analysing financial performance

Question 1

what is a budget variance?

Answer 1

term that describes where the costs are either higher or lower than the standard/projected costs.

Question 2

how do you calculate a budget variance?

Answer 2

subtract the actual spend from the planned spend over that given time (divide by original budget to find % variance).

Question 3

what is an advantage of budget variances?

Answer 3

• helps identify any risks
• can motivate staff
• helps a business be proactive

Question 4

what are the disadvantages of a budget variance?

Answer 4

• may be subject to human errors
• changing economy
• downfalls may result in demotivation

Question 5

what is a balance sheet?

Answer 5

the financial statement of the business including their assets, liabilities, equity capital .

Question 6

how to create a balance sheet?

Answer 6

1. pick balance sheet date
2. list all assets
3. add up all assets
4. determine current liabilities
5. calculate long-term liabilities
6. add up liabilities
7. calculate owner’s equity
8. add up liabilities and owner’s equity

Question 7

what is working capital?

Answer 7

difference between the business’ current assets and current liabilities.

Question 8

what is capital employeed?

Answer 8

the fixed assets of a business added to the working capital.

Question 9

what is depreciation?

Answer 9

a business’ assets losing value over time.

Question 10

what is the working capital formula?

Answer 10

current assets - current liabilities

Question 11

how do you calculate capital employes?

Answer 11

long-term liabilities + shareholder funds

Question 12

how do you work out depreciation?

Answer 12

divide the cost of an asset minus its salvage life over useful life.

Question 13

what are the advantages of a balance sheet?

Answer 13

• determines risk
• can help secure loans/attract investors
• provides helpful ratios
• positive results can increase motivation

Question 14

what are the disadvantages of a balance sheet?

Answer 14

• use of estimates

- use of outdated values

Question 15

what is the formula for return on capital employed?

Answer 15

earing before interest and tax / capital employed

Question 16

what is the formula for acid current ratio test?

Answer 16

(total current assets - stock) / total current liabilities

Question 17

how do you interpret the acid ratio test

Answer 17

£0.90 : 1 - this means the business has £0.90 current assets excluding stock to every £1 of current liabilities

Question 18

what is the formula for current ratio?

Answer 18

total current assets / total current liabilities

Question 19

how do you interpret current ratios?

Answer 19

£1.50 : 1 - this means the business has £1.50 current assets to every £1 of current liabilities

Question 20

what is the formula for gearing?

Answer 20

(long term liabilities/capital employed) x 100

Question 21

what are advantages of an income statement?

Answer 21

• way to track companies capital
• can be used as a forecasting tool
• can attract investors

Question 22

what are the disadvantages of an income statement?

Answer 22

• can mis-represent value of company
• doesn’t evaluate non-revenue factors of success
• many assumptions made

Question 23

how do you evaluate the financial position of a business?

Answer 23

-look at gross profit margin
-net profit margin
-working capital
etc

Question 24

what is window dressing?

Answer 24

strategy used to improve the appearance of a fund’s performance before presenting it to shareholders.

Question 25

how do changes in demand affect business accounts?

Answer 25

may cause business to lose profitability if they don’t keep up with the trends:

• customers may go to competitors
• prices may increase

Question 26

how does inflation affect business accounts?

Answer 26

• may lead to low spending in customers, decreasing profitability in businesses
• prices for supplies may increase