Business 3.7 Topic 2

Balance sheet

Snapshot of businesses assets and its liabilities (what it owes) on a particular day - last day of the financial period

Examples of current assets

Cash balance

Receivables

Inventories

Examples of non-current assets

Land and buildings

Machinery

Goodwill e.g. Brand image and reputation

Examples of current liabilities

Payables

Short-term borrowings

Examples of non-current liabilities

Long-term borrowings

working capital

amount of money available to the business to pay its day-to-day expenses like raw materials and bill.

current assets - current liabilities

income statement

Records income and expenditure over the last year.

Business can then calculate how much profit/loss has been made

What are the 4 types of financial ratios

• Profitability ratios

• Liquidity ratios

• Gearing

• Efficiency rations

What are the 4 profitability ratios

GPM, OPM, PFTYM & ROCE

What is the liquidity ratio

Current ratio- CA/CL

What is the gearing ratio

Proportion of a businesses long-term capital that is funded from debt.

LT measure of liquidity

Gearing calculation- NCL/CE (Total equity + NCL) x 100

What is a lowly geared organisation

0-24%

Easily able to pay off interest if increases.

Shareholders not happy

What is a moderately geared organisation

25-50%

Not relying too heavily on retained profit and borrowing

Where businesses want to be

What is a highly geared organisation

50%+

If interest rates rise, business becomes vulnerable

How can a firm improve gearing

Repay loans

Retain more profits

Issue more shares (ordinary shares)

What are the 3 efficiency ratios

• Receivables days

• Payables days

• Inventory turnover

Limitations of ratios in assessing financial performance

• Doesn’t include non-financial information

• Does not take into account external factors

• Quantitative and not qualitative

Window dressing

When a firms financial situation is manipulated to provide a favourable view on the date on which they are prepared