Unit 3 - Topic 2

Question 1

4 points - Sections in the financial statements?

Answer 1

Profit and Loss Account - revenue & expenses
Balance Sheet - assets, liabilities & shareholders funds
Cash Flow statement - operating activities
Explanatory Notes - greater detail

Question 2

What are small companies not required to produce?

Answer 2

Cash Flow statements

Question 3

3 points - What are the 2 out of 3 things to classify as small company?

Answer 3

Less than £6.5m turnover
Less than £3.26m total assets
Less than 50 employees

Question 4

3 points - What does the Balance Sheet tell us?

Answer 4

How much the company is worth
How healthy it is
How much shares are worth in relation

Question 5

2 points - How to check if the company is solvent?

Answer 5

Balance sheet helps you work out if they will be around this time next year
Liquidity ratio as companies go bust because of no money

Question 6

2 points - What is liquidity ratio

Answer 6

Current assets divided current liabilities

Less than one is cash crunch

Question 7

2 points - Acid test ratio calculation and why?

Answer 7

Current assets (less stock) divided current liabilities
As stock can't be sold quickly in times of trouble

Question 8

2 points - What is NAV or capital employed?

Answer 8

Net Asset Value = Total assets - total liabilities

Shows how much a company is worth according to balance sheet

Question 9

3 points - Results of NAV per share and calculation?

Answer 9

Net asset Value divided by shares
If NAV per share is higher than stock share price it could be bad news ahead
If NAV per share is lower than stock share this could mean good news ahead as they are expecting more profits than they are showing

Question 10

2 points - What period is the Balance Sheet and P&L?

Answer 10

Balance Sheet is a snap shot of a given day

P&L is over a period of time either quarterly, half or full year

Question 11

3 points - How to know how much a company is making?

Answer 11

Turnover is the value of sales
Gross profit is Turnover minus cost of sales
EBITDA

Question 12

2 points - What is Depreciation and Amortisation

Answer 12

Depreciation is falling of the value of fixed assets e.g. machinery
Amortisation is falling of the value of intangible assets e.g research, trademarks

Question 13

3 points - What is the cash flow statement

Answer 13

How much money running through the business from operating activities - net cash
Operating profit minus non business activities e.g. dividends, interest for finance
Money from financing e.g loans or money from shares being sold

Question 14

3 points - What does operating profit exclude?

Answer 14

Depreciation
Amortisation
Exceptional items (revaluation for example)

Question 15

What liability does a Partnership have compared to a limited company?

Answer 15

Unlimited liability for a partnership

Limited company has a liability to what they agree to invest e.g. shares

Question 16

2 points - What is gearing results and calculation?

Answer 16

total capital employed

50% or higher is high gearing
20% or less is low gearing
But depends on the business

Question 17

3 points - Benefit of high gearing

Answer 17

Less capital required by shareholders to be invested
Debt can be a relatively cheap source of finance compared to dividends
Easy to pay interest if profits and cashflows are strong

Question 18

3 points - Benefits of low gearing

Answer 18

Less risk of defaulting on debts
Shareholders rather than debt providers call the shots
Business has the capacity to add to the debt if required

Question 19

Operating profit margin?

Answer 19

Operating profit divided Turnover

Question 20

3 points - Operational Gearing what is it?

Answer 20

Analysis of fixed costs
High operating (fixed) costs is described as having high operational gearing.
Low operating (fixed) costs is described as having low operational gearing.

Question 21

2 points - Operational Gearing results from increased Turnover?

Answer 21

High Gearing = Increase in Operating profit margin

Low Gearing = Decrease in Operating Profit margin

Question 22

2 points - What is the Breakeven point?

Answer 22

Selling Price - Variable Costs

When total costs are exactly the same as total sales neither a profit or loss

Question 23

What is the margin of safety?

Answer 23

The extent to which the planned volume of output or sales lies above the breakeven point.

Question 24

Calculating Revenue?

Answer 24

Sales price x units

Question 25

3 points - Limits of using ratios for business analysis?

Answer 25

Limited if used in isolation as they have a limited perspective No such thing as a good or bad ratio as it is highly subjective Reliability as it is from a single point in time - such as year end

Question 26

2 points - Name ratio categories?

