Section 8 - Finance Flashcards
What are the 2 profitability tests?
- Gross profit margin
- Net profit margin
How do you work out gross profit margin?
gpm = (gross profit / sales) x 100
How do you work out net profit margin?
npm = (net profit / sales) x 100
Which profitability test is a better indicator of business performance?
Net profit margin
What are the advantages of producing an income statement?
- Easily identify problems in the business
- Decide if merger/takeover
- Accurately calculate tax
- Identify trends
- Compare to different businesses
- Helps secure a loan
- Indicator for shareholders
- Compare to previous years, performance/progress
What are the disadvantages of producing an income statement?
- Requires a professional to do it, cost
- Time consuming
- Different types of profit can be misleading
- Can be difficult to classify direct + indirect costs
What is an asset?
- Something a business owns
- e.g. building, office furniture, equipment, vehicles, stock
What is a liability?
- Something a business owes
- e.g. loans, trade credit
What is capital (or financed by)?
Money provided by owners
What is a current asset?
Short term assets that can be turned into cash within 12 months e.g. stock
What is a non current asset?
Resources used often that are difficult to turn into cash. Usually owned for a long period of time (>12 months) e.g. equipment
What is a non current liability?
Debts due to be repaid after more than 12 months e.g. mortgage
What is a current liability?
Debts due to be repaid within 1 year e.g. overdraft
On a balance sheet, what 2 thing must be equal?
Net assets + total equity
On a balance sheet, how do you work out net current assets?
current assets - current liabilities
On a balance sheet, how do you work out net assets?
non current assets + net current assets - non current liabilities
What is a balance sheet?
A statement showing a business’ assets + liabilities
What is a ratio?
A technique for analysing a business’s financial performance by comparing 1 piece of financial info w// another
What is a liquidity ratio?
Measures business’s performance by examining its ability to pay short term debts using current assets. All figured for liquidity ratios are found in a balance sheet
What does it mean if an asset is said to be liquid and why are they important?
- Can be turned into easily cash
- Important for firms to be able to meet their debts
What are the two liquidity ratios?
- Current ratio
- Acid test ratio
How do you work out the current ratio?
(current assets / current liabilities):1
What is the ideal current ratio?
2:1
What does the current ratio show?
How many assets you have for each liability
How do you work out the acid test ratio?
([current assets - stock] / current liabilities):1
What is the ideal acid test ratio?
1:1
What does it mean if the acid test ratio is less that 1:1?
Will be unable to pay you debts
How can an established firm raise finance?
- Retained profit (reinvesting profit after paying themselves dividends)
- Reinvested saving (bank savings/buying shares)
- Selling fixed assets (no longer in use)
- Shares
- Debentures (loans from the public)
- Loans/mortgages
What factors affect which source of finance a growing business go for?
- Type of company (e.g. not all have fixed assets etc.)
- Amount of money needed
- Length of time finance needed for
- Cost of finance
- State of the economy (if poor public unlikely to invest)
