Chapter 4- Analysing financial performance Flashcards
(30 cards)
What is a trading profit and loss account?
Measures the businesses performance over a given period of time (one year)
It is also known as an income statement
What does an income statement look like?
Sales revenue
- Cost of sales
=Gross profit
- Expenses (fixed costs)
= Net profit
- Corporation tax @ 20%
= Profit after tax
- Dividends
= Retained profit
What is the formula for gross profit margin?
Gross profit/ Sales revenue X 100
What is the formula for net profit margin?
Net profit/ Sales revenue X 100
What is a balance sheet?
A snapshot of the businesses assets (what it owns) and its liabilities (what it owes) at a particular time
What does a balance sheet look like?
Non-current assets
Current assets
- Stock
- Debtors
- Cash and bank
Current liabilities
- Bank overdrafts and loans
- Creditors
- Other
Total current liabilities
Net current assets (working capital)
Total long term liabilities (non-current)
Net assets
Shareholder funds
- Share capital
- Retained profit (reserves)
What is a non-current asset
Anything you have for more than 12 months- long term
E.g. land and buildings, plant and machinery
What is a current asset?
Anything owned for less than 12 months- short term
E.g. cash and bank, stock and trade debtors
What is a current liabilities?
Money that is owed is less than 12 months- short term
E.g. trade creditors, loan and overdrafts and accruals
What is a non-current liabilities?
Money that is owed in more than 12 months- long term
E.g. long term-borrowing
What is shareholder funds?
Reveals the origin of the money which funds the business. It includes share capital and retained profit (reserves). It is also known as capital employed
What is working capital?
Total current assets- Total current liabilities
It is also known as the net current assests. The money a business can use to pay its day-to-day running costs
What is liquidity?
Means the ease and cost with which assets can be turned into cash and used immediately as a means of exchange
What is the formula for current ratio?
Current assets/ Current liabilities
What is the formula for the acid test?
Current assets- Stock/ Current liabilities
What is the formula for Return on Capital Employed (ROCE)?
Net profit/ Shareholder funds + Long term liabilities X 100
What would a business need working capital for?
Paying for day-to-day running costs such as:
- wages
- rent
- electricity
- raw materials
Main causes of working capital problems?
1) Poor control of stocks
2) Unexpected events
3) Poor control of trade debtors
4) Ineffective use of trade creditors
5) Poor cash flow forecasting
Factors impacting working capital?
1) Businesses with lots of cash sales and few credit sales tend to have lower working capital
2) Many businesses operate in industries that have seasonal demand
What is gearing?
The proportion (%) of capital employed that is financed by long term liabilities. It indicates the financial risk associated with a business
Impact of high levels of gearing?
High levels of borrowing, higher risks are to the business since interest and repayment are not ‘optional’
What is the formula for gearing?
Long term liabilities/ Shareholder funds + Long term liabilities X 100
Evaluation of the gearing ratio
- More than 50%= ‘highly geared’
- Less than 25%= ‘low gearing’
- Between 25% and 50%= normal for a well-established business which is happy to finance its activities using debts
What is depreciation?
An accounting provision that measures the fall in value of a fixed asset.
Once depreciation is calculated the cost of a fall in value can be recognised in the financial account
