Analysing Financial Performance Flashcards
Fixed (non-current) assets
Includes land, buildings, machinery and vehicles.
Expected to be retained in the business for more than a year, therefore having a long term role in the business and are used to produce output.
Current assets
Includes stock, debtors and bank and cash balances.
Currents assets are expected to change value often. All asses that are expected to be sold, consumed or used within a year.
Current liabilities
Current liabilities are debts are normally paid within a year.
Include trade creditors and bank overdraft.
Long term liabilities
Which are often banks loans or mortgages, which are repaid over more than a year.
Capital employed - shareholders funds
Net assets
Calculated by adding both fixed and current asset’s together and then deducting current and long term liabilities.
Net current assets
Difference between current assets and current liabilities
Shareholders funds
The money that has been invested into the business by the owners (through the sale of shares), and also includes retained profit and reserves.
Reserves or retained profits is money that has been kept in the business from profit made by the business.
Working capital
The money needed in the buildings to pay for the day to day expenses of a business.
Working capital = current assets - current liabilities.
Shows financial strength in the short term
Current ratio
Current ratio = current assets
———————-
Current liabilities
The gearing ratio
Compares the amount of capital employed that is financed by borrowing.
Gearing ratio=Long term liabilities
————————x100
Capital employed
Capital employed = long term liabilities + shareholders fund
Return of Capital employed
The ROCE figure means how effectively the capital invested in the business is being used to create profits.
ROCE = Net profit before tax
——————— X100
Shareholders funds + long term liabilities
Window dressing
The manipulation of financial accounts by a business to improve its appearance of its performance.
Examples include
- Overstating brand value
- Presentation of financial data
- Hiding poor investment
- Sale and leaseback
- Exceptional items
Why window dress?
Improve share price - if profits are recorded higher, this could improve the share price.
Takeovers - a more valuable business could attract a take over and increase the price they get. On the other hand, if they don’t want to be taken over making a business more expensive and might deter bids
Reduce tax bill - making profits look smaller than a business can reduce the amount it has to pay in taxes
Improve credit rating - businesses with higher profits can gain finance more easily from banks
Praise and rewards - having good financial accounts could result in praise for mangers
Depreciation
Most fixed assets will decrease in value over time.
Historic cost - depreciation = net book value.
Capital employed
Is the amount of money that is used to finance a business in the long term. This finance has been either invested by shareholders or borrower long term.
It is calculated by adding long-term liabilities to shareholders funds.
