finance - analysing the financial performance of a business

Question 1

What is sales revenue?

Answer 1

The total amount of money achieved as a result of selling goods or services.

Question 2

What is cost of sales?

Answer 2

Costs which are directly related to producing the goods and services. (e.g raw materials)

Question 3

What is the formula for gross profit?

Answer 3

gross profit = sales revenue - cost of sales

Question 4

What are expenses?

Answer 4

All other costs incurred by a business.

Question 5

What is operating profit?

Answer 5

The money a business has left after paying all the indirect costs.

Question 6

What is the formula for net profit?

Answer 6

net profit = gross profit - expenses

Question 7

What are the three components of an income statement?

Answer 7

Trading account, profit and loss account and appropriation account.

Question 8

What does an income statement show?

Answer 8

Whether a business has made a profit or loss at the end of a year.

Question 9

How can a business increase gross profit?

Answer 9

Reduce cost of sales or increase revenue.

Question 10

How can a business increase operating profit?

Answer 10

Reduce the money being spent on investments.

Question 11

What does retained profit show?

Answer 11

How profitable a company is, and whether it has the potential to expand.

Question 12

What is the formula for gross profit margin?

Answer 12

GPM = (gross profit/sales revenue) x 100

Question 13

How can the gross profit margin be increased?

Answer 13

By increasing sales revenue or reducing the direst cost of sales.

Question 14

What is the formula for net profit margin?

Answer 14

NPM = (net profit/sales revenue) x 100

Question 15

What does a low GPM indicate?

Answer 15

Thet the cost of sales is too high in relation to selling price.

Question 16

What does a low NPM indicate?

Answer 16

That the cost of sales and expenses are too high in relation to selling price.

Question 17

What does a statement of financial position show?

Answer 17

A summary of everything a business owns and owes.

Question 18

What is the purpose of a statement of financial position?

Answer 18

To calculate the net worth of a business at a set point in time.

Question 19

What are fixed/non-current assets?

Answer 19

Items owned by a business which it will keep for more than one year.

Question 20

What is an example of a fixed asset?

Answer 20

• Vehicles
• Machinery
• Premises

Question 21

What is a current asset?

Answer 21

Items owned by a business which it will sell or use within one year.

Question 22

What is an example of a current asset?

Answer 22

• Stock
• Debtors
• Cash

Question 23

What are debtors?

Answer 23

The value of products sold (usually on credit) which the business has not yet been paid for.

Question 24

What are current liabilities?

Answer 24

Items the business owes which will be paid back within one year.

Question 25

What is an example of a current liability?

Answer 25

• Creditors
• Overdraft
• Unpaid corporation tax
• Unpaid dividends to shareholders

Question 26

What are creditors?

Answer 26

The money a firm owes to its suppliers.

Question 27

What are non-current liabilities?

Answer 27

Items the business owes which will be paid back in over one year.

Question 28

What is an example of a non-current liability?

Answer 28

• Bank loan

* Mortgage

Question 29

What is share capital?

Answer 29

The money put into the business when shares were originally issued.

Question 30

What is the formula for net current assets?

Answer 30

net current assets = current assets - current liabilities

Question 31

What is another name for net current assets?

Answer 31

Working capital.

Question 32

What is working capital?

Answer 32

The money available for the day to day running of a business.

Question 33

What is the formula for net assets?

Answer 33

net assets = net current assets + fixed assets

Question 34

What are net assets?

Answer 34

The amount the business would make if it sold all its assets - the worth of the business.

Question 35

What is capital employed equal to?

Answer 35

Net assets.

Question 36

What is the formula for capital employed.

Answer 36

capital employed = shareholder funds + non-current liabilities

Question 37

What is the formula for total equity?

Answer 37

total equity = share capital + reserves and retained profits

Question 38

What is total equity always equal to?

Answer 38

Net worth.

Question 39

What is the formula for net worth?

Answer 39

net worth = (current assets + non-current assets) - (current liabilities + non-current liabilities)

Question 40

Give 2 things that financial performance includes a consideration of.

Answer 40

• Current performance
• Performance against previous years
• Performance against competitors
• Performance from the perspective of a range of stakeholders

Question 41

How might existing shareholders be interested in a financial analysis?

Answer 41

They may use the income statement to see if the directors of the business have made sensible decisions.

Question 42

How might potential shareholders be interested in a financial analysis?

Answer 42

They may look at how much profit a business makes to see if it worthwhile investing in it.

Question 43

How mught employees be interested in a financial analysis?

Answer 43

To see if a business makes a profit or loss and so can afford to give them a pay rise.

Question 44

How might the government be interested in a financial analysis?

Answer 44

They may use the income statement to see how much tax the business needs to pay.

Question 45

How might suppliers be interested in a financial analysis?

Answer 45

They are likely to be interested in the liquidity of a business to see how likely they are to sell goods.