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Personal and Business Finance > Learning Outcome F: Complete statements of comprehensive income and financial position and evaluate business performance > Flashcards

Learning Outcome F: Complete statements of comprehensive income and financial position and evaluate business performance Flashcards

1
Q

What does a statement of comprehensive income calculate and how does it do this?

A

Whether the firm has made a profit or a loss by deducting all expensive from sales revenue

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2
Q

Statement of comprehensive income

A

Shows the trading position of the business which is used to calculate gross profit. It then takes into account all other expenses to calculate the profit or loss for the year

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3
Q

What does a statement of financial position calculate and how does it do this?

A

The net worth of a business by balancing what the business owns against what it owes

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4
Q

Statement of financial position

A

A snapshot of a business’s net worth at a particular moment in time, normally the end of a financial year

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5
Q

A statement of comprehensive income, if produced correctly, will give…

A

an accurate calculation showing how much profit or loss the business has made. It records sales, costs and profit over a period of time (normally a year)

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6
Q

What does a statement of comprehensive income record?

A

Sales, costs and profit over a period of time (normally a year)

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7
Q

A statement of comprehensive income records sales, costs and profit over what period of time?

A

Normally a year

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8
Q

The first part of the statement of comprehensive income is made up of how many components?

A

Three

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9
Q

Sales revenue

A

The money coming into the business from providing a trade

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10
Q

Give an example of a trade that would generate revenue for a business

A

Any from selling goods, manufacturing goods, providing a service, etc.

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11
Q

What’s the calculation for sales turnover?

A

Quantity sold x selling price

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12
Q

Cost of goods sold

A

The actual value of inventory used to generate sales

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13
Q

What does cost of goods sold include?

A

The costs directly linked to providing that trade

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14
Q

The cost of buying the goods or raw materials used to produce goods is an example of…

A

cost of goods sold

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15
Q

To work out the cost of goods sold, a simple calculation is done to ensure that the figure recorded for cost of goods sold can be directly linked to…

A

the goods actually sold and not just all the materials purchased

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16
Q

What is the calculation for cost of goods?

A

Opening inventories + purchases - closing inventories

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17
Q

Opening inventory

A

The value of inventory in a business at the start of a financial year

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18
Q

Closing inventory

A

The value of inventory at the end of a financial year

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19
Q

Gross profit is the amount of money left or _______ after the cost of goods sold has been deducted from…

A

surplus, the sales turnover

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20
Q

Why is gross profit not a business’s final profit?

A

There are still other expenses to deduct in the next part of the account

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21
Q

What’s the calculation for gross profit

A

Sales turnover - cost of goods sold

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22
Q

Profit is the money after…

A

all other expenses have been deducted from gross profit and any other revenue income has been added

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23
Q

Revenue income

A

Non-capital income that is received by the business from sources other than sales

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24
Q

Give an example of revenue income

A

Any from discounts received and interest on positive bank balance

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25
Q

Non-capital income that is received by a business from sources other than sales is known as what?

A

Revenue income

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26
Q

True/False: Depreciation appears as an expense in the statement of comprehensive income

A

True

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27
Q

Why does depreciation appear as an expense in the statement of comprehensive income?

A

This is a way that accountants can spread the cost of a fixed asset over its lifetime

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28
Q

Gross profit =

A

Sales revenue - cost of goods sold

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29
Q

Cost of goods sold =

A

Opening inventory + purchases - closing inventory

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30
Q

Profit or loss for the year =

A

Gross profit - expenses + other income

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31
Q

What is tax to be deducted from?

A

Profit

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32
Q

Tax is a percentage of what?

A

Profit

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33
Q

Who does tax get paid to?

A

HMRC

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34
Q

What is tax?

A

A percentage of profit that is to be paid to HMRC

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35
Q

After a percentage of profit is paid to HMRC, this gives…

A

profit after tax

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36
Q

In the case of a company, a proportion of profit may be issued to who?

A

Shareholders

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37
Q

In the case of a company, a proportion of profit may be issued to who shareholders in the form of what?

