7.2 Analysing internal position: financial ratio analysis (Income…
7.2 Analysing internal position: financial ratio analysis
A financial snapshot of the business at a moment of time.
Shows the source of all capital invested in the business for it to be able to operate.
Assets with a lifespan of more than a year.
Assets with a life span of less than a year.
Short-term debts to the business.
Debts that need to repaid in over a years time.
Capital and Reserves
Shows how the assets and business have been financed.
Net Current Assets (Working Capital)
Gives an idea of a firms liquidity.
Liquidity - A businesses ability to pay back their current liabilities.
A business aims to have £2 of current assets for every £1 of current liabilities.
Net Assets (Net Worth)
Shows how much the business is worth when the balance sheet is created.
Should always balance with the total equity
Because any capital, which is the owner’s funds invested into the business must be accounted for.
Balance sheet Key Terms
Items that the business owns.
Non-Current assets that exist physically.
Non-Current assets that do not have a physical presence but still have value.
Stock, work-in-progress, finished goods.
Money owed to the company by its customers.
Debts owed by the business.
Total Equity (Capital)
Funds provided by shareholders to finance the business.
Funds provided by shareholders through the purchase of shares.
Reserves and Retained Earnings
Profit reinvested into the business that has not been paid to shareholders as dividends.
It describes the income and expenditure of a business over a period of time.
It shows the profit or loss made by the business.
Income from sales.
Cost of Sales
Costs linked directly to the production of the product or service.
Gross profit shows how efficiently a business is converting its raw materials into finished products.
Indirect costs that are not directly related to producing the product.
The profit from trading activities minus the costs in carrying out these activities.
Any interest paid to the company on money lent or saved.
Any interest payments on loans.
Profit before tax
Operating Profit minus finance expenses plus income
Profit for the year
Profit before tax minus taxes.
Purposes of the income statement
To measure company performance.
Owners can assess their return on investment.
Abide by legislation
Gives an idea of the profit quality.
See how the profit is being utilised.
Compare with other firms and past trends.
Likely to continue into the future.
Unlikely to continue into the future.