Learning Outcome F: Complete statements of comprehensive income and financial position and evaluate business performance Flashcards
What does a statement of comprehensive income calculate and how does it do this?
Whether the firm has made a profit or a loss by deducting all expensive from sales revenue
Statement of comprehensive income
Shows the trading position of the business which is used to calculate gross profit. It then takes into account all other expenses to calculate the profit or loss for the year
What does a statement of financial position calculate and how does it do this?
The net worth of a business by balancing what the business owns against what it owes
Statement of financial position
A snapshot of a business’s net worth at a particular moment in time, normally the end of a financial year
A statement of comprehensive income, if produced correctly, will give…
an accurate calculation showing how much profit or loss the business has made. It records sales, costs and profit over a period of time (normally a year)
What does a statement of comprehensive income record?
Sales, costs and profit over a period of time (normally a year)
A statement of comprehensive income records sales, costs and profit over what period of time?
Normally a year
The first part of the statement of comprehensive income is made up of how many components?
Three
Sales revenue
The money coming into the business from providing a trade
Give an example of a trade that would generate revenue for a business
Any from selling goods, manufacturing goods, providing a service, etc.
What’s the calculation for sales turnover?
Quantity sold x selling price
Cost of goods sold
The actual value of inventory used to generate sales
What does cost of goods sold include?
The costs directly linked to providing that trade
The cost of buying the goods or raw materials used to produce goods is an example of…
cost of goods sold
To work out the cost of goods sold, a simple calculation is done to ensure that the figure recorded for cost of goods sold can be directly linked to…
the goods actually sold and not just all the materials purchased
What is the calculation for cost of goods?
Opening inventories + purchases - closing inventories
Opening inventory
The value of inventory in a business at the start of a financial year
Closing inventory
The value of inventory at the end of a financial year
Gross profit is the amount of money left or _______ after the cost of goods sold has been deducted from…
surplus, the sales turnover
Why is gross profit not a business’s final profit?
There are still other expenses to deduct in the next part of the account
What’s the calculation for gross profit
Sales turnover - cost of goods sold
Profit is the money after…
all other expenses have been deducted from gross profit and any other revenue income has been added
Revenue income
Non-capital income that is received by the business from sources other than sales
Give an example of revenue income
Any from discounts received and interest on positive bank balance
Non-capital income that is received by a business from sources other than sales is known as what?
Revenue income
True/False: Depreciation appears as an expense in the statement of comprehensive income
True
Why does depreciation appear as an expense in the statement of comprehensive income?
This is a way that accountants can spread the cost of a fixed asset over its lifetime
Gross profit =
Sales revenue - cost of goods sold
Cost of goods sold =
Opening inventory + purchases - closing inventory
Profit or loss for the year =
Gross profit - expenses + other income
What is tax to be deducted from?
Profit
Tax is a percentage of what?
Profit
Who does tax get paid to?
HMRC
What is tax?
A percentage of profit that is to be paid to HMRC
After a percentage of profit is paid to HMRC, this gives…
profit after tax
In the case of a company, a proportion of profit may be issued to who?
Shareholders
In the case of a company, a proportion of profit may be issued to who shareholders in the form of what?
Dividends
For a ____ ______ or ___________, profit could be taken out of the business as drawings
soul trader or partnership
For a soul trader or partnership, profit could be taken out of the business as what?
Drawings
Where is either some or all of a business’ profits likely to go?
Back into the business
Either some or all of a business’ profit is likely to be ploughed back into the business. What is this called?
Retained profits
Where are retained profits transferred from and to?
From the statement of comprehensive income to the statement of financial position
Depreciation is an accountancy concept used to…
spread the cost of an asset over its useful life
It is important that when fixed assets are shown in the statement of financial position, they are…
given a realistic value
It is important that when fixed assets are shown in the statement of financial position, they are given a realistic value. For this reason, they are…
depreciated on an annual basis
True/False: The annual amount by which assets are depreciated is included as an expense in the statement of comprehensive income
True
If a business bought a delivery van for £30,000 and three years later still showed its value at £30,000, this would be…
unrealistic and inaccurate accounting
True/False: The statement of financial position should show the historic cost of an asset
True
True/False: The statement of financial position should show the amount by which an asset has depreciated over its life
True
True/False: The statement of financial position should show the current value of an asset
True
What does book net value represent?
What an asset is thought to be worth at a particular moment in time
The statement of financial position should show the historic cost of an asset, the amount by which it has depreciated over its life and the current value for the asset. What is this final figure?