A

Dividends

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38
Q

For a ____ ______ or ___________, profit could be taken out of the business as drawings

A

soul trader or partnership

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39
Q

For a soul trader or partnership, profit could be taken out of the business as what?

A

Drawings

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40
Q

Where is either some or all of a business’ profits likely to go?

A

Back into the business

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41
Q

Either some or all of a business’ profit is likely to be ploughed back into the business. What is this called?

A

Retained profits

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42
Q

Where are retained profits transferred from and to?

A

From the statement of comprehensive income to the statement of financial position

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43
Q

Depreciation is an accountancy concept used to…

A

spread the cost of an asset over its useful life

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44
Q

It is important that when fixed assets are shown in the statement of financial position, they are…

A

given a realistic value

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45
Q

It is important that when fixed assets are shown in the statement of financial position, they are given a realistic value. For this reason, they are…

A

depreciated on an annual basis

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46
Q

True/False: The annual amount by which assets are depreciated is included as an expense in the statement of comprehensive income

A

True

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47
Q

If a business bought a delivery van for £30,000 and three years later still showed its value at £30,000, this would be…

A

unrealistic and inaccurate accounting

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48
Q

True/False: The statement of financial position should show the historic cost of an asset

A

True

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49
Q

True/False: The statement of financial position should show the amount by which an asset has depreciated over its life

A

True

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50
Q

True/False: The statement of financial position should show the current value of an asset

A

True

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51
Q

What does book net value represent?

A

What an asset is thought to be worth at a particular moment in time

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52
Q

The statement of financial position should show the historic cost of an asset, the amount by which it has depreciated over its life and the current value for the asset. What is this final figure?

A

The net book value

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53
Q

Straight-line depreciation

A

An asset is depreciated by a set amount each year

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54
Q

Reducing balance depreciation

A

An asset is depreciated by a set percentage of its remaining value each year

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55
Q

What does the straight-line depreciation method involve?

A

Reducing the value of an asset, from the price paid (historic cost) by a fixed amount each year

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56
Q

The straight-line depreciation method involves reducing the value of an asset, from the price paid (________ cost), by a fixed amount each year

A

historic

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57
Q

Which two decisions must an accountant make to calculate straight-line depreciation

A

How long the asset is expected to be useful to the business, i.e. its expected life, and at the end of its useful life, how much it might be worth if sold on or sold for scrap, i.e. its residual value

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58
Q

Historic cost

A

The cost of an asset when it was first purchased

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59
Q

Expected life

A

How long an asset is expected to be used within a business

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60
Q

Residual value

A

The value of an asset when it is disposed of by the business, for example, resale value

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61
Q

What’s the formula for straight-line depreciation?

A

(Historic value - residual value) / expected life

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62
Q

If a Ford transit van cost £16,000 and it was expected to be used by the business for four years with a resale value of £4000, the calculation of depreciation would be shown how?

A

(£16,000 - £4,000) / 4 = £3k depreciation per year

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63
Q

If the straight-line depreciation of a Ford transit van was £3k per year, this would be shown as…

A

an expense on the statement of comprehensive income

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64
Q

What does the reducing balance method of depreciation involve?

A

Reducing the value of the asset by a set percentage each year

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65
Q

The reducing balance method of depreciation involves reducing the value of the asset by a set percentage each year. How is this percentage decided?

A

By a senior accountant and stated in the financial reports

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66
Q

The reducing balance method of depreciation depreciates an asset by a lower amount as…

A

the asset ages

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67
Q

The reducing balance method of depreciation depreciates an asset by a _____ amount as the asset ages

A

lower

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68
Q

It is important that the financial records are a true and fair record of the business’s activities. For this reason, adjustments will be made to what so that the expenditure shown matches the period in which the good or service is used?

A

The statement of comprehensive income

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69
Q

What are the two types of adjustments to statements of comprehensive income known as?

A

Prepayments and accruals

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70
Q

Prepayment

A

When an expense is made in advance of the period to which it relates

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71
Q

A prepayment is when an expense is made in advance of the periods to which it relates. The expense is therefore taken out of what?

