Unit 7 Flashcards
(26 cards)
Internal stakeholders, examples
Entities that are affected by the decisions or performance of the company that are within the company
- Investors - current and potential - should I invest (or continue to hold my share in the business?)
- Managers - measure performance against targets
- Employees
External stakeholders
Entities that are affected by or interested in the decisions or performance of the company that are outside the company
- Banks - should we lend to the business?
- Suppliers - should we give them trade credit?
- Customers
- Government
Profit and loss account (AO4)
What is the difference if it is a non-profit enterprise?
A summary of the business’ financial performance over a given period of time
Non profit enterprise
- Replacing profit with surplus
- No dividend payments as it’s non-profit
- Usually no tax is paid
Balance Sheet (AO4)
Records the net worth of a business a one moment in time (as at - financial position at that particular date)
What does the Net Asset in the Balance Sheet indicate
Total assets - total liabilities
- One measure of the worth of the business
- If all assets were sold and debts paid, this is the amount left to go to investors
What does Equity represent in the Balance sheet?
Value of the business for shareholders
- Share capital
- Retained earnings
Equity = Net assets
What do we change in a Balance Sheet if it is a non-profit entity?
No share capital so we only have retained earnings for the equity
Depreciation
When the the value of an asset goes down over time
Always draw a table
Year - Book Value - Annual Depreciation
Start from Year 0
Put the Book Value as the Original Value for Year 0
Straight Line Depreciation Method
Each year the asset depreciates by the same amount
Annual depreciation = Original value - Residual Value / The life of the asset
Ex. a delivery company purchases a new machine for $100,000. They will sell it in 4 years for an expected value of $20,000 → this is called the residual value or scrap value
Annual depreciation = (100,000 - 20,000 / 4) = 20,000 dollars per year
Book value at end of year 1 = 100,000 - 20,000 = 80,000
Units of production method
The more an assets is expected to be used in a year, the more depreciation will be recorded
Go year by year
1- Find what the lifetime depreciation is (original value-expected residual value)
2- Find total unit of production
3- (Units of production in that year/total unit of production) x lifetime depreciation
Gross Profit Margin (AO4) (formula booklet)
Gross Profit/Sales Revenue x 100
- The % profit made on just the production and sale of the product
- Does not account for expenses
How to increase GPM
Raising revenue
- Marketing strategies
- Alternative revenue streams
Cutting Cost of Sales
- Cheaper suppliers, materials → in the long run?
- Cheaper labour (e.g. outsourcing)
- Increase productivity (e.g. automation)
Profit Margin (AO4) (formula booklet)
We use profit before interest and tax
(Profit before interest and tax / Sales revenue) x 100
Measures overall profitability - after all costs have been removed - Better indicator than GPM
Increasing Profit Margin
Raising Revenue
Cutting Cost of Sales
Cutting Expenses
- Reduce utilities (e.g. electricity)
- Reduce Managers salaries
Liquidity Ratios : Current Ratio (formula booklet)
Current Assets/Current Liabilities
Current Assets = Cash coming in the next 12 months
Current Liabilities = Cash going out in the next 12 months
It shows to what extent the business can pay its short term debts in the next 12 months
Ideally 1.5-2
If <1.5
- Business may struggle to have enough cash flow to pay its short term debts
If >2
- Holding Current Assets which do not generate profit, e.g. cash in the bank doesn’t generate profit, if we make investments with that money such as buying more machinery we can use it more efficiently
Liquidity Ratios : Acid Test (Quick) Ratio (AO4) (formula booklet)
Current Assets - Stock / Current Liabilities
Stock might not be easily turned into cash, we might not be able to sell it
Ideally 1-1.5
How to improve liquidity?
Holding more Current Assets compared to Current Liabilities
Hold more Cash
- e.g sell some Non-Current Assets
Reduce short-term borrowing
- e.g hold more long-term borrowing
Return on Capital Employed (ROCE) (AO4) (formula booklet)
Profit before interest and tax/Capital Employed x 100
Capital Employed = Total Equity + Non-Current Liabilities
How to improve ROCE?
Increase Profit to increase the ROCE
Make more efficient use of the capital employed → what you invest in a business should be efficient so you can make the same profit by spending less. Investing in the right thing?
Assets, types of assets
Items of monetary value owned by the company
Tangible assets
Intangible assets
Non-current assets
Long-term assets - used for > 12 months
Tangible assets, examples
Physical
Property (land), plants (factory), and equipment (vehicles, machinery)
Intangible assets, examples
Has a value but not physical and are not physical instruments
Marketing-related → trademarks, logos, brand names, slogans, internet domain names
Technology-related → patents : legal rights granted to make, use, sell, or license their invention
Contract-related → franchises, liscensing agreements
Goodwill → value of the customer base and brand image
Current assets, examples
Assets that are likely to be converted into cash within 12 months (before next accounts)
Cash
Stock → will be sold
Debtors → customers who have bought our product and will pay at a certain date in the future, they were given trade credits
