Schedule I

Question 1

function of financial accounts

Answer 1

to provide information to stakeholder groups on how the business has performed during a given period

Question 2

Stakeholder interest in financial accounts: Shareholders

Answer 2

position of the business will change their share price and amount of dividends they get

Question 3

Stakeholder interest in financial accounts: managers

Answer 3

managers make their decisions based off of the financial position of the business

Question 4

Stakeholder interest in financial accounts: banks

Answer 4

financial accounts give banks a good idea whether the business would be high or low risk

Question 5

balance sheets definition

Answer 5

a snapshot of a firms worth/financial position at a particular moment in time. shows the assets and liabilities of a business

Question 6

current assets definition (2 points)

Answer 6

• items that the business owns
• usually held for a short period of time (under 12 months) e.g. cash

Question 7

long term assets definition (3 points)

Answer 7

• held for over 12 months
• dont get used up in production
• can be physical or non physical
  e.g. copyright

Question 8

current liabilities definition

Answer 8

monies owed by the business that must be paid back within 12 months
e.g. short term loan

Question 9

non current liabilities

Answer 9

dont have to be paid back within 12 months e.g. long term loan

Question 10

capital

Answer 10

consists of money raised by selling shares, retained earnings, reserves and share premiums

Question 11

depreciation

Answer 11

a cost that occurs when a business writes off the net cost of a fixed asset over its useful life

Question 12

shareholders equity

Answer 12

the money invested or kept within the business by the owners/shareholders

Question 13

working capital

Answer 13

the finance available for the day-to-day running of a business

Question 14

Total equity

Answer 14

the sum of the capital, retained earnings and any other assets

Question 15

net assets

Answer 15

assets - liabilities

Question 16

2:1 current ration meaning

Answer 16

good working capital management and good liquidity

Question 17

10:1 current ration meaning

Answer 17

bad working capital management and good liquidity

Question 18

0.5:1 current ration meaning

Answer 18

poor working capital management and poor liquidity

Question 19

how do you increase liquidity (5 points)

Answer 19

• sell assets not in use
• try to find a cash account with the highest interest rates
• take out a long term loan to pay off an overdraft
• analyse if you are holding too much stock
• receivables may be too high

Question 20

what is the threshold to being highly geared

Answer 20

50%

Question 21

highly geared companies in recessions (2 points)

Answer 21

• interest rates increase therefore interest payments increase leading to higher costs
• people spend less in recessions, therefore less revenue but increased costs leads to big drop in profit

Question 22

disadvantages of being highly geared (2 points)

Answer 22

• have to pay more for interest
• they are higher risk to banks

Question 23

advantages of being lowly geared (2 points)

Answer 23

• less of a risk to banks
• loans are easier to get with lower interest rates

Question 24

how to increase gearing (2 points)

Answer 24

• take out more long term loans
• spend retained profits

Question 25

how to decrease gearing (2 points)

Answer 25

• pay off loans
• move to short term loans

Question 26

what does ROCE measure

Answer 26

the efficiency with which the firm generates profit from the funds invested in the business

Question 27

what does inventory turnover measure

Answer 27

the number of times a year a business sells and replaces its stock

Question 28

how to increase inventory turnover (2 points)

Answer 28

• make inventory smaller
• increase sales volume

Question 29

advantages of ratio analysis (4 points)

Answer 29

• helps us intemperate accounts
• allows us to do comparisons over time against other businesses and targets
• ratios are data which helps us make scientific decision making
• can help people make decisions internally e.g. whether to invest or not

Question 30

disadvantages of ratio analysis (3 points)

Answer 30

• only quantitive analysis available
• you can manipulate numbers to make them look better
• numbers dont tell the whole story (ROCE reducing would look bad but could be due to a large investment into machinery which will bring long term benefits)