A

Expenses in the statement of comprehensive income and shown as a current asset in the statement of financial position

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72
Q

Rental on a phone line paid quarterly in advance is an example of what?

A

A prepayment

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73
Q

A prepayment is when an expense is made in advance of the periods to which it relates. The expense is therefore taken out of expenses in the statement of comprehensive income and shown as what?

A

A current asset in the statement of financial position

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74
Q

Accrual

A

When expense is paid after the periods to which it relates

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75
Q

Accrual expenses are added as an expense in what?

A

The statement of comprehensive income

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76
Q

Accrual expenses are shown as current liabilities in what?

A

The statement of financial position

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77
Q

Electricity paid quarterly in arrears mean what?

A

The expense is paid after the periods to which it relates

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78
Q

Once produced, the statement of comprehensive income can be used internally by management to…

A

help measure the performance of the business and inform future decision making

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79
Q

Once produced, the statement of comprehensive income can be used externally by who?

A

Potential investors and creditors

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80
Q

Why may a creditor want to look at a business’s statement of comprehensive income?

A

To decide whether or not to offer trade credit

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81
Q

Give 3 examples of ways of analysing a statement of comprehensive income

A

Any 3 from comparisons between figures within the statement, comparisons between years, intrafirm comparisons and interfirm comparisons

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82
Q

Profit as a percentage of sales revenue is an example of which way of analysing a statement of comprehensive income?

A

Comparisons between figures within the statement of comprehensive income

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83
Q

Gross profit this year as compared with gross profit for last year is an example of which way of analysing a statement of comprehensive income?

A

Comparisons between years within the statement of comprehensive income

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84
Q

Revenue for one product or branch compared with another product or branch is an example of which way of analysing a statement of comprehensive income?

A

Intrafirm comparisons to see how different aspects of the business are performing

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85
Q

Why may intrafirm comparisons be made on a statement of comprehensive income?

A

To see how different aspects of the business are performing

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86
Q

Why may interfirm comparisons be made on a statement of comprehensive income?

A

To see how the business is performing in relation to its competitors

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87
Q

When interpreting and analysing a statement of comprehensive income, it is important to consider ______ quality

A

profit

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88
Q

What is profit quality?

A

How sustainable a profit is

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89
Q

If profits have increased, but this is because of a one-off event, such as selling an asset, then this cannot be repeated the following year. How may profit quality be seen as a result of this?

A

Poor

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90
Q

If an increase in profit is as a result of increased sales or lower costs, this may/may not be seen as achievable in future years

A

may

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91
Q

If an increase in profit is as a result of increased sales or lower costs, this may be seen as achievable in future years and will therefore have what impact on profit quality?

A

It will be seen as good

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92
Q

True/False: Profit quality can be used to evaluate the statement of comprehensive income

A

True

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93
Q

Why must accounts be accurate?

A

To meet legal requirements

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94
Q

Window dressing

A

Manipulating data in accounts to make it look more favourable

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95
Q

Statement of financial position

A

A snapshot of a business’s net worth at a particular moment in time, normally the end of a financial year. It is a summary of everything that a business owns and owes. Therefore states the value of a business

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96
Q

Which document is a snapshot of a business’s net worth at a particular moment in time?

A

A statement of financial position

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97
Q

A statement of financial position is a summary of everything that a business owns (its ______) and owes (its ___________)

A

assets, liabilities

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98
Q

What does a statement of financial position state?

A

The value of a business at a particular moment in time

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99
Q

True/False: Statements of financial position can be shown in a vertical or horizontal format

A

True

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100
Q

What is the most common format of a statement of financial position?

A

Vertical

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101
Q

What is a balance sheet also known as?

A

Statement of financial position

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102
Q

What is a statement of financial position also known as?

A

Balance sheet

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103
Q

What does the first half of a balance sheet calculate?

A

The net assets

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104
Q

Non-current assets

A

Items of value that are owned by the business and likely to stay within the business for more than one year

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105
Q

What are the two types of non-current assets?

