Business- Booklet F

What is a Statement Of Comprehensive Income?

Produced at the end of the year, includes a statement of profit & loss. Records sales revenue & expenses.

Define Gross Profit.

Amount of money made after the cost of sales are taken away.

Equation for Gross Profit.

Net Sales - Costs of goods sold

Define Net Assets

Measures of profit once operating costs (taxes) have been taken away.

Equation for Net Assets

)Current + Non current assets) - (Current + Non current liabiliti

What are Non-current assets?

Those that are used for longer than a year, tangible & intangible.

What are current assets?

Short term assets, sold/used within a year.

What are Current Liabilities?

Debts the business owes within a year.

What are Non current assets?

Long term debts, more than a year.

Define Capital Employed.

Total amount of money made.

How to calculate Capital Employed?

Capital + Retained profit

What is Depreciation?

Cost of physical asset over its useful life expectancy, value being lost over time.

What is Straight-line depriciation?

Reduces the value of an asset by the same amount each year.

Equation for Straight-line deprication.

Historic Value - Residual Value
Expected Life

What is Historic Value?

Cost of asset when its first purchased.

What is Expected Life?

How long the asset is expected to be used within the business.

What is Reducing Balance Deprication?

Loss of value as being higher during the early years.

Equation for Reducing Balance Deprication.

Take historic value & reduce by 20% each year.

Define costs of goods sold.

All the costs directly related to the production of goods.

Equation for Costs Of Goods Sold.

Opening Inventory + Purchases - Closing Balance

Define Expenses.

Costs associated with operating the business e.g rent, salaries, advertisement.

How to Improve Profitability?

1. Reduce Salaries
2. Increase Prices
3. Advertise more
4. Increase volume of sales

What is a statement of financial position?

Shows a business networth at a particular point in time, what a business owes/owns.

Define Trade Receivables.

Debts made by the sales of goods/services.

Define Trade Payables.

Debts made by purchasing goods/services.

Equation for Working Capital

Current Assets - Current Liabilities

What is Profitability Ratio?

What is Gross Profit Margin?

Enables a business to work out the gross profit on goods after deducting their costs. Measures as a percentage.

Equation for Gross Profit Margin.

Gross profit x 100
Revenue

What is Net Profit Margin?

Meaures the profit made by the business after all expenses have been deducted.

Equation for Net Profit Margin.

Net Profit. x100
Revenue

What is Mark-up?

Is the percentage added to the cost to create the selling price. Larger the mark up, greater the gross profit.

Equation for Mark Up.

Gross Profit. x100
Cost of sales

Define Return On Capital Employed.

Investors/owners put capital into a business in the hope that this will make a profit.

Equation for Return On Capital Employed.

Net Profit. x100
Capital Employed

Why are liquidity ratios important?

Liquidity ratios allow you to measure the ability of a business to be able to pay its short term debts.

Define current ratio.

Measures a business assets compared to its liabilities.

Equation for Current Ratio.

Current Assets - Current Liabilities

Define Liquid Capital Ratio.

Removes inventory from the calculation as this may be difficult to quickly turn into cash.

Equation for Liquid Capital Ratio.

Current Assets - Inventory
Current Liabilities

Why are Efficiency Ratios Important?

Enables a buisness to measure how effiecently it manages its finances & uses its inventory.

Define Trade Recievable days

Ratio measures the average number of days debtors take to pay invoices. Higher number days are bad mostly.

Equation for Trade Payable Days

Trade Recievables x 365
Credit Sales

Define Trade Payable Days.

Ratio measures the average number of days for the business to pay its suppliers.

Equation for Trade Payable Days.

Trade Payables x365
Credit Purchases

Define Inventory Turnover days.

Ratio measures the average number of days a business holds its stock, able to know when to restock.

Equation for Inventory Turnover days.

Average Number x365
Cost of sales

What are limitations of efficiency ratios?

1. Ratio data may change
2. Highlights problems but doesnt explain them
3. Ratios are averages, not exact