7.2c - Assessing Financial Performance

Question 1

How can financial information be used for making comparisons?

Answer 1

• Intra-firm (between departments and branches)
• Inter-firm
• Comparison to a benchmark

Question 2

Trend analysis definition

Answer 2

Comparing a companies data over time to judge trends and patterns

Question 3

What is a balance sheet designed to do?

Answer 3

• Assess the size of a business

- Show how reliant a business is on borrowing

Question 4

What is an income statement designed to do?

Answer 4

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

Question 5

Advantages of using income statements and balance sheets:

Answer 5

• Obligation to show independent auditors to ensure they are valid
• Stakeholders require accurate data or will lose interest
• Useful for comparing internally and externally
• Can show potential investors to gain support

Question 6

Disadvantages of income statements:

Answer 6

• Doesn’t include information about external factors (such as market demand, which could forecast future revenue)
• Doesn’t include information about internal factors (such as staff morale, which could determine productivity)
• Value of revenue could be inaccurate in times of high inflation