A

Tangible assets and intangible assets

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106
Q

Tangible assets

A

Assets that can be touched, e.g. a machine or premises

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107
Q

Intangible assets

A

Assets that cannot be touched, for example a trademark or recognised name

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108
Q

Give 2 examples of tangible assets

A

Any from premises, fixtures and fittings, equipment, vehicles, etc.

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109
Q

It is important that when tangible assets are shown in the statement of financial position, they are given a…

A

realistic value

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110
Q

Why are tangible assets depreciated on an annual basis?

A

To give them a realistic value

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111
Q

What should the statement of financial position show about a tangible asset?

A

The historic cost of the asset, the amount by which it has depreciated over its life and then the current value for the asset

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112
Q

Net book value

A

What the asset is thought to be worth at a particular moment in time

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113
Q

Net book value = The cost of an asset - what?

A

Depreciation

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114
Q

An intangible asset is something that…

A

adds value to a business but does not have a physical presence

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115
Q

Goodwill is an example of which type of asset?

A

An intangible one

116
Q

True/False: The value of an intangible asset is constant

A

False, it can change over time

117
Q

If a decision is made to decrease the value of an intangible asset, a principle similar to what is applied?

A

Depreciation

118
Q

Amortisation

A

Where a one-off change is made to the value of an intangible asset

119
Q

Why is amortisation shown on the statement of financial position?

A

To record the cost, amortisation, and net book value of the intangible asset

120
Q

Current assets

A

Items owned by the business that change in value on a regular basis, such as stock

121
Q

Current assets are those items of value owned by a business whose value is likely to…

A

fluctuate on a regular basis

122
Q

Every time a business makes a transaction, the value of its _______ ______ will fluctuate

A

current assets

123
Q

Give 2 examples of current assets

A

Any 2 from inventories, trade receivables, prepayments, cash in the bank, cash in hand, etc.

124
Q

Inventory

A

The value of stock held at that moment in time

125
Q

What are the three forms that inventory can take?

A

Raw materials, work in progress and finished goods

126
Q

A business must be careful to give stock a realistic value and not…

A

overvalue stock

127
Q

How may stock be overvalued?

A

Inventory which a business are unlikely to sell because it has gone out of fashion or is damaged must be considered

128
Q

Trade receivables

A

People who owe the business money. Although the business does not yet physically have the money, it is, in effect, owned by the business

129
Q

People who owe the business money. Although the business does not yet physically have the money, it is, in effect, owned by the business. What does this describe?

A

Trade receivables

130
Q

Trade receivables/payables are customers who have not yet paid for the good or service provided by the business

A

Trade receivables

131
Q

Trade receivables are customers who have not yet paid for the good or service provided by the business and must be…

A

monitored to ensure that they do make the payment by the due date

132
Q

True/False: Trade receivables are shown on a balance sheet

A

True

133
Q

Prepayments

A

When an expense is made in advance of the period to which it relates

134
Q

True/False: Prepayments are classed as an asset

A

True

135
Q

Where are prepayments transferred from?

A

The statement of comprehensive income

136
Q

How are current assets listed on the statement of financial position?

A

In order of how easy

137
Q

If a business has liquidity problems, it may find it difficult to turn inventory into…

A

cash quickly

138
Q

If a business has liquidity problems, it may struggle to receive what for inventory?

A

The true value

139
Q

A current liability is something owed to/by a business

A

by

140
Q

Current liability

A

Something owed by the business that should be paid back in under one year

141
Q

Give 2 examples of current liabilities

A

Any 2 from overdrafts, accruals and trade payables

142
Q

Overdrafts

A

The ability to withdraw money from a current account that you do not have

143
Q

Accruals

A

When an expense is paid after the period to which it relates

144
Q

Trade payables

A

People or businesses that the business owes money to because it has received a good or service but has not yet paid for it

145
Q

What does net current assets/liabilities represent?

A

The business’s ability to meet short-term debts

146
Q

What is net current assets also called?

