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buisness > unit 7 > Flashcards

unit 7 Flashcards

1
Q

what is ratio analysis

A

the comparison of financial data to gain insights into business performance

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2
Q

what does ratio analysis help to answer

A

why one business is more profitable than the other
-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

where does the information for ratio analysis come from

A

-income statement
-balance sheet

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4
Q

what is included in the income statement

A

revenues
-cost of sales
-gross profit
-operating profit
-net profit

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5
Q

what is included in the balance sheet

A

current assets
current liabilities
inventories
trade receivables and payables]
long term liabilities
capital and reserves

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6
Q

stages in ratio analysis

A

gather data- calculate ratios- interpret results- take action

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7
Q

three main groups of rations

A

-profitability
-liquidity
-Financial efficiency

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8
Q

who are the key users of ratios

A

profitability- shareholders, government, competitors, employees.
Liquidity- shareholders, lenders, suppliers
Financial efficiency-shareholders, Lenders, competitors.

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9
Q

what is liquidity

A

the ability of a company to change its assets into cash.

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10
Q

different between income statement and balance sheet

A

income is within one day whereas balance is within one year

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11
Q

what his the difference between Current liabilities and non current liabilities

A

current is something you have to pay in 12 months, non current is more long term like a loan

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12
Q

what are net assets

A

non current plus current assets minus liabilities

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13
Q

limitations of ratio analysis

A

one data set is not enough
reliability of data
based on the past
comparability

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14
Q

why might ratio data not be entirely reliable

A

-financial information involves making subjective judgements
-different business have different accounting policies
-potential for manipulation of accounting information (window dressing) -boosting figures, look carefully on where the data has come from.

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15
Q

the importance of effective comparison

A

one ratio is rarely enough- need to compare with competitors- need to analyse over time.

Circumstances change over time
-markets and industries change
-different economic and market conditions.

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16
Q

what ratios don’t tell you

A

competitive advantages
quality
ethical reputation
future prospects
changes in the external environment

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17
Q

what is the definition of a balance sheet

A

a document describing the financial position of a company at a particular point in time. It compares the items owed by the organisation (assets) with the amount it owes (its liabilities) and shows how the firm has been funded

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18
Q

what are non-current assets

A

what the business owns with a lifespan of more than a year.

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19
Q

what are current asset

A

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

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20
Q

what are current liabilities and what are non-current liabilities

A

current liabilities are short-term, debts of the business , will have to be repaid within one year.

non-current liabilities, are debts that need to be repaid, but not within one year

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21
Q

why is a balance sheet beneficial.

A

shows thew 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, e.g stock, premises, debt

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22
Q

what are net current assets also known as

A

working capital

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23
Q

liquidity

A

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

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24
Q

what needs to be the same on a balance sheet

A

net current assets and total equity.

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25
Q

what are assets

A
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26
Q

what are tangible assets

A
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27
Q

what are intangible assets

A
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28
Q

what are inventories

A
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29
Q

what are receivables

A
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30
Q

what is total equity

A
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31
Q

what is the calculation for net current assets

A

current assets-current liabilities

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32
Q

what is the calculation for net assets

A

total assets- total liabilities

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33
Q

what is the equation for capital employed

A

total equity + non- current assets

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34
Q

what does an income statement describe

A

the income and expenditure of a business over a period of time, usually a year.
-shows the profit or loss made by a business
-also known as the profit and loss account.

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35
Q

what are exceptional items

A

money from selling or buying that only happens once- selling machinery

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36
Q

what’re finance income

A

any interest paid to the company on money lent or saved

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37
Q

what are finance expenses

A

any payments of interest on loans held

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38
Q

what type of business is needed to post their income statement

A

plc
and

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39
Q

why are public and private limited companies charged corporation tax on profits

A

they have gone through the legal incorporation process

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40
Q

what is the earnings per share formula

A

profit for the period/number of shares

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41
Q

what does earnings per share tell you

A

an indication of the amount of money per share but assumes all profit will be returned as dividends.
-firm decides what percentage of profit will be paid back.

