Accounting And Finance (steeds) Flashcards
What are the objectives of finance and accounting
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
Why do businesses need to use accounting and finance
Providing a focus for the entire business. A measure of success of failure for the business. Reduced risk of business failure
what is the usefulness of accounting and finance objectives to a business
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.
what is the importance of accounting and finance objectives in the achievement of business objectives
-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)
What are the 4 sources of short term finance
-overdraft
-trade credit
-factoring
-hire purchase
short term finance: overdraft, with adv and dis
-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
short term finance: trade credit, with adv and dis
-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
short term finance: factoring, with adv and dis
-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
short term finance: hire purchase, with adv and dis
-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
What are the 7 medium to long term sources of finance
-bank loan
-leasing
-debentures
-rationed profit
-shares
-government assistance
-venture capital and business angels
medium to long term sources of finance: bank loan, adv and dis
-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
medium to long term sources of finance: leasing, adv and dis
-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.
medium to long term sources of finance: debentures, adv and dis
-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.
medium to long term sources of finance: retained profits, adv and dis
-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
medium to long term sources of finance: shares, adv and dis
-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
medium to long term sources of finance: government assistance, adv and dis
-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
medium to long term sources of finance: venture capital and business angels, adv and dis
-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
What is meant by internal and external source of finance
-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
What is an accounting concept
-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
What are the 2 categories of accounting
-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.
What is matching in accounting conventions
-dates use to record financial transactions taken place not when payment is made.
What is materiality in accounting conventions
Value of business needs to be realistic figure, not calculating every asset
What is realisation in accounting conventions
-takes place when the legal ownership changes hand and not when payment is made
What is true and fair view of business accounting
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
What is generally accepted accounting practice (GAAP)
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.
What is consistency in accounting conventions
Accounts produced in the same way
What is going concern in accounting conventions
Operating as normal (not in danger of closing)
What is objectivity in accounting conventions
Accounts must be realistic and based on facts not opinions and guesses
What is prudence in accounting conventions
Is concerned with not overstating the organisation’s financial situation
What is the usefulness of accounting conventions to a business
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
What is capital structure
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
Why do businesses have higher debt and equity
-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)
What 6 factors affect the choice of finance for a business
-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
What is fixed and variable costs and how to work out total costs.
-Fixed: costs that don’t change in relation to output.
-variable: changes in payments to level of output
-total costs= fixed costs + variable costs
What are direct and indirect costs
Direct: direct link between the making of the product. (Wages, electricity, material) fixed costs
Indirect costs: costs associated with the business. Variable costs
How to calculate costs of producing 1 product and unit costs
-costs of producing 1 product= unit costs / output
-unit cost= total costs/output
What is marginal, social and opportunity costs
-Marginal: Costs of producing an extra unit/ good
-social: cost of society
-opportunity: the loss of other alternatives when one alternative is chosen
What is overhead costs and how to calculate
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
What is revenue and how to calculate
-is the cash that flows into the business from the sales of goods and services
-revenue = price X Sales
Calculation of profit
Total revenue-total costs
what is the importnace of direct, indirect and overhead costs
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.
what is the usefulness of cost and profit centres to a business
-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
What is break even and it’s formula
-reach a point in a business venture when the profits are equal to the costs.
-BEP= fixed costs / selling price - variable costs
What is margin of safety
-difference between revenue and break even point. When revenue is higher then costs
-formula: MoS: total revenue -break even point
What is the impact of break even point on a business
It helps entrepreneurs come up with a pricing strategy that will not only cover costs but will generate a gross profit.
How could a business lower their break even point
-decrease the amount of fixed costs
-sell more
-increase price
What are the advantages of using break even point in making decisions
-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
What are the disadvantages of using break even point in making decisions
-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
How does a business need to increase revenue
-increase the amount of volume sold
-achieve a higher selling point
What is costing method
-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
What are the advantages and disadvantages of cost centres
+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.
What are the advantages and disadvantages of profit centres
+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
What is absorption costs
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.
Allocation of fixed costs is done via either
-divide production
-% if total sales
-% of total production
What is the usefulness of costing methods to stakeholders
-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.
What is contribution
What a business needs to achieve from selling products in order to just cover it’s fixed costs and therefore make a profit
What is breakeven
the point at which total cost and total revenue are equal,
How to calculate break even output
Fixed costs / contribution per unit
Eg/ 10,000 / 6 = 1667
How can contribution be increased
-increasing the selling price per unit
-lowering the variable costs per unit
What is target level of profit
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.
What is break even analysis
-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
Calculation of contribution margin ratio
-CMR: total revenue - variable costs /total revenue
Formula of margin of safety
current sales - breakeven point / current sales X 100
Formula of target level of profit /revenue
Fixed costs + target profit / gross margin
What is a stepped fixed cost
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
Evaluate the impact of break even analysis
-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
How to lower a businesses break even point
-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.
What is investment appraisal
-the process of analysing whether investment projects are worthwhile
investment appraisal: what is payback and how to calculate
-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
investment appraisal: what is average rate of return and how to calculate it
-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
investment appraisal: what is net present value and how to calculate
-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
What is total present value
The current value of a future sum of money or stream of cash flows given a specified rate of return.
investment appraisal: payback adv and dis
-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
investment appraisal: average rate of return adv and did
-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
investment appraisal: net present value adv and dis
-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
What is meant by budget
-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)
What is a favourable and adverse in sales
-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
What is favourable and adverse in expenditure
-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)
What is variance in budget
Variance is the difference between planned and actual numbers (both expenses and revenue).
