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Business study Year 12 > m2- topic 3 part 2 > Flashcards

m2- topic 3 part 2 Flashcards

1
Q

what do financial statements do

A

summarise the activities of the business

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2
Q

what things are analysed in financial statements (4)

A

liquidity
gearing (solvency)
profitability
efficiency

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3
Q

what is liquidity

A

the extent to which a business can meet its short term debt commitments

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4
Q

what is working capital

A

the amount of money the business will have access to for its day to day operations

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5
Q

how is working capital calculated

A

current assets - current liabilities

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6
Q

what is used to asses liquidity

A

the current ratio

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7
Q

what is the current ratio equation

A

current assets/current liabilities

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8
Q

what is the minimum industry standard for a current ratio

A

1.5 : 1

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9
Q

what is solvency

A

the ability for a business to pay off its long term debt

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10
Q

what is used to assess solvency

A

gearing

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11
Q

what is gearing

A

how the business is financed through debt and equity

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12
Q

what is is used to measure gearing

A

debt to equity ratio (total liabilities/total equity)

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13
Q

why is high gearing bad

A

business is more open to the influence of interest rates

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14
Q

what is profitability

A

the earning capacity of the business

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15
Q

how is profitability calculated (3)

A

gross profit ratio
net profit ratio
return on equity ratio

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16
Q

what is the equation for the gross profit ratio

A

gross profit/sales

17
Q

what is the equation for the net profit ratio

A

net profit / sales

18
Q

what does return on equity show

A

how effective funds contributed by the owner are being generated into profits

19
Q

what is the equation for the return on equity ratio

A

net profit/total equity

20
Q

what form is gross profit, net profit and return on equity ratios calculated in

A

as a percentage

21
Q

is it better to have a higher or lower gross profit, net profit and return on equity ratio

A

higher

22
Q

what is efficiency

A

the ability of the business to use resources effectively

23
Q

how is efficiency calculated (2)

A

expense ratio

accounts receivable turnover ratio

24
Q

what s the equation for the expense ratio

A

total expenses / sales

25
Q

what does accounts receivable turnover ratio determine

A

measures the effectiveness of the firms credit policy

26
Q

what is the accounts receivable turnover ratio equation

A

365/sales/accounts receivable

27
Q

what is the average credit period

A

30 days

28
Q

should the efficiency ratio be high or low

A

low

29
Q

what are the limitations of financial reports (6)

A 
Debt repayments
Capitalising expenses
Normalised earnings
Timing issues
Notes of financial statements
Assets valuation
30
Q

why are normalised earnings misleading

A

they remove one time influences (eg sale of land)

31
Q

why is capitalising expenses misleading

A

they reclassify expenses as assets

32
Q

how can valuing assets be misleading

A

inaccurate calculation of asset

33
Q

how can debt repayments be misleading

A

financial reports don’t disclose information about debt repayments

34
Q

how can notes to financial statements misleading

A

may not be easy to understand

35
Q

why do businesses over estimate expenditure and underestimate revenue

A

to allow a margin for error so the investor doesnt feel they invested in a bad business

36
Q

what types of audits are there (2)

A

external

internal

37
Q

what are external audits

A

when a outside accountant checks all financial information to ensure the business is not lying and misleading investors

38
Q

what are internal audits

A

when someone within the business checks

39
Q

what is tax evasion

A

when a business doesn’t declare revenue to lower tax

Business study Year 12 (33 decks)

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