Analysing Financial Performance Flashcards
What is financial performance analysis?
Financial performance analysis involves evaluating a company’s financial health by examining its financial statements.
What are the main financial statements used in financial performance analysis?
The main financial statements used are the income statement, balance sheet, and cash flow statement.
What is the purpose of financial performance analysis?
The purpose is to assess a company’s profitability, liquidity, solvency, and efficiency.
What is liquidity in financial performance analysis?
Liquidity refers to a company’s ability to meet its short-term obligations with its current assets.
What is solvency in financial performance analysis?
Solvency refers to a company’s ability to meet its long-term obligations with its long-term assets.
What is profitability in financial performance analysis?
Profitability refers to a company’s ability to generate profit from its operations.
What is efficiency in financial performance analysis?
Efficiency refers to how well a company utilizes its resources to generate revenue.
What is the formula for calculating return on equity (ROE)?
ROE = Net Income / Shareholders’ Equity
What is the formula for calculating current ratio?
Current Ratio = Current Assets / Current Liabilities
True or False: A higher current ratio indicates better liquidity.
True
What is the formula for calculating gross profit margin?
Gross Profit Margin = (Gross Profit / Revenue) x 100%
What is the formula for calculating net profit margin?
Net Profit Margin = (Net Income / Revenue) x 100%
What is the formula for calculating working capital?
Working Capital = Current Assets - Current Liabilities
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True or False: A higher debt to equity ratio indicates lower financial risk.
False
What is the formula for calculating ROCE (Return on Capital Employed)?
ROCE = net profit before tax / Capital Employed
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What is a budget?
Financial plan for the future.
What is variance analysis?
Checking actual outcomes against predicted outcomes.
What does favourable and adverse variance show?
Favourable - actual revenue higher, actual costs lower, actual profits higher.
Adverse - actual revenue lower, actual costs higher, actual profits lower.
What can cause favourable variances?
Effective bonus schemes, successful advertising campaign, downfall of competitor, improved labour productivity, reduced cost of raw material, cheaper supplier, greater efficiency.
What causes adverse variances?
Success of competitors, ineffective advertising, logistical problems, price rise in raw materials, increased wage costs.
4 advantages of analysing budget variances?
Understand when money is coming in and out of business.
Identify cost and profit centres to set department targets.
Understand why variances have occurred and solutions
Can be used to monitor achievement and motivate employees.