Unit 7

• Whats a balance sheet?


  A snapshot of the firms finances at a fixed point in time
• How to calculate net assets?


  (Net current assets + non current assets) - non current liabilities
• What must be the same in a balance sheets?


  Net assets and total equity
• How to calculate net current assets?


  Current assets - current liabilities
• How to calculate total equity?


  Share capital + reserves
• What are assets?


  Items that a business owns.
• What are liabilities?


  Debts that a business owes
• What are bad debts?

  Debts that are never paid.
• Whats working capital?


  The amount of cash that a business used to pay off it's day to day debts.
• How to calculate working capital?


  Current assets - current liabilities
• Whats overtrading?


  When a business produces too much output so they're unable to pay their suppliers until customers buy the products.
• Whats the net realisable value?


  The amount the company could get by selling stock right now in it's current state.
• Why do businesses calculate depreciation every year?


  To make sure that the assets value on the balance sheet is a true reflection of what the business would get from selling it. This avoids value hitting all at once when the business sells the asset. The amount lost is recorded in the income statement as an expense.
• What are suppliers interested in?


  Working capital and liquidity so they can see how reliable they are in paying bills. They may offer credit based on this.
• What does an income statement show?


  How much money has been coming into the company (revenue) and how much has been leaving (expenses)
• What must PLCs do with their income statements?


  Publish them so they're available to potential shareholders, current shareholders and competitors.
• Why do income statements also have the previous years data?

  Easy comparison to identify trends
• What are the different measures of profit?

  1. Gross profit
  2. Operating Profit
  3. Profit before tax
  4. Profit for the year (after tax)
  5. Retained profit
• What does gross profit show?


  Shows the money made by actually producing and selling products. If low, managers need to reduce the cost by increasing the selling price.
• What does operating profit show?


  Shows the money made from 'normal' business activities. Managers could use this to lower cost. Banks may use this to make decisions on loans.
• Why is profit before and after tax compared?

  To show how much profit is coming from other activities that may not continue in the future.
• What does retained profit show?


  The businesses growth potential.
• What are the two ways a business can use profit?

  These must be balanced to satisfy shareholders.

  1. pay dividends
  2. retain profit
• Whats a disadvantage of financial analysis?

  1. It shows nothing non numerical
  2. external factors aren't reflected
• Whats a disadvantage of a balance sheet?

  1. shows one point in past, hard to predict future
  2. doesn't reflect market/ economy
  3. Don't value intangible assets (staff skill, staff motivation, management experience)
  4. If bad debts included, may be misleading
• Whats the disadvantages of an income statement?

  1. doesn't show the whole story
  2. no useful external factors
  3. doesn't include internal factors eg. staff morale
• Whats the liquidity of an asset?

  How easily it can be turned into cash to buy things
• When is a business insolvent?


  When it doesn't have enough current assets to pay its liabilities
• Whats the current ratio?


  Current assets/ current liabilities
• What does the current ratio show?


  Should be higher than 1. If the value is 1.5 - 2, it's ideal since it can pay off its liabilities. If the value is below 1.5, it may have a liquidity problem which it should include.
• What does return on capital employed show?


  How much money is made by the business compared to how much money has been put into the business. A high ROCE is better.
• Why should ROCE be compared to interest rates?


  It tells the potential investor whether it's worth investing or saving.
• Whats the return on capital employed calculation?


  (Operating profit/ (total equity + non current liabilities)) x 100
• What do efficiency ratios show?


  Shows managers and shareholders how well a business is using their resources.
• What are the 3 important efficiency ratios?

  1. inventory turnover
  2. payables days
  3. receivables days
• What do the inventory turnover ratio compare?

  The cost of all sales a business makes over the year compared to the cost of average stock held.
• What do the inventory turnover ratio show?


  How many times during the year the business has sold all it's stock. This can be improved by holding less stock or increasing sales.
• What does aged stock analysis show?


  Lets managers make sure that old stock gets sold before it becomes obsolete and unsaleable. The stock is listed in age order so the manager can discount old stock and cut down on orders for slow-selling stock.
• Whats the inventory turnover calculation?


  Cost of sales/ cost of av. stock held
• What does the payables days ratio compare?


  The amount a business owes to it's creditors compared to the cost of all the sales a business makes in a year.