Financial Perfomance Of A Business Flashcards
What is a balance sheet?
A formal financial document the net worth of a business at a given point a time
What are the components of a balance sheet
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
What’s a current assets?
Likely to be turned into cash within a year
-inventory
-receivable/debtors
-cash and cash equivalent
What is non-current assets?
Likely to be kept by the business for over a year
-vehicles
-premises
Machinery
What current liabilities?
Debts that the business have to pay back within a year
-overdraft
-payable
What is non-current liabilities?
Debts that the business has more than a year to repay
-bank loan
-mortgage
What is working capital?
A measure of firm’s liquidity/ability to meet day to day expense
Working capital = current assets - current liabilities
What is capital employed?
The value of all long term finance that has been invested.
Capital employed = Long-term Liabilities + shareholders capital
Shareholders capital = share capital + retained profit
What is Depreciation?
Depreciation is a method of allocating the cost of tangible assets over their useful life e.g wear , tear
Non current (fixed ) assets are depreciated
How to calculate depreciation? Using the straight line methods?
( original cost of asset - expected final value) / expected useful life
What are the three different types of ratios?
Liquidity
Profitability
Gearing
What is liquidity and how is it calculated?
It is a measure of a firms short term survival i.e its ability to meet short term debts.
1. Current ratio which is Current assets : current liabilities
2. Acid test ratio which is Liquid assets : current liabilities. (Liquid assets = current assets - stock/inventory)
What is profitably and how is it calculated?
Profitability is a measure of an organization’s profit relative to its expenses
Gross Profit Margin - (Gross Profit/Sales Revenue) x 100
Net Profit Margin - (Net profit/Sales Revenue) x 100
ROCE ( return on capital employed) - (Net Profit/Capital Employed) x 100
What is gearing and how is it calculated?
Measures what proportion of a business’ capital is funded through long term loans
Equation: (Long term liabilities/ Total equity + long term liabilities) x 100
Why use balance sheet?
Shows relationships between figures
used for comparison over time
What is the difference between Intra and Inter business
Intra used to compare performance against competitors
Inter used within a business (over time, within one organisation)
What is ROCE?
Return on Capital employed,A measure of how efficient a business is using capital employed to generate profits.
Operating profit/Total equity + non/current liabilities (long term) * 100
How to improve liquidity ?
Increase current assets or decrease liabilities:
Sell assets that are no longer being used(liquid)
Move cash to high interest(value increases)
switch to long term finance
monitor debtors to avoid bad debt
What is an income statement ?
A formal financial document that summarises a businesses revenue and expenses over a period of time.
How to assess a businesses financial health?
Income statement
Balance statement
Cash flow statement