Balance Sheets

Question 1

Balance sheet

Answer 1

Shows the value of a business assets and liabilities at a particular time
It also shows what the company is financed by

Question 2

Assets definition and types

Answer 2

Assets - items of value which are owned by the business

Types
- non current/fixed assets
- current assets

Question 3

Fixed assets definition and examples

Answer 3

Items that are owned by the business for more than twelve months and are hard to turn into cash eg: machinery

Question 4

Current assets

Answer 4

Items that are held by the business for less than twelve months easier to turn into cash eg: products/goods

Question 5

Liabilities definition and examples

Answer 5

Debts owed by the business

• current liabilities
• long term liabilities

Question 6

Current liabilities

Answer 6

Short term debts owed by the business usually repaid in less than one year eg: creditors

Question 7

Long term liabilities

Answer 7

Long term debts owed by the business usually for more than one year eg: a bank loan

Question 8

Working capital equation and definition

Answer 8

Current assets - current liabilities

Remember working capital is money used on a day to day basis

Question 9

Creditors vs debtors

Answer 9

What customers owes to the business - debtors
What the company owes to their suppliers - creditors

Question 10

Net assets

Answer 10

Net assets = total assets (fixed asset + current assets) - total liabilities (long term liabilities + current liabilities)

Question 11

What is the business financed by

Answer 11

Retained profit - financed put back in the businesss
Share capital - amount invested by the shareholders
Total share holder funds/equity - share capital + retained profit

REMEMBER THE TOTAL SHARE HOLDER FUNDS = THE NET ASSETS (ALWAYS)

Question 12

Liquidity definition

Answer 12

How easy we can turn assets into cash to pay off its short term debts if the business is illiquid and can’t quickly turn assets into cash then the business cannot pay and they may be forced to take an overdraft or sell some of its assets

Question 13

Liquidity ratios definition and types

Answer 13

a type of financial ratio used to determine a company’s ability to pay its short-term debt obligations

• current ratio
• acid test ratio

Question 14

Current ratio

Answer 14

Current assets/current liabilities = current ratio (decimal)
Ideal figure is 1.5 - 2
If the answer is 1.5 then that means for every dollar that you owe you have $1:50 to pay off your debts

Too low you cant pay off your debts bad
Too high you have too much cash that you can use to expand your business
Exactly 1:1 is okay however it isn’t guaranteed that you can sell your stock (which is a current asset)

Question 15

Acid test ratio

Answer 15

A more accurate ratio as it doesn’t account for stock

Current assets - stock / current liabilities

The ideal figure is now 1 - as you are probably going to sell some stock so your actual figure may be 1.2 - 1.4

Question 16

ROCE - return on capital employed definition and equation

Answer 16

measures how good a business is at generating profits from capital

Net profit/ capital employed x 100

Question 17

Capital employed definition and equation

Answer 17

the total amount of funds used for expansion or for the acquisition of profits

Working capital + total share holder funds + long term loan

(All the long term finance)