The net book value
Straight-line depreciation
An asset is depreciated by a set amount each year
Reducing balance depreciation
An asset is depreciated by a set percentage of its remaining value each year
What does the straight-line depreciation method involve?
Reducing the value of an asset, from the price paid (historic cost) by a fixed amount each year
The straight-line depreciation method involves reducing the value of an asset, from the price paid (________ cost), by a fixed amount each year
historic
Which two decisions must an accountant make to calculate straight-line depreciation
How long the asset is expected to be useful to the business, i.e. its expected life, and at the end of its useful life, how much it might be worth if sold on or sold for scrap, i.e. its residual value
Historic cost
The cost of an asset when it was first purchased
Expected life
How long an asset is expected to be used within a business
Residual value
The value of an asset when it is disposed of by the business, for example, resale value
What’s the formula for straight-line depreciation?
(Historic value - residual value) / expected life
If a Ford transit van cost £16,000 and it was expected to be used by the business for four years with a resale value of £4000, the calculation of depreciation would be shown how?
(£16,000 - £4,000) / 4 = £3k depreciation per year
If the straight-line depreciation of a Ford transit van was £3k per year, this would be shown as…
an expense on the statement of comprehensive income
What does the reducing balance method of depreciation involve?
Reducing the value of the asset by a set percentage each year
The reducing balance method of depreciation involves reducing the value of the asset by a set percentage each year. How is this percentage decided?
By a senior accountant and stated in the financial reports
The reducing balance method of depreciation depreciates an asset by a lower amount as…
the asset ages
The reducing balance method of depreciation depreciates an asset by a _____ amount as the asset ages
lower
It is important that the financial records are a true and fair record of the business’s activities. For this reason, adjustments will be made to what so that the expenditure shown matches the period in which the good or service is used?
The statement of comprehensive income
What are the two types of adjustments to statements of comprehensive income known as?
Prepayments and accruals
Prepayment
When an expense is made in advance of the period to which it relates
A prepayment is when an expense is made in advance of the periods to which it relates. The expense is therefore taken out of what?
Expenses in the statement of comprehensive income and shown as a current asset in the statement of financial position
Rental on a phone line paid quarterly in advance is an example of what?
A prepayment
A prepayment is when an expense is made in advance of the periods to which it relates. The expense is therefore taken out of expenses in the statement of comprehensive income and shown as what?
A current asset in the statement of financial position
Accrual
When expense is paid after the periods to which it relates
Accrual expenses are added as an expense in what?
The statement of comprehensive income
Accrual expenses are shown as current liabilities in what?
The statement of financial position
Electricity paid quarterly in arrears mean what?
The expense is paid after the periods to which it relates
Once produced, the statement of comprehensive income can be used internally by management to…
help measure the performance of the business and inform future decision making
Once produced, the statement of comprehensive income can be used externally by who?
Potential investors and creditors
Why may a creditor want to look at a business’s statement of comprehensive income?
To decide whether or not to offer trade credit
Give 3 examples of ways of analysing a statement of comprehensive income
Any 3 from comparisons between figures within the statement, comparisons between years, intrafirm comparisons and interfirm comparisons
Profit as a percentage of sales revenue is an example of which way of analysing a statement of comprehensive income?
Comparisons between figures within the statement of comprehensive income
Gross profit this year as compared with gross profit for last year is an example of which way of analysing a statement of comprehensive income?
Comparisons between years within the statement of comprehensive income
Revenue for one product or branch compared with another product or branch is an example of which way of analysing a statement of comprehensive income?
Intrafirm comparisons to see how different aspects of the business are performing
Why may intrafirm comparisons be made on a statement of comprehensive income?
To see how different aspects of the business are performing
Why may interfirm comparisons be made on a statement of comprehensive income?
To see how the business is performing in relation to its competitors
When interpreting and analysing a statement of comprehensive income, it is important to consider ______ quality
profit
What is profit quality?
How sustainable a profit is
If profits have increased, but this is because of a one-off event, such as selling an asset, then this cannot be repeated the following year. How may profit quality be seen as a result of this?
Poor
If an increase in profit is as a result of increased sales or lower costs, this may/may not be seen as achievable in future years
may
If an increase in profit is as a result of increased sales or lower costs, this may be seen as achievable in future years and will therefore have what impact on profit quality?
