chapter 4 analysing financial performance

Question 1

balance sheet

Answer 1

fixed (non- current) assets
current assets
-cash in bank
-debtors
-stock

current liabilities
-bank overdraft and loans
-creditors
-other
total current liabilities

net current assets (working capital )

total long term liabilities

net assets

shareholder funds

Question 2

working capital formula

Answer 2

total current assets - total current liabilities

Question 3

what are factors that cause working capital problems

Answer 3

• poor stock control
• poor control of debtors
• ineffective use of trade credit
• poor cashflow forecasting
• unexpected events

Question 4

what are different types of gearing

Answer 4

• a business wiht a gearing ration of more than 50% is highly geared
• a gearing ratio of less thna 25% is low gearing
• a gearing ratio between 25% and 50% is considered to be normal gearing

Question 5

what is gearing

Answer 5

gearing ratio calculates the proportion of capital emplyed that is financed by LTL
indicated the finacial risk associated with a business:
* if a company has too much debt that could fall into finacial trouble
* the higher level of borrowing (gearing) the higher the risk

Question 6

what is window dressing

Answer 6

window-dressing is the manipulation of financial accounts by a business to improve the appearance of its performance

Question 7

what are some window dressing techniques

Answer 7

• presentaition of finacial data: businesses can achieve this is by using graphs with distorted scales to give the appearance of bigger or smaller changes in sales. Businesses might also highlight only certain data or use
  certain examples in their reporting documents
• overstatiing brand value: businesses revaluing their brands (brand value is an intangible fixed
  asset and therefore increases in brand value increases the assets of a company and gives the impression that the
  company is more valuable). This
  revaluation is often carried out to increase the asset value of a company and to defend against take-overs.
• hiding costs: Banks have been found to have written down the value of so-called ‘toxic assets’, as a result of failed investment
  decisions. The result is that huge losses are made on these investments, which businesses might understate, and by
  doing so gives the appearance of minimising losses and therefore inflating profit levels.
• sale and leaseback to improve liquidity: This involves the sale of fixed assets (such
  as buildings or capital equipment) and then leasing back the same assets so that they are available for use.
• the use of exceptional items: Exceptional items are costs and revenues to the business that arise from normal business activity but are unusual in
  some way. For example, redundancy costs are normally an exceptional item. this is a method of window-dressing because businesses
  might try to pass these off as normal business revenues

Question 8

why would a business window dress

Answer 8

• improve share price
• attract or prevent a take over
• reduce tax bill
• improv credit rating
• have a good balance sheet leads to paise and rewards for managers

Question 9

what is depreciation

Answer 9

Most fixed assets used by businesses will decrease in value over time. This decrease in value is known as depreciation.
Assets depreciate with use, with age or as a result of the development of new technology

Question 10

why would a business account for depreciation

Answer 10

Depreciation is shown as a business expense on the profit and loss account. Depreciation also affects fixed assets on
the balance sheet by reducing their value by the amount of depreciation applied each year.

Question 11

what are non finacical methods to analyse business perfomance

Answer 11

• marktet share
• sales targets
• productivity
• environmental impact
• consumer satification
• employee attidtude survey