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Julie a level business studies > Analyzing financial performance > Flashcards

Analyzing financial performance Flashcards

1
Q

What are financial accounts used for

A

To analyse businesses financial performance

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2
Q

What does a business use to measure financial performance

A

Balance sheets
Trading profit and loss accounts (income statements)
Ratio analysis
Budget variances

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3
Q

What does a business use ratio analysis to calculate and interpret

A

Key performance indicators

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4
Q

What are budget variances

A

Difference between the figure the business budget for and the actual figure

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5
Q

What is a balance sheet or statement of financial position

A

A statement of business assets (what sines sons) and liabilities ( what business owes) at a certain point in time - usually last day of trading period

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6
Q

What are the 7 things a balance sheet made up

A

1 fixed assets - land, buildings, machines - things expected to be retained by company for more than a year and used to produce output

2 current assists - stocks, debtors (customers who haven’t yet paid for goods received - considered an asset and bank and cash balances

3 current liabilities - include trade creditors of the business and bank overdrafts. They are debts normally paid within a year and arise due to normal business practise eg trade credit from supplier.

4 long term liabilities - often bank loans or mortgages to be repaid over more than a year

5 net assists - calculated by adding fixed and current assets and deducting current and long term liabilities

6 net current assists - difference between current assets and current liabilities

7 shareholders funds - money invested into business by owners and include retained profit and reserves (money kept in business from profits. Owners may reinvest part of profit back into business to help future profits. Reserves usually used for buying business assets

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7
Q

Why is it called a balance sheet

A

The total of the company’s assets always equal the total of its liabilities shown as an equation

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8
Q

What is the equation for a balance sheet

A

Fixed assets +(current assets-current liabilities)= long term liabilities +shareholder funds

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9
Q

How many years financial data does a balance sheet generally show

A

2 years - current year and previous year so that a comparison can be made and to enable calculation of ratios

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10
Q

What is working capital and how is it calculated

A

The money needed in a business to pay for the day to day expenses
Calculated by taking the value of current liabilities from current assets

Working capital = current assets-current liabilities

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11
Q

What is working capital an indication of

A

The financial strength of a business over the short term
The higher the level of working capital the more able a business is to meet demands from creditors

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12
Q

Can a business have a negative working capital

A

Yes current liabilities are greater than current assets -m shown as a number in brackets to show it is negative

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13
Q

Give 3 examples of businesses who need different working capitals

A

1 a large business will need a larger amount of working capital than a smaller business

2 a retail business that needs to hold a high level of stock may need a higher level of working capital

3 the amount of debtors and creditors

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14
Q

What is liquidity

A

How quickly an asset can be converted into cash

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15
Q

What are the most and the least liquid of assets

A

Money in bank or cash is most liquid
Stock is the least liquid

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16
Q

What is liquidity an indication of

A

A measure of a businesses ability to pay its short term debts so a measure of available working capital

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17
Q

Why is it important a business has a good level of liquidity

A

If a business can not pay creditor then supplies of stock or raw material may stop and bank stops cheques so may be forced to stop trading

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18
Q

Which 2 ratios can be calculated to help a business understand liquidity position

A

Current ratio and acid test ratio

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19
Q

What is current ratio

A

Tells us about the relationship between current assets and current liabilities

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20
Q

What is the formula for current ratio

A

Current ratio= current assets/current liabilities

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21
Q

What is the disadvantage of using current ratio

A

It includes stock which may not be very liquid asset

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22
Q

What is the acid ratio test

A

It excludes stock from current assets as a way to measure the ability of a business to meet short term demands for cash - more reliable than current ratio

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23
Q

What is the formula for acid ratio test

A

Acid test ratio = surrender assets - stock/current liabilities

24
Q

What is the gearing ratio

A

Compares the amount of capital employed that is financed by borrowing with the total capital employed

25
Q

What is the formula for calculating gearing

A

Gearing ratio = long term liabilities / capital employed x100

26
Q

What is capital employed

A

The sum of the company’s share capital , reserves and long term liabilities

27
Q

When is a business said to be highly geared

A

If gearing ratio exceeds 50%

28
Q

Where is a company that is low gearing getting its funding

A

From share capital and reserves

29
Q

Where is a business with high gearing getting funding

A

Mainly loan capital

30
Q

When can high gearing be a bad thing

A

The interest paid on debts reduces profit and if interest rates increase costs to business will increase

31
Q

Is high gearing always a bad thing

A

No - it can indicate a company is adventurous in expansion plans and has taken the opportunity to invest by borrowing at low rates

