Chapter 3 - Using Financial Data - Mindmap in A Level and IB Business Studies

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Created on: 07-10-15 11:50

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Chapter 3- Using Financial Data
- Main types of accounts
  - Financial accounts
    - Report the transactions of a business
  - Management accounts
    - Analyse and present financial data
    - Help decision making
    - Monitor performance
- Key users of accounts
  - Investors
  - Creditors
  - Customers
  - Lenders
  - Competitors
- Balance Sheets
  - Every financial transaction results in an equal change in assets or liabilities
  - Assets and Liabilities
    - Assets
      - Non-Current Assets
        Owned longer than a year
        
        Allow a business to operate continuously
        Machinery
        
        Buildings
        
        Equiptment
        
        Land
        
        Intanglable non-current assets
        Still have a value
        
        E.g. Good will
        
        Depreciation
        Value on the balance sheet is an actual value of how much they're now worth
        
        Annual depreciation appears as an expense
        
        Untitled
      - Current Assets
        Inventories
        Least liquid
        
        Valued at the cost they were bought
        
        Stock obsolescence
        Value should reflect what could be covered
        
        Trade Receivables
        Normally known as trade debtors
        
        Amounts owed by customers
        
        Late payment is common
        
        Provision should be made for companies not expected to pay
        
        Cash and Cash Equivalents
        Most liquid
        
        Balance sheets shows cash held at period end
        
        Untitled
    - Liabilities
      - Current Liabilities
        Money that is owed short term and paid back within the next twelve months
        
        Trade and Other Payables
        Amounts owed to suppliers
        
        Take all the supplier credit available
        
        Worth comparing level of trade payables
        
        Short Term Borrowings
        Balance on overdraft
        
        Proportion that have to be repaid in next year
        
        Current Tax Liabilities
        Amount owed in tax to HMRC
        
        Corporation tax
        
        Income tax and VAT
        
        Provisions
        Allowences for future costs and liabilities
        
        Based on 'prudence'
        
        Examples
        Potential costs of legal disputes
        
        Costs of reorganisation
      - Non-Current Liabilities
        Amounts that are owed, but not due to be paid in the next year
        
        Equity
        Share Capital
        Cash raised by sale of new shares
        
        Doesn't reflect change in share price value
        
        Retained Earnings
        Untitled
  - Working Capital (Net Current Assets)
    - = Current assets - Current liabilities
    - Provides an indication to whether it can pay short term debts
    - The day-to-day finance used in a business, consisting of current assets minus current liabilities
    - How much working capital?
      - Should be positive
      - E.g.
        Dividends
        
        Payables
        
        Overdraft
    - Causes of Working Capital Problems
      - Failure to control inverntory
      - Poor control of:
        Receivables
        
        Payables
      - Poor control of
  - Calculations
    - Total Current Assets = Inventories + Receivables + Cash
    - Net Current Assets = Total Current Assets - Current Liabilities
    - Net Assets = Non Current Assets + Net Current Assets - Non current Liabilities
    - Total Equity = Share Capital + Reserves
- Income Statement
  - Calculations
    - Gross Profit = Revenue - Cost of Sales
    - Operating Profit = Gross Profit - expenses+- Exceptional Items
    - Profit Before Tax = Operating Profit + Finance Income - Finance Cost
    - Profit For Year = Profit Before Tax - Taxation
  - A formal financial document that summarises a business' trading activities and expenses to show whether the business has made a profit or a loss
  - Analysis
    - Profit Utilisation
      - Depend on long/short term financial objectives
      - How profit after tax is used
        % in Dividends
        
        % in Retained profit
    - Profit Quality
      - Sustainability of profit figure
        % from normal trading activity
        
        % from non standard trading
- Using Financial Data for Comparisons
  - Inter-Firm
    - Between different firms
    - Set ROCE targets
    - E.g. Tesco and ASDA
  - Intra-Firm
    - Within same firm
      - By Product
      - By Branch
  - Year on Year
    - Identify trends
  - Decision Making
    - Act as a constraint
    - Inform
- Strengths and Weaknesses of Financial Data
  - Strengths
    - Plc accounts are audited so should be accurate
    - Detailed quantitative data
    - Ease of comparisons
    - Facilitates ratio analysis
  - Weaknesses
    - Potential for manipulation
    - Need to be considered in corporate/ functional objectives
    - Historical info
    - It's just a financial measure

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Chapter 3 - Using Financial Data

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