3.7.2 Analysing The Internal Position Of A Business To Assess Strengths And Weaknesses: Financial Ratio Analysis

Question 1

What are assets?

Answer 1

Assets is anything that a business owns

Question 2

What are non current assets

Answer 2

Assets that the business is likely to keep for more than a year eg. Land, property

Question 3

What are current assets

Answer 3

Assets that are likely to be exchanged for cash within the accounting year, before the next balance sheet is made.

Question 4

How is net assets calculated

Answer 4

Non current assets + current assets

Question 5

What is current liabilities

Answer 5

Debts which needs to be paid off within a year. Eg overdrafts.

Question 6

What is a non current liability

Answer 6

A debt that can be paid off long term and could be paid off several years eg. Bank loan mortgages.

Question 7

What is a balance sheet

Answer 7

A Snapshot of a businesses finances at a fixed point in time.

Question 8

What is working capital

Answer 8

The amount of cash and assets that the business has available to pay off its day to day debts.

Question 9

How to calculate working capital

Answer 9

Current assets - current liabilities

Question 10

What is capital expenditure

Answer 10

Means money to use to buy non current assets

Question 11

What is depreciation

Answer 11

A drop in value of a business asset over time

Question 12

Why do business calculate depreciation

Answer 12

To make sure that an assets value on the balance sheet is a true reflection of what the business would get from selling it.

Question 13

What does a balance sheet show

Answer 13

How much the business is worth

Question 14

What does an income statement show?

Answer 14

Shows how much money has been coming into the company (revenue) and how much has been going out (expenses)

Question 15

Income statements shows 5 different measures of profit

Answer 15

-gross profit (revenue - cost of sales)
-operating profit ( gross profit- operating expenses)
-profit before tax
-profit after tax (profit for the year)
-retained profit (once shared to shareholders.

Question 16

How can income statements be used to assess financial performance

Answer 16

-Gross profit shows the money being made from actually making and selling products. If profit is low managers need to look at ways of reducing costs
-retained profit shows how much internal finance is available that can be used to invest.

Question 17

How is financial analysis is useful

Answer 17

-Can be good at comparing competitors perform.
- investors can use this to decide whether they want to invest or not.

Question 18

However financial analysis can be unuseful as :

Answer 18

-it only takes into account financial data and does t look at qualities data that potential investors will be looking for.
-external factors are not reflected in an income statement.

Question 19

Current ratio

Answer 19

Current assets divided by current liabilities

Question 20

ROCE formula? (Return on capital employed)

Answer 20

Operating profit divided by (total equity+non current liabilities) x100

Question 21

Inventory turnover formula

Answer 21

Cost of sales divided by cost of average stock held.

Question 22

Payable days formula

Answer 22

Payables
—————
Cosy of sales X365

Question 23

Receivable days formula

Answer 23

Receivables divided by sales revenue x365

Question 24

Gearing (%) formula

Answer 24

Non current liabilities
——————————-
Total equity +non current
Liabilities. X100

Question 25

Ratio analysis effectiveness

Answer 25

Benefits
-can be useful for looking at a businesses performance over a long period of time.
-can help with managers decision making.

However…
-these trends need to take into account of variable factors eg inflation.