3.5- Assessing competitiveness

Question 1

What is a profit and loss account

Answer 1

shows firms revenue for time period

-asw as costs associated with generating that revenue

Question 2

What is a balance sheet

Answer 2

financial document showing businesses assets & liabilities

Question 3

Name the 2 major documents all companies are required by law to publish

Answer 3

-statement of comprehensive income (profit and loss account) -> shows revenue generated & costs within revenue

-statement of financial position (balance sheet) -> details what business owes, owns, where money came from

Question 4

What does a balance sheet list

Answer 4

long-term non-current assets

short-term (current) assets

total asset

Question 5

What is an asset

Answer 5

item owned by a business

Question 6

What is liquidity

Answer 6

ability of a firm to pay its bills and short-term spending

Question 7

What are long-term assets

Answer 7

things used over and over again by a business to generate profit

Question 8

Give 3 examples of long-term assets

Answer 8

-vehicles

-land, buildings

-machinery

Question 9

Give 3 examples of current assets (short-term) assets

Answer 9

-stock -> value of any inventories of raw materials, partially finished ggods owned by business

-receivables -> money owed to business - by customers who have bought on credit

-cash -> money avaliable in bank -> easily accessed

Question 10

Name the 3 sources of capital shown on balance sheet

Answer 10

-banks -> loans from banks carry interest - repaid

-shareholders -> when shares are sold -> share capital -> owed back to shareholders

-profits -> retained profit kept in business

Question 11

Why is a balance sheet good for assessing long-term performance

Answer 11

as if reserves figure is rising over time it shows firm has been consistently profitable

Question 12

Name the interests of stakeholders: bankers, suppliers, staff in a companies balance sheet

Answer 12

-bankers -> look at relationship between long-term borrowing, total equity

-suppiers -> interested in short-term financial health of business

-staff -> ‘wealth’ of business has ^/ decreased

Question 13

What is cost of sales

Answer 13

shows cost of making/ buying products

Question 14

Give the formula for gross profit

Answer 14

revenue - cost of sales = gp

Question 15

What does gross profit tell us

Answer 15

what is left from revenue once cost of making/ buying goods has been deducted

Question 16

What is operating profit

Answer 16

shows amount of profit left after deducting normal costs of operating the business

Question 17

What is the formula or operating profit

Answer 17

gross profit - expenses = op

Question 18

What is ratio analysis

Question 19

Name the 3 types of ratio

Answer 19

-profitability -> shows relationship between gp/op/np & rev, assets, capital

-liquidity -> shows ability of a firm to meet its short-term debts

-gearing -> shows proportion of long-term finance in a business that has come from loans

Question 20

Name the 2 ratios used to work out liquidity

Answer 20

-current ratio -> current assets/ current liabilities

-acid test ratio ->current assets - stock/ current liabilites

shows balance between companies short-term debts and the assets it can use to meet that debt

Question 21

What is the ideal value for current ratio and why

Answer 21

1.5

-this means business would have £1.50 current assets for every £1 short-term debt -> so enough to cover debts

-if ratio = too low -> firm suffering liquidity crisis -> can’t pay off debts

Question 22

What is acid test ratio formula

Answer 22

current assets - stock/ current liabilities

Question 23

What is the ideal value for acid test ratio

Answer 23

1

would mean £1 of cash to cover every £1 of short-term debt

Question 24

What is capital employed

Answer 24

adds shareholders capital (total equity) to loan capital (long-term liabilities) to work out total long-term finance in business

Question 25

What is the formula for gearing ratio

Answer 25

long-term liabilities/ capital employed x100

Question 26

What does gearing ratio tell us

Answer 26

the proportion of assets invested in a business that are financed by long-term borrowing

Question 27

Why is it bad for a business to have high gearing

Answer 27

higher the gearing means the more a business is borrowing -> ^ risk

Question 28

Name 3 ways a business could reduce high gearing

Answer 28

-issue more shares

-retain more profits

-repay some loans

Question 29

Name the 4 profitability ratios

Answer 29

-gross profit margin

-operating profit margin

-net profit margin

-return on capital employed

Question 30

What is the formula for capital employed

Answer 30

Capital employed = Share capital + retained earnings + long-term liabilities

Question 31

What is suggested as low gearing

Answer 31

gearing lower than 25%