m2- topic 3 part 2 Flashcards
what do financial statements do
summarise the activities of the business
what things are analysed in financial statements (4)
liquidity
gearing (solvency)
profitability
efficiency
what is liquidity
the extent to which a business can meet its short term debt commitments
what is working capital
the amount of money the business will have access to for its day to day operations
how is working capital calculated
current assets - current liabilities
what is used to asses liquidity
the current ratio
what is the current ratio equation
current assets/current liabilities
what is the minimum industry standard for a current ratio
1.5 : 1
what is solvency
the ability for a business to pay off its long term debt
what is used to assess solvency
gearing
what is gearing
how the business is financed through debt and equity
what is is used to measure gearing
debt to equity ratio (total liabilities/total equity)
why is high gearing bad
business is more open to the influence of interest rates
what is profitability
the earning capacity of the business
how is profitability calculated (3)
gross profit ratio
net profit ratio
return on equity ratio
what is the equation for the gross profit ratio
gross profit/sales
what is the equation for the net profit ratio
net profit / sales
what does return on equity show
how effective funds contributed by the owner are being generated into profits
what is the equation for the return on equity ratio
net profit/total equity
what form is gross profit, net profit and return on equity ratios calculated in
as a percentage
is it better to have a higher or lower gross profit, net profit and return on equity ratio
higher
what is efficiency
the ability of the business to use resources effectively
how is efficiency calculated (2)
expense ratio
accounts receivable turnover ratio
what s the equation for the expense ratio
total expenses / sales