Answer 26

Working capital ratios - Cash pressure in the business | Capital Management ratios - How well they are managing their assets to produce sales

Question 27

4 points - Working capital ratios?

Answer 27

Trade Debtor days - how long the customers take to pay Trade Creditor days - how long they take to pay suppliers Stork Turnover days - how long business holds on to stock Calc - X divided by Turnover x 365 Current ratio - How cash is covered by liabilities in next 12 months Current assets --------------------- Current liabilities

Question 28

4 points - Capital Management Ratios?

Answer 28

Asset Turnover - How well the assets are being used for sales (Turnover divided by net assets) PBIT (Profit before interest and tax) - Measures profit after all expenses (Turnover - total expenses and interest and tax) EBITDA - Measure of business operating performances without factoring accounting treatment and accounting decisions (PBIT - Depreciation and Amortisation) ROCE - Ratio that is the amount of profit that can be attributed tot he shareholders of the business Operating profit ----------------------- x 100 Total Capital & reserves

Question 29

5 points - What is the business flow before cash is generated? Referred to as the funding gap

Answer 29

1) Stock is purchased 2) Stock is stored. or converted to finished goods 3) Products are sold to the consumer on credit terms 4) Invoiced debtor are passed to the collections 5) Invoices are paid and converted to cash

Question 30

4 points - Result of all working capital ratios if they are high?

Answer 30

Trade Debtor days - More pressure on the business cash flow (if too high bad debt likely) Trade Creditor days - Less pressure on business cash flows but too high could mean suppliers remove credit lines Stock turnover days - Means more pressure on cash flows and could mean stock piling of obsolete stock Current ratio - Means the business is better able to pay back liabilities

Question 31

4 points - Result of all capital management ratios being high?

Answer 31

Asset Turnover - Means assets are being utilised efficiently PBIT - Means more cash is in the business available to settle creditors useful if low relative depreciation and amortisation EBITDA - Means more cash in the business but useful if they have relatively high relative depreciation and amortisation ROCE - Better return for the shareholders

Question 32

2 points - Liquidity?

Answer 32

A measurement of a company’s ability to pay its short-term debts. The three common liquidity measures are current ratio, acid-test ratio and cash ratio.

Question 33

3 points - Why is Profit not equal to cash?

Answer 33

Operating activities - selling goods on credit Financing actiivites - Loans, etc Investing activities

Question 34

8 points - Sections to the cash flow statement?

Answer 34

``` Inflow from operating activities Returns on investment and finance costs Purchase and sale of assets (net) Acquisition and disposal of businesses Dividends paid Purchase/sale of shares Repayments of finance lease Net increase or decrease of cash ```

Question 35

How can serviceability of debt be measured?

Answer 35

Look at Ratio analysis

Question 36

2 points - What is CFADS and how is it calculated?

Answer 36

Cash flow available for debt service EBITDA as a baseline less dividends tax paid and net capital expenditure. Plus or minus working capital (i.e. net changes in stock, debtors and creditors). This end figure is then compared with the repayments required for a decision or annual debt service cost to see if it is a surplus or deficit

Question 37

4 points - When did automated credit approvals start and how do they operate?

Answer 37

1980s Business rules engines - organised by the funder to reflect their credit policies CRA searches Automated analysis of customer financial data (approve, decline or refer to manual underwriter)

Question 38

Post financial crisis what was citied as a barrier to entry

Answer 38

Challenger banks do not have access to levels of CRA like the big four

Question 39

5 points - ABCFG of credit scoring?

Answer 39

``` Application scoring Behavioural scoring Customer scoring Fraud Scoring Generic Scoring ```

Question 40

Broker benefit of auto approval?

Answer 40

Quicker decision

Question 41

4 points Funder benefit?

Answer 41

Improved customer service levels Customer retention better Reduced credit staff costs Ability to quickly amend credit policy rules (respond to economic environment changes or requirement to change asset or industry mix of their portfolio)

Question 42

3 points - Issues to resolve involving technology in asset finance

Answer 42

Development of robust and secure mobile/tablet solutions Development of cloud based solutions Increased need for cyber security for protection of customer data