THEME 3: SECTION 5 (ASSESSING COMPETITIVENESS) Flashcards
What is a statement of comprehensive income?
- A profit and loss account, shows how much money has been coming into the business (revenue/ profit) and how much has been going out (costs)
What is a statement of financial position ?
- A balance sheet, is a snapshot of a firm’s finances at a fixed point in time, showing the current and non-current assets and liabilities
key information about profit and loss accounts
- shows a company’s revenue and expenses over a particular period of time
- Shows if a firm is profitable through the three profit measurements
- Can be used in assessing a businesses financial performance
Key information about Balance sheets
- shows the liquidity of the business
- Shows whether it balances out debts and equity
- one of the three core financial statements that are used to evaluate a business
What interest with Stakeholders have in a profit and loos account ?
- Managers = look at what they will need to change in order to see what is are necessary, compare with competitors to see where they’re going wrong/right.
- Employees will look at if the business is profitable enough to stay open and keep them employed as well as if net profit is high enough for bonuses etc.
- Supplier won’t want to do business with a firm that has more costs than profit
What interest with Shareholders have in a profit and loos account ?
- interested in seeing how profitable the business is by looking at the net profit on different statements
- how high dividends could be
- look for fluctuating profits to see if it is risky to invest in them
- look at how often profit and costs change and whether there is a simple way to fix profit issues etc.
What interest with Shareholders have in a balance sheet?
- financial performance over time
- Predict future financial performance
- See what the main source of capital is if the firm has lots of outgoing debts that could affect dividends
What interest with Stakeholders have in a profit and loos account ?
- Managers want to ensure that the firm has liquid current assets and enough cash to deal with everyday debts in order to avoid failure. Knowing will help make changes and prevent issues
- Suppliers will look to see if the firm is solvent and has liquid assets as they are most able to pay bills on time and wont need trade credits.
Define liquidity
How able a firm is to turn an assets to cash
Define solvency
How able a firm is to pay off debts
What are the two liquidity ratios used?
- Current ratio (working capital ratio) = current assets /current liabilities
- Acid test ratio = (current assets - inventory) / current assets
What is a gearing ratio used for and what does it show ?
Gearing = shows a business where its capital comes from
- It will show the proportion of finance that comes from non-current liabilities (long-term debts)
- Gearing figures will show how vulnerable a business is to interest rates affecting them because the amount a firm can borrow depends on the businesses profitability and the value of the assets.
What is the formula for the gearing ratio?
Gearing ratio = (𝒏𝒐𝒏−𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒍𝒕𝒊𝒆𝒔)/(𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅 ) 𝒙𝟏𝟎𝟎
( capital employed = capital employed = non current liabilities + total equity )
What is total equity ?
Assets - liabilities
- represents the net worth of a company, which is the amount that would be returned to shareholders if a company’s total assets were liquidated and all of its debts repaid.
What is a high geared ratio value and what does it mean?
- more than 50% of the capital is from long term funding and borrowings
- vulnerable to interest rate changes
- might be acceptable if the firm can service debts well and doesn’t have liquidity issues
X= affects liquidity, if interest rose the business would struggle for cash
