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A-Level Business > unit 7 > Flashcards

unit 7 Flashcards

1
Q

whats ratio analysis

A

involves the comparison of financial data to gain insights into business performance

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2
Q

ratio analysis help to answer questions such as

A
  • why is one business more profitable than another
  • what returns are being earned in investment in a business
  • is a business able to stay solvent
  • how effectively is a business using its assets
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3
Q

what are the key stages in ratio analysis

A
  • gather data
  • calculate ratios
  • interpret results
  • take actions
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4
Q

where does the information for ratio analysis come from

A

income statement
balance sheet

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5
Q

whats does income statement involve

A
  • revenue
  • costs of sales
  • gross profit
  • operating profit
  • net profit (profit for the year)
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6
Q

whats does balance sheet involve

A
  • current assets
  • current liabilities
  • inventories
  • trade receivables and payables
  • long term liabilities
  • capital and reserves
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7
Q

what are the main groups of ratios

A
  • profitability (gross profit margin, operating profit margin, return on capital employed)
  • liquidity (current ratio, acid test ratio)
  • financial efficiency (payables days, receivables days, inventory turnover, gearing)
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8
Q

key users of ratios (profitability)

A
  • shareholders
  • governments
  • competitors
  • employees
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9
Q

key users of ratios (liquidity)

A
  • shareholders
  • lenders
  • suppliers
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10
Q

key users of ratios (financial efficiency)

A
  • shareholders
  • lenders
  • competitors
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11
Q

what are the limitations of ratio analysis

A
  • one data set is not enough
  • reliability of data
  • based on past
  • comparability
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12
Q

why might ratio data not be entirely reliable

A
  • financial info involves making subjective judgements
  • different businesses have different accounting polices
  • potential for manipulation of accounting info (eg window cleaning)
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13
Q

whats the importance of effective comparison

A

one ratio is rarely enough
- need to compare with competitors
- need to analyse over time (trends)

circumstances change over time
- markets and industries change
- different economic and market conditions

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14
Q

what ratios don’t tell you

A
  • competitive advantage eg brand strength
  • quality
  • ethical reputation
  • future prospects
    -changes in the external environment
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15
Q

what is window dressing

A

a short-term strategy used by companies and funds to make their financial reports and portfolios look more appealing to clients, consumers, and investors

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16
Q

why are ratios useful

A
  • very useful analytic tools
  • widely used and understood
  • identify issues, don’t solve problems though
  • part of a range of indicators of business performance
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17
Q

definition of balance sheets

A

a financial snapshot of the business at a moment of time

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18
Q

what does a balance sheet show

A

shows the source of all capital invested in the business for it to be able to operate, and in what form that money currently is in within the firm, eg stock, premises, debt etc

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19
Q

whats a liability

A

A liability is something a person or company owes, usually a sum of money

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20
Q

what are non current assets

A

what the business owns with a lifespan of more than a year. they are used repeatedly as part of the firms operations and will not regularly be sold

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21
Q

what are current assets

A

assets owned by the business that are likely to be turned into cash within one year. these assets constantly change form

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22
Q

what are current liabilities

A

short term debt of the business, will not have to be repaid within a year

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23
Q

what are non current liabilities

A

debts that need to be rapid, but not within one year. also known as creditors falling due after a year

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24
Q

what do capital and reserves show on a balance sheet

A

shows how the assets and business have been financed

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25
Q

what are net current assets also known as

A

working capital

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26
Q

whats liquidity

A

a firms ability to pay its short term liabilities (debts)

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27
Q

what are assets

A

items that the business owns

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28
Q

whats inventories

A

stock, worked in progress, finished goods

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29
Q

whats total equity (capital)

A

funds provided by shareholders to set up the business, fund expansion and purchase non current assets

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30
Q

whats the formula for net current assets

A

current assets - current liabilities

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31
Q

whats the formula for net assets

A

total assets - total liabilities

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32
Q

whats the formula for capital employed

A

total equity + non current liabilities

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33
Q

what are receivables (debtors)

A

money owned to the company by its customers mostly from sales on credit

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34
Q

what does income statement show

A

shows the profit or loss made by a business

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35
Q

whats gross profit

A

revenue minus cost of sales

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36
Q

whats finance income

A

any interest paid to the company on money lent or saved

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37
Q

whats finance expenses

A

any payment of interests on loans held

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38
Q

profit before tax

A

operating profit minus finance expenses plus any finance income

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39
Q

whats profit for the year

A

profit before tax minus taxation

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40
Q

what are exceptional items

A

items that have a one off affect on profits.

