Analysing the Financial Performance of a Business (AQA GCSE Business): Flashcards
Exam code: 8132
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Why must companies produce financial statements each year?
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Cards in this collection (50)
Why must companies produce financial statements each year?
Companies must submit financial statements to Companies House each year to meet legal requirements.
Managers use financial statements to measure performance and set ________.
Managers use financial statements to measure performance and set objectives.
Why do shareholders use financial statements?
Shareholders use financial statements to assess the performance of their investment.
True or False?
Lenders and suppliers use financial statements to judge the stability of a business.
True.
Employees, suppliers and lenders use financial statements to judge the stability of the business before they commit to it.
Define income statement.
The income statement summarises a business's income and costs and identifies the profit or loss made over a period of time, usually a year.
Define statement of financial position.
The statement of financial position identifies a business's assets and liabilities and the capital used to fund it at a specific point in time.
Define income statement.
An income statement records the income and costs of a business over a period of time, usually one year.
The income statement is also known as the _____________ account.
The income statement is also known as the profit-and-loss account.
How is sales revenue calculated?
Sales revenue is calculated using this formula:
Sales revenue = Price × Quantity
Define cost of sales.
Cost of sales is the cost of producing or buying in the goods actually sold by a business during a time period.
What is another name for cost of sales?
Cost of sales is also known as the cost of goods sold.
How is gross profit calculated?
Gross profit is calculated using this formula:
Gross profit = Sales revenue − Cost of sales
True or False?
Advertising costs are included in the cost of sales.
False.
Advertising is an expense, not a cost of sales. Cost of sales only includes costs such as raw materials, packaging and labour used to produce the goods sold.
In the income statement, expenses are sometimes called _______.
In the income statement, expenses are sometimes called overheads.
How is operating profit calculated?
Operating profit is calculated using this formula:
Operating profit = Gross profit − Expenses
True or False?
The income statement of a limited company must account for corporation tax.
True.
Limited companies pay corporation tax on their profits, so the tax must be deducted in the income statement.
What do profit margins measure?
Profit margins measure how successfully a business converts revenue into profit.
Define gross profit margin.
The gross profit margin is the proportion of revenue that is converted into gross profit.
Gross profit margin = Gross profit ÷ Revenue × 100
Define net profit margin.
The net profit margin is the proportion of revenue that is converted into net profit.
Net profit margin = Net profit ÷ Revenue × 100
Profit margins are expressed as _________, which allows comparisons over time and with other businesses.
Profit margins are expressed as percentages, which allows comparisons over time and with other businesses.
A business has revenue of £124,653 and gross profit of £105,731. What is its gross profit margin?
The gross profit margin is 84.82% (£105,731 ÷ £124,653 × 100).
True or False?
The product with the higher selling price is always the more profitable product.
False.
A higher-priced product may sell fewer units, so its revenue can be lower. It may also have a higher cost of sales.
Why do investors look at profitability?
Investors look at profitability when deciding which business to invest in, because higher profitability usually means higher rewards.
Directors and managers consider profitability when assessing business _____ and setting future objectives.
Directors and managers consider profitability when assessing business success and setting future objectives.
Why might employees be interested in profitability?
Employees may use high profitability to justify requesting higher wages or better working conditions.
True or False?
Managers can use income statements to compare their performance with competitors.
True.
Income statements allow managers to compare performance with competitors and previous years, and to make future forecasts.
What should a business consider first if it is making a loss?
It should consider whether the loss is a short-term or long-term problem, such as a temporary external shock or a lasting change in the market.
Define assets.
Assets are items that are owned by a business.
What are non-current assets?
Non-current assets are items owned by the business in the long term, such as buildings, machinery and vehicles.
True or False?
Non-current assets can be intangible, such as patents or brand value.
True.
Non-current assets include tangible items such as land and intangible items such as patents, goodwill and brand value.
What are current assets?
Current assets are cash and items that can be turned into cash relatively quickly, usually within 12 months.
The four types of current assets are cash in hand, cash in bank, trade _________ and inventory.
The four types of current assets are cash in hand, cash in bank, trade receivables and inventory.
Define liabilities.
Liabilities are items that are owed by a business.
What are current liabilities?
Current liabilities are short-term financial obligations that a business must usually pay within one year, such as trade payables and bank overdrafts.
True or False?
A long-term loan is a current liability.
False.
A long-term loan is a non-current liability because it is repaid over a period longer than twelve months.
What does the statement of financial position show?
It shows the financial structure of a business at a specific point in time, including the capital (equity) used to fund it.
Why is the statement of financial position also called the balance sheet?
It is called the balance sheet because net assets are equal to total equity.
True or False?
A business with a large loan compared with its share capital will find it easy to borrow more.
False.
A business with a large loan may be seen as a lending risk, so future loan applications may be declined.
How can a business judge its current financial performance?
It can compare information from its financial statements with the financial objectives set for the period.
Net profit rose from £2.2m to £2.4m. What is the percentage increase in net profit?
The percentage increase is 9.09% (£0.2m ÷ £2.2m × 100).
Revenue, gross profit, net profit and profit margins can be tracked and compared over __.
Revenue, gross profit, net profit and profit margins can be tracked and compared over time.
True or False?
The year with the highest revenue must also be the year of best overall performance.
False.
Revenue can be high while profit margins are low, so performance should be judged on several measures, such as gross and net profit margins.
When is comparing financial performance with competitors most useful?
It is most useful when competitors are of a similar size, sell similar products and use similar accounting processes.
True or False?
A business can earn the highest revenue in its market but not the highest net profit.
True.
A rival with lower revenue can still earn more net profit and a higher net profit margin, so revenue alone does not show who performed best.
Why do lenders look at the statement of financial position?
Lenders use it to judge the business's solvency and its ability to pay back its debts.
Why are shareholders interested in the income statement?
Shareholders are interested in revenues, costs and profits, business growth and dividend payments.
Suppliers use financial information to decide the level of __________ to offer a business.
Suppliers use financial information to decide the level of trade credit to offer a business.
Why do employees look at a business's financial statements?
Employees want to know whether jobs are at risk and whether profits could support wage increases.
How do tax authorities use financial statements?
Tax authorities use them to check the accuracy of tax returns and assess how much tax a business must pay.
How can the statement of financial position help managers decide how to raise funds?
It shows the capital structure of the business, which helps managers decide whether to raise funds through borrowing or a share issue.
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