It will be seen as good
True/False: Profit quality can be used to evaluate the statement of comprehensive income
True
Why must accounts be accurate?
To meet legal requirements
Window dressing
Manipulating data in accounts to make it look more favourable
Statement of financial position
A snapshot of a business’s net worth at a particular moment in time, normally the end of a financial year. It is a summary of everything that a business owns and owes. Therefore states the value of a business
Which document is a snapshot of a business’s net worth at a particular moment in time?
A statement of financial position
A statement of financial position is a summary of everything that a business owns (its ______) and owes (its ___________)
assets, liabilities
What does a statement of financial position state?
The value of a business at a particular moment in time
True/False: Statements of financial position can be shown in a vertical or horizontal format
True
What is the most common format of a statement of financial position?
Vertical
What is a balance sheet also known as?
Statement of financial position
What is a statement of financial position also known as?
Balance sheet
What does the first half of a balance sheet calculate?
The net assets
Non-current assets
Items of value that are owned by the business and likely to stay within the business for more than one year
What are the two types of non-current assets?
Tangible assets and intangible assets
Tangible assets
Assets that can be touched, e.g. a machine or premises
Intangible assets
Assets that cannot be touched, for example a trademark or recognised name
Give 2 examples of tangible assets
Any from premises, fixtures and fittings, equipment, vehicles, etc.
It is important that when tangible assets are shown in the statement of financial position, they are given a…
realistic value
Why are tangible assets depreciated on an annual basis?
To give them a realistic value
What should the statement of financial position show about a tangible asset?
The historic cost of the asset, the amount by which it has depreciated over its life and then the current value for the asset
Net book value
What the asset is thought to be worth at a particular moment in time
Net book value = The cost of an asset - what?
Depreciation
An intangible asset is something that…
adds value to a business but does not have a physical presence
Goodwill is an example of which type of asset?
An intangible one
True/False: The value of an intangible asset is constant
False, it can change over time
If a decision is made to decrease the value of an intangible asset, a principle similar to what is applied?
Depreciation
Amortisation
Where a one-off change is made to the value of an intangible asset
Why is amortisation shown on the statement of financial position?
To record the cost, amortisation, and net book value of the intangible asset
Current assets
Items owned by the business that change in value on a regular basis, such as stock
Current assets are those items of value owned by a business whose value is likely to…
fluctuate on a regular basis
Every time a business makes a transaction, the value of its _______ ______ will fluctuate
current assets
Give 2 examples of current assets
Any 2 from inventories, trade receivables, prepayments, cash in the bank, cash in hand, etc.
Inventory
The value of stock held at that moment in time
What are the three forms that inventory can take?
Raw materials, work in progress and finished goods
A business must be careful to give stock a realistic value and not…
overvalue stock
How may stock be overvalued?
Inventory which a business are unlikely to sell because it has gone out of fashion or is damaged must be considered
Trade receivables
People who owe the business money. Although the business does not yet physically have the money, it is, in effect, owned by the business
People who owe the business money. Although the business does not yet physically have the money, it is, in effect, owned by the business. What does this describe?
Trade receivables
Trade receivables/payables are customers who have not yet paid for the good or service provided by the business
Trade receivables
Trade receivables are customers who have not yet paid for the good or service provided by the business and must be…
monitored to ensure that they do make the payment by the due date
True/False: Trade receivables are shown on a balance sheet
True
Prepayments
When an expense is made in advance of the period to which it relates
True/False: Prepayments are classed as an asset
True
Where are prepayments transferred from?
The statement of comprehensive income
How are current assets listed on the statement of financial position?
In order of how easy
If a business has liquidity problems, it may find it difficult to turn inventory into…
cash quickly
If a business has liquidity problems, it may struggle to receive what for inventory?
The true value
A current liability is something owed to/by a business
by
Current liability
Something owed by the business that should be paid back in under one year
Give 2 examples of current liabilities
Any 2 from overdrafts, accruals and trade payables
Overdrafts
The ability to withdraw money from a current account that you do not have
Accruals
When an expense is paid after the period to which it relates
Trade payables
People or businesses that the business owes money to because it has received a good or service but has not yet paid for it
What does net current assets/liabilities represent?
The business’s ability to meet short-term debts
What is net current assets also called?
Working capital
A business with insufficient net current assets does not have enough current assets to…
meet its current liabilities
Why could a business not having enough current assets to meet its current liabilities be potentially disastrous?