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41
Q

earnings per share formula

A

profit for the period/number of shares

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42
Q

purses of the income statement

A
  • to measure company performance and the impact of strategies
  • owners can assess their return on investment
  • to abide by legislation as part of being a limited company
  • gives an idea of the profit quality
  • to see how profit is being utilised
  • used to compare with other firms and past trends
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43
Q

whats profit quality

A

whether a source of profit is sustainable in the long term

44
Q

whats high quality profit

A

a source of profit which is likely to continue

45
Q

whats low quality profit

A

a result of actions that are unlikely to occur again

46
Q

whats a leaseback

A

an arrangement in which the company that sells an asset can lease back that same asset from the purchaser

47
Q

who are stakeholders

A

someone with an interest in the business

48
Q

what are the 6 ratios

A
  • current ratio
  • gearing ratio
  • return on capital employment
  • payables days
  • receivable days
  • inventory turnover
49
Q

whats liquidity

A
  • is a firms ability to pay short term debts (liabilities)
  • firms pay their short term debts (called liabilities) with their current asset of cash. their other current assets inventories (stock) and receivables (debtors)
50
Q

what does insolvent mean

A

the company is unable to pay its debts

51
Q

whats current ratio

A

although profit is the main measure of success if its important to understand if the firm is able to meet its short term debts to continue trading

52
Q

liquidity formula

A

current assets
——————— : 1
current liabilities

53
Q

what does a 2:1 current ratio mean

A

for every £1 you owe you have £2

54
Q

problems with a high ratio

A

the money is sitting around and could be spent on investing

55
Q

whats Tescos current ratio

A

7.39:1

56
Q

whats gearing

A

gearing measures the proportion of a business’s capital (finance) provided by debt

57
Q

why is gearing useful

A

greeting shows what proportion of the capital invested in a business has come from bank loans.

58
Q

the gearing ratio

A

non current liabilities
———————————— x100
total equity + non current liabilities

59
Q

whats a high gearing as a %

A

a value higher than 50%

60
Q

whats a low gearing as a %

A

usually below 25%

61
Q

benefits of high gearing

A
  • bank loans can be a cheap source of finance when interest rates are low
  • less dividend payments will be required as share capital will not be needed
  • it may imply the business is heavily investing in growth to drive the company forward and take advantage of opportunities to stay ahead of the competition.
62
Q

benefits of low gearing

A
  • the company will have lower interest and loan payments positively impacting its liquidity
  • it makes the business a more attractive investment to potential shareholders
  • the firm will not be as vulnerable to cost impacts of interest rate changes
  • there is reduced risks as the business has less debt and fewer creditors who could put the business into liquidation if these debts go unpaid
  • if shares are sold as an alternative, share capital is permanent capital so doesn’t need to be repaid unlike loans
63
Q

whats ROCE stand for

A

return on capital employed

64
Q

what is return on capital employed

A

the profitability ratios help to show a firms efficiency in achieving this objective and producing a profit. they relate the profit made by the firm to its size.

65
Q

ROCE formula

A

operating profit(before tax)
————————————— x100
total equity + non current liabilities

66
Q

what is profitability

A

a firms profit in relation to its size

67
Q

whats inventory turnover

A

inventory turnover measures how often each year a business sells and replaces its inventory

68
Q

what are the financial efficiency ratios

A
  • inventory (stock) turnover
  • receivables (debtors) days
  • payables (creditors) days
69
Q

what do the financial efficiency ratios measure

A

how efficiently the business manages its current assets and liabilities, which will also impact a firms liquidity

