Analysing Financial Performance Flashcards

1
Q

What is financial performance analysis?

A

Financial performance analysis involves evaluating a company’s financial health by examining its financial statements.

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2
Q

What are the main financial statements used in financial performance analysis?

A

The main financial statements used are the income statement, balance sheet, and cash flow statement.

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3
Q

What is the purpose of financial performance analysis?

A

The purpose is to assess a company’s profitability, liquidity, solvency, and efficiency.

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4
Q

What is liquidity in financial performance analysis?

A

Liquidity refers to a company’s ability to meet its short-term obligations with its current assets.

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5
Q

What is solvency in financial performance analysis?

A

Solvency refers to a company’s ability to meet its long-term obligations with its long-term assets.

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6
Q

What is profitability in financial performance analysis?

A

Profitability refers to a company’s ability to generate profit from its operations.

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7
Q

What is efficiency in financial performance analysis?

A

Efficiency refers to how well a company utilizes its resources to generate revenue.

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8
Q

What is the formula for calculating return on equity (ROE)?

A

ROE = Net Income / Shareholders’ Equity

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9
Q

What is the formula for calculating current ratio?

A

Current Ratio = Current Assets / Current Liabilities

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10
Q

True or False: A higher current ratio indicates better liquidity.

A

True

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11
Q

What is the formula for calculating gross profit margin?

A

Gross Profit Margin = (Gross Profit / Revenue) x 100%

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12
Q

What is the formula for calculating net profit margin?

A

Net Profit Margin = (Net Income / Revenue) x 100%

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13
Q

What is the formula for calculating working capital?

A

Working Capital = Current Assets - Current Liabilities

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14
Q

You’re doing great pookie xxx

A

Keep goinggg!!!

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15
Q

You’re eating this up xxxx

A

Keep smashing it queen x

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16
Q

Make me proud x

A

Keeeeeep on serving girl x

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17
Q

True or False: A higher debt to equity ratio indicates lower financial risk.

A

False

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18
Q

What is the formula for calculating ROCE (Return on Capital Employed)?

A

ROCE = net profit before tax / Capital Employed
X 100

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19
Q

Ur doing so good!

A

A levels will be over soon xx

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20
Q

What is a budget?

A

Financial plan for the future.

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21
Q

What is variance analysis?

A

Checking actual outcomes against predicted outcomes.

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22
Q

What does favourable and adverse variance show?

A

Favourable - actual revenue higher, actual costs lower, actual profits higher.
Adverse - actual revenue lower, actual costs higher, actual profits lower.

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23
Q

What can cause favourable variances?

A

Effective bonus schemes, successful advertising campaign, downfall of competitor, improved labour productivity, reduced cost of raw material, cheaper supplier, greater efficiency.

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24
Q

What causes adverse variances?

A

Success of competitors, ineffective advertising, logistical problems, price rise in raw materials, increased wage costs.

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25
Q

4 advantages of analysing budget variances?

A

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.

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26
Q

4 disadvantages of budget variances?

A

Some factors are out of business’ control and can’t be predicted.
If unreliable data is used, validity will be affected.
May exclude certain employees from budgeting process and so may be less committed.
Unrealistic budgets can be demotivating.

27
Q

What can usefulness of budget variance depend on?

A

Experience of budget setter
Stability of market
Amount of historical data available
Size of business.

28
Q

What is a balance sheet?

A

Statement of financial position is a a statement of a business’ assets and liabilities at specific point in time.

29
Q

What are fixed assets?

A

Possessions expected to be retained in business for 1+ years eg land, buildings, machinery, vehicles.

30
Q

What is a current asset?

A

Includes short term possessions business expects to turn into cash within a year. Eg stocks, receivables, bank and cash balances.

31
Q

What are current liabilities?

A

Debts that the business owes that are repayable within a year eg payables and bank overdrafts.

32
Q

What are long term liabilities?

A

Long term debts repayable in over a year eg bank loans and mortgages.

33
Q

What are net assets?

A

Fixed assets + current assets - current liabilities - long term liabilities.

34
Q

What are shareholders funds?

A

Money invested into business by owners through sales of shares and includes retained profit and reserves.

35
Q

What is working capital?

A

Money needed in business to pay for day to day expenses.

36
Q

What is capital employed?

A

Amount of money used to finance a business in the long term. Either been invested or borrowed long term.

37
Q

What is depreciation?

A

Decreased in value of fixed assets over time. Depreciation due to age or development of new product.

38
Q

You’re gonna smash this !

A

Just think of how good summer is gonna be xxx

39
Q

Why does depreciation need to be carried out?

A

So profits aren’t overestimated
So value of fixed asset isn’t overestimated
Make accounting provision for replacement purchase of new fixed assets in the future.

40
Q

What is return on capital employed?

A

Measures how effectively capital invested in the business is being used to create profits.

41
Q

Would a business want a high ratio for ROCE?

A

Generally yes.

42
Q

What is ROCE often compared to?

A

Interest rates.

43
Q

What are current ratios?

A

Business’s ability to meet short term payments eg suppliers.

44
Q

What is current ratio expressed as and the ideal ratio?

A

:1
Ideal is between 1.5:1 and 2:1

45
Q

What is current ratio expressed as and the ideal ratio?

A

:1
Ideal is between 1.5:1 and 2:1

46
Q

What does a low current ratio indicate?

A

Business may not be able to pay short term debts.

47
Q

What does a high current ratio indicate

A

Business has spare cash not being used productively.

48
Q

What sort of business may like a low current ratio?

A

One with very high levels of stock turnover eg supermarkets as they sell stock quickly and consistently.

49
Q

How does acid test ratio differ from current ratio?

A

It excludes stock from current assets because it’s the most difficult to turn to cash.

50
Q

What’s generally a good acid ratio?

A

1:1

51
Q

What is gearing ratio?

A

Looks at ratio of shareholders funds to money borrowed eg loans.

52
Q

3 advantages of high gearing ratio?

A

If interest rates decrease, cost effective to borrow.
Borrowing can fund investments.
Quicker way of raising finance for larger companies rather than issuing new shares.

53
Q

Disadvantages of high gearing.

A

If interest rates increase, payments become more costly.
Investors reluctant to invest in company with high gearing ratio as lower chance of return.

54
Q

What is window dressing?

A

Manipulation of financial accounts by a business to improve appearance of its performance.

55
Q

5 types of window dressing?

A

Not efficiently depreciating noncurrent assets. (Will make asset value seem higher).
Overstating brand value.
Sale and leaseback to improve liquidity.
Exceptional items.
Presentation of accounts.

56
Q

What does window dressing lead to?

A

Misleading potential shareholders into making poor decisions about investing.

57
Q

What does window dressing lead to?

A

Misleading potential shareholders into making poor decisions about investing.

58
Q

What 3 things can affect a business’s financial statement?

A

Window dressing.
Changes in demand - eg covid caused losses but not representative of real demand.
Inflation - may have increased price but not extra profits.

59
Q

How could business improve current ratio?

A

Increase current assets.
Pay off debts such as overdrafts.

60
Q

drawbacks of window dressing?

A

Legal implications.
Damaged stakeholder relationships.
Devalues company.
Lose access to sources of finance.

61
Q

Why might a business window dress?

A

Improve share price.
Increase value of business
Reduce tax bill
Improve credit rating
Praise and rewards.

62
Q

What can you compare financial statements with?

A

Previous years.
Future targets.
Competitors.
Industry average.
Ideal range.

63
Q

What can you compare financial statements with?

A

Previous years.
Future targets.
Competitors.
Industry average.
Ideal range.