A

Working capital

147
Q

A business with insufficient net current assets does not have enough current assets to…

A

meet its current liabilities

148
Q

Why could a business not having enough current assets to meet its current liabilities be potentially disastrous?

A

If the liabilities have to be paid for now, and the business cannot meet these demands from its current assets, then it will have to find the cash elsewhere. This could mean being forced to sell a fixed asset without which the business cannot operate

149
Q

How is net current assets/liabilities calculated?

A

Current assets - current liabilities

150
Q

Current assets are greater than current liabilities =

A

net current assets

151
Q

Current assets are less than current liabilities =

A

net current liabilities

152
Q

A liability is something that a busses ____

A

owes

153
Q

Non-current liabilities

A

Liabilities that a business will pay back in more than one year

154
Q

Give 2 examples of non-current liabilities

A

Any from bank loans and mortgages, etc.

155
Q

What are non-current liabilities likely to be used for?

A

To buy fixed assets or set up a business initially

156
Q

Net assets

A

The figure that represents the total value of all the assets minus the value of the liabilities

157
Q

How is net assets calculated?

A

Non-current assets + current assets - (current liabilities + long term liabilities)

158
Q

Capital employed

A

The total amount of capital tied up in a business at a point in time. It is calculated as owners’ or shareholders’ capital + retained profit - drawings

159
Q

Capital employed =

A

Owners’ or shareholders’ capital + retained profit - drawings

160
Q

What does the second half of a statement of financial position ask?

A

How things have been financed

161
Q

Capital employed is shown in the first/second half of the statement of financial position

A

second

162
Q

Opening capital

A

The capital in the business at the start of trading. This is the money invested in the business from the owners.

163
Q

What is the money invested in the business from the owners known as?

A

Opening capital

164
Q

Retained profits

A

Profits kept from pervious years plus the net profit from the current year.

165
Q

Where will retained profits be transferred from?

A

The statement of financial position

166
Q

Drawings

A

Withdrawals made by owners from the business

167
Q

For a statement of financial position to balance, net assets must be equal to what?

A

Capital employed

168
Q

Why are adjustments made between the statement of comprehensive income and the statement of financial position?

A

To ensure that both records are showing a true and fair picture of the business’s activity

169
Q

Give 2 examples of adjustments that are made between the statement of comprehensive income and the statement of financial position to ensure that both records are showing a true and fair picture of the business’s activity

A

Any 3 from depreciation, prepayments and accruals

170
Q

How is annual depreciation shown on the statement of comprehensive income?

A

As an expense

171
Q

Each year depreciation is deducted from what to show the value of an asset at the end of the year?

A

The book net value of an asset

172
Q

Depreciation is deducted from the net book value of an asset to show the value of the asset at the end of the year; this is the value of the asset recorded where?

A

In the statement of financial position

173
Q

Prepayment

A

When an expense is made in advance of the periods to which it relates

174
Q

Prepayments are taken out of which section in the statement of comprehensive income and shown as what in the statement of financial position?

A

Expenses, a current asset

175
Q

If broadband is paid for 12 months in advance, and the accounts are produced half way through this 12 month period, half of the total payment would be recorded as a prepayment under which heading on the statement of financial position?

A

Current assets

176
Q

Accruals

A

When an expense is paid after the periods to which it relates

177
Q

Accruals are added as what in the statement of comprehensive income?

A

An expense

178
Q

Accruals are shown as what in the statement of financial position?

A

A current liability

179
Q

If electricity is paid quarterly in arrears; a figure would be shown in the statement of financial position to account for what?

A

The value of electricity alreadyy consumed

180
Q

Once produced, the statement of financial position can be used internally by management to help…

A

measure the financial health of the business and inform future decision making

181
Q

Once produced, the statement of financial position can be used externally by who?

A

Potential investors and creditors

182
Q

Why may an investor look at a business’s statement of financial position?