70
Q

what are the 3 main types of inventory

A
  • raw materials and components
  • work in progress
  • finished goods
71
Q

inventory turnover formula

A

average inventories held

72
Q

how is inventory valued

A

cost price not selling price

73
Q

industries with typically low inventory turnover

A
  • construction
  • engineering
  • industrial distribution
74
Q

industries with typically high inventory turnover

A
  • supermarket retail
  • fast food
  • motor vehicle production
75
Q

how can inventory turnover be increased

A
  • sell of or dispose of slow moving or obsolete inventory
  • introduce lean production techniques to reduce amounts of inventory held
  • rationalise the product range made or sold
  • negotiate sale or return arrangements with suppliers - so inventory can be returned if doesn’t sell
76
Q

factors influencing inventory turnover

A
  • popularity
  • type op product
  • type of business/industry
  • changes in consumer tastes and fashions
  • quality of research
  • product portfolio
77
Q

what are trade receivables (debtors)

A

amounts owed to a business by customers

78
Q

what are trade payables (creditors)

A

amounts owed by a business to suppliers and others

79
Q

what are receivables days

A

the average length of time taken by customers to pay amounts owned

80
Q

what are payables days

A

the average length of time taken by a business to pay amounts it owes

81
Q

receivables (debtors) days formula

A

trade receivables
————————- x 365
revenue (sales)

82
Q

issues to consider with ratio analysis

A
  • is the data reliable
  • were the accounts produced accurately
  • some firms may not pursue profit maximisation but other objectives eg social enterprise
  • it may be hard to access the accounts of rivals to make comparisons
  • economic factors may have impacted the company’s performance.
83
Q

whats inter firm comparisons

A

comparisons between different companies

84
Q

whats intra firm comparisons

A

comparisons within the company

85
Q

what are business objectives

A

the specific intended outcome of business strategy

86
Q

the hierarchy of business objectives

A

TOP TO BOTTOM
mission
corporate/strategic
functional
team
individual

87
Q

what are objectives

A

statements of specific outcomes that are to be achieved

88
Q

4 operations of business

A
  • operations
  • finance
  • HR
  • marketing
89
Q

what are corporate objectives

A

objectives that relate to the business as a whole

90
Q

purposes of corporate objectives

A
  • provide strategic focus
  • measure performance
  • inform decision making
  • set the scene for more detailed functional objectives
91
Q

key areas for corporate objectives

A
  • market
  • innovation
  • productivity
  • physical + financial resources
  • profitability
  • management
  • employees
  • public responsibility
92
Q

what are functional objectives

A

set for each key business function and are designed to ensure that the corporate objectives are achieved

93
Q

examples of how functional objectives might support corporate objectives

A
  • increase sales
  • reduce costs
  • increase cash flow
  • improve customer satisfaction
94
Q

key internal influences on corporate objectives and decisions

A
  • business ownership
  • attitude to profit
  • ethical stance
  • organisational culture
  • leadership
  • strategic position and resources
  • stakeholder influence
95
Q

key external influences on corporate objectives and decisions

A
  • short termism
  • economic environment
  • political / legal environment
  • competitors
  • social and technological change
96
Q

what is short-termism

A

is where a business priorities short-term rather than long-term performance

97
Q

why might businesses be concerned with short term performance

A
  • stock market (investors) focus on latest financial performance
  • reliance on bonuses based on short term performance
  • frequent changes in leadership and strategy
98
Q

possible indicators of short termism

A
  • bonuses based on short term objectives
  • low investment in R+D
  • high dividend payments rather than reinvesting profits
  • overuse of takeovers rather than internal growth.
99
Q

short termism may damage other measures of long term performance for example

A
  • market share
  • quality
  • innovation
  • brand reputation
  • employee skills and experience
  • social responsibility+sustainability
100
Q

case study of short termism

A

BT stopped graduate apprentice, saved money short term, lost long term, skill shortage

Land Rover Jaguar, kept it going, short term money loss, long term saved money

all in pandemic

101
Q

whats strategy

A
  • how the business intends to achieve its objectives
  • usually long term
  • made by senior management
102
Q

whats tactics

A
  • support achievements of specific targets
  • usually routine and short term
  • often delegate to junior management
103
Q

whats synergy

A

the combined power of a group of things when they are working together that is greater than the total power achieved by each working separately

104
Q

strategic decions

A
  • external growth
  • enter international market
  • rebrand the business
105
Q

tactical decisions

A
  • relocate staff from takeover HQ
  • choose locations in new market
  • launch rebranding campaign

A-Level Business (15 decks)

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