Mangaging Finace Theme 2 Flashcards
Why create a statement of comprehensive income
It’s also called a loss and profit account
It’s legal requirement
Allows a business to compare its performance to previous years
Encourages shareholders or potential investors to invest in the business
How to calculate equity
Total non current assess + current assets - non current liabilities - current liabilities = equity
What are ?
Non current assets
Current assets
Non current liabilities
Current liabilities
Non current assets are everything that
Machinery premises and vehicles
Current assets could be inventory
Cash in bank
Debtors moving owed to business
Non current liabilities could be bank loans overdraft dividends
Current liabilities are tax creditors
Define liquidity
How easily assets could be turned into cash
Cash is very liquid where as something like a factory isn’t
How can liquidity be improved
Decrease stock levels
Increase the collection of debts
Slowing down payments to creditors
What is the current ratio
Current assets / current liabilities
What’s is the acid test ratio formulae
Current assets - inventory / current liabilities
What numbers should the current ratio be
A value below 1.5 shows liquidity problems
A value between 1.5 and 2 is perfect
A value higher than 2 shows that business has to much assets compared to liabilities so the business has more current assets than liabilities so business should should reinvest this money into the business go make more profit
A value higher than 2 could put shareholders off as they might think that the business is not trying to maximise profits
What are good values for acid test ratio
A value higher than 1 is good for a business value lower than 1 is bad for business
High acid test ratio may indicate cash is lying idle in inventory rather than being invested to make profit
What is working capital formulae
Current assets - current liabilities
What is the working capital cycle
The time period between buying raw material for the products and selling the product as a finished good
Factors that affect how much cash a business needs
Inflation
The working capital cycle longer working capital cycle means a business needs more money to cover its day to day expenses
When a business expands it needs more money to avoid overtrading
