Financial Perfomance Of A Business

Question 1

What is a balance sheet?

Answer 1

A formal financial document the net worth of a business at a given point a time

Question 2

What are the components of a balance sheet

Answer 2

Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets

Question 3

What’s a current assets?

Answer 3

Likely to be turned into cash within a year
-inventory
-receivable/debtors
-cash and cash equivalent

Question 4

What is non-current assets?

Answer 4

Likely to be kept by the business for over a year
-vehicles
-premises
Machinery

Question 5

What current liabilities?

Answer 5

Debts that the business have to pay back within a year
-overdraft
-payable

Question 6

What is non-current liabilities?

Answer 6

Debts that the business has more than a year to repay
-bank loan
-mortgage

Question 7

What is working capital?

Answer 7

A measure of firm’s liquidity/ability to meet day to day expense
Working capital = current assets - current liabilities

Question 8

What is capital employed?

Answer 8

The value of all long term finance that has been invested.
Capital employed = Long-term Liabilities + shareholders capital
Shareholders capital = share capital + retained profit

Question 9

What is Depreciation?

Answer 9

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

Question 10

How to calculate depreciation? Using the straight line methods?

Answer 10

( original cost of asset - expected final value) / expected useful life

Question 11

What are the three different types of ratios?

Answer 11

Liquidity
Profitability
Gearing

Question 12

What is liquidity and how is it calculated?

Answer 12

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)

Question 13

What is profitably and how is it calculated?

Answer 13

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

Question 14

What is gearing and how is it calculated?

Answer 14

Measures what proportion of a business’ capital is funded through long term loans
Equation: (Long term liabilities/ Total equity + long term liabilities) x 100

Question 15

Why use balance sheet?

Answer 15

Shows relationships between figures
used for comparison over time

Question 16

What is the difference between Intra and Inter business

Answer 16

Intra used to compare performance against competitors

Inter used within a business (over time, within one organisation)

Question 17

What is ROCE?

Answer 17

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

Question 18

How to improve liquidity ?

Answer 18

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

Question 19

What is an income statement ?

Answer 19

A formal financial document that summarises a businesses revenue and expenses over a period of time.

Question 20

How to assess a businesses financial health?

Answer 20

Income statement
Balance statement
Cash flow statement