Balance sheet
A financial statement recording the assets and liabilities of a business on a particular day at the end of an accounting period
Income Statement
This measure the business’ performance (income and costs) over a given time period
What’s on a firm’s balance sheet?
Assets
Liabilities
Capital
Working Capital
The money a business has available to run it day-to-day operations
Working Capital equation
Working capital = current assets - current liabilities
Importance of working capital
To pay for their day-to-day bills
When there are significant time lags
Usefulness of a balance sheet
Compare different firms of the same size in the same industry
Trend analysis
Shows firm what they are able to afford
Factors influencing a firm’s financial performance
Economic climate
New/strong competition
Supplier/production/quality issue
A change in the firm’s objectives
Withdrawal from a market
Window dressing
The manipulation of financial accounts by a business to improve the appearance of its performance
Goodwill
Intangible assets that accounts for the excess purchase price of another company. E.g. brand loyalty and brand name
Income statement
A historical record of a firms income and expenditure of a business over a period of time
Gross profit
The profit made after costs of sales have been deducted from revenue
Gross profit equation
Gross Profit = Sales Revenue - Cost of goods sold
Operating profit
The profit made after admin and distribution costs have been deducted from gross profit
Operating profit equation
OP = Gross Profit - Expenses
Net profit before tax
The profit left after all expenses have been paid
Net profit before tax equation
NPBT = OP - financial expenses
Profit for the year
The profit the firm has left after tax has been deducted
PFTY equation
PFTY = Profit before tax - tax
Different types of ratio
Liquidity ratios
Efficiency ratios
Profitability ratios
Liquidity ratios
Refers to how easy the firm could pay all of its short term debts
Current Ratio
Assesses whether a business has sufficient cash to be able to pay its short term debts
Current Ratio equation
Current Ratio = Current Assets / Current Liabilities
Improving Current Ratio
Increase current assets
Reducing trade credit terms
Be ensuring that receivables are received quickly
Acid test ratio
More severe test of firms capability to meet short term debts
Acid test ratio equation
Acid test = (current assets - stock) / Current liabilities
Inventory turnover
How many times in a trading year a firm sells the value of their stock
Inventory turnover equation
IT = Cost of goods sold / closing stock
Improving inventory turnover
Sell off obsolete stock
Introducing lean production
Rationalise the product range to reduce stock-holding requirements
Receivable days
How long it takes receivables to pay
Receivables days equation
Receivables / sales revenue x 365