Analysing The Financial Performance Of A Business Flashcards
Income statement
A financial statement showing a business’s revenue and costs and thus it’s profit or loss over a period of time
Balance sheet
Sets out the assets and liabilities that a business has on a particular day
(Why businesses prepare financial statements) the law
Companies act requires businesses to publish financial settlements. If a company fails to in the agreed format, it could be fined or even (rarely) forced to stop trading. Only required for companies
(Why businesses prepare financial statements) helps managers make decisions
E.g. if profits were lower than expected, managers can take appropriate action
(Why businesses prepare financial statements) guides investors
They can use a business’s income statement to decide wether an investment is safe
An income statement shows these three pieces of information:
-the revenue (or ‘sales income’)
-the cost of production that the business has paid
-the profit or loss
Gross profit
Sales revenue minus the cost OF SALES over a period of time
Net profit
Sales revenue minus cost of sales, overheads and other costs over a period of time
Overheads
Don’t change when the level of production does
(On a balance sheet) liability
A sum of money that is owed by a business to another business or an individual
Non current liabilities
Will be paid back over many years. Bank loans for example
Current liabilities
Debts that a business will pay within a year. May be tax or money owed to suppliers
Total equity
The part of a business’s money that belongs to shareholders
Financial ratio
Compares two figures from a business’s financial statements
Gross profit margin equation
Gross profit/revenue*100
Net profit margin equation
Net profit/revenue*100
Importance of financial statements
-assesing business performance
-helping managers to make effective decisions
Non-current assets
A business will normally keep these for many years. May be shops or vehicles. Create recenue and enable profits
Current assets
Businesses expect to have these for less than a year. Could be cash or inventories of raw materials. Tend to be used to settle debts, such as paying for raw materials
Net current assets / working capital
Total current assets - total current liabilities
Net assets employed
Fixed assets + working capital