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42
Q

purposes of income statement

A

-measures company performance and impacts pf strategies.
-owners can assess their return on investment
-to abide by legislation as part of being a limited company.

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43
Q

what is profit quality

A

whether a source of profit is sustainable in the long term.

44
Q

types of profit quality

A

high profit quality- source of profit that is likely to continue, e.g a successful well-established product such as Heinz ketchup

low profit quality- a result of actions that are unlikely to occur again (exceptional items), e.g selling an asset such as a building.g HSBC a sale and leaseback deal for their headquarters in Canary Wharf London

45
Q

what is profit utilisation

A

the way in which a businesses chooses to use its profit. common in two ways.
-dividends to pat shareholders
-retained profit- reinvest profit into the business to maintain its liquidity.

46
Q

how do shareholders have authority in the businesses actions with profit

A

some shareholders have a short-term interest looking for predictable and regular dividend payments

-other shareholders, such as those of companies still run by their initial founders or family-owned private limited companies, may have more of a long term perspective and be happy to retain profit to fund expansion.

47
Q

problem with income statement

A

its based on historical data, CEO must convince shareholders that the current year will be better.

48
Q

what are the six financial ratios

A

current ratios
gearing ratio
ROCE (return on capital employed)
payables days
receivables days
inventory turnover

49
Q

liquidity

A

a firms ability to pay a firms short term debts. They do so with their current assets, using a balance sheet shows how easily a firm is able to pay their short-term debts and how solvent they are.

50
Q

what is the current ratio

A

helps to understand if the firm is able to meet its short-term debts

51
Q

current ratio

A

current assets/current liabilities :1

52
Q

what is the recommended ratio

A

2:1 or 1.5:1

53
Q

what does 2:1 tell you

A

for every pound owed you have 2 pounds to pay it off

54
Q

why is a ratio of 8:1 seen as a bad ratio

A

the firm has a lot of money sitting in banks which should be reinvested into non-current assets.

55
Q

why might a low current ratio not be bad

A

for Land Rover and other manufacturing industries the turnover is very high

56
Q

current ratios for Sony,apple and Tescos

A

sony-0.69:1, apple- 1.07:1, Tescos: 7.37:1

57
Q

evaluating current ratio

A

firms have different requirements depending on their size.
How does the current ratio compare with competitors
how is it doing, trend-

58
Q

what does gearing do

A

measures the proportion of the businesses capital provided by debt.

59
Q

equation for gearing

A

non-current liabilities/ total equity +liabilities x100

60
Q

why is gearing useful

A

shows stakeholders the capital structure of the business

61
Q

why would high gearing be good

A

50% or more if the interest rates are low- opportunity to borrow money to invest, less need to raise finance through share capital when bank loans are used

62
Q

why would low gearing be good

A

if the interest rates are low below 25%, will have lower interest and loan repayments positively impacting its liquidity.
makes a business more attractive for investment to potential stakeholders.
-less vulnerable for changes in interest rates
-easier to liquidate the business

63
Q

what is profitability

A

a firms profit in relation to its size

64
Q

what is ROCE

A

return on capital employed

65
Q

what does ROCE show

A

the operating profit (a measure of the firms success compared with the total capital employed

66
Q

ROCE equation

A

operating profit/total equity+non-current liabilities x100

67
Q

what is the best ROCE

A

the bigger is the better

68
Q

benefits of ROCE

A

lets the owners or potential investors understand how efficient then business is at producing profit based on capital invested in the business.

69
Q

what is inventory turnover

A

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

70
Q

what are the three types of inventory

A

-raw materials and components
-work in progress
-finished goods

71
Q

what is the inventory turnover equation

A

cost of sales/average inventories held

72
Q

how can inventory turnover be increased

A

sell-off or dispose of slow-moving or obsolete inventory
introduce lean production techniques

73
Q

factors influencing inventory turnover

A
74
Q

what are payables days

A

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

75
Q

what are receivables days

A

the average length of time by customers to pay amounts owed

76
Q

equation for receivables days

A

trade receivables/revenue x365

77
Q

what are trade receivables

A

amounts owed to a business by customers

78
Q

what are trade payables

A

amounts owed by a business to suppliers

79
Q

what should be a business aim for their receivables days

A

a short period to maintain the best cash flow possible.