A

When deciding whether or not to offer capital to the business

183
Q

Give 3 examples of ways in which a statement of financial position may be analysed

A

Any 3 from comparisons between figures within the statement of financial position, comparison between years, intrafirm comparisons and interfirm comparisons

184
Q

A statement of financial position may be analysed by making comparisons between figures within the statement, e.g…

A

Current assets in relation to current liabilities, etc.

185
Q

Value of fixed assets or current liabilities in one year compared with previous years is an example of which way of analysing a statement of financial position?

A

Comparison between years

186
Q

Why may intrafirm comparisons be made in a statement of financial position?

A

To see how different aspects of the business are performing

187
Q

Debtors for one branch compared with another branch to identify any potential concerns regarding bad debts is an example of which way of analysing a statement of financial position?

A

Intrafirm comparisons

188
Q

Why may interfirm comparisons be made to analyse a statement of financial position?

A

To see how the business is performing in relation to its competitors

189
Q

Why is it useful to consider working capital when interpreting and analysing a statement of financial position?

A

This is a measure of the firm’s ability to meet day-to-day expenses, and the statement of financial position is a useful indicator of how effectively management are running the business

190
Q

The statement of financial position is a useful indicator of how effectively…

A

management are running a business

191
Q

Both statements of financial position and statements of comprehensive income are interpreted with the use of ______

A

ratios

192
Q

Ratio analysis allows for…

A

a more meaningful interpretation of published accounts by comparing one figure with another

193
Q

True/False: Ratio analysis allows for both interfirm and intrafirm comparisons

A

True

194
Q

True/False: Ratio analysis allows for interfirm comparisons, but not intrafirm

A

False, it allows for both

195
Q

True/False: Ratio analysis allows for interfirm comparisons, but not intrafirm

A

False, it allows for both

196
Q

Who will ratios be used by?

A

Internal stakeholders such as managers and employees, as well as external stakeholders such as investors and creditors

197
Q

Profitability is a measure of…

A

the profit of a firm in relation to another factor

198
Q

Profitability allows for a more comprehensive assessment of the performance of a firm by…

A

comparing one figure to another

199
Q

What are the four profitability ratios?

A

Gross profit margin, mark-up, net profit margin and return on capital employed

200
Q

Interfirm

A

Between different firms, for example, comparing the performance of two different house builders

201
Q

Comparing the performance of two different house builders is an example of interfirm/intrafirm analysis

A

interfirm

202
Q

Intrafirm

A

Within the firm, for example, comparing this year’s results with the last year’s, or the performance of the York branch with the Leicester branch of retail

203
Q

Comparing this year’s results with the last year’s, or the performance of the York branch with the Leicester branch of a retail store is an example of interfirm/intrafirm analysis

A

intrafirm

204
Q

Stakeholder

A

Anyone with an interest in the interest in the activities of a business, whether directly or indirectly involved

205
Q

How is gross profit margin calculated?

A

(gross profit / revenue) x 100

206
Q

The gross profit margin ratio looks at gross profit as a percentage of what?

A

Sales turnover

207
Q

What does gross profit margin ratio show us?

A

For every £1 made in sales, how much is left as a gross profit after the cost of goods sold has been deducted

208
Q

What does a gross profit of 88% mean?

A

For every £1 of sales made, 88p is left as gross profit

209
Q

If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to reduce…

A

the cost of its purchases

210
Q

If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to reduce the cost of its purchases. This may involve…

A

looking for a cheaper supplier

211
Q

If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to reduce the cost of its purchases. This may involve looking for a cheaper supplier, but the firm must first try to ensure that this…

A

doesn’t affect the quality of the product

212
Q

If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to increase…

A

sales without increasing the cost of goods sold

213
Q

How is mark-up calculated?

A

(gross profit / cost of sales) x 100

214
Q

The mark-up ratio looks at…

A

profit as a percentage of cost of sales

215
Q

What does the mark-up ratio show?

A

What percentage of cost of sales is added to reach selling price

216
Q

What would a mark-up of 25% mean?

A

If cost of raw materials used to produce a good were £1, it has been sold for £1.25

217
Q

How is net profit margin calculated?

