Topics 60-66 (Analysis and Change) Flashcards
What does a statement of financial position show? And what its alternative name?
A statement of financial position (Balance sheet) shows the assets, liabilities and equity at a specific point in time.
What does a statement of comprehensive income show? And what its alternative name?
A statement of comprehensive income (Profit and Loss account) shows the financial figures regarding profit for a particular year.
List the contents of the statement of comprehensive income (profit and loss account) (8)
- Revenue
- Cost of Sales
- Gross Profit
- Selling Expenses
- Administritative Expenses
- Operating Profit
- Finance Costs
- Net Profit Before and After Tax
Why may shareholders be interested in the statement of comprehensive income (profit and loss account)
They will be interested in the profit made by a business so that they can assess its growth.
Why may managers and directors be interested in the statement of comprehensive income (profit and loss account)
They are likely to use it in order to monitor growth, potentially setting goals and targets to be achieved.
Why may suppliers be interested in the statement of comprehensive income (profit and loss account)
To measure creditworthiness in order to assess whether they are a profitable debtor.
Why may the government be interested in the statement of comprehensive income (profit and loss account)
To assess how much tax a business must pay to the government.
Things included in the statement of financial position (balance sheet) (4)
Current and non-current assets
Current and non-current liabilities
Net Assets
Equity
Why may shareholders be interested in the statement of financial position (balance sheet)
To analyse the asset structure of the business. It shows how funds raised have been put to use. It can also measure the solvency of the business.
Why may managers and directors be interested in the statement of financial position (balance sheet)
To be aware of the firm’s financial position. It monitors working capital to ensure no overspending.
Why may suppliers and creditors be interested in the statement of financial position (balance sheet)
To measure the solvency of a business, as they are not likely to offer credit to a business which has very limited amounts of working capital.
Benefits to businesses of using ratios
Allows them to see their returns on investments
Allows them to assess competitiveness
Aids decison making - reduces future risk
Limitations of using ratio analysis
Quickly changing
Varies between industries
Only a snapshot of time
Can be ‘window dressed’
Meaning of the gearing ratio
they show the long-term financial position by comparing debt to equity. They are useful for understanding how much of the business is financed by loans vs. shareholders.
Gearing Ratio formula
Gearing Ratio = Non current liabilities / Capital employed x 100
What gearing ratio suggests a business is over-reliant on loans?
50% and above
What does return on capital employed (ROCE) ratio show
ROCE measures the efficiency of capital use by comparing profit to the capital invested.
Return on capital employed (ROCE) formula
ROCE = Operating Profit / Capital Employed x 100
Labour productivity
Labour productivity = Total output (per period of time)
———————————– x 100
average number of employees (per period of time)
Why is labour productivity important?
- Cuts costs
- Helps price competitveness
- Boosts profit margins
What is a drawback of using labour productivity?
It is hard for comparisons to be made across industries due to different equipment or processes.
Labour turnover formula
number of staff leaving per period
————————————————– x 100
Average number of staff in post during the period
disadvantages of high labour turnover
Can lead to higher recruitment and training costs
Disrupts continuity and morale
Labour retention formula
number of staff staying
—————————— x 100
Average number of staff in post
