What is the SOCI?
- Known as the profit and loss account
What are the key points of SOCI
- Gross prof
- Operating profit
- Profit for the year
How do you calculate gross profit ?
Revenue - Cost Of Sales
How do you calculate operating profit ?
Gross profit - Expenses (eg, administrative costs)
How do you calculate profit for the year ?
- Operating profit - interest
What are some stakeholders that may be interested in the SOCI ?
- Gov
- Employees
- Shareholders
- Suppliers
Why would the gov be interested of a companies SOCI?
- To determine tax rates which a firm must pay
Why would employees be interested of a companies SOCI?
- Increases in profit may lead to wage increases
- Job stability
Why would shareholders be interested of a companies SOCI?
- Interested in profits earned
- How may profits be paid out in dividends
- Growth of the company as a result in increases in levels of profit
Why would suppliers be interested of a companies SOCI?
- To determine levels of trade credit allocated for the firm
- High profits may lead to higher trade credit supplied.
What is a balance sheet
- A snapshot of a businesses liquidity
What key stakeholders are interested in a firms balance sheet
- Shareholders
- Creditors
Why are shareholders interested in a firms balance sheet
- To have a rough valuation of the businesses liquidity
- To see whether or not the firm is financially stable
Why are creditors interested in a firms balance sheets
- Can judge a firms solvency, determine how much trade credit can be allocated for a firm
What are the two kinds of ratio analysis ?
- Current ratio
- Acid test ratio
What is current ratio
- Current assets / current liabilities
How do you calculate acid test ratio
- Current Assets - Inventory / current liabilities
What is the gearing ratio
- Examines the proportion of the businesses capital structure that has been financed via debt
How are some ways firms can improve liquidity?
- Increase trade agreement with supplier
- Reduce customer credit terms
- Overdraft
What is the calculation of gearing ratio
- Non Current Liabilities / (Non-Current Liabilities + Total Equity) X 100
What does a gearing ratio of above 50% (>50) infer?, VICE versa
- Business is highly reliant on debt
Why may be high gearing be good in some circumstances ?
- Debt may be a cheaper source of finance than dividends
- Less capital required to be invested by shareholders
Why may be high gearing be bad for a firm
- Risky if interest rates fall or if profits fall
What are some benefits of low gearing
- Business has the capacity to add debt if it needs to
- Shareholders can make key decisions rather than banks