32
Q

When can low gearing be a bad thing

A

It may indicate the company is not aggressive enough to survive and may not be seeking opportunities to survive

33
Q

What is return of capital employed (ROCE)

A

Another profitability ratio used to analyse performance

34
Q

What does ROCE measure

A

How effective the capital invested in the business is being used not create a profile

35
Q

What is the formula for calculating ROCE

A

ROCE= net profit before tax/shareholders funds+long term liabilities. X100

36
Q

What do some analysts state the desirable figure for ROCE is

A

15%- but like other ratios it depends on the type of business as to what rate of return is acceptable to investors

37
Q

In order to evaluate the financial position o a business what must you take into account

A

All of the 6 ratios and any non financial information available eg customer satisfaction, quality, employee motivation
Provide as much context as possible
Comparisons with previous years and competitors
Wider economic environment

38
Q

What is window dressing

A

The manipulation of financial accounts by a business to improve the appearance of its performance

39
Q

Which body lays down the rules for the presentation of accounts for ltd companies and plus

A

Rules laid down by statue and the professional accountancy bodies

40
Q

List examples of methods of window dressing

A

1 overstate brand valuations
2 sale and leaseback to improve liquidity
3 presentation of financial data
4 hiding the cost of poor investments and hiding costs
5 use of exceptional and extraordinary items

41
Q

How can presentation of financial data be a method of window dressing

A

Manipulating the presentation of the information in the accounts eg using graphs with distorted scales to give the impression of bigger or smaller changes in sales, only highlighting certain data eg product lines that have done well and not presenting any compariative data

42
Q

Explain how overstating brand value assists with window dressing

A

An increase in the value of the brand increases the paper worth of the company and make it harder or more expensive to take over

43
Q

How is hiding cost of poor investment and hiding costs a method of window dressing

A

Business may understate any huge losses made from failed investments and give the appearance of minimising losses ad therefore inflating profit levels

44
Q

How is sale and leaseback to improve liquidity window dressing

A

Sale and leaseback can improve cash flow , it involves sale of fixed assets and then leasing them back so they can still be used - it can improve short term cash flow and improve current asset ratios and liquidity. Large amounts of money are injected into the business and shows a higher cash balance improving cash flow short term

45
Q

How is the use of exceptional and extraordinary items an example of window dressing

A

Exceptional items are costs or revenue to the business that arise from normal business activity but are in some way unusual. Eg redundancy exceptional revenue can be passe off as normal business revenue

46
Q

Why do businesses window dress

A

1 to improve share price and attract investment
2 take overs - more valuable businesses can attract a takeover and increase the amount they get.or can deter a takeover because brand to expensive
3 reduce a tax bill - by making profits look smaller a business can reduce how much it pays in tax
4 improve credit rating - business with high profits and assets can gain finance more easily from banks
5 praise and rewards - having a good set of financial figures could result in rewards from managers

47
Q

What is depreciation

A

Decrease in value of assets value over time due to age or developments in technology making the asset obsolete
Some show the asset on the balance sheet at its historic value and not its true or book value

48
Q

How is net book value calculated

A

Historic cost - depreciation = net book value

49
Q

What is a budget

A

A financial plan for the future - tells us where money is coming aim and where it is going out

50
Q

What is the consequence of no budget plan

A

Can lead to insolvency as you can’t pay creditors

51
Q

What is the most important aspect of budgeting

A

To check the actual outcomes against predicted .

52
Q

What are the 2 types of outcomes

A

Favourable or adverse effects

53
Q

What might cause a favourable or adverse variance

A

Favourable sales variance can be caused by an effective bonus scheme for salesmen or successful advertising campaign
Adverse sales variance may be caused by successful competitor activities , ineffective advertising, bad weather or logistical problems

54
Q

What might cause favourable or adverse cost variances

A

Favourable cost variance caused by improved labour productivity, reduced costs
Adverse cost variance may be caused by strike, bad weather, unexpected supply price rise

55
Q

Which non financial performance measures are there

A

1 market share- the proportion of total sales a business has in the market
2 sales targets - based on sales forcasting techniques
3productivity - measure of output against a fixed input
4 environmental impact -
5 customer satisfaction - degree to which customers expectations are met in terms of price and product, amount of complaints or feedback to a survey
6 employee attitude survey - finding out their views allows a business to identify issues , indicate how motivation can be improved , assess effectiveness of policies

56
Q
A

Julie a level business studies (56 decks)

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