AS2 TP12 (answer as %) Flashcards
what does an income statement tell us
tells business if profit or loss has been made
what is the cost of sales and how is it calculated
cost of buying items that have been sold
= opening inventory + purchases - closing inventory
how is gross profit calculated
sales revenue - cost of sales
how is net profit calculated
= gross profit - expenses
what is a statement of financial position
summarises the value of the assets , liabilities and the net worth of business at end of accounting period
how is net worth calculated
total assets - total liabilities
what are non current assets
items the business owns that will last for more than a year
what are current assets
assets that change constantly usually less than a year
what are non current liabilities
items that the firm owes which are due to be paid back e.g mortgage
what are current liabilities
items firm owes in short term usually paid back within a year
e.g overdrafts
what are trade receivables
money that customers owe the firm
what are trade payables
money firm owes to its suppliers
what is equity
capital with which business started with plus any retained profit from prior years
what are drawings
these are the owners wages
not an expense to the business but a reduction in the capital
what is working capital and how is it calculated
money for day to day running of the business
current assets - current liabilities
what 2 subsections can ratios be divided into
profitability
solvency
what is a net profit margin ratio and how is it calculated
shows what percentage of turnover is represented by net profit (how many pence out of every £1 of sales is net profit)
net profit / sales revenue x100
what does the net profit margin tell us about the business
establishes whether business has been efficient in controlling its expenses if not net profit margin falls (increasing price will resolve this)
what is return on capital employed (ROCE) and how Is it calculated
shows the % return achieved from the money invested into business
net profit / total assets - current liabilities x 100
or
net profit / capital employed x100
what does ROCE tell us about the business
shows how profitable the owners invest is
the higher the value of ROCE the more profitable the business was
figure is compared to previous years to determine if the year was satisfactory
most business’ regard 20% ROCE as very satisfactory
how can the ROCE ratio be improved
increasing the level of profit from same level of capital invested
maintaining profit levels whilst decreasing amount of capital invested
what is current ratio and how is it calculated
measures liquidity - how easy business can convert asses to cash
= current assets / current liabilities
then put answer against 1 e.g 1.5:1
what does it mean if a business is operating with a ratio below 1.5:1
business does not have enough working capital and so the business might be over borrowing/trading
what does it mean if a business is operating with a ratio above 2:1
suggests too much money is tied up unproductively and money tied up in stocks does not earn any return
what does it mean if business is operating with a ratio between 1.5-2:1
business has sufficient liquid resources
what is a gearing ratio and how is it calculated
how much risk the business has due to the amount of capital it has borrowed
non current liabilities (debt capital)
/ closing capital + debt capital x 100
benefits of high gearing
it may imply the business is heavily investing in growth to drive the company forward and stay competitive
bank loans are a cheap source of finance if interest rates are low
benefits of low gearing
company will have Lower interest and loan repayments positively impacting liquidity
makes business a more attractive investment to potential shareholders
reduced risk as business has less debt so harder to go bankrupt
advantages of using final accounts in assessing business performance
financial position can be assessed
comparisons with other business’ can be made
shows trends year to year
disadvantages of using final accounts in assessing business performance
qualitative factors are not taken into account
doesn’t reveal info about competition
its a static statement - figures may only be valid the day they are being published
