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JC Business > Chapter 47 - Assessing the Business > Flashcards

Chapter 47 - Assessing the Business Flashcards

1
Q

Why do we need to financially analyse our business?

A

~To compare our business to other similar types of firms
~To compare how well our business has done this year compared to last year
~To see whether the business is as profitable and efficient as it should be

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2
Q

When looking at how a business is doing, we look at …

A

When looking at how a business is doing, we look at …profitability, liquidity, solvency and dividend policy

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3
Q

Profitability

A

How much money is the firm making?

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4
Q

What is the formula for gross profit percentage?

A

gross profit 100
—————– X —–
sales 1

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5
Q

What is the formula for net profit percentage?

A

net profit 100
————- X —–
sales 1

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6
Q

How do we decide if the gross profit percentage and net profit percentage ratios are good or bad?

A

○Compare them to the results of other firms in the same industry
○Compare them to last years results

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7
Q

What is the formula for return on capital employed? (total investment)

A

net profit 100
———————— X —–
capital employed 1

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8
Q

What does the formula for return on capital employed (total investment) show us?

A

The formula shows the profit made as a % of the total amount of money invested in the business. The total amount invested is known as capital employed

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9
Q

What is the formula for return on share capital? (ordinary shares)

A

net profit 100
—————————– X —–
issued share capital 1

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10
Q

What does the formula for return on share capital (ordinary shares) show us?

A

Shows the profit made as a % of money invested in the business by shareholders and it tells them how well the firm used their money

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11
Q

How do we decide if the return on capital employed and return on share capital ratios are good or bad?

A

~Compare them to the results of other firms in the same industry
~Compare them to last years results
~Compare them to interest rates available on investments from other financial institutions

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12
Q

Liquidity

A

Does the firm have enough money to pay back its debts as they fall due?

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13
Q

What is the formula for working capital (current) ratio?

A

current assets : current liabilities

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14
Q

What does the formula for working capital (current) ratio show us?

A

Shows us how much money the firm has available to pay its debts

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15
Q

What is the ideal ratio for working capital (current) ratio?

A

2:1 or better

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16
Q

What is the formula for acid test (quick) ratio?

A

current assets - closing stock : current liabilities

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17
Q

What is the acid test (quick) ratio for?

A

Similar to the working capital ratio but we take into account that we might not be able to sell off all our stock and turn it into cash in a hurry

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18
Q

What is the ideal ratio for acid test (quick) ratio?

A

1:1 or better

19
Q

What is the formula for period of credit given to debtors?

A

debtors 365
—————- X —–
credit sales 1

20
Q

What does the formula for period of credit given to debtors tell us?

A

Ratio tells the firm the average number of days it is taking to collect its debts. The answer should be compared to the amount of credit given to debtors in the first place

21
Q

What is the formula for period of credit received from creditors?

A

creditors 365
———————— X —–
credit purchases 1

22
Q

What does the formula for period of credit received from creditors tell us?

A

Tells the firm the average number of days it is taking them to pay their suppliers. The answer should be compared to the amount of credit given to firm by creditors

23
Q

Solvency

A

Are the firms assets worth more than their liabilities?

24
Q

A firm is solvent if…

A

…its total assets are greater in value than its external lliabilities

25
Q

A firm is said to be insolvent if…

A

…its external liabilities are greater than its total assets

26
Q

What is the formula for solvency?

A

total assets : external liabilities

27
Q

Dividend policy

A

How much money is being paid to shareholders each year?

28
Q

What is the formula for dividends per share?

A

dividends paid 100

  • ——————————- X —–
    no. of ordinary shares 1
29
Q

What does the ratio for dividends per share tell us?

A

Tells the shareholder how many cent they received out of profits for each share they own

30
Q

What is the formula for earnings per share?

A

net profit 100

  • —————————— X —–
    no. of ordinary shares 1
31
Q

What does the ratio for earnings per share tell us?

A

Shows the shareholder how well the company is doing by telling them how much they would have got if all profits had been divided amongst shareholders. The ratio should be compared to returns (interest rates) available on investments with main financial institutions

32
Q

What is the formula for percentage rate of dividends?

A

dividends 100
—————————– X —–
issued share capital 1

33
Q

What does the ratio for percentage rate of dividends tell us?

A

Tells the shareholder what % of investment they actually got back in the form of dividends from the firm. The ratio should be compared to returns (interest rates) available on investments with main financial institutions

34
Q

What is the formula for dividends as a percentage of profits?

A

dividends 100
————– X ——
net profit 1

35
Q

What does the formula for dividends as a percentage of profits calculate?

A

What % of the year’s profit is being paid out in dividends to ordinary shareholders

36
Q

What is the formula for mark-up?

A

gross profit 100
———— X —–
cost price 1

37
Q

What does the formula for mark-up calculate?

A

What % of the cost price was added on as profit to get the selling price

38
Q

What is the formula for margin?

A

gross profit 100
————- X —–
selling price 1

39
Q

What does the formula for margin calculate?

A

What % of the selling price is made up of profit

40
Q

What is the formula for rate of stock turnover?

A

average stock

(opening + closing stock)
———————————— = average stock
2

41
Q

What does the formula for rate of stock turnover calculate?

A

How many times in a year the firm sells its stock. Also indicates the no. of times in a year the firm must put in an order to purchase new stock

42
Q

Overtrading

A

The company is overtrading if the current assets are less than the current liabilities

43
Q

Turnover

A

The turnover of a firm is their sales minus sales returns for a periold

JC Business (30 decks)

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