Why do managers use budgets
-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
-
What are the principles for good budget control
-managerial responsibilities are clearly defined
-performance is monitored against the budget
-variances are investigated
-corrective action is taken if results differ from forecasting budget
Possible causes of favourable variances (positive)
-stronger demand then expected
-selling prices increased higher then budget
-cautious sales and cost assumption
-better then expected productivity
Possible causes of adverse variances (negative)
-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
Advantages of using variance analysis
-measure performance
-identify variances
-identify inefficiency in production
-allows to spot trends and threats
-can control expenses
Disadvantages of using variance analysis
-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
What is zero budgeting
-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
What is cash flow
-When money comes in and out of the business.
Why would a business produce a cash flow forecast
-advanced warning of cash shortage
-makes sure that the business can pay suppliers and employees
-important part of financial control
-provide reassurance to investors
What is cash flow forecast
predict the cash that’s going out of your business and coming back in over a specific period.
What is cash flow statement
financial statement that provides aggregate data regarding all cash inflows that a company receives from its ongoing operations and external investment sources.
What is the purpose for cash flow statement
shows the source of cash and helps you monitor incoming and outgoing money.
How to calculate net cash flow
NCF= total cash inflows -total cash outflows
How does cash flow statement impact the business
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.
Evaluate the usefulness of cash flow statement
-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
How to calculate cash flow
•current assets - current liabilities
how does cash flow forecasts impact and help analyse costs and revenue of a business.
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
how does cash flow forcastes impact stakeholders
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.
Usefulness of cash flow forecast to a business
-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
what are the strategies of overcoming forecast cash flow problems
-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.
What is working capital
the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities
What is the working capital cycle
-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
What is an income statement
Measures the performance over a given time period. It shows profit loss made by the business.
What is contained within an income statement
-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
How to calculate profit, gross profit, operating profit and net profit.
-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
Usefulness of an income statement to the business
-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
What is included in assets
-current = stock
-non current = fixed, machinery ect
What is the statement of financial position
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
What are the two sides of a balance sheet: what is included in the balance sheet
Net assets:
-non current assets
-current assets
-current liabilities
-non current liabilities
Shares capital:
-shares capital
-reserves (profit)
What is non current assets and net assets
-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
What is inventory, receivables, payables
-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
What is shareholders equity
Shareholders’ equity is the amount that the owners of a company have invested in their business.
What is the usefulness of statement of financial position for a business
-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
What is depreciation
-is the drop in value of an asset over time mainly as a result of wear and tear
What is the need for the provision of depreciation
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.
How to calculate net book value
Costs of machine -depreciation
How to calculate straight line of depreciation
Initial costs -residual value / life of assets
What is straight line depreciation
The value of the asset is reduced equally per year over its lifetime.
What is residential value
Value of product at the end of its life once the depreciation has been deducted
What is reducing balance in depreciation
Reducing balance depreciation is a method to help you calculate the rate of depreciation of an asset when it’s expensed at a percentage.
How to calculate reducing balance in depreciation
-cost of machine x depreciation value in %
What is the impact of depreciation on a business
-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
What is ratio analysis and what are the main groups
-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
What are liquidity ratios and what are the two
-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
Liquidity ratios: current ratio and its formula
-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)
Liquidity ratios: current ratio evaluation
-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
Liquidity ratios: Acid test ratio and its formula
-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
Liquidity ratios: Acid test ratio evaluation
-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
Profitability ratio analysis: gross profit margin formula and analysis (MUST KNOW)
-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
Profitability ratio analysis: net profit margin (MUST KNOW)
-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
Profitability ratio analysis:return on capital employees (ROCE) (return on money invested) (MUST KNOW)
-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
What are profitability ratios
-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
What is ROCE useful for and evaluate
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
Profitability ratio analysis: return on equity and formula
-measures the ability of a business to generate profits form its shareholders investments into a business
-net profit/ total equity x 100
What is activity ratio and what are they
-how well a business manages its assets and liabilities
-creditor days and debtor days
Activity ratio: what is receivables (debtor days) and formula
-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
Activity ratio: evaluating receivable days
-shows average time customers take pay
-each industry will have a norm
-look out for significant changes
-comparisons (good or bad) vs competitors
Activity ratio: what are payables (creditor days) and formula
-amount owed by a business to suppliers and others
-PD= trade with payables/cost of sales x365
Activity ratio: evaluating payable days
- a higher figure is better for cash flow
-payable days should be higher then recievable days
-a high figure may suggest liquify problems
-
Activity Ratios: What is assets turnover and formula
-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)
Activity Ratios: evaluating asset turnover
-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
Activity Ratios: what is stock turnover and its formula
-this ratio measures how quickly the stock is sold
-ST=cost of sales/average stock
-average stock=opening stock + closing stock /2
Activity Ratios: evaluating stock turnover
-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
Gearing ratio: what is it and formula
-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
Evaluating gearing ratio
-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
Benefits of high and low gearing
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
How to reduce and increase gearing
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
What is interest cover
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
Shareholder ratios: what is it and what are the ratios
-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
Shareholder ratios: dividend per share and evaluation
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
Shareholder ratios: dividend yield and evaluation
-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
Shareholder ratios: dividend cover and formula
-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
Shareholder ratios: earnings per ratio
-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
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Shareholder ratios: what is price earning ratio and formula
-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
What are the influences on accounting and finance:
-social
-legal
-ethical
-environmental
-economic
-political
-technological
-international
Evaluate the impact and importance of a financial strategy to a business and its stakeholders
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.
