Section 8- Internal Analysis Flashcards
What is financial accounting?
Formal records, summaries and reports of a businesses transactions.
What is financial accounting?
Formal records, summaries and reports of a businesses transactions.
What is management accounting?
Presenting and analysing financial data to help management make decisions and monitor progress.
What does a balance sheet provide?
A summery of the assets and liabilities of a business. It is specific to that period of time.
How is information recorded in a balance sheet?
By using the double entry system, every transaction has two equal effects on the assets and liabilities.
Who might want to view a businesses balance sheet?
Shareholders or potential shareholders as they can view a businesses financial position, cash flow and working capital.
What is the equation for working capital?
working capital= current assets - current liabilities
A positive number means a good cash flow
What is the equation for net current assets?
Net current assets/ working capital= current assets - current liabilities
What is the equation for net assets?
Net assets= fixed assets + working capital
What is the equation for capital employed?
Capital employed = equity & share capital + long term liabilities
What is window dressing?
A short term strategy used by businesses to make their financial reports look more appealing to shareholders.
e.g. recording future sales or using own funds to increase working capital
What is profitability?
Compares profits to other factors such as the amounts of capital used or the sales revenue
What is the equation for gross profit margin?
Gross profit margin = gross profit/revenue x100
What is the equation for the operating profit margin?
Operating profit margin= operating profit/revenue x100
What is the equation for the profit for the year margin?
Profit for the year= profit for the year/revenue x100
What is an income statement?
A historical record of the trading of a business over a specific period, shows a firm’s total incomes or losses.
What is the equation for gross profit?
Gross profit= sales revenue - cost of sales
What is the equation for operating profit?
Operating profit= gross profit- operating expenses
What is the equation for profit before tax?
Profit before tax= operating profit - financial costs
What three decisions could data help a business decide?
- does the business have enough capital to fund new projects?
- what would the effect on cash flow be?
- how might a return on investment perform?
What does ROCE stand for?
Return On Capital Employed
What is the ROCE equation?
ROCE = operating profit/capital employed x100
What is ROCE?
Compares the amount of capital earns with the amount of capital employed, allowing a business to assess the overall financial performance.
Goldie zone= 20%-30%
How can you improve ROCE?
Increasing operating profit or paying off long term borrowing
What is the current ratio used for?
To assess if a business has enough cash.
What is the equation for current ratio?
Current ratio= current assets/current liabilities
Always _: 1
What is gearing?
The measure of long term liabilities. Essentially how vulnerable a business would be to an increase in interest rates.
How could you reduce the gearing ratio?
- reduce non current liabilities (but will decrease cash)
-increase share capital (but would loose more control) - repay long term loans
What is the equation for gearing?
Non current liabilities/capital employed x100
