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7.2 Analysing internal position: financial ratio analysis (Income…
7.2 Analysing internal position: financial ratio analysis
Balance Sheet
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.
Non-Current Assets
Assets with a lifespan of more than a year.
Current Assets
Assets with a life span of less than a year.
Current Liabilities
Short-term debts to the business.
Non-Current Liabilities
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.
Current Assets
-
Current Liabilities
Net Assets (Net Worth)
Shows how much the business is worth when the balance sheet is created.
Total Assets
-
Total Liabilities
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
Assets
Items that the business owns.
Tangible Assets
Non-Current assets that exist physically.
Intangible Assets
Non-Current assets that do not have a physical presence but still have value.
Inventories
Stock, work-in-progress, finished goods.
Receivables
Money owed to the company by its customers.
Liabilities
Debts owed by the business.
Total Equity (Capital)
Funds provided by shareholders to finance the business.
Share Capital
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.
Income Statement
It describes the income and expenditure of a business over a period of time.
It shows the profit or loss made by the business.
Revenue
Income from sales.
Cost of Sales
Costs linked directly to the production of the product or service.
Gross Profit
Gross profit shows how efficiently a business is converting its raw materials into finished products.
Expenses (Overheads)
Indirect costs that are not directly related to producing the product.
Operating Profit
The profit from trading activities minus the costs in carrying out these activities.
Finance income
Any interest paid to the company on money lent or saved.
Finance expenses
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.
Profit Quality
High Quality
Likely to continue into the future.
Low Quality
Unlikely to continue into the future.