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81 Cards in this Set

  • Front
  • Back

What is liabilities?

are debts that need to be paid off in a year

What is assets?

are things that the business owns

What is non current asset?

Asset the business is likely to keep for more than a year.

what is non current liabilities?

Debt business pay over a long period of time

What is balance sheet?

Is a list of assets and liabilities that a business has at a fixed point in time.

What are examples of assets?

Receivable: money owed by other companies.



Inventries: are stuff that will be sold to customers.

What is working capital?

The amount of cash a business has available to pay day to day debts.

What does more workig capital mean?

it means more liquid money (money able to pay short term debt)

How to calculate working capital?

Working capital = current asset - current liabilities

What is the disadvantage of inventries being high?

inventries need to be turned to cash before a business can spend it.

What are use of non-current asset?

non current asset can be used for making sales possible (e.g.machinery)

WHat is fixed capital?

Money used to buy non current asset and its day to day expenditure for sales (e.g. factories and equipment).

Why you need capital expenditure?

to start up


to grow


to replace worn equipment



What is capital expenditure on balance sheet?

Its the non current assets.

What is a debtors?

when people owe money to the firm

Importance of controlling Debtors?

so the business can keep track of money thats been You cant rely on the debtors




You cant rely on the debtors


You cant rely on the debtors

Importance of stock (inventries)

too much stock mean money tied up in stock rather than working for the company



too little stock will lose sales as you cant supply enough goods.

what is net realisable value?

Its the amount the company could get from selling stock right now at its current state. (rather than finished product)

What does it mean if realisable value is lower than cost value?

means business pays lower for the stock.

What is asset depreciate?

when asset lose value over time. (longer its kept the less its worth)

What is delreciation?

The drop in value of a business over time

Why business need to calculate depreciation?

to see a true reflection of what the business get from selling



depreciation avoid the value hitting all at once when asset is sold



to compare financial year easily

What is share capital?

Money shareholders have invested in the business

What are reserves?

profit from previous year to be reclaimed to finance in the future.

Profit/loss account

money kept back from the current years profit. (net profit)

What is gross profit?

Revenue minus the cost of sales

What is operating profit?

Gross profit (revenues - cost of sales) - operating expenses.

What is retained profit?

Whats left from profit after tax and once the share dividend is paid off to the share holders.

What does Gross profit show?

Shows the money being made from making and selling the product.

What happens when gross profit is low?

Manager may need to reduce cost of making or increase selling price.

What does Operating profit show?

Shows the money made from normal business operations.

What happens when operating profit is low?

If lower than gross profit then it show company operating expenses is weak and manager need to reduce these expenses.




Operating profit is used by banker and investors to see the risk of lending money.

What does the comparison of profit before tax and operating profit show?

It shows if income or expenses are coming from other activities (selling or buying building) than normal activities (selling or making goods)

What does profit tax tell you?

Tells you if the company is profitable or not.




- shareholders/investers look at these figures before investing their money.

What does retained profit show?

How much internal finance the company has available to invest which shows how strong the growth potential is.

How to calculate Gross Profit?

Revenue - cost of sales

How to calculate Operating profit?

Gross profit - operating expences

How to calculate Profit before tax?

Operating profit - other expenses

How to calculate Profit after tax?

Profit before tax - tax

How to calculate retained profit?

Profit after tax - dividend

How is financial analysis useful for decision making?

- can be used to compare business current performance to previous ones.




- can help compare business with its competitors performance.




-help with decision based on financial strength and weakness (e.g. reduce dividend to retain more profit, if business growth is slow).

Disadvantages of financial analysis?

- its only numerical data and ignores qualitative data




-internal factors don`t appear like quality of staff, market share or productivity levels.




- external factor that don`t appear are economic or market situation and doesn`t tell what competitors are tending to do.

What is a balance sheet?

Is a statement about a point in the past that may not help predict the future.

Disadvantage of balance sheet?

- doesn't give clue about the market or the economy that the business is trading in




-only value some intangible asset like brand recently purchased y company and not like staff skills or motivation of staff or management experience.




- bad debt seen as an asset which could be misleading.

Advantage of income statement?

- help when assessing the companies performance




- good to use both income statement and balance sheet to assess business financial performance.

Disadvantages of income statement?

- Doesn't include external factors like market demand (useful for forecasting future revenue and profit)




- Doesn't include internal factors like staff morale (useful in determining staff productivity and profitability).

What is liquidity of an asset?

Its how easily it can be turned into cash and used to buy things.

What are examples of liquid?

Cash is an example




- factories are not liquid.

How can liquidity be improved?

- decrease stock levels




- speed up collection of debt owed to businesses




- slow payment to creditors (suppliers)



What does a liquidity ratio tell you?

