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Business Comp 2 > C4 Analysing Financial Performance > Flashcards

C4 Analysing Financial Performance Flashcards

1
Q

Balance Sheet

A

A balance sheet is a statement of a businesses assets and liabilities at a specific point in time (usually at the end of a trading period)

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2
Q

Components of a balance sheet

A
  • Fixed (or non current) Assets
  • Current Assets
  • Current Liabilities
  • Long term (or non current) Liabilities
  • Net Assets
  • Net Current Assets
  • Shareholders funds
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3
Q

Fixed (non current) Assets

A

Fixed assets are expected to be retained within the business for at least a year.
Eg. Land, buildings, machinery, and vehicles

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4
Q

Current Assets

A

Current assets are expected to change vale often, due to the normal course of business trading.
Eg. Stock, debtors, and bank and cash balances.

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5
Q

Current Liabilities

A

Current liabilities are debts that are usually paid within a year.

Eg. Trade credit, bank overdrafts.

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6
Q

Long Term (or Non-Current) Liabilities

A

Debts that are paid over more than a year.

Eg. Bank loans, mortgages

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7
Q

Net Assets

A

Calculated by adding fixed and current assets together, then deducting current and long term liabilities.

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8
Q

Net Current Assets

A

The difference between current assets and current liabilities, might also be shown in a balance sheet.

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9
Q

Shareholders funds

A

Money that has been invested into the business by the owners (through the sale of shares), also includes retained profits and reserves.

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10
Q

Working Capital (definition)

A

Working Capital is the money needed in the business to pay for day-to-day expenses.

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11
Q

Working Capital (Equation)

A

Current Assets - Current Liabilities

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12
Q

Liquidity

A

Liquidity refers to how quickly an asset can be converted into cash, and the businesses ability to pay off its short term debts.

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13
Q

Most and least liquid assets

A

Most- Money in the bank

Least - Stock

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14
Q

Current Ratio

A

Current assets
———————-
Current liabilities

Given as a ratio to 1 eg. 2.85:1

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15
Q

Ideal range for current ratio

A

1.5:1 - 2.1:1

A current ratio below 1.5:1 may indicate over borrowing.
A current ratio above 2.1:1 may indicate there is too much money not being put to use

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16
Q

Acid Test Ratio (definition)

A

The acid test ratio excludes stock from current assets as a way if measuring the ability of a business to meet short term demands for cash more reliably than the current ratio.

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17
Q

Acid Test Ratio (Equation)

A

Current Assets - Stock
——————————
Current liabilities

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18
Q

What does having an Acid Test Ratio of 1.26:1 mean?

A

This means that for every £1 that the business owes it has £1.26 available in current assets.

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19
Q

Gearing Ratio

A

Long Term Liabilities
————————— *100
Capital employed

20
Q

ROCE (definition)

A

Return on Capital Employed.
This measures how effectively the capital invested in a business is being used to create profits.
The higher this ratio the better.

21
Q

ROCE (equation)

A

Net Profit before tax
—————————————————- *100
Shareholders funds + long term liabilities

22
Q

What is a risk if ROCE is too low?

A

The company is at risk of being taken over by another business that could offer the shareholders a better rate of return.

23
Q

What is a risk if liquidity ratios are too low?

A

The business may be running into short-term cash flow problems.

24
Q

What should a company do if it’s gearing ratio is too low?

A

It may be a good idea for the business to borrow more money to take advantage of opportunities to expand the business.

25
Q

What should a company do if it’s gearing ratio is too high?

A

It may be a good idea to halt expansion plans until some of its debt has been repaid.

26
Q

Window Dressing

A

Window dressing is the manipulation of financial accounts by a business to improve the appearance of its performance.

27
Q

Methods of window dressing

A
  • Overstating Brand Value
  • Sale and Leaseback
  • Presentation
  • Exceptional Items
  • Hiding Poor Investments
28
Q

Presentation of Financial Data (Window Dressing)

A

This is a method of manipulating the information within the accounts.
This can be done by:
- Using graphs with distorted scales
- Highlighting certain data or only using certain examples
- Not including any comparative data to be used for analysis

29
Q

Overstating Brand Value (Window Dressing)

A

Brand value is an intangible fixed asset and so will increase the paper worth of a company. The true value of a brand is perhaps in the eye of the beholder which is why valuing brands is subjective. A company will often reevaluate the worth of the brand to protect from takeover.

30
Q

Hiding poor investments (window dressing)

A

Banks have been found to have written down the value of so called ‘toxic assets’, as a result of failed investment decisions. The result is huge losses are made on these investments, which a business might understate, and by doing so gives the appearance of minimising losses and therefore inflating profit level

31
Q

Sale and leaseback (Window Dressing)

A

This involves the sale of fixed assets (such as buildings or capital equipment) and then leasing back the same assets so that they are available for use by the company

In terms of window dressing, because large capital outlays are recovered showing a higher cash balance with relatively smaller lease payments being made.

32
Q

Exceptional items (window dressing)

A

Exceptional items are costs and revenues to the business that arise from normal business activity but are unusual in some way.

Eg. Redundancy costs or the sale of buildings.

33
Q

Why would a business window dress?

A
  • Improve share price (attract investors)
  • Takeovers (attract a takeover by seeming more successful or deter a takeover by looking too expensive)
  • Reduce tax bill (less profits = less tax)
  • Improve credit rating (look less risky to a bank)
  • Praise and rewards (having good financial accounts may result in praise and financial rewards for managers)
34
Q

Net book value

A

Historic cost - depreciation

35
Q

Depreciation (equation)

A

Original cost of fixed asset
———————————
Useful life of fixed asset

36
Q

Budget

A

A budget is a financial plan for the future

37
Q

Insolvency

A

The inability for a business to pay it’s creditors.

38
Q

Favourable sales variance can be caused by…

A
  • Effective bonus scheme for salesmen
  • A successful advertising campaign
  • Favourable weather
  • The demise of a competitor
39
Q

Adverse sales variance can be caused by…

A
  • Successful activities of competitors
  • Ineffective advertising
  • Logistical problems that mean that stock did not arrive with the customer on time
  • Bad weather
40
Q

Favourable cost variances may be caused by…

A
  • Improved labour productivity
  • Reduced costs of imported components
  • Strengthening of the pound
  • Finding a cheaper supplier
41
Q

Adverse cost variances may be caused by…

A
  • A strike by dockers
  • Bad weather in the growing regions
  • A devaluation of the pound
  • An unexpected price rise from suppliers
42
Q

Elements of non-financial performance

A
  • Market share
  • Sales Targets
  • Productivity
  • Environmental impact
  • Quality
  • Customer satisfaction
  • Employee attitude surveys
43
Q

Market share

A

Market share is the proportion of total sales a business has in the market.

44
Q

Productivity

A

A measure of output against fixed input.

45
Q

Environmental Impact

A

Measures might include recycling or using recycled materials, paying their workers above the market wage,ensure suppliers in developing counties get a good deal.
For some businesses their environmental vision and aims and objectives will be far more important than increasing market share or maximising profit.

46
Q

Customer satisfaction surveys

A

Customer satisfaction measures the degree to which customer expectations are met or exceeded
Eg.
- In terms of price and product/service quality
- Repeat purchases
- Customer complaints
- Percentage of products returned
- Gathering feedback through questionnaires and focus groups

Business Comp 2 (5 decks)

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