Week 9- Business organisations/Ratios Flashcards
how do different types of businesses finance themselves?
Sole traders /partnerships: Capital
Private and public limited companies: Share capital (ordinary and preference shares) rewarded through payment of dividends
What are preferential shareholders?
They receive preferential treatment in receiving dividends and in the distribution of profits during liquidation but cant vote at an AGM
What are ordinary shareholders?
They have voting rights at the AGM but receive dividends after preferential shareholders
explain the two ways in which shares can be issued
1) At par value: whe shares are issued at face value eg A par value of £1 means the company benefits by £1 per share sold
2) At a premium: When shares are issued at the par value plus an amount reflecting the increase in the value of the shares eg. shares issued at £1.25, share capital per share sold is £1 so the share premium is 25p per share
Are dividends an expense?
No, they are a distribution of profit to shareholders
how are dividends quoted for ordinary shareholders?
In pence per share
how are dividends quoted for preferential shareholders?
quoted based upon the return of the share eg. 2% of preferential shares receive a 2% return on their investment
Do dividends have to be declared by a PLC every year?
No, if the business has financial problems eg. weak cash flow then they can decide to not pay dividends and retain the profits instead. However, this needs to be approved by ordinary shareholders at an AGM
How else are preferential and ordinary share dividends different?
pref dividends are paid by the period of time that they have been held for, like interest. Ordinary dividends are paid to the current holder of the share regardless of how long they have held it.
what are distributable reserves?
Another name for retained earnings, thus a business must have funds in this account to distribute dividends
what are non-distributable reserves?
Share capital (ordinary and preferential), share premium and revaluation reserve. Dividends cannot be paid from these reserves
what is the role of ratio analysis?
Compares the figures from financial statements to previous years
What do profitability ratios show?
The higher the profit percentage the more profitable the firm
What are all the profitability ratios?
Gross profit percentage
Operating profit percentage
Profit before tax percentage
profit after tax/ net profit percentage
How do you calculate a profitability ratio?
Example: Gross profit/sales x 100 = gross profit percentage ratio
why are profitability ratios important
They show that larger profits don’t specifically indicate greater success or an improvement from past years.
What does the return on capital employed show?
The higher the percentage, the better the return on the capital which was used
how do you calculate the return on capital employed?
Operating profit / capital employed x 100
what are the two liquidity ratios that we need to know?
Current ratio and Acid test ratio
What does the current ratio show?
The ratio is expressed as Current assets: Current liabilities. The higher the CA the more able the business is able to pay CL and therefore better the ratio.
what doe the acid test ratio show?
The acid test ratio is the same as the current ratio but excludes inventory from the calculation. Thus the ratio is expressed as Current assets- Inventory: Current liabilities. The higher the CA-INV the better the ratio as more able to pay CL.
what are the benefits of using ratios?
- Compare a company’s performance from one year to the next
- Useful comparison between companies
how do you calculate the current ratio?
current assets / current liabilites
how do you calculate the acid test ratio?
Current assets- Inventory / Current liabilites
