204 analysing financial performance

Question 1

explain what is meant by budget variance

Answer 1

• a budget is a financial plan for the future, variance analysis s checking actual outcomes over predicted outcomes
• the difference between the business budgeted and the actual figure

Question 2

variance calculation

Answer 2

actual- budgeted figures

Question 3

favourable variance is shown when

Answer 3

• actual revenue is greater than budgeted revenue
• actual costs and below budgeted costs
• the variance results in more profit being made

Question 4

adverse (unfavourable) variance is shown when

Answer 4

• actual revenue is less than budged revenue
• actual costs are above budgeted costs
• the variance results in less profit being made

Question 5

importance of budgets to stakeholders

Answer 5

• understand when money is coming in and out- avoid cash flow difficulties
• understand why variances have occurred- solutions to maximise favourable variances
• can be used to se and monitor achievements to targets - motivating for employees
• helps set departmental targets for individual managers for focus on

Question 6

disadvantages of budgets to stakeholders

Answer 6

• competition and economy - unable to predict budget
• only a prediction of future- if incorrect/unreliable research is used- inaccurate budgets- can be demotivating (if targets are set too high)

Question 7

usefulness of budgeting depends on

Answer 7

• expertise of budget setter
• stability of market
• amount of historical data available
• size of business - small may not have time/knowledge

Question 8

what is a balance sheet

Answer 8

• a balance sheet is a statement of a firms assets, liabilities and shareholder’s or owners funds.it shows the net worth of a business at a specific point in time.

Question 9

what are fixed (non-current) assets

Answer 9

fixed assets expected to be retained in the business for over a year, used to produce output of the business eg.machinery , land

Question 10

what are current assets

Answer 10

• short term assets, maintain value for the business for less than a year eg.stock

Question 11

what are current liabilities

Answer 11

• debts that are normally paid within a year eg. overdraft, loan

Question 12

what are long term (non-current) liabilities

Answer 12

• money repaid over more than a year eg bank loans and mortgages

Question 13

what are net assets

Answer 13

• total assets- total liabilities
• calculated by adding both fixed an current assets together and then deducting current liabilities and long term liabilities
• this shows business value

Question 14

what is shareholders capital/ funds

Answer 14

-also called equity
- is money that has been invested into the business by owners (through the sale of shares) and also includes retained profit and reserves

Question 15

shareholders funds equation

Answer 15

Fixed assets + (Current assets- Current liabilities) - Long term liabilities = Shareholder’s funds

Question 16

what is working capital

Answer 16

• the money needed in the business to pay for the day-to-day expenses of a business
  current assets-current liabilities

Question 17

what is meant by capital employed

Answer 17

• the amount of money that is used to. finance a business sin the long term, this finance has either been invested by shareholders or borrowed long term

Question 18

capital employed equation

Answer 18

capital employed= shareholder’s funds + long. term liabilities

Question 19

what is depreciation

Answer 19

• the decrease in value of fixed assets overtime eg.due to wear and tear
• the straight-line method of depreciation assumes that a fixed asset depreciates an equal
  amount to each year of its expected useful

Question 20

decrepitation equation

Answer 20

Calculation:
Original Cost - Residual Value
———————————————-
Useful life of the asset (years)

-> take the answer from the equation away year by year from the original cost

Question 21

what is ROCE

Answer 21

• measures how effectively a business is creating profit based on the money they invested into the business
• the answer is a percentage

Question 22

ROCE equation

Answer 22

ROCE = net profit before tax
———————————- x 100
capital employed

Question 23

what is current ratio

Answer 23

shows the business ability to meet short term payments eg. to suppliers

Question 24

current ratio equation

Answer 24

current ratio= current assets
———————— : 1
current liabilities
(idea, ratio between 1.5:1 and 2:1)

Question 25

interpreting current ratios

Answer 25

- *below 1.5:1*-> business may not be able to pay its short term debts - ^above 2:1*-> business has space cash that is not being used productively - but some business hapily survive on low ratios -> eg. supermarkets have high volume sof stock and are able to sell stock quickly and consistently

Question 26

what does the acid test ratio show

Answer 26

- shows how well a company can cover its short term liabilities, without relying on the sale of stock

Question 27

what does the acid test ratio show

Answer 27

- shows how well a company can cover its short term liabilities, without relying on the sale of stock

Question 28

acid test ratio formula

Answer 28

current assets - stock ———————————- current liabilities

Question 29

interpreteing acid test ratio

Answer 29

- ideal range 1:1 - less than 1:1- business does not have enough cureent asets (minis stock) to cover its liablities - some busisnes surive on low acid test ratios-> business swith high level of stock turnover - acid tes of 2:1- buisness holding too much cash-could be better used investing in growth

Question 30

what does gearing ratio look at

Answer 30

- shows how much a company relies on borrowed money compared to its own money

Question 31

gearing ratio equation

Answer 31

long term (non-current liabilties) —————————————————————— x 100 capital employed (as a %)

Question 32

inrepret gearing ratios

Answer 32

*high gearing* : (-)- interest rates increase-costly payments-reduces pfofits available to shareholders-less money to re-invest/- investors reluctant to invest in companies with high gearing ratio-feel lower chance of profit (+) - interest rate low-cost effectve to borrow-helps business grow - quciker way of raising finance for larg companies -*low gearing* : (+) less risk to changes in interst rates as most of the capital in the business comes from shareholder investment, more capital available to pay shareholders their dividends (-) business might only be focusing on cash flow- not expanding-miss out on oppotunities/markets

Question 33

usefullness of a balence sheet

Answer 33

-shareholders are owners of the business-want to know how well it is doing. -If the current liabilities are a lot more than the currentassets in each year, then the business could have a problem in paying its debts. -can be compared over time.

Question 34

gearing ratio percenatges

Answer 34

- high= 51%+ -medium= 26-50%+ -low = 0-25%

Question 35

what is window dressing

Answer 35

manipulation of financial accounts by a business to improve the appreance of its preformace

Question 36

methods of window dressing

Answer 36

- overstating brand value - cash flow problmes can be hidden using sale and leaseback eh.sale of fixed assets eg.buildings, and leasing then back so they can still be used - expetional items - if fixed asset isjt depreacuated enough it will make the balence sheet look better as the asset will be listed as having higher value than they actually do

Question 37

what can affect window dressing

Answer 37

- change in demand eg.covid-busineses had to close-not reperesntive of the state of the business - inflation- may look like a business has increased sales/profits- all businses increased profts-not refeltive of improved performace

Question 38

evalaute window dressing

Answer 38

(-) legal implications, demanged stakehlder relationshop,devalue comany, loose acsess to soirces of finance

Question 39

income statement equation

Answer 39

- gross profit = revenue- cost of sales - net profit = grss profit - expences - GPM= pross profit —————— x 100 revenue -NPM= net profit —————— x100 revenue