It tells you how able is a business to pay its debts.

How to calculate Current ratio/ working capital ratio?

Current ratio= Current asset / current liabilities

What is (ROCE) return on capital employed?

It is a profitability ratio which shows the profit margin.

How to calculate Return on capital employed?

ROCE (%) = Operating profit / (total equity + non-current liabilities)




+ TOTAL EQUITY AND NON CURRENT LIABILITIES IS ON BALANCE SHEET


+ OPERATING PROFIT IS ON INCOME STATEMENT.

What does return on capital employed tell you?

How much money is made and how money is put into the business




the higher the ROCE the better

How to calculate Inventory turnover ratio?

Inventory turnover ratio = Cost of sales (found on income statement) / Cost of average stock held (on balance sheet)




-sometimes cost of sales written as cost of goods sold

What does the inventory turnover ratio tell you?

- It tells you how many times the business sold all its stock in a year.

How to calculate payables days?

Payables days = (Payables / cost of sales) x 365

What does the payable days tell you?

It tell you how how many days it take for firm to pay for goods it buys in credit from suppliers.




firm can use it to maximise cash flow.

How to calculate Recievable days?

Recievable days = Recievable (on balance sheet) / Sales revenue ( on income statement)

What is receivable days?

Is the amount of days the firm has to wait to be payed for goods it sold on credit.

How to calculate Gearing?

Gearing (%) = Non current liabilities / (total equity + non current liabilities) x 100

What is Gearing?

Its ratio which tell where the business finance comes from. (e.g. what proportion come from non-current asset (longterm debt).

What does more than 50% of gearing tell you?

More than 50% of gearing show that more than half of the business finance come from the long term debt.




-25% to 50% is standard as its evenly spaced




- below 25% means less than quarter come from long term debt.

Effect of interest rate on gearing?

- if high interest mean less money borrowed so low gearing




-if low interest mean more money borrowed so high non current liabilities so high gearing.

What are rewards of gearing?

- extra money for expansion which lead to increase in profit




-to gain competitive advantage as it can become market leader




-if low interest rate then gearing is very little risky

What are drawbacks of gearing?

- since its borrowing the business may not be able to payback




- might not make enough profit to payback loan




- interest rate may play a major role in repayment.

Gearing rewards for shareholder?

- since high gearing mean more profit the shareholders would expect more dividend.




- also increase in share price as the company will be expanding

Gearing drawback for share holders?

- business may fail even after expansion




- business may not be able to afford repayment so money invested by shareholder is wasted. when firm goes through Liquidation.

Advantages of ratio analysis?

- good way of looking at business performance




- ratio analysis ca help with decision making (e.g. payable ratio is low may negotiate longer credit period).




- help investors to decide whether to invest or not.

Disadvantages of ratio analysis?

- only numerical value that doesn't give in-depth information about the business (e.g. internal strength like quality of staff...)




-future changes not shown like technological advancement.




-ratio only compares past and present so not useful for newly business which established recently.





What is Core competences?

Core competence is features of a business which makes the business unique.




- this gives them competitive advantages and it can be any feature that makes the business different.

How is Core competences spotted?

Core competences is something that is really hard for rivals to copy and its not something taht is expected of you like good customer service.




This is why it give you extra advancement against your competitors.




Also a firm must be able to change core competences to meet demand and changes.

What is used to accurately assess business performance?

The Kaplan and Norton Balanced Scorecard model.

What is Kaplan and norton Balanced Scorecard model?

- It considers the 4 different perspectives such as Financial, Customer, Internal Business process and Learning and growth.




-Also analysis each section.

The financial perspective in the Kaplan and Norton Balanced Scorecard model?

Question: Create value for shareholders




- increase profitability by measuring sale growth and increase ROCE BY 3% (Return on capital employed)




-increase effeciency and promote more

The internal Business process perspective in Kaplan and Norton Balanced Scorecard model?

Question: How to improve process?




- improve efficiency


- by measure cost per unit, capacity utilisation, productivity.




-increase productivity by a percentage and try different method of production.

The learning and growth perspective in Kaplan and Norton Balanced Scorecard model?

Question asked to department: How we can continue to grow and improve?




- by increase employee development




- done by staff training

The customer perspective in Kaplan and Norton Balanced Scorecard model?

What do customers value abuot us:




- improve customer loyalty


- increase market share so attract new customers




-improve quality of product

What does the Elkington Triple Bottom line model measure?

It measures sustainablity by looking at three areas ( profit, people, planet)

How does the Elkington Triple Bottom line model look like?

- the point in the middle is ideal balance of sustainability.

- the point in the middle is ideal balance of sustainability.

How do business use Elkington Triple Bottom line model?

Business set objectives base on taking into consideration each of these areas.