MBA - Managing finance Flashcards
What is liquidity?
Easily convertiable into cash
3 measurements of liquidity
- Current Ratio = Current Assets / Current Liabilites
- Acid Test Ratio = (Current Assets - Inventories) / Current Liabilities
- Working Capital = Current Assets - Current Liabilities
What do the figures 1.5 - 2, below 1.5 and above 2 mean in current ratio?
- 1.5 - 2: Ideal value - plently of working capital
- Below 1.5: Not enough CA to cover CL - debts could arise
- Above 2: Cash/assets is lying/idle around - could earn interest or invest to expand
What do the figures above 1 and below 1 mean in acid test ratio?
- Above 1: Plently of working capital
- Below 1: Not enough CA to cover CL - debts could arise
Why is the acid test ratio considered more reliable comapared to current ratio?
Takes into account the business’ stock as they may not sell all of it
What’s the difference between assets and liabilites?
- Assets are what you own
- Liabilites are what you owe
What are current assets?
Short term assets that are likely to be converted into cash within the next year of trading
What are non-current assets?
Long term assets that aren’t likely to be converted into cash within the next year of trading
What are examples of current assets?
- Cash
- Inventories
- Trade and other recievables
What are examples of non-current assets?
- Intangible assets; copyright, goodwill, trademarks
- Tangible assets; property, plants, equipment
- **Deffered tax **assets; payment of taxes
What are current liabilites?
Debts that are likely to be paid within the next year of trading
What are non-current liabilites?
Debts that aren’t likely to be paid within the next year of trading
What are examples of current liabilties?
- Borrowing; short-term loans and overdraft
- Current tax liabilities; corporation tax
- Provision for liabilites; money set aside to pay borrowings and tax
What are examples of non-current liabilites?
- Borrowings; long-term loans
- Retirement benefit obligations; money owed to past employees in pensions
- Provisions for liabilites; money set aside for future expenses
- Other non-current liabilities; may be money for repairs
What is equity?
The amount of money that could be returned to a company’s shareholders if all its assets liquidated and debts paid off
What are examples of equity?
- Ordinary shares
- Retained earnings
- Share capital (raised by business from the sale of new shares)
What are 3 uses of a balance sheet?
- Evaluate performance of the business
- Evaluate potential of a business to an investor
- Summary valuation of the business
What are 3 limitations of a balance sheet?
- Value of assets stated may not be the same as the amount they will sell for
- Intangible assets may include goodwill, which is hard to put a value on
- It is a static snapshot of one day in a business
What are 4 ways of improving liquidity?
- Reduce the amount of stocks
- Reduce credit periods - trade credit of 30 days to 15 days…
- Negotiate with supplier
- Increase borrowing long-term and clear short-term debts
What is the structure of a balance sheet?
- Revenue
- Costs of sales
- GROSS PROFIT
- Overheads
- OPERATING PROFIT
- Tax and interest
- NET PROFIT
What are the indirect and direct costs?
- Indirect costs: Cost of sales
- Direct costs: Overheads
How do you find gross, operating and net profit?
- Revenue - Costs of sales
- Gross profit - Operating costs
- Operating Profit - Tax and interest
How do you find gross, operating and net profit margin?
- Gross profit/Revenue x 100
- Operating profit/Revenue x 100
- Net profit/Revenue x 100
What is overheads and an example?
The costs of running a business that aren’t directly related to producing a good or service.
- Rent, wages
- Transport, admin
What does the liquidity ratio represent?
Represents the companys’ ability to convert sales into profit
- operating profit margin, gross profit margin and net profit margin
What does the return ratio represent?
Represents the companys’ ability to generate return to the shareholders
- capital employed, gearing ratio
How do you find ROCE?
Operating profit/Capital employed x 100
How do you find capital employed?
Total equity - non-current liabilites
What is total equity?
Current assets - Current liabilites
The higher the figure, the higher the…
Rate of return
How do you find gearing ratio?
Non-current liabilities/Capital employed x 100
What does gearing ratio look at and if the % is above 50 or below, what does this mean?
Looks at long-term finance
- Above 50%: Problem, borrowing too much - risky (HIGHLY GEARED)
- Below 50%: Okay, most money is coming from owners (LOWELY GEARED)