A

(net profit / revenue) x 100

218
Q

What does the net profit margin ratio look at?

A

A net profit as a percentage of sales turnover

219
Q

What does net profit margin show?

A

For every £1 made in sales, how much of it is left as net profit after all expenses have been deducted

220
Q

What does a net profit of 31% mean?

A

For every £1 of sales made, 31p is left as net profit

221
Q

If net profit margin falls from one year to the next or is thought to be too low, what may a firm look at doing?

A

Reducing its expenses, for example, by moving to cheaper premises or cutting staff costs

222
Q

Before taking action, what must an accountant try and identify if net profit margin falls from one year to the next or is thought to be too low?

A

The cause of a falling figure - whether it’s related to sales, cost of goods sold or expenses, as all of these factors will impact upon the net profit margin

223
Q

How is return on capital employed calculated?

A

(net profit before interest and tax / capital employed) x 100

224
Q

ROCE

A

Return on Capital Employed

225
Q

What does the return on capital employed ratio show?

A

The percentage return a business is achieving from the capital (or money) being used to generate that return. it shows, for every £1 invested in the business owners’ capital or retained profits, what percentage is being generated in profit

226
Q

What does a ROCE of 5% mean?

A

For every £1 tied up in the business, 5p is being generated in net profit

227
Q

Investors will often compare ROCE to what?

A

The interest rate being offered in a bank or building society

228
Q

Why will investors often compare ROCE to the interest rate being offered in a bank or building society?

A

To see if their investment is working effectively for them in generating a return

229
Q

What do liquidity ratios measure?

A

How solvent a business is

230
Q

What is meant by how solvent a business is?

A

How able it is to meet short-term debts

231
Q

What are the two liquidity ratios?

A

Current ratio and acid test ratio/liquidity ratio (liquid capital ratio)

232
Q

How is current ratio calculated?

A

Current assets / current liabilities

233
Q

What does current ratio show?

A

The amount of current assets in relation to current liabilities

234
Q

How is current ratio expressed?

A

x:1

235
Q

If a firm had a current ratio of 2:1, what would this mean?

A

For every £2 it owned in current assets, it owed £1 in current liabilities

236
Q

A current ratio of 2:1 is generally considered acceptable/unacceptable

A

acceptable

237
Q

If a firm had a current ratio of 0.5:1, what would this mean?

A

For every 50p it owned in current assets, it owed £1 in current liabilities

238
Q

What’s the problem with having a current ratio of 0.5:1 if the firm’s bank demanded that it repaid its overdraft immediately and creditors demanded payment?

A

The firm would not be able to cover these demands from current assets

239
Q

Having a current ratio of 0.5:1 is a safe/dangerous position to be in

A

dangerous

240
Q

How is liquid capital ratio calculated?

A

(current assets - inventory) / current liabilities

241
Q

Which liquidity ratio is thought to be a tougher measure of a firm’s liquidity out of the two?

A

The liquid capital ratio

242
Q

Like the current ratio, the liquid capital ratio shows…

A

the amount of current assets in relation to current liabilities

243
Q

What’s different about the liquid capital ratio compared to the current ratio?

A

The liquid capital ratio includes inventory

244
Q

What’s considered to be the hardest current asset to turn into cash quickly?

A

Inventory

245
Q

How is the result of the liquid capital ratio expressed?

A

x:1

246
Q

Efficiency ratios tend to be used to assess…

A

how well management is controlling key aspects of a business, primarily stock and finances

247
Q

Efficiency ratios tend to be used to assess how well management is controlling key aspects of a business, primarily…

A

stock and finances

248
Q

What are the three efficiency ratios?

A

Trade receivable days, trade payable days and inventory turnover

249
Q

How are trade receivable days calculated?

A

(trade receivables / credit sales) x 365

250
Q

True/False: If you don’t know what percentage of sales were made on credit, then it is acceptable to use the sales figure as given in the statement of comprehensive income

A

True

251
Q

The trade receivable days ratio, on average, measures what?

A

How long it takes for debtors to pay

252
Q

How is the trade receivable days expressed?

