3.5 Flashcards
Which stakeholders would be interested in the statement of comprehensive income and why
Shareholders
Interested in profits earned, business growth and dividend payments
Employees
Interested in profits earned and potential for wage increases and job stability
Managers & Directors
Interested in key performance data such as an improvement in sales revenue and net profit
Suppliers
Interested in the continued success of the company the are supplying and this infromation is also used by suppliers to determine the level of trade credit offered to businesses
Government
Used to determine how much tax is payable
Local community
Interested in the stability of the business and what this may mean for jobs in the community. Another interest is to see if the firm is generating enough profit to perhaps approach them for local sponsorship
What would you expect to see on a statement of comprehensive income
Gross profit (Revenue-cost of sales)
Operating profit (cost of sales- expenses
Profit for the year (Operating profit- interest and exceptional costs)
Profit for the year after tax
What would you expect to see on the statement of financial position
The Statement of Financial Position contains the financial information required to draw conclusions about the liquidity of the business
Current and non current assets and liabilities
which 4 stakeholders would be interested in the SOFP
Shareholders
Used to identify the asset structure of the business and how their investment has been put to use
Used to calculate the working capital of the business and determine its solvency
Used to determine the rough value of a business which helps a judgement on whether their investment is growing
Managers & Directors
Used to identify the financial position of the business at a given point in time
Useful to assess the working capital position of the business and determine if there are enough liquid current assets to pay its bills
Provides information on the capital structure of the business which helps guide decisions on whether to raise further funds through borrowing or via other means (e.g. share issue)
Suppliers & Creditors
Used to judge the solvency of the business to determine the risk when offering firms trade credit
Businesses with low levels of working capital may find it difficult to pay short-term debts and so suppliers may offer trade credit, but with stricter terms
Employees
Is the business financially stable or are jobs at risk?
Has the businesses performance improved or worsened?
What is the business spending its money on?
How much are senior executives paid?
How much tax is the business paying?
Name 3 current assets and liabilities
cash, debtors,inventory
bank overdrafts, creditors, bills payable,
Working capital definition
Current assets- current liabilities
What does the gearing ratio show + formula and guide figure
The gearing ratio shows the long-term financial structure of the business
It shows the balance of non-current liabilities (e.g. long-term loans) to shareholder capital used to fund a business
50%
ROCE definition, formula and guide figure
The Return on Capital Employed is also known as the Primary Ratio
It compares the profit made by a business to the amount of capital invested in the business
It is a measure how how effectively a business uses the capital invested in the business to generate profit
Return on Capital Employed is a key performance indicator that can be compared over time and also with competitors and other potential capital investments
ROCE= Operating profit/ capital employed x 100
More the better, above 20% is good
3 Limitations of Ratio analysis
Making Comparisons
It is important to compare like for like
Over time the nature of a business can change affecting the desired level of ratio
E.g. a business may diversify into a less competitive industry where higher levels of RoCE may be expected
Comparisons between firms are only meaningful where significant similarities exist (e.g. same industry, similar size, comparable products)
E.g. a high street jewellery business will have very different working capital needs to those of a fast food outlet and their profit margins will differ
Balance Sheet Limitations
As a ‘snapshot’ of a businesses assets, liabilities and capital at a specific point of time the balance sheet may not be representative of its usual circumstances
E.g. a balance sheet may be completed one day before a business sells a large amount of stock or buys a new property, rendering current and non-current assets figures invalid almost immediately
Qualitative Information
As ratios only use numerical data from a businesses accounts key qualitative factors that affect its performance are ignored
E.g. the collapse of a competitor may lead to increased sales revenue and profit
Increased profit increases the RoCE without any strategic decisions being made
Labour productivity calculation, how can it be improved and why if its low its a problem
Labour productivity= Total output/ average number of employees
Lower labour productivity - higher labour cost per unit- fall in efficiency - fall in competitive edge
Motivation strategies
Labour turnover calculation + 3 problems and opportunities
Labour turnover= Number of staff leaving / average number of staff x 100
Problems
Increased recruitment and selection costs
Increased induction and training costs
Lower productivity levels as workers settle into new roles
Opportunities
Workers with existing skills can be recruited to reduce the need for training
New ideas and creativity introduced to the business
New perspective and approaches to problem-solving can improve business performance
Absenteeism calculation + 2 problems
Absenteeism rate = no. of staff absent/ number of staff employed x 100
Absence due to illness requires sick pay to be paid
Hiring temporary staff to cover for those absent increases costs
4 ways of improving employee performance
Offering financial rewards
Offering employees shares in the company
Consultation
Empowerment
