Analysing financial performance

Question 1

what are fixed assets?

Answer 1

• includes land buildings machinery, they have a long term role in the business and are used to produce the output of the business.

Question 2

What are current assets?

Answer 2

• includes stock, cash and bank balances, etc current assets are expected to change value often, due to normal business trading.

Question 3

What are current liabilities?

Answer 3

• includes the trade creditors of the business and bank overdrafts. current liabilities are debts that normally paid within a year. can be things like suppliers agreeing to grant business, etc. these things remain a current liability until they are paid

Question 4

what are long term liabilities?

Answer 4

• which are often bank loans and mortgages, which are repaid over more than a year.

Question 5

what are net assets?

Answer 5

• might also be shown in a balance sheet, which is the difference between current assets and current liabilities

Question 6

what are shareholders funds?

Answer 6

• money invested into the business by the owners.

Question 7

What is liquidity?

Answer 7

• liquidity refers to how quickly an asset can be converted into cash.
• Money in the bank, or held cash, is the most liquid asset. stock and debtors are the least liquid assets.
• liquidity is a measure of the business’ ability to pay its short term debts. It is therefore also a measure of the availability of working capital within a business.
• two ratios can be calculated to help a business understand its liquidity position; the current ratio and acid test ratio.

Question 8

What is the current ratio?

Answer 8

• the current ratio tells us about the relationship between current assets and current liabilities.
• current ratio = current assets/current liabilities
• the ratio is given as a ratio to one, so for example, 2.3:1
• means that for every £2.30 the business owns in current assets, it owes £1 in current liabilities.
• an ideal current ratio is between 1.5:1 and 2:1.
• 1.5:1 is considered due to over borrowing etc.

Question 9

What is the acid test ratio?

Answer 9

• the acid test excludes stock from current assets as a way of measuring the ability of a business to meet short term demands for cash more reliably than the current ratio.
• the method of calculation of the acid test ratio is almost the same as the current ratio and the answer is in the same format. the only difference is we remove stock from the equation.
• acid test ratio= current assets - stock / current liabilities.
• ideal ratio is 1:1
  because if all creditors demanded the money the business owes them, then it would be able to pay it back.

Question 10

What is the gearing ratio?

Answer 10

• The gearing ratio compares the amount of capital employed that is financed by borrowing with the total capital employed.
• capital employed is the sum of a company’s share capital, reserves and long term liabilities. the gearing ratio calculates the proportion (%) of capital employed that is financed by long term liabilities.
• gearing ratio = long term liabilities (non current liabilities) / capital employed x 100