A

As a number of days

253
Q

If a business has a debtors’ payment period of 60 days, what does this mean?

A

On average, it takes debtors two months to pay for goods or services purchased on credit

254
Q

A business with cash flow problems will try to increase/reduce its debtors’ payment period

A

reduce

255
Q

Business-to-business (B2B)

A

Refers to when one business sells to another business - for example, a stationery business selling to a firm of accountants

256
Q

Business-to-consumer (B2C)

A

Refers to when one business sells to an individual - for example, a stationery business selling wedding stationery to a bride and groom

257
Q

A stationery business selling wedding stationery to a bride and groom is an example of B2B/B2C

A

B2C

258
Q

A stationery business selling to a firm of accountants is an example of B2B/B2C

A

B2B

259
Q

True/False: Trade receivable days will vary from firm to firm

A

True

260
Q

Trade receivable days will vary from firm to firm, depending upon…

A

the nature and price of items sold and whether the business deals in B2B or B2C sales

261
Q

B2B

A

Business-to-business

262
Q

B2C

A

Business-to-consumer

263
Q

If a business deals in business-to-business, shorter/longer payment terms may be given

A

longer

264
Q

One business may give different payment terms to different customers depending on…

A

the size and importance of a customer’s business, reliability of payment and discounts offered

265
Q

How are trade payable days calculated?

A

(Trade payables / credit purchases) x 365

266
Q

True/False: If you don’t know what percentage of purchases were made on credit, it is acceptable to use the purchases figure as given in the statement of comprehensive income

A

True

267
Q

What does the trade payable days ratio mean?

A

On average, how long it takes a firm to pay for goods and services bought on credit

268
Q

How is the trade payble days ratio expressed?

A

As a number of days

269
Q

If a business has trade payable days of 30 days, what does this mean?

A

On average, there is a one month gap between the business buying the good or service and paying for it

270
Q

A business with cash flow problems will try to lengthen/shorten its trade payable days

A

lengthen

271
Q

How is inventory turnover calculated?

A

(average inventory / cost of sales) x 365

272
Q

How is average inventory calculated?

A

Opening inventory + closing inventory / 2

273
Q

What does the inventory turnover ratio measure?

A

The average amount of time an item of stock is held by a business

274
Q

How is the inventory turnover ratio expressed?

A

As a number of days

275
Q

If a business has an inventory turnover of 7, what does this mean?

A

On average, it holds each item of stock for one week

276
Q

The rate of inventory turnover is very much dependent upon…

A

the nature of the firm

277
Q

You could expect a florist or fishmonger to have a much lower/higher inventory turnover than a fashion store or car showroom

A

lower

278
Q

If the rate of inventory turnover appears high for the nature of the product, this might result in…

A

stock going out of date or out of fashion

279
Q

Give 3 limitations of ratios

A

Any 3 from they are calculated on past data and therefore may not be a true reflection of the business’s current performance, financial records may have been manipulated and therefore the ratios will be based on potentially misleading data, they do not consider qualitative factors, a ratio can indicate that there is a problem in a business but does not directly identify the cause of the problem or the solution and interfirm comparisons can be difficult as not all firms report their performance in the same way or generate their accounts in the same way

280
Q

Ratios are calculated on past data and therefore…

A

may not be a true reflection of the business’s current performance

281
Q

Financial records may have been manipulated and therefore the ratios will be based on…

A

potentially misleading data

282
Q

True/False: Ratios consider qualitative factors

A

False, they do not

283
Q

A ratio can indicate that there is a problem in a business but does not…

A

directly identify the cause of the problem or the solution

284
Q

Why may interfirm comparisons be difficult?

A

Not all firms report their performance in the same way or generate their accounts in the same way

285
Q

True/False: Ratios only report the financial performance at a set point in time

A

True

286
Q

True/False: A statement of financial position is a snapshot of the business at a point in time

A

True

287
Q

True/False: A statement of financial position is the same through time

A

False, it may be different

Personal and Business Finance (6 decks)

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