INTRO TO RATIO ANALYSIS

Question 1

What is ratio analysis

Answer 1

Ratio analysis: Examining accounting information by making calculations with the collected date allowing for judgements to be made about a firm’s performance.

Question 2

What are current assets

Answer 2

Current assets = Things that are going to be turnt into cash within 12 months

Question 3

What are current liabilities

Answer 3

Current liabilities = Costs that the business will have to pay within 12 months

Question 4

Look over busines A and B

Answer 4

https://docs.google.com/document/d/1PUAb34hJPeWqdmalMebDum4Lgopkc9cqvPTUsC22w7I/edit

Question 5

What are profitability ratios

Answer 5

These measure how effectively a firm turns revenue into profit

Question 6

What is a liquidity ratio

Answer 6

These meausre the ability of a firm to meet its short term debts and give an indication of the likelihood of thr firm surviving the next year

Question 7

What are efficiency ratios

Answer 7

These meausre how efficiently a firm is at managing their assets

Question 8

What is gearing

Answer 8

This ratio examines how reliant a business is on borrowed money (like bank loans) and indicate a business’s prospects of lonf term survival

Question 9

Why does managment use ratio analysis

Answer 9

Part of SWOT analysis - identify strengths and weaknesses of organisational and incorporate to strategic planning - In terms of finance

Question 10

Why do employees use ratio analysis

Answer 10

Assess job security and justification for wage demands

Question 11

Why do customers use ratio analysis

Answer 11

Assess long term survival prospects of a business will guarantees be honoured? - For example you buy a rolex and get a 5 year guarantee on it for scratches etc but if rolex goes into liquidity before the 5 years are up, then the customer would have had the contract broken, and the guarantee would be useless.

Question 12

Why do suppliers use ratio analysis

Answer 12

Assess the extent to which the business should be offered favourable credit terms.

Question 13

Why do shareholders use ratio analysis

Answer 13

Assess the effectiveness of management team/ compared to other potential investments

Question 14

What is intra firm comparison

Answer 14

Looks at the performance of different opereations within the same firm

Maybe comparing branches, product lines, profit centeres or geographical areas

Can help to set targets

Can compare current performance to historical performance

Question 15

What is inter firm comparison

Answer 15

Compares the performance of one firm to another

Helps investors choose wheather or not to invest

Can help set tergets

Allows for benchmarking against best performing firms

Question 16

What is the definition of intra firm comparison

Answer 16

Intra firm comparison = Comparing a firm with itself - For example comparing branches with each other, or products with each other

Question 17

What is the definition of inter firm comparison

Answer 17

Inter firm comparison = Comparing the organisation to another organisation - It doesn’t have to be in the same industry

Question 18

What are the strenghts of using financial data to jedge performance

Answer 18

Allows for bother inter and intra firm performance to be assessed

Plc accounts are audited and should be accurate

Regulations mean that the layout of the accounts should be consistent between firms, therefore they are easier to use

Provides large amoutns of quantative date for analysis

Question 19

What are the weaknesses of using financial data to judge performance

Answer 19

Does not consider qualitative data, such as the motivation of a firm;s workforce

It is difficult to accurately account for some intangible assets like the value of a brand;s image

There is potential for accounts to be manipulated - window dressing