80
Q

equation for payables days

A

trade payables/cost of sales x 365

81
Q

what should be a businesses payables days aims

A

firms that receive long credit periods will have high figures; those that pay in cash will have low figures

82
Q

comparing receivables and payables

A
83
Q

what are objectives

A

statements of specific outcomes that are to be achieved

84
Q

what are business objectives

A

specific intended outcomes of business strategy

85
Q

what is the hierarchy of business objectives

A

-mission
-corporate/strategic (whole company)
-functional
-team
-individual
gets increasingly detailed as it goes down
further up the more strategic

86
Q

what are the four functions of a business

A

finance.
operations.
HR
Marketing

87
Q

examples of hierarchy of objectives

A

corporate objective- 12% market share
functional objective- sakes per customer of £45
unit objective-shop sales of £500,000

88
Q

what are corporate objectives

A

those that relate to the business as a whole

89
Q

purposes of corporate objectives

A

provide strategic focus
-measure performance of a firm as a whole
-inform decision making
-set the scene for more detailed functional objectives

90
Q

key areas for corporate objectives

A

market
innovation
productivity
physical and financial resources
profitability
management
employees
public responsibility

91
Q

what is offshoring

A

manufacturing abroad where the labour costs are cheaper.

92
Q

example of a corporate objective

A

start bucks- ‘the most recognised and respected brands in the world’.- however they lost respect due to tax evasion.
costa and premiering,’reach 85,000 uk hotel rooms and 2.5 billion system sales in Costa by 2020

93
Q

what are functional objectives

A

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

94
Q

examples of how functional objectives might support corporate objectives

A

increase sales- successfully launch five new products in the next two years

reduce costs- increase factory productivity by 10%

95
Q

key influence on corporate objectives

A

business ownership
attitude to profit
ethical stance
organisational culture
leadership
strategic position
stakeholder infleunce

96
Q

external influences on corporate objectives

A

short-termism
economic environment
political/legal environment
competitors
social and technological change

97
Q

what is short terms

A

when a business prioritises short term rather than long term performance

98
Q

what is the problem with short terms

A

thinking about short terms could cost you in the long term e.g reputation- use in evaluation
might damage:
market share
-quality
-innovation- BT vs Land Rover Jaguar
Land Rover jaguar decided to keep their apprentaships running with high costs in recession. After recession they came out on top. Caused BT to have natural wastage.
-brand reputation
-employee skills and experience
-social responsibility- funding a local football team

99
Q

why might a business be concerned with short term performance

A

stock market focus on latest financial performance

-reliance on bonuses based on short term performance

-frequent change of leadership and stratergy

100
Q

possible indicators of short terms

A

bonuses based on short term objectives
low investment in research and development
high dividend payments rather than reinvesting profits
overuse of takeovers rather than internal growth

might help a company to be sold

101
Q

what is synergy

A

two companies companies coming together to form a better income

102
Q

what is the difference between a statergy and a tactic.

A

tactics- short term, normally to address a problem- buy one get one free to real competitors
-strategy- long term- how a business intends to achieve its objectives e.g equal up the work place, positive discrimination- hiring types of people you don’t have.

103
Q

an example of leaders being increasingly critical of short-termism

A

Since Polman took over as CEO in 2009 of Unilever he stopped updating stock market every quarter, which influenced short terms

104
Q

examples of strategic decisions

A

external growth via takeover
enter international market
rebrand the business
-adopt cost minimisation stratergy

105
Q

examples of tactical decisions

A

relocate staff from takeover HQ chose locations in new market
launch rebranding campaign

buisness (12 decks)

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