Unit 6: Finance

• What do Statements of Financial Position summarize?

  They summarize the financial balances of a business at a specific point in time.
• What are Statements of Financial Position also known as?

  They are also known as Balance Sheets.
• What are the primary components of a Statement of Financial Position?

  The primary components are assets, liabilities, and shareholders’ equity.
• What does a Statement of Financial Position show about a business?

  It shows what a business owns (assets), what it owes (liabilities), and the value of the owners’ investment in the business (equity).
• How are assets defined in a business context?

  Assets are resources owned by a business from which future economic benefits are expected.
• What are the two main categories of assets?

  The two main categories of assets are current assets and non-current assets.
• What are current assets?

  Current assets are short-term assets which can be converted into cash within one year.
• Can you name some examples of current assets?

  Examples of current assets include cash, stock, and debtors.
• What are non-current assets also known as?

  Non-current assets are also known as fixed assets.
• What are non-current assets?

  Non-current assets are long-term investments which cannot be converted into cash easily.
• Can you name some examples of non-current assets?

  Examples of non-current assets include property, plant, and equipment.
• What are liabilities in a business context?

  Liabilities are financial obligations of the business, representing amounts owed to others.
• How are liabilities categorized?

  Liabilities are divided into current liabilities and non-current liabilities.
• What are current liabilities?

  Current liabilities are short-term financial obligations which need to be paid within one year.
• Can you name some examples of current liabilities?

  Examples of current liabilities include creditors, bank overdrafts, and short-term loans.
• What are non-current liabilities?

  Non-current liabilities are long-term obligations which need to be paid over a period exceeding one year.
• Can you name some examples of non-current liabilities?

  Examples of non-current liabilities include long-term loans and mortgages.
• What does shareholders’ equity represent?

  Shareholders’ equity represents the residual interest in the assets of a business after deducting liabilities.
• What are the components of shareholders’ equity?

  Shareholders’ equity includes share capital, retained earnings, and other financial elements.
• What is share capital?

  Share capital is the money that shareholders invest in a business.
• What are retained earnings?

  Retained earnings are the profits that a business has earned but has not paid out to shareholders as dividends.
• How are retained earnings used in a business?

  Retained earnings are reinvested back into the business.
• What is the equation that must be balanced in the Statement of Financial Position?

  • The equation is: Assets = Liabilities + Shareholders’ Equity
  • This means that the value of a company’s assets should be equal to the sum of its liabilities and equity.
• What are profit margins used for in businesses?

  To gauge financial success and understand profitability relative to revenues
• What does the gross profit margin represent?

  The percentage of total sales revenue retained after incurring direct costs of goods sold
• How is the gross profit margin calculated?

  By deducting the cost of goods sold (COGS) from total sales and dividing by total sales
• What does the operating profit margin measure?

  The proportion of revenue left after covering COGS and all operating expenses
• How is the operating profit margin calculated?

  By deducting COGS and operating expenses from total sales and dividing by total sales
• What does the net profit margin indicate?

  How much of each pound of sales a company keeps as earnings after all expenses and taxes
• How is the net profit margin calculated?

  By subtracting all expenses (including taxes and interest) from total sales and dividing by total sales
• Why are profit margins important for businesses?

  They provide insights into the overall health and efficiency of a business
• What do high profit margins indicate about a company?

  That it is more profitable and has better control over its costs
• Who uses profit margins to evaluate a company's earning power?

  Stakeholders, investors, and creditors
• What is one limitation of profit margins?

  They don’t account for a company’s investment assets
• How can a company with low profit margins still be profitable?

  Due to investments in other companies
• Why is it important to consider market share when evaluating profit margins?

  A business with a smaller market share can have a higher profit margin than a larger company
• What are the limitations of using profit margins as a financial metric?

  • Do not account for a company’s investment assets
  • Low profit margins can still indicate profitability due to investments
  • Do not consider the size and market share of the business
  • Should be used as one of many tools for evaluating financial state
• What are the three types of profit margins?

  1. Gross Profit Margin
  2. Operating Profit Margin
  3. Net Profit Margin
• What is an income statement?

  An income statement is a financial document that lists a company’s revenues, costs, and profits or losses over a specific period.
• What is the purpose of an income statement?

  The purpose of an income statement is to show managers and investors whether the company made or lost money during the period under review.