GCE Business Studies - Final Accounts. Evaluating the usefulness of financial information to a business.
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5 Terms
1
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Profitability
Adv:
\-Can be compared to capital invested to see level of return & compare to interest rates in the bank.
\-Helps identify areas of strength or areas of concern so corrective action can be taken.
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Disadv:
\-Assessing profitability for a single year does not allow user to assess trends anf therefore informed decision must be made about business performance .
\-Must compare to previous years or industry average
\-Can be compared to capital invested to see level of return & compare to interest rates in the bank.
\-Helps identify areas of strength or areas of concern so corrective action can be taken.
\
Disadv:
\-Assessing profitability for a single year does not allow user to assess trends anf therefore informed decision must be made about business performance .
\-Must compare to previous years or industry average
2
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Gearing Ratio
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Adv:
\-Assesses dependency on borrowing (non-current liabilities) and helps see if business is too dependant on borrowings to finance business .
\-Helps them to see if they can obtain further borrowings from the bank.
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Disadv:
\-Based on historic data and not indication of current borrowings
Adv:
\-Assesses dependency on borrowing (non-current liabilities) and helps see if business is too dependant on borrowings to finance business .
\-Helps them to see if they can obtain further borrowings from the bank.
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Disadv:
\-Based on historic data and not indication of current borrowings
3
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Liquidity
Adv:
\-Assesses ability to pay short term debts. Ideal ratio of 1.5-2:1. If ratio is below this then business may struggle to pay debts and seen as high risk to investors. If this is above then money is being mismanaged and not being put to effective use by business.
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Disadv:
\-Accounts can be manipulated so business appears to be in better financial position than actually is. Not true reflection of performance. (only applicable for potential buyer)
\-Assesses ability to pay short term debts. Ideal ratio of 1.5-2:1. If ratio is below this then business may struggle to pay debts and seen as high risk to investors. If this is above then money is being mismanaged and not being put to effective use by business.
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Disadv:
\-Accounts can be manipulated so business appears to be in better financial position than actually is. Not true reflection of performance. (only applicable for potential buyer)
4
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Expenses
Adv:
\-Assess level of expenses and see if they can be lowered. High expenses is high risk
\-Assess level of expenses and see if they can be lowered. High expenses is high risk
5
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Purchasing price of business
Adv:
\-Allows owners to set buying price of business and assess if the price is fair
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Disadv:
\-Only considers qualitative data and not quantitative data. May be other factors that influence business failure
\-Allows owners to set buying price of business and assess if the price is fair
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Disadv:
\-Only considers qualitative data and not quantitative data. May be other factors that influence business failure