Unit 9: Financial information and decision making

Question 1

The importance of cash

Answer 1

The business needs cash in order to pay its bills,wages, or any type of payment in form of cash. If the business does not have cash, it would soon have to close.

Question 2

What is the use of cash flow forecast? (Check in the book pg. 126 for the layout)

Answer 2

Cash flow forecast is used to keep a record of the movement of cash they expect to have coming in and out. Receipts is the cash flowing into the business, payments represent cash that flow out of the business. Balance is the amount of cash that the business will have at a particular moment in time.

Question 3

How to calculate gross profit and net profit? (Really? -.-)

Answer 3

Gross profit = Sales revenue - Cost of sales

Net profit = Gross profit - Overheads

Question 4

What is the use of profit and loss accounts?

Answer 4

Shows the owners how well the business is being run. Also helpful if the owner needs to borrow funds, to visualise how big of a risk it would be. The p&l accounts are usually produced after a trading period.

Question 5

How to write P&L account? (For the layout - TB pg. 130)

Answer 5

Write the cause of the money in or out, then the value on the other side. Negative numbers are put in brackets. Always have negative profit at the end.

Question 6

The difference between cash and profit?

Answer 6

Cash is the money that the business has to pay its bills, or the bank when they demand payment. Cash is the money available for use at a certain moment in time. Cash can come from profit.
Profit is earned from running the business well. Profit is earned over a period of time.

Question 7

What is a balance sheet?

Answer 7

A balance sheet is a statement showing a financial health of a business at a particular moment in time.

Question 8

What are the balanced sheets used for?

Answer 8

Balanced sheet enables you to compare how much a business owns and how much it owes to lenders.

Question 9

What are assets? What type of assets are there and give examples?

Answer 9

Assets are items that are owned by a business.
There are fixed assets (will not turn into cash), and current assets (turns into cash).
Fixed assets: E.g. Vehicles, Buildings, Machinery
Current assets: E.g. Stock, Debtors, Cash

Question 10

What are liabilities? What type of liabilities are there and give examples.

Answer 10

Liabilities are what the business owes.
There are long term liabilities (need to be paid over a year) and short term liabilities (need to be paid within a year).
Long term liability: E.g. Mortgage, Loans
Short term liability: E.g. Debts

Question 11

How to calculate net current assets?

Answer 11

Net current assets = Current Assets - Current Liabilities = Working capital

Question 12

How to calculate fixed assets employed?

Answer 12

Fixed assets employed= Fixed + Net Current Assets

Question 13

What are the two things that should always balance in the balance sheet?

Answer 13

Net assets employed = Capital employed

Question 14

What are the 5 main financial ratios and how to calculate them?

Answer 14

1) Gross profit margin = Gross Profit/ Sales revenue
2) Net profit margin = Net profit / Sales Revenue
3) Return of Capital Employed (ROCE)= Net profit/Capital Employed
4) Liquidity/Current ratio = Current Assets/Current Liabilities
5) Quick ratio = (Current Assets - Stock) / Current liabilities

Question 15

What does Gross Profit Margin show?

Answer 15

Gross profit margin: Shows how much gross profit a business makes for $1 of sales. Shows performance of the business. Shows managing ability of consistently controlling the business’s production costs and the margin between what to buy and sell.

Question 16

What does Net Profit Margin show?

Answer 16

Net Profit Margin: Shows how much net profit a business makes for $1 of sales. Shows performance of the business. Shows management ability and control of expenses/ overheads.

Question 17

What does ROCE show?

Answer 17

How much a business makes from $1 of investment

Performance rate, justification of investment (If it’s worth it)

Question 18

What does Current/Liquidity ratio show?

Answer 18

At what rate (how many times) can the business afford to pay current liabilities out of its current assets.

Question 19

What does Quick Ratio show?

Answer 19

Stock is the least liquid asset. This ratio shows at what rate can the business afford to pay current liabilities out of its current assets without stock.

Question 20

How liquid are the 3 main current assets?

Answer 20

Stock - least liquid
Debtors - average
Cash - most liquid

Question 21

Define budget

Answer 21

A budget is a plan stated in numbers of what is to be spent, earned in the future. It is used to control business and keep finances “on-budget”.
Good budgeting can motivate workers.

Question 22

Variance in the budgeting

Answer 22

Variance occurs when the actual figure differ from the budgeted once.
E.g Overheads: Budget: $2000; Actual: $2100 => Variance = -$1000
E.g. Sales: Budget: $25000; Actual $30000 => Variance = $5000

Question 23

Who reads the accounts? (Total of 7)

Answer 23

Owners/Shareholders
Lenders
Managers
Suppliers
Customers
Employees
Tax Collectors

Question 24

What do the owners/shareholders, lenders and managers want to find out in the accounts?

Answer 24

Owners/Shareholders: They want to know that their investment is being used properly.
Lenders: Want to know that the business is able to pay interests and repay any loans.
Managers: Want to check the profitability of the business, whether they are doing a good job.

Question 25

What do the suppliers, customers, employees and tax collectors want to find out from the accounts?

Answer 25

Suppliers: Want to know whether the business generates enough to pay for the supplies.
Customers: Want to make sure of they are not being charged too much (If their profits are too high).
Employees: Want to know the job security; whether the business is financially stable and can pay wages.
Tax collectors: In order to calculate the business’s tax on profits that is needed to be collected.