Financial Ratios Flashcards
What are the types of information that stakeholders need for making decisions about business?
- How well the business has performed
- Whether the business is able to pay on time before granting credit
- Capable of repaying the loan, principal and interest before granting a loan
Where can the deicision-making information be found?
Financial statements (income statement and balance sheet)
How is the financial information grouped?
Profitability, Liquidity, Inventory Management Ability
What are the two common ways of analyzing the financial performance of the business?
- Analysis of absolute figures reported in the financial statements
- Calculation and analysis of financial ratios
What is profitability?
Profitability measures the ability of the business to generate enough income to cover its expenses.
What is profit also known as?
Bottom line
Where is profitability reported in?
Income statement
What is the general equation for profitability?
Profit/(loss) for the period = Total Income - Total Expenses
What is gross profit?
Gross profit is the difference between net sales revenue and the cost of sales.
What is the expanded equation for profitability?
Profit for the period = Gross profit + Other income - Other expenses
Why is being profitable important for a business?
- Continue operating the business
- Distribute profits to its owners
- Attract other investors
- Expand its operations
- Reward employees
What will happen to the business that suffers losses continuously?
It is likely to close down eventually.
What does the income statement tell us about the profitability of the business?
- Net sales revenue
- Cost of sales
- Gross profit
- Expenses
- Profit or loss for the period
How do we determine net sales revenue?
Net sales revenue = Total units sold x Unit selling price
What are the possible explanations for the increase in net sales revenue?
- The business could have added more stores and hence sold more goods.
- Increased selling prices