If the liabilities have to be paid for now, and the business cannot meet these demands from its current assets, then it will have to find the cash elsewhere. This could mean being forced to sell a fixed asset without which the business cannot operate
How is net current assets/liabilities calculated?
Current assets - current liabilities
Current assets are greater than current liabilities =
net current assets
Current assets are less than current liabilities =
net current liabilities
A liability is something that a busses ____
owes
Non-current liabilities
Liabilities that a business will pay back in more than one year
Give 2 examples of non-current liabilities
Any from bank loans and mortgages, etc.
What are non-current liabilities likely to be used for?
To buy fixed assets or set up a business initially
Net assets
The figure that represents the total value of all the assets minus the value of the liabilities
How is net assets calculated?
Non-current assets + current assets - (current liabilities + long term liabilities)
Capital employed
The total amount of capital tied up in a business at a point in time. It is calculated as owners’ or shareholders’ capital + retained profit - drawings
Capital employed =
Owners’ or shareholders’ capital + retained profit - drawings
What does the second half of a statement of financial position ask?
How things have been financed
Capital employed is shown in the first/second half of the statement of financial position
second
Opening capital
The capital in the business at the start of trading. This is the money invested in the business from the owners.
What is the money invested in the business from the owners known as?
Opening capital
Retained profits
Profits kept from pervious years plus the net profit from the current year.
Where will retained profits be transferred from?
The statement of financial position
Drawings
Withdrawals made by owners from the business
For a statement of financial position to balance, net assets must be equal to what?
Capital employed
Why are adjustments made between the statement of comprehensive income and the statement of financial position?
To ensure that both records are showing a true and fair picture of the business’s activity
Give 2 examples of adjustments that are made between the statement of comprehensive income and the statement of financial position to ensure that both records are showing a true and fair picture of the business’s activity
Any 3 from depreciation, prepayments and accruals
How is annual depreciation shown on the statement of comprehensive income?
As an expense
Each year depreciation is deducted from what to show the value of an asset at the end of the year?
The book net value of an asset
Depreciation is deducted from the net book value of an asset to show the value of the asset at the end of the year; this is the value of the asset recorded where?
In the statement of financial position
Prepayment
When an expense is made in advance of the periods to which it relates
Prepayments are taken out of which section in the statement of comprehensive income and shown as what in the statement of financial position?
Expenses, a current asset
If broadband is paid for 12 months in advance, and the accounts are produced half way through this 12 month period, half of the total payment would be recorded as a prepayment under which heading on the statement of financial position?
Current assets
Accruals
When an expense is paid after the periods to which it relates
Accruals are added as what in the statement of comprehensive income?
An expense
Accruals are shown as what in the statement of financial position?
A current liability
If electricity is paid quarterly in arrears; a figure would be shown in the statement of financial position to account for what?
The value of electricity alreadyy consumed
Once produced, the statement of financial position can be used internally by management to help…
measure the financial health of the business and inform future decision making
Once produced, the statement of financial position can be used externally by who?
Potential investors and creditors
Why may an investor look at a business’s statement of financial position?
When deciding whether or not to offer capital to the business
Give 3 examples of ways in which a statement of financial position may be analysed
Any 3 from comparisons between figures within the statement of financial position, comparison between years, intrafirm comparisons and interfirm comparisons
A statement of financial position may be analysed by making comparisons between figures within the statement, e.g…
Current assets in relation to current liabilities, etc.
Value of fixed assets or current liabilities in one year compared with previous years is an example of which way of analysing a statement of financial position?
Comparison between years
Why may intrafirm comparisons be made in a statement of financial position?
To see how different aspects of the business are performing
Debtors for one branch compared with another branch to identify any potential concerns regarding bad debts is an example of which way of analysing a statement of financial position?
Intrafirm comparisons
Why may interfirm comparisons be made to analyse a statement of financial position?
To see how the business is performing in relation to its competitors
Why is it useful to consider working capital when interpreting and analysing a statement of financial position?
This is a measure of the firm’s ability to meet day-to-day expenses, and the statement of financial position is a useful indicator of how effectively management are running the business
The statement of financial position is a useful indicator of how effectively…
management are running a business
Both statements of financial position and statements of comprehensive income are interpreted with the use of ______
ratios
Ratio analysis allows for…
a more meaningful interpretation of published accounts by comparing one figure with another
True/False: Ratio analysis allows for both interfirm and intrafirm comparisons
True
True/False: Ratio analysis allows for interfirm comparisons, but not intrafirm
False, it allows for both
True/False: Ratio analysis allows for interfirm comparisons, but not intrafirm
False, it allows for both
Who will ratios be used by?
