unit 7 - Flashcards
what do final accounts do
outline the financial performance of a business over a period of time
where are financial accounts posted for publicy-held companies
published in the annual report
why would people be interested in the accounts? (internal stakeholders and external stakeholders)
Internal Stakeholders
- investors (current and potential): should i continue to hold my share/invest into the business
- managers: measures performance against targets
External Stakeholders
- banks: should we lend to the business?
- suppliers: should we give them trade credit?
employees, customers, government etc.
what is a profit and loss account (income statement)
a summary of the business’ financial performance over a given time period
what NEEDs to be on a profit and loss account
- needs a title
- needs the date
how should the title of a profit and loss be stated?
“statement of profit & loss for XX for year ended ../../….”
Order of the profit and loss account
sales revenue
cost of sales - has to be ()
gross profit
Expenses - has to be ()
Profit before interest and tax
Interest - has to be ()
Profit before tax
Tax - has to be ()
Profit for period
Dividends - has to be ()
Retained profit
what does expenses on a profit and loss mean
fixed or indirect cost not directly involved in production
pros of paying dividends - profit and loss
- satisfies shareholders who get a return
- possible impact on share price
pros of not paying dividends
- can retain the money and grow the business
- may lead to higher profits and dividends in the future
what is the difference if a business is a non-profit enterprise (profit and loss)
- any place where there was the word profit before - becomes surplus
- no dividends
- no taxes
sales revenue
cost of sales - has to be ()
gross surplus
Expenses - has to be ()
surplus before interest and tax
Interest - has to be ()
surplus before tax
Tax - has to be ()
surplus for period
Retained surplus
what does depreciation mean?
the reduction of the value of an asset over time
why is it important to add depreciation onto a balance sheet?
important to put onto the balance sheet as we can see the real value of fixed assets
what is the purpose of accounts to different stakeholders?
managers: for decision making and strategic planning
investors: determine profitability and future growth
creditors: evaluate a companies ability to pay debts
government: uses accounts for taxation purposes and regulatory compliance
what are different types of intangible assets
Definition: Non-physical assets like patents, trademarks, goodwill, and brand recognition.
Goodwill: The extra value a company has beyond its tangible assets, often created during mergers.
Patents and Trademarks: Legally protect innovations and branding, adding value to the company.
gross profit margin - what is it and how to calculate
(gross profit/sales revenue) x 100
shows the % profit made on the production and sale of a product
profit margin - what is it and how to calculate
(profit before interest and tax/sales revenue) x 100
shows the % profit made on the production and sale of a product after subtracting expenses
return on capital employed - what is it and how to calculate
(profit before interest and tax/total equity + non-current liabilities) x 100
it shows the success of a company at using capital to generate profit
how to improve gross profit margin, profit margin
raise revenue:
- marketing
- alternate revenue streams
cut costs of sales:
- cheaper supplies
- cheaper labour
- increase of productivity (automation)
what are the liquidity ratios
- current
- acid-test
what are the profitability and efficiency ratios
- gross profit margin
- profit margin
- return on capital employed
current liquidity ratio - how to calculate and what is it
(current assets/current liabilities)
shows the ability of a business to pay back debts over 12 months
ideally 1.5 - 2
less than 1.5 - would not be able to pay back debts
larger than 2 - inefficiently run business as they hold more assets that can be used to support the business instead
acid test (quick) - how to calculate and what is it
(current assets - stock / current liabilities)
shows the ability of a business to pay back debts over 12 months, not considering stock as it may be difficult to sell stock out
ideally 1-1.5
possible strategies to improve return on capital employed:
- increase profits
- more efficient use of capital employed
how to improve liquidity ratios?
Assuming it is too low:
- hold more current assets than current liabilities
hold more cash:
- eg. sell non-current assets
reduce short term borrowing:
- eg. hold more long-term loans
