204-5 Analysing financial (and non financial)performance Flashcards
(22 cards)
What is a budget?
A budget is a financial plan for the future. Budgets can be for income, expenditure, and profit.
What is budget variance?
The difference between the actual outcome and the predicted outcome.
What is variance analysis?
Variance analysis is checking actual outcomes against predicted outcomes.
What is a favourable variance?
When the actual figure will lead to more overall profit being made than was budgeted. This could either be that actual costs were lower than budgeted or actual revenue was higher than budgeted.
What is an adverse variance?
When the actual figure will lead to less overall profit being made than was budgeted. This could either be that actual costs were higher than budgeted or actual revenue was lower than budgeted.
What is a balance sheet?
A statement of the firm’s assets, liabilities, and shareholder’s or owner’s funds. It shows the net worth of a business at a specific point in time.
In accounting, it is called the statement of financial position.
What are non-current (fixed) assets?
Assets expected to be retained in the business for more than a year/long term. They are used to produce the output of the business.
E.g. machinery, vehicles, computers.
What are current assets?
Assets that are cash (bank account) or can be turned into cash within a year.
For example, stock, trade receivables (money owed by customers who have bought on credit).
What are current liabilities?
Money owed by the business that will be paid within a year.
For example, trade payables (suppliers) and overdraft.
What are non-current (long term) liabilities?
Money owed which is repaid over more than a year.
For example, a bank loan, a mortgage.
What are net assets?
The value of a company’s assets once the value of its liabilities has been deducted.
Formula: non-current assets + current assets – current liabilities – non-current liabilities.
What are shareholder’s funds (equity)?
Money that has been invested into the business by the owners through the sale of shares, and also includes retained profit and reserves.
What is working capital?
Working capital represents the money needed in the business to pay for the day-to-day expenses of a business.
Formula: current assets – current liabilities.
What is capital employed?
Capital employed is the amount of money that is used to finance a business in the long term. This finance has been either invested by shareholders or borrowed long term.
Formula: Shareholder’s funds + non-current liabilities.
What is depreciation?
Depreciation is the decrease in value of fixed assets over time.
E.g. due to wear and tear.
What is the formula for depreciation?
Historical Cost – Residual Value / Useful Life of Asset.
What does ROCE stand for?
ROCE shows how much profit has been made compared to the capital (money) invested in it.
Formula: Net profit / capital employed x 100.
What is the current ratio?
Measures the ability of a business to pay its short-term obligations.
The accepted ideal is 1.5:1. Formula: current assets / current liabilities.
What is the acid test ratio?
Measures the ability of a business to pay its short-term obligations after stock has been excluded.
The accepted ideal is 1:1. Formula: (current assets – stock) / current liabilities.
What is the gearing ratio?
Measures how much of the business is financed by borrowing. Above 50% is highly geared and is considered higher risk.
Formula: Non-current liabilities / capital employed x 100.
What is window dressing?
Window dressing is the manipulation of financial accounts by a business to improve the appearance of its performance.
E.g. it could insufficiently depreciate a fixed asset so that its value is overstated in the balance sheet and its profit is more than it should be.
Non-financial performance
The performance of a business based on data other than the business’s financial information e.g. customer attitude surveys, employee attitude surveys, market share, productivity and a company’s environmental record.
