Financial Analysis

Question 1

What is the balance sheet

Answer 1

a list of assets and liabilities. It is a snapshot of a firm’s finances at a fixed point in time

Question 2

What two things always balance

Answer 2

net assets and total equity

Question 3

what is the equation for net current assets

Answer 3

current assets - current liabilities

Question 4

what is the equation for net assets

Answer 4

net current assets + non-current assets - non-current liabilities

Question 5

what are assets

Answer 5

things the business owns

Question 6

what are liabilities

Answer 6

debts the business owes

Question 7

what are bad debts

Answer 7

debts that debtors won’t ever pay

Question 8

what is working capital

Answer 8

the amount of cash the business has available to pay its day-to-day debts

Question 9

what is the equation for working capital

Answer 9

current assets - current liabilities

Question 10

what is net realisable value

Answer 10

the amount a company could get by selling the stock right not in its current state

Question 11

what do assets do overtime

Answer 11

depreciate

Question 12

which stakeholders are particularly interested in working capital and liquidity

Answer 12

suppliers

Question 13

what can you see by comparing balance sheets

Answer 13

long-term trends

Question 14

what does the income statement show

Answer 14

revenue and expenses

Question 15

how long should an income statement cover

Answer 15

a 12 month period

Question 16

which different measures of profit does the income statement show

Answer 16

gross profit, operating profit, profit before tax, profit for the year

Question 17

the equation for gross profit

Answer 17

revenue - cost of sales

Question 18

equation for operating profit

Answer 18

gross profit - operating expenses

Question 19

equation for profit before tax

Answer 19

operating profit - other expenses

Question 20

equation for profit for the year

Answer 20

profit before tax - tax

Question 21

why is financial analysis useful

Answer 21

businesses can compare current performance to their past performance as well as their own performance in the past

Question 22

limitations of financial analysis

Answer 22

it only takes into account financial data. Does not factor for data like the quality of staff and product, market share, productivity levels.

Question 23

limitation of balance sheet

Answer 23

it will not help predict the future. Doesn’t give any clues about the market or the economy.

Question 24

the equation for current ratio

Answer 24

current assets / current liabilities

Question 25

the equation for ROCE

Answer 25

operating profit / total equity + non current liabilities x100

Question 26

what are the liquidity ratios

Answer 26

current ratio and ROCE

Question 27

what are the efficiency ratios

Answer 27

inventory turnover, payable days and receivable days

Question 28

what is the equation for inventory turnover

Answer 28

cost of sales/cost of average stock held

Question 29

what is the equation for payable days

Answer 29

payables/cost of sales x 365

Question 30

what is the equation for receivable days

Answer 30

receivables/sales revenue x 365

Question 31

what is the equation for gearing

Answer 31

non current liabilities / total equity + non current liabilities

Question 32

what does gearing show

Answer 32

how vulnerable a business is to changes in interest rates

Question 33

what are benefits of being highly geared

Answer 33

increased borrowing results in extra funds for expansion

when interest rates are very low, high gearing is less risky

Question 34

Benefits of ratio analysis

Answer 34

good way of assessing performance
can be used to help decision making
potential investors can look at them

Question 35

limitations of ratio analysis

Answer 35

doesn’t account for internal strengths, external factors and future changes