Internal stakeholders such as managers and employees, as well as external stakeholders such as investors and creditors
Profitability is a measure of…
the profit of a firm in relation to another factor
Profitability allows for a more comprehensive assessment of the performance of a firm by…
comparing one figure to another
What are the four profitability ratios?
Gross profit margin, mark-up, net profit margin and return on capital employed
Interfirm
Between different firms, for example, comparing the performance of two different house builders
Comparing the performance of two different house builders is an example of interfirm/intrafirm analysis
interfirm
Intrafirm
Within the firm, for example, comparing this year’s results with the last year’s, or the performance of the York branch with the Leicester branch of retail
Comparing this year’s results with the last year’s, or the performance of the York branch with the Leicester branch of a retail store is an example of interfirm/intrafirm analysis
intrafirm
Stakeholder
Anyone with an interest in the interest in the activities of a business, whether directly or indirectly involved
How is gross profit margin calculated?
(gross profit / revenue) x 100
The gross profit margin ratio looks at gross profit as a percentage of what?
Sales turnover
What does gross profit margin ratio show us?
For every £1 made in sales, how much is left as a gross profit after the cost of goods sold has been deducted
What does a gross profit of 88% mean?
For every £1 of sales made, 88p is left as gross profit
If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to reduce…
the cost of its purchases
If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to reduce the cost of its purchases. This may involve…
looking for a cheaper supplier
If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to reduce the cost of its purchases. This may involve looking for a cheaper supplier, but the firm must first try to ensure that this…
doesn’t affect the quality of the product
If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to increase…
sales without increasing the cost of goods sold
How is mark-up calculated?
(gross profit / cost of sales) x 100
The mark-up ratio looks at…
profit as a percentage of cost of sales
What does the mark-up ratio show?
What percentage of cost of sales is added to reach selling price
What would a mark-up of 25% mean?
If cost of raw materials used to produce a good were £1, it has been sold for £1.25
How is net profit margin calculated?
(net profit / revenue) x 100
What does the net profit margin ratio look at?
A net profit as a percentage of sales turnover
What does net profit margin show?
For every £1 made in sales, how much of it is left as net profit after all expenses have been deducted
What does a net profit of 31% mean?
For every £1 of sales made, 31p is left as net profit
If net profit margin falls from one year to the next or is thought to be too low, what may a firm look at doing?
Reducing its expenses, for example, by moving to cheaper premises or cutting staff costs
Before taking action, what must an accountant try and identify if net profit margin falls from one year to the next or is thought to be too low?
The cause of a falling figure - whether it’s related to sales, cost of goods sold or expenses, as all of these factors will impact upon the net profit margin
How is return on capital employed calculated?
(net profit before interest and tax / capital employed) x 100
ROCE
Return on Capital Employed
What does the return on capital employed ratio show?
The percentage return a business is achieving from the capital (or money) being used to generate that return. it shows, for every £1 invested in the business owners’ capital or retained profits, what percentage is being generated in profit
What does a ROCE of 5% mean?
For every £1 tied up in the business, 5p is being generated in net profit
Investors will often compare ROCE to what?
The interest rate being offered in a bank or building society
Why will investors often compare ROCE to the interest rate being offered in a bank or building society?
To see if their investment is working effectively for them in generating a return
What do liquidity ratios measure?
How solvent a business is
What is meant by how solvent a business is?
How able it is to meet short-term debts
What are the two liquidity ratios?
Current ratio and acid test ratio/liquidity ratio (liquid capital ratio)
How is current ratio calculated?
Current assets / current liabilities
What does current ratio show?
The amount of current assets in relation to current liabilities
How is current ratio expressed?
x:1
If a firm had a current ratio of 2:1, what would this mean?
For every £2 it owned in current assets, it owed £1 in current liabilities
A current ratio of 2:1 is generally considered acceptable/unacceptable
acceptable
If a firm had a current ratio of 0.5:1, what would this mean?
For every 50p it owned in current assets, it owed £1 in current liabilities
What’s the problem with having a current ratio of 0.5:1 if the firm’s bank demanded that it repaid its overdraft immediately and creditors demanded payment?
The firm would not be able to cover these demands from current assets
Having a current ratio of 0.5:1 is a safe/dangerous position to be in
dangerous
How is liquid capital ratio calculated?
