Analysing financial performance

Question 1

3 different budgets

Answer 1

revenue
expenditure
profit

Question 2

What can failure of not knowing what money is coming in and out of business lead to

Answer 2

cash flow difficulties
worst case- insolvency(not being able to pay creditors) useually affecting smes in times of recession

Question 3

Main causes of cash flow problems

Answer 3

late or failed payments from customers
weak sales
unexpected increased costs

Question 4

Importance of creating and monitoring a budget

Answer 4

-prevent cash flow issues
-calculate budget variences

Question 5

Why is it good to have favourable and bad to have adverse

Answer 5

increased and decreased net profit values

Question 6

Why may adverse be beneficial to business

Answer 6

if sales rev has risen by 10% its likely cost of sales may have increased to cover costs of production good or performing service.
Or more money into advertising increasing costs but sales rev may have increased

Question 7

Reasons for favourable and adverse sales variances

Answer 7

-successful advertising campaign, demise of competitor, favourable weather, bonus scheme for sales team
-successful activities of competitors, ineffective advertising,logistical problems of stock not arriving with customer on time, bad weather,decreased or increased price

Question 8

Causes of favourable and adverse cost variances

Answer 8

-improved labour productivity, reduced costs of imported components due to stronger pound, cheaper supplier
-waste in production, strikes, devalue of pound, price rise from suppliers

Question 9

Ways to improve sales revenue

Answer 9

new improved product range, advertising campaign

Question 10

Why may wages have increased

Answer 10

had to take on new staff or avoid strike from workforce

Question 11

Ways to improve wage costs

Answer 11

purchasing machines to replace workers, redundancies

Question 12

What may also cause variances in budget

Answer 12

inaccurate budget

Question 13

Ads and disads of budgets

Answer 13

-improved financial control-monitering expenditures and revenues so adverse can be reacted to increaseing profit
-limited resources are used effectively allocsting resources where most likely to achieve objectives saving money and costs
-motivate employees as feel involved in meeting budget, financial rewards if budget is met

-mangers and employees not included in budget can be demotivated
-inflexibility to react to changes in market such as new competition and. not enough marketing budget
-if info is unreliable innaccurate budget constructed so budget variances will be in accurate

Question 14

What is the trading, profit and loss account

Answer 14

historical record of a business over a specific period of time

Question 15

Why is the trading pl account important

Answer 15

-shareholders see hoe business has performed acceptable profit?
- comparrison with other similar businesses
- providers of finance to see wether viable
- limited compants to satisfy legal requirements to report on financial record

Question 16

What is gross and net profit an indicater of

Answer 16

efficiency of making and selling product
is efficiency overall as rev and expenses included

Question 17

What is corporation tax and dividends, and retained profits

Answer 17

limited companies requierd to pay this from net profit
% of profit after tax paid to shareholders
money left that will be reninvested for following year ( capital employed)

Question 18

What should be considered when analysing p and l account

Answer 18

performance over time- trend in fall or rise
comparing performance to competitors- may compare to market growth as a whole
benchmarking- comparison with business who is not direct competitor- set standards of aims to achieve - innaccurate if in complete different industry

Question 19

Reasons for sales rev or costs of sales rising or falling

Answer 19

-attracting or losing customers, poor product range, advertising campaigns
-increasing raw mats cost or direct labour costs

Question 20

Why may have expenses increased

Answer 20

advertising or higher wages

Question 21

What is a balance sheet

Answer 21

way of recording a businesses assets and liabilities

Question 22

What is a non current assets and current assets

Answer 22

owned for over a year such as machinery, property and viechlles
owned for less than a year such as cash in bank account, owed invoices, stock

Question 23

What are current liability and non current liabilities

Answer 23

current- paid within next 12 months overdrafts, trade credit,
non current- paid over a year bank loan, mortgage

Question 24

What is net assets

Answer 24

total assets- total liabilities

Question 25

What else may be on balance sheet

Answer 25

share capital, retained profits

Question 26

What is working capital

Answer 26

total current assets - total current liabilities money used to pay short term liabilities (less than a year)

Question 27

Why may fixed assets have fallen

Answer 27

business shrank in size as owns less long term assets

Question 28

If current assets increase and current liabilities fall what dors thid mean

Answer 28

more working capital and so improved liquidity for paying day to day running costs- supplies more willing for tc

Question 29

If non current liabilities fall

Answer 29

interest rates also mean not investing in growth especially if fixed assets decrease

Question 30

What is capital employed

Answer 30

share capital+retained profit(shareholders funds)+non current liabilities money used all the money to invest into assets and pay liabilities

Question 31

What is capital employed a measurement of

Answer 31

total resources a business has available to it but may not be perfect as a business may lease some production capacity

Question 32

What is returm on capital employed

Answer 32

Net profit/capital employed x100 profit made on resources available to it

Question 33

If roce is above 5% of interest provided by banks what does this mean

Answer 33

return is good

Question 34

Why is roce important to business

Answer 34

if deemed good -retain and attract shareholders -more capital available for investment such as growth, r and d and marketing -compare to other companies to see whos roce is better

Question 35

Why does business need wc

Answer 35

pay wages, pay suppliers maintain day to day cash flow maintain sufficient liquidity to survive and grow in the future

Question 36

causes of wc problems

Answer 36

-poor control of stock -poor control of trade debtor -unexpected events -ineffective use of trade creditor

Question 37

Why may working capital vary

Answer 37

-need to hold stock- some business may need to hold substantial stock(retailers) -lean production- lower levels of stock and so less working capital needed -expected credit period by customers-i flong credit periods can be taken before trade debtors settle invoices high wc required -effectiveness of credit control- too much trade credit snd too long to settle bills meaning higher trade debtors and higher wc -credit period offered by suppliers-longer the better the cash flow and wc

Question 38

Why may larger businesses obtain more favourable credit terms from suppliers and what else may affect wc

Answer 38

bargaining power seasonal demand

Question 39

What is current ratio

Answer 39

current assets/current liabilities ability to cover short term liabilities expressed to :1

Question 40

What is ideal current ratio

Answer 40

1.5:1

Question 41

What does it mean if current ratio less than 1

Answer 41

insolvency- cannot cover liabilities fines,fees, relationships

Question 42

What does it mean if too liquid over 2

Answer 42

inefficiency as could be used elsewhere to improve profits, pay shareholders

Question 43

Why may current ratio be misleadiing

Answer 43

are inventory and receivables liquid enough to cover assets inventory that goes out at slower rate so current assets may lead to false sense of security

Question 44

What is acid test ratio calculaton

Answer 44

(current assets-inventories)/current liabilities

Question 45

What is ideal ratio

Answer 45

1:1

Question 46

What if acid test ratio is less than 1

Answer 46

not enough current assets and is insolvent

Question 47

What element of doubt is left with acid test

Answer 47

are recievables liquid enough are customers reliable,customers default on payments

Question 48

Why may firms firms have less than 1:1 acid test ratio

Answer 48

confident in ability to turnover stock quickly confident in size and power of organisation( bargaining power) to get out of situation

Question 49

What is liquidity ratio used to measure

Answer 49

sufficient current assets to cover current liabilities

Question 50

What is depreciation

Answer 50

estimate of fall of value of fixed asset over time