analysing financial performance Flashcards
what is a budget variance?
term that describes where the costs are either higher or lower than the standard/projected costs.
how do you calculate a budget variance?
subtract the actual spend from the planned spend over that given time (divide by original budget to find % variance).
what is an advantage of budget variances?
- helps identify any risks
- can motivate staff
- helps a business be proactive
what are the disadvantages of a budget variance?
- may be subject to human errors
- changing economy
- downfalls may result in demotivation
what is a balance sheet?
the financial statement of the business including their assets, liabilities, equity capital .
how to create a balance sheet?
- pick balance sheet date
- list all assets
- add up all assets
- determine current liabilities
- calculate long-term liabilities
- add up liabilities
- calculate owner’s equity
- add up liabilities and owner’s equity
what is working capital?
difference between the business’ current assets and current liabilities.
what is capital employeed?
the fixed assets of a business added to the working capital.
what is depreciation?
a business’ assets losing value over time.
what is the working capital formula?
current assets - current liabilities
how do you calculate capital employes?
long-term liabilities + shareholder funds
how do you work out depreciation?
divide the cost of an asset minus its salvage life over useful life.
what are the advantages of a balance sheet?
- determines risk
- can help secure loans/attract investors
- provides helpful ratios
- positive results can increase motivation
what are the disadvantages of a balance sheet?
- use of estimates
- use of outdated values
what is the formula for return on capital employed?
earing before interest and tax / capital employed
what is the formula for acid current ratio test?
(total current assets - stock) / total current liabilities
how do you interpret the acid ratio test
£0.90 : 1 - this means the business has £0.90 current assets excluding stock to every £1 of current liabilities
what is the formula for current ratio?
total current assets / total current liabilities
how do you interpret current ratios?
£1.50 : 1 - this means the business has £1.50 current assets to every £1 of current liabilities
what is the formula for gearing?
(long term liabilities/capital employed) x 100
what are advantages of an income statement?
- way to track companies capital
- can be used as a forecasting tool
- can attract investors
what are the disadvantages of an income statement?
- can mis-represent value of company
- doesn’t evaluate non-revenue factors of success
- many assumptions made
how do you evaluate the financial position of a business?
-look at gross profit margin
-net profit margin
-working capital
etc
what is window dressing?
strategy used to improve the appearance of a fund’s performance before presenting it to shareholders.
how do changes in demand affect business accounts?
may cause business to lose profitability if they don’t keep up with the trends:
- customers may go to competitors
- prices may increase
how does inflation affect business accounts?
- may lead to low spending in customers, decreasing profitability in businesses
- prices for supplies may increase
