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FINANCIAL STRATEGIES AND ACCOUNTS
USING FINANCIAL DATA TO MEASURE AND ASSESS PERFORMANCE
“Money speaks sense in a language all nations understand”
Aphra Baldwin
“Annual income twenty pounds, annual expenditure nineteen and six, result happiness.
Annual income twenty pounds, annual expenditure twenty pounds nought and six,
result misery.”
Charles Dickens
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USING FINANCIAL DATA TO MEASURE AND ASSESS PERFORMANCE
IN THIS TOPIC YOU WILL LEARN ABOUT:
Analysing balance sheets
Analysing income statements
Using financial data for comparisons, trend analysis and decision making
Assessing strengths and weaknesses of financial data in judging performance
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You will need access to the internet to watch this clip
USING FINANCIAL DATA
PLCs have a legal obligation to publish their annual accounts
The format is governed by International Financial Reporting Standards (IFRS)
This format has altered some of the terminology used by UK firms to comply with standard practices across the world
Financial data can be used to assess Performance and Potential
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ANALYSING FINANCIAL DATA
Income Statement(previously referred to as a Trading, profit and loss account)
A formal financial document that summarises a business’ trading activities and expenses to show whether the business has made a profit or a loss
Balance Sheet
A formal financial document that summarises the net worth of a business at a given point in time. It balances net assets with total equity.
BU
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This unit is an introduction to analysing financial data, it is then covered in more detail in the next unit.
INCOME STATEMENT – THE TERMINOLOGY
Revenue Selling price x quantity soldCost of sales Direct costs relating to quantity soldGross profit Profit after cost of sales has been
deductedExpenses Other costs incurred e.g. marketingOperating profit Profit after all other expenses have
been deductedFinance income Money from investmentsFinance cost Costs incurred through debtsProfit before tax Profit after adjustments for profits
from joint ventures or investmentsTaxation Tax deducted as a % of profit before taxProfit for the year Profit after tax has been deducted
INCOME STATEMENT – THE CALCULATIONS
£mRevenue 35400Cost of sales 30100Gross profit 5300Expenses 720Operating profit 4580Finance income 300Finance cost (260)Profit before tax 4620Taxation 1109Profit for the year 3511
35400 – 30100 =
5300
5300 – 720 = 4580
4580 + 300 - 260= 4620
4620 – 1109 = 3511
INCOME STATEMENT – THE LAYOUT
£mRevenue 35400Cost of sales (30100)Gross profit 5300Expenses (720)Operating profit 4580Finance income 300Finance cost (260)Profit before tax 4620Taxation (1109)Profit for the year 3511
The accounts are presented in a single
column
Brackets are used to show that a figure
should be deducted
Brackets are also used to show a negative figure so if the business had made a loss of £2000 this would be shown as
(£2000)
INCOME STATEMENT – FURTHER ANALYSIS
Profit Utilisation How the profit after
tax is used % paid in dividends
to shareholders % reinvested
(retained) in the business
Profit Quality The sustainability of
the profit figure % from normal
trading activities % from non standard
trading activities Sale of an asset Financial income from
an investment
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Profit utilisation will depend upon both long term and
short term financial objectives
You will need access to the internet to watch this clip
What are the benefits of considering profit in the short, medium and long
term?
BALANCE SHEET – THE TERMINOLOGY
Assets Items of value owned by a business
Non – current assets Likely to be kept by the business for more than one
yearVehiclesPremisesMachinery
Current assets Likely to be turned into cash within a year
InventoriesAccounts Receivable (Debtors)Cash and Cash Equivalents
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BALANCE SHEET – THE TERMINOLOGY
Liabilities Money a business owes i.e. debts
Non – current liabilities Debts that the business has more than one
year to repayBank loans
Current liabilities Debts that the business may have to repay
within one yearOverdraftsAccounts Payable (Creditors)
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BALANCE SHEET – THE TERMINOLOGY
Non-current assets Long term or fixed assets ownedThe next 3 headings are all current
assetsInventories The value of stock heldReceivables Cash owing from credit salesCash & cash equivalents Cash in hand or in the bank Total current assets The current assets added togetherCurrent liabilities Money owed to be repaid in the short termNet current liabilities Total current assets – current
liabilitiesNon-current liabilities Long term debtsNet assets The net worth of the business’
assets and liabilities
Share capital Money raised from the sale of shares
Reserves & retained earnings Cumulative profits kept in the business
Total equity The value of shareholders’ funds
BALANCE SHEET – THE CALCULATIONS
£mNon-current assets 19550Inventories 2375Receivables 1170Cash & cash equivalents 2300Total current assets 5845Current liabilities 8160Net current liabilities (2315)Non-current liabilities 6000Net assets 11235Share capital 6000Reserves & retained earnings 5235Total equity 11235
2375 + 1170 + 2300 =
5845
5845 – 8160 = (2315)
19550 + (2315) – 6000
= 11235
6000 + 5235 = 11235Net Assets = Total Equity
BALANCE SHEET – THE LAYOUT£m
Non-current assets 19550Inventories 2375Receivables 1170Cash & cash equivalents 2300Total current assets 5845Current liabilities (8160)Net current liabilities (2315)Non-current liabilities (6000)Net assets 11235Share capital 6000Reserves & retained earnings 5235Total equity 11235
The accounts are presented in a single column
Brackets are used to show that a figure
should be deducted
Brackets are used to show the number
is negative
BALANCE SHEET – FURTHER ANALYSIS
Depreciation Non – current assets are depreciated
Vehicles, machinery and fixtures and fittings This ensures their value as shown in the
balance sheet is a fair reflection of their actual value
The annual depreciation appears as an expense in the income statement
If a machine depreciates by £2500 per year this is the cost of using the machine in that financial year
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BALANCE SHEET – FURTHER ANALYSIS
Working Capital A measure of a firm’s liquidity / ability to
meet day to day expenses Working capital = Current assets – current
liabilities Stated on the balance sheet as net current
liabilities Working capital answers the basic question if
the firm had to pay off all its short term debts could it do so out of its short term cash resources i.e. Inventories, payables and cash
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USING FINANCIAL DATA FOR COMPARISONS
Inter-firm Between different firms Set ROCE targets
Intra-firm Within the same firm
By product By branch
Set ROCE targets Year on Year
Identify trends Decision Making
Financial data will help inform decision making and may even act as a constraint
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These comparisons will allow the firm to
benchmark externally against
competitors or internally .
Helps a business identify internal strengths and weaknesses.
Informs the setting of future objectives.
ASSESSING STRENGTHS AND WEAKNESSES OF FINANCIAL DATA
Strengths PLC accounts are audited and should therefore
be accurate Detailed quantitative data Ease of comparisons Facilitates ratio analysis for meaningful
interpretation Weaknesses
Is just a financial measure What about CSR?
Potential for some manipulation – Window dressing
Need to be considered in the context of corporate and functional objectives
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ACTIVITY – FINANCIAL ACCOUNTS TERMINOLOGY
You have been introduced to a lot of new terminology in this unit, it is important that you are confident with the language of accounts before moving onto the next unit.
1. Draw a mind map to summarise both an income statement and a balance sheet, make sure that all the correct terms are included, with explanations and examples where appropriate.
2. As a class individually draw 2 grids each with 9 squares in it - in one grid put in 9 words to do with an income statement in a random order and in the second grid 9 words related to a balance sheet. Nominate one person or the teacher to call out words or definitions. As they appear on your grid cross them off as if playing bingo.
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