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43 Cards in this Set

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  • Back

What is the balance sheet?

Produced at the end of financial year


Provides the summary of business assets, liabilities and capital.

What are assets?

Resources owned by the business.


Examples: buildings machinery stock and cash equipment.

What are liabilities?

The money owed by the business-its debts


Examples- overdraft loan mortgage trade credit

What is capital?

The money put into the business by its owners


Examples: investment share capital retained profit

What should the statement of financial position do?

Balance

What does the value of assets (owns) equal?

Liabilities and capital (owes)

What is the formula for assets?

Capital + liabilities

What are non current assets?

The long term resources used repeatedly by the business over a period of time. (Fixed assets). E.g. buildings or equipment.

What are current assets?

Assets that will be changed into cash within 12 months.


Theyre liquid assets.


The liquidity is how easily its converted into cash.


Examples:


Inventories


Trade and other recieveables


- cash or cash equivialents.


- debt to debtors

What is the formula for total assets?

Non current assets + current assets

What are current liabilities?

Any money owed by a business that must be repaid within one year.


Examples:


Loans/borrowing


Trades and other payables- money owed to suppliers


Current tax liabilities.- money owed to tax authorities.


What are non currenr liabilities?

Non current liabilities relate to long term loans and any other money owed by business that doesnt have to be repaid for at least one year.


Long term bank loans, mortages and company pensions are examples


What are intangible assets?

Non physical costs such as customers lists, franchising agreements and brand names.

Whats the formula for total liabilities?

Current liabilities + non current liabilities

What is the formula for net assets?

Total assets - total liabilities

What is the formula for total equity?

Shareholders equity + share capital + retained earnings.

What can measure liquidity of a business?

Balance sheets

What must businesses be able to reach?

Its short term debts


So it must have enough liquid resources to pay immediate bills

What are the two ratios that can measure liquidity?

Current ratio


Acid test ratio

What is current ratio?

Ratio used to assess if the business has enough resources to meet any of the debts that might arise in the next 12 months.

Whats the formula for current ratio?

Current assets ÷ current liabilities

Whats the explanation of current ratio?

A business is regarded having sufficient liquid resources if the current ratio is between 1.5:1 and 2:1


If a ratio is below 1.5:1 the business doesnt have enough working capital


- the business could be over


- borrowing or overtrading


If the ratio is above 2:1 its suggested too much money is tied up unproductively


- the business has too much money held unproductively


- money in stocks for example not earning any return.

What is acid test ratio?

A more severe ratio used to assess if the business has enough resources to meet any of the debts that might arise in the next 12 months.


Excludes stocks from current assets.

What is the formula acid test ratio?

Current assets - inventories ÷ current liabilities.

Whats the explanation of acid test ratio?

A business is regarded as having a good acid test ratio if its greater than one


If the ratio is less than 1.1 it means current assets in minis stock do not cover its current liabilities.


There are always deviations from this through dependant on the industries and business type.


Retailers with fast cash flow may be comfortable at one.

What is the explanation of working capital?

- amount of money needed to pay for the day to day trading of the business.


Money needed to pay for expenses such as wages, electricity, gas, componants of products and raw materials


Money left over after all current debts are paid

What is the formula for working capital?

Current assets - current liabilities

What are current assets?

Relatively liquid asssets that are easily changed to cash (cash, inventories, money owed from debtors

What are current liabilities?

Money owed by the business which needs to be paid in the short term (to the bank, creditors, government tax, shareholders dividends)

Why can working capital vary and change between businesses?

1. The size of the business


2. The stock levels of the business


3. The debtors and creditors of the business

Who has large working capital?

Larger businesses that need a large amount of working capital for stock, trade credit, and cash in order to fulfil large scales e.g retail business.


- businesses that need to hold stocks levels.


- businesses that have to buy stock on trade credit, wait for a long time before being paid for finished goods e.g. a builder. They owe a lot to their creditors; and their debtors owe them for some time.

What businesses need small working capital?

- businesses that adopt just in time techniques.


- at the other extreme, supermarkets may have negative working capital as they buy stock from supplier not to repay them til 30 days but they sell stock in store before. So their current assets are less than liabilities. They owe to their creditors but the debtors owe them very little.

What are implications of keeping too little working capital (current assets too low and current liabilities too high)?

- not enough raw materials to fulfil production


- not enough cash in the business to pay bills on time


If its has borrowed too much on trade credit, it owes too much and maybe unable to pay its invoices.

What are the implications of keeping too much working capital (current assets too high and current liabilities too low)?

- Is keeping a large amount of costly stocks. This is expensive to store, insecure and liable to shrinkage.


- too much cash in the business which is not earning interest, being used to pay debts or invest.


What are the ways to improve liquidity?

- overdraft facilities


- negociate additional short or long term loans.


- encourage cash sales and sell out of stock


- sales and lease back.


- only make essential purchases


- extend credit with selected suppliers.


- reduce personal drawings from the business.


- introduce fresh capital

What is overdraft facilities?

Increasing cash by borrowing money through minus numbers in account.


Problems- if theres already a limit then it has to negociate with bank to increase limit.

What is negociating additonal short or long term loans?

- short term- inject extra cash


- long term- money needed for long period.


- pay back in installments over long period help with cash flow


- if business is known to be struggling banks/money, lenders may be reluctant.

What is encourage cash sales and sell of stock?

- generate cash by offerring large discounts to pay in customers.


- may be possible to sell stocks of raw materials, compentants etc


- can reduce stock but the danger is the stock will not be available to make products that are required for sale.

What is sales and leaseback?

- assets can be sold to a specialist in a market. The assets are then leased back to the seller.


- this means that cash can be raised and the business can continue to use assets.


- takes ages to set up agreements.


- expensive way to fund assets in long term.

What is only make essential purchases?

- a business should only buy resources for cash when it absoulutly has to.


- a business may be simply delay payments. It then keeps this cash in business for longer period of time.


- it will only make payments when its put under pressure to do so by creditors.

What is extend credit with selected supplies?

- a business can save cash if it delays paying suppliers for goods and services already brought.


However delaying for too long could mean that suppliers withdraw their credit facilities or refuse to deliever goods in the future.

What is reduced personal drawings from the business?

Owners that regullarly take cash from the business for their own personal use could attempt to take less

What is introduces fresh capital?

- owners may be able to provide some new capital to improve cash flow.


- small businesses may be able to get friends/relatives to invest


- large businesses can sell their shares to raise fresh capital


- likely to come down to owners to raise capital