function of financial accounts
to provide information to stakeholder groups on how the business has performed during a given period
Stakeholder interest in financial accounts: Shareholders
position of the business will change their share price and amount of dividends they get
Stakeholder interest in financial accounts: managers
managers make their decisions based off of the financial position of the business
Stakeholder interest in financial accounts: banks
financial accounts give banks a good idea whether the business would be high or low risk
balance sheets definition
a snapshot of a firms worth/financial position at a particular moment in time. shows the assets and liabilities of a business
current assets definition (2 points)
- items that the business owns
- usually held for a short period of time (under 12 months) e.g. cash
long term assets definition (3 points)
- held for over 12 months
- dont get used up in production
- can be physical or non physical
e.g. copyright
current liabilities definition
monies owed by the business that must be paid back within 12 months
e.g. short term loan
non current liabilities
dont have to be paid back within 12 months e.g. long term loan
capital
consists of money raised by selling shares, retained earnings, reserves and share premiums
depreciation
a cost that occurs when a business writes off the net cost of a fixed asset over its useful life
shareholders equity
the money invested or kept within the business by the owners/shareholders
working capital
the finance available for the day-to-day running of a business
Total equity
the sum of the capital, retained earnings and any other assets
net assets
assets - liabilities
2:1 current ration meaning
good working capital management and good liquidity
10:1 current ration meaning
bad working capital management and good liquidity
0.5:1 current ration meaning
poor working capital management and poor liquidity
how do you increase liquidity (5 points)
- sell assets not in use
- try to find a cash account with the highest interest rates
- take out a long term loan to pay off an overdraft
- analyse if you are holding too much stock
- receivables may be too high
what is the threshold to being highly geared
50%
highly geared companies in recessions (2 points)
- interest rates increase therefore interest payments increase leading to higher costs
- people spend less in recessions, therefore less revenue but increased costs leads to big drop in profit
disadvantages of being highly geared (2 points)
- have to pay more for interest
- they are higher risk to banks
advantages of being lowly geared (2 points)
- less of a risk to banks
- loans are easier to get with lower interest rates
how to increase gearing (2 points)
- take out more long term loans
- spend retained profits
