7.2c Assessing Financial Performance

Question 1

What are the ways in which financial information can be used for making comparisons over time?

Answer 1

• Intra-firm comparisons
• Inter-firm comparisons
• Comparison to a benchmark

Question 2

Intra-firm definition

Answer 2

Between departments and branches

Question 3

Inter-firm definition

Answer 3

Between yourself and competition

Question 4

Trend analysis definition

Answer 4

Comparing a companies data over time to judge trends and patterns

Question 5

A balance sheet is designed to:

Answer 5

• Assess the size of the business

- Show how reliant a business is on borrowing

Question 6

An income statement is designed to:

Answer 6

• Show the profit levels
• Allow potential investors to see if it is worth buying shares
• See if profit is of high quality

Question 7

Strengths of using financial documents data:

Answer 7

• All published accounts have to respond to the International Financial Reporting Standards (IFRS)
• Independent auditors have to check published accounts to ensure they are valid
• Stakeholders require accurate data or they may lose interest in the business
• Useful for comparing performance to competitors
• Can show potential investors to gain support

Question 8

Disadvantages of balance sheets:

Answer 8

• Focuses on the past, may not be reliable for future
• Doesn’t recognise external events
• If bad debts are included it can be misleading
• Just a snapshot

Question 9

Disadvantages of income statements:

Answer 9

• Doesn’t include information about external factors, such as market demand
• Doesn’t include information about internal factors, such as staff morale, which could determine productivity
• In times of inflation true value of revenue could be inaccurate