Booklet 2 Flashcards
(23 cards)
What are fixed assets
Items owned by the business which do not change in the short term e.g. building/machinery
What are current assets
Items owned by the business which are expected to be used or sell within one year e.g. cash/stock
What are current liabilities
Debts that a business owes and expects to pay within one year e.g. creditors/overdraft
What are long term liabilities
Money owed to others that will take more than a year to pay back e.g. bank loan/mortage
What are net assets
Both fixed and current assets combined than deducting both current and long term liabilities
What are Net current assets/Working capital
The difference between current assets and current liabilities
What are shareholder funds
Money that has been invested into the business by shareholders e.g. share capital/retained profits
Current ratio ideal
Ideal is between 1.5:1 and 2:1
-If too high resources may be put to better use (cash invest, stock perishable, debtors may not pay you)
-If too low (below 1:1) you won’t be able to pay off your creditors if they all call in now
Acid test ideal
Idea is 1:1
-If too high same as current ratio(excluding the point about stock)
-If to low then you are too reliant on stock
Definition of gearing
Amount of capital employed that is financed by borrowing
Evaluation of being too highly geared(>50%)
-May be bad because you owe debt ->gain interest->lower profits
+May not be bad because you are willing to takes risks->borrowing to grow->fast and generate significant revenues to pay back loans
Evaluation of being too lowly geared(<25)
-May be bad because you are not ambitious-> slow growth and may be vulnerable to a takeover
+It may not be bad as you have smaller interest and repayments-> higher profits-> invest or greater shareholder satisfaction ALSO you can borrow if you want to
What is ROCE
Return on capital employed and it measures how effectively the capital invested in the business is being used to create profits.
What is window dressing
Manipulation of financial accounts by a business to improve/worsen the appearance of its performance.
Why would a business window dress
1.Improve share price->attract investor
2.Take-overs->can get a higher price if a business tries to take them over OR brand valuation may deter people trying to takeover.
3.Reduce Tax bill -> by making profits look smaller they pay less in tax
4.Improve credit rating->gain finance easier
What is depreciation
When a fixed asset will be less of value over time
Why is depreciation used
- To prevent assets being overvalued on the balance sheet
2.Providing potential investors with a misleading view of the financial strength of the business e.g. profit.
3.Legal requirement
4.To make an accounting provision for the cost of purchasing a new replacement fixed asset in the future.
What is investment appraisal
The use of many quantitative methods used to evaluate a planned investment and it’s potential value./
What is payback period
Measures how quickly the cost of the investment can be paid back
What is average rate of return
Calculates the value of the average annual profit generated by an investment against the initial cost
What is the net present value
This considers the value of money over time.
What are the qualitative factors influencing investment decisions.
- Impact on staff->redundancy training etc.
- State of the economy->growing or shrinking, inflation interest rates etc.
- Actions of competitors->are they investing, market share
4.Impact on stakeholders->share price local communities etc.
What are special order decisions
An order from a customer that differs from what a business normally offers.