(current assets - inventory) / current liabilities
Which liquidity ratio is thought to be a tougher measure of a firm’s liquidity out of the two?
The liquid capital ratio
Like the current ratio, the liquid capital ratio shows…
the amount of current assets in relation to current liabilities
What’s different about the liquid capital ratio compared to the current ratio?
The liquid capital ratio includes inventory
What’s considered to be the hardest current asset to turn into cash quickly?
Inventory
How is the result of the liquid capital ratio expressed?
x:1
Efficiency ratios tend to be used to assess…
how well management is controlling key aspects of a business, primarily stock and finances
Efficiency ratios tend to be used to assess how well management is controlling key aspects of a business, primarily…
stock and finances
What are the three efficiency ratios?
Trade receivable days, trade payable days and inventory turnover
How are trade receivable days calculated?
(trade receivables / credit sales) x 365
True/False: If you don’t know what percentage of sales were made on credit, then it is acceptable to use the sales figure as given in the statement of comprehensive income
True
The trade receivable days ratio, on average, measures what?
How long it takes for debtors to pay
How is the trade receivable days expressed?
As a number of days
If a business has a debtors’ payment period of 60 days, what does this mean?
On average, it takes debtors two months to pay for goods or services purchased on credit
A business with cash flow problems will try to increase/reduce its debtors’ payment period
reduce
Business-to-business (B2B)
Refers to when one business sells to another business - for example, a stationery business selling to a firm of accountants
Business-to-consumer (B2C)
Refers to when one business sells to an individual - for example, a stationery business selling wedding stationery to a bride and groom
A stationery business selling wedding stationery to a bride and groom is an example of B2B/B2C
B2C
A stationery business selling to a firm of accountants is an example of B2B/B2C
B2B
True/False: Trade receivable days will vary from firm to firm
True
Trade receivable days will vary from firm to firm, depending upon…
the nature and price of items sold and whether the business deals in B2B or B2C sales
B2B
Business-to-business
B2C
Business-to-consumer
If a business deals in business-to-business, shorter/longer payment terms may be given
longer
One business may give different payment terms to different customers depending on…
the size and importance of a customer’s business, reliability of payment and discounts offered
How are trade payable days calculated?
(Trade payables / credit purchases) x 365
True/False: If you don’t know what percentage of purchases were made on credit, it is acceptable to use the purchases figure as given in the statement of comprehensive income
True
What does the trade payable days ratio mean?
On average, how long it takes a firm to pay for goods and services bought on credit
How is the trade payble days ratio expressed?
As a number of days
If a business has trade payable days of 30 days, what does this mean?
On average, there is a one month gap between the business buying the good or service and paying for it
A business with cash flow problems will try to lengthen/shorten its trade payable days
lengthen
How is inventory turnover calculated?
(average inventory / cost of sales) x 365
How is average inventory calculated?
Opening inventory + closing inventory / 2
What does the inventory turnover ratio measure?
The average amount of time an item of stock is held by a business
How is the inventory turnover ratio expressed?
As a number of days
If a business has an inventory turnover of 7, what does this mean?
On average, it holds each item of stock for one week
The rate of inventory turnover is very much dependent upon…
the nature of the firm
You could expect a florist or fishmonger to have a much lower/higher inventory turnover than a fashion store or car showroom
lower
If the rate of inventory turnover appears high for the nature of the product, this might result in…
stock going out of date or out of fashion
Give 3 limitations of ratios
Any 3 from they are calculated on past data and therefore may not be a true reflection of the business’s current performance, financial records may have been manipulated and therefore the ratios will be based on potentially misleading data, they do not consider qualitative factors, a ratio can indicate that there is a problem in a business but does not directly identify the cause of the problem or the solution and interfirm comparisons can be difficult as not all firms report their performance in the same way or generate their accounts in the same way
Ratios are calculated on past data and therefore…
may not be a true reflection of the business’s current performance
Financial records may have been manipulated and therefore the ratios will be based on…
potentially misleading data
True/False: Ratios consider qualitative factors
False, they do not
A ratio can indicate that there is a problem in a business but does not…
directly identify the cause of the problem or the solution
Why may interfirm comparisons be difficult?
Not all firms report their performance in the same way or generate their accounts in the same way
True/False: Ratios only report the financial performance at a set point in time
True
True/False: A statement of financial position is a snapshot of the business at a point in time
True
True/False: A statement of financial position is the same through time
False, it may be different
