Statement of comprehensive income
shows revenue and costs over the course of a period of time
How do you calculate gross, operating and net profit
gross = revenue - cost of sales
operating = gross profit - fixed overheads
net = operating profit - financing costs (interest and tax)
statement of financial position
shows the value of a businesses assets and liabilities on a specific date
Non current assets
long term assets (buildings, machinery)
Current assets
short term assets (stock, receivables)
Current liabilities
short term debts (payables, mortgages)
Non current liabilities
long term debts (loans, mortgages)
Total equity
total investment into the business
(retained profits + share capital)
Current ratio
current assets / current liabilities
Acid test ration
current assets - inventories / current liabilities
Capital employed
all available finance for a business
total equity + non current liabilities
liquidity
the ease in which assets can be converted into cash
measured by current and acid test ratio
benefits of high gearing
- less capital required to be invested by stakeholders
- debt relatively cheap source of finance
- easy to pay interest if profits and cash flows areb strong
benefits of low gearing
- less risk of defaulting on debts
- shareholders rather than debt providers ‘call the shots’
- business has the capacity to add debt if required
what does current assets measure
the companies ability to pay short term obligations due in a year
lower is a higher risk
high is not using their assets efficiently
what does acid test ratio measure
indicates a firms ability to pay immediate liabilities
less than 1/low = struggle to pay them
over 1/high = can pay them
