to calculate reducing balance in depreciation

Answer 120

-cost of machine x depreciation value in %

Question 121

What is the impact of depreciation on a business

Answer 121

-Has an indirect effect on cash flow because it changes the company’s tax liabilities, which reduces cash outflows from income taxes
-reduces return on equity for shareholders

Question 122

What is ratio analysis and what are the main groups

Answer 122

-Involves the comparison of financial data to gain insights into business performance
Main ratio groups:
-profitability: gross profit margin, Pepe rating profit margin, return on capital employed
-liquidity: current ratio, acid test ratio
-financial efficiency: payables days, receivables days, inventory turnover, gearing

Question 123

What are liquidity ratios and what are the two

Answer 123

-measures teh ability to convert assets into cash, liquidity is about having enough sufficient costs to keep the business working
-current ration and acid test ratio

Question 124

Liquidity ratios: current ratio and its formula

Answer 124

-the current ratio is a simple measure that estimates whether the business can pay debts due within one year out of the current assets (machinery)
-a ratio of less than one shows you can’t pay it back within a year
-current ratio= current assets /current liabilities
-‘must be done on a 1:1 ratio)

Question 125

Liquidity ratios: current ratio evaluation

Answer 125

-ratio 1.5-2 would suggest efficient management of working capital
-low ratio below 1 indicates cash problems
-high ratio may indicate too much working capital. Look out for:
•industry norms
•trend
-benchmark should look for 2:1
-usually will compare between 2 years

Question 126

Liquidity ratios: Acid test ratio and its formula

Answer 126

-because a business cannot be certain that it will be able to sell all of its stock, the acid test ratio takes this into consideration and for some businesses can be seen as a more reliable test of liquidity
-ATR= current assets minus stock / current liabilities
-1:1 benchmark

Question 127

Liquidity ratios: Acid test ratio evaluation

Answer 127

-a better indicator of liquidity problems for business that usually hold inventors
-sufficiently less than 1 is bad
-less relevant for business with high stock turnover
-significant determination in the ratio can indicate a liquidity problem

Question 128

Profitability ratio analysis: gross profit margin formula and analysis (MUST KNOW)

Answer 128

-margin %= gross profit / sales revenue x100
-gross profit = revenue -cost of goods
Eg/
16.2/33=49%
19.6/30.1=34.9%
Every £1 of sales you are making 51p costs of sales rather then 65p costs of sales. May be because of use of ECOS

Question 129

Profitability ratio analysis: net profit margin (MUST KNOW)

Answer 129

-NPM= net profit (before tax) / sales (revenue) x 100
Eg/
2015: 5.2/33 x 100= 15.8/16p profit
2014:1.5/30.1x100= 5p profit
Shows for every £1 of sales the business has a net profit of 16p

Question 130

Profitability ratio analysis:return on capital employees (ROCE) (return on money invested) (MUST KNOW)

Answer 130

-Operating profit (or net profit) /total equity (loans, money invested) + non current liabilities (machines) x 100
-Eg/
2015: 12.2/49+60 x100=11.1% profit
2014: 6.5/48+63 x100= 5.8% profit

Question 131

What are profitability ratios

Answer 131

-these rations are concerned with the level of profit measured against various aspects of the business
-ROCE
-net profit margin
-gross profit margin
-return on equity

Question 132

What is ROCE useful for and evaluate

Answer 132

Useful:
-evaluate the overall performance of the business
-provide a target return for individuals projects
-benchmark performance with competitors
Evaluate:
-ROCE is a widely used measure of return on investment by business
-vary between industries
-based on a snapshot of a business balance sheet
-comparisons are over time and with key competitors are mostly useful

Question 133

Profitability ratio analysis: return on equity and formula

Answer 133

-measures the ability of a business to generate profits form its shareholders investments into a business
-net profit/ total equity x 100

Question 134

What is activity ratio and what are they

Answer 134

-how well a business manages its assets and liabilities
-creditor days and debtor days

Question 135

Activity ratio: what is receivables (debtor days) and formula

Answer 135

-amount owed to a business by a customer
-RD=trade receivables (debt owned to a business) /revenue x365
-should be paid between 60-90 days

Question 136

Activity ratio: evaluating receivable days

Answer 136

-shows average time customers take pay
-each industry will have a norm
-look out for significant changes
-comparisons (good or bad) vs competitors

Question 137

Activity ratio: what are payables (creditor days) and formula

Answer 137

-amount owed by a business to suppliers and others
-PD= trade with payables/cost of sales x365

Question 138

Activity ratio: evaluating payable days

Answer 138

• a higher figure is better for cash flow
  -payable days should be higher then recievable days
  -a high figure may suggest liquify problems
  -

Question 139

Activity Ratios: What is assets turnover and formula

Answer 139

-this ratio measures how efficiently a business is able to use its net assets to generate sales revenue. The higher the ratio the better as it implies the assets are being used in a more efficient manner to generate sales revenue
-sales revenue / net assets (assets a liabilities)

Question 140

Activity Ratios: evaluating asset turnover

Answer 140

-higher number is better
-low numbers compared to previous years or competitors may suggest a problems with generating sales revenue with the assets you have

Question 141

Activity Ratios: what is stock turnover and its formula

Answer 141

-this ratio measures how quickly the stock is sold
-ST=cost of sales/average stock
-average stock=opening stock + closing stock /2

Question 142

Activity Ratios: evaluating stock turnover

Answer 142

-higher number is better
-low number suggest a problems with stock control
-holding more stock may improve customer service and allow the business to meet demand
-seasonal flu Turin demand during the year may not be reflected in the calculations

Question 143

Gearing ratio: what is it and formula

Answer 143

-about how the business is financed and the relationship between the amount of finance provided by equity and debt. Gearing measures the proportion of a business capital provided by equity and debt
-equity: amounts invested by the owners of the business, share capital, retained profits
-debt: finance provided to the business by external parties.
G%=non current liabilities / total equity + non current liabilities x100

Question 144

Evaluating gearing ratio

Answer 144

-GR of 50%+ normally said to be high
-gearing of less then 20% normally said to be low
-but level of acceptable gearing depends on businesses and industry

Question 145

Benefits of high and low gearing

Answer 145

High:
-less capital required to be invested by the shareholders
-debt can be relatively cheap source of finance compared to dividends
-wash to pay interest if profits and cash flow are strong
Low:
-less risk of defaulting on debts
-shareholders rather then debt providers call the shots
-business has the capacity to add debt if required

Question 146

How to reduce and increase gearing

Answer 146

Reduce:
-focus on profit improvements
-repay long term loans
-retain profits rather then pay dividends
-issue more shares
-convert loans to equity
Increase:
-focus on growth
-buy back shares
-convert short term debt into long term loans

Question 147

What is interest cover

Answer 147

This ratio measures the number of times in which a business can pay its interest charges with the opening profit it makes.

Interest covers: operating profit / interest payable

Question 148

Shareholder ratios: what is it and what are the ratios

Answer 148

-measures the returns that shareholders gain from their investment
-include
•dividend per share
•earnings per share
•price earning ratio
•dividend per share
•dividend yield
•dividend cover

Question 149

Shareholder ratios: dividend per share and evaluation

Answer 149

DPS= total dividends paid/ number of shares in issue
Eg/
500,000/10m =£5p
Evaluate:
-basic calculation of the return share
-how much the shareholder paid for the shares
-return on investment
-how much profit per share was earned

Question 150

Shareholder ratios: dividend yield and evaluation

Answer 150

-dividend per share / share price x100 (%)
Eg/ 0.10/1.75=5.7%
-evaluate:
•yields can be compared with other companies in same sectors, rates of return on alternative investments
•shareholders consider dividend yield in deciding whether to invest in the first place
•usually high yield naught suggest an under valued share price of a possible dividend cut

Question 151

Shareholder ratios: dividend cover and formula

Answer 151

-how many times dividends can be paid from the net profits
-profit after tax/dividend
-less then 1 they don’t have profits to pay the dividend
-if it is 1.5 below it is a concern 2is good

Question 152

Shareholder ratios: earnings per ratio

Answer 152

-this ratio shows what each share earned in a financial year. However, the shareholder is unlikely to receive this amount when the dividend is declared
•Earnings per share= profits for the year/ number of shares issued
-

Question 153

Shareholder ratios: what is price earning ratio and formula

Answer 153

-this ratio is a measured of confidence about what the shares will earn. The ratio compares the current market price with the earnings for that share
•PER: market price of share /earnings per share

Question 154

What are the influences on accounting and finance:

Answer 154

-social
-legal
-ethical
-environmental
-economic
-political
-technological
-international

Question 155

Evaluate the impact and importance of a financial strategy to a business and its stakeholders

Answer 155

financial strategy enables you to assess your financial needs and the resources required to support and meet your objectives and to fulfill your organisations’ overarching objective, as well as plan for continued growth to enable business success and sustainability.