A* revision notes covers all the content 3.7- internal analysis, uses a myriad of resources: cgp revision guide, youtube, bizconsesh seneca,. Start revising now and secure those grades. A* analysis and evaluation
Internal analysis 3.7
Balance sheets are lists of assets and liabilities. LTD & PLC – legally publish
§ Balance sheets are a snapshot of a firms finances at a fixed point in time.
§ They show the value of all the business’ assets (the things that belong to the business, including cash in the bank)
and liabilities (the money business owes). They also show the value of all the capital (money invested in the business)
and the source of that capital (loans, shares or retained profits) – so they show where the money’s come from as well
as whats being done with it
§ The net assets value (total fixed assets- total current and non-current (long term) liabilities is always the same as
‘total equity’ value- the total of all the money that’s been put into the business- balance sheets- they balance
Current assets: Non- current asset (fixed Current liability- s/t thing Non- current liability- l/t
asset) – l/t thing you own you owe thing you owe
Short term thing you own
§ Property/ factory § Creditors (trade credit, § Bank loan
§ Cash bills, rent, overdraft) § Mortgage
§ Land/ vehicles
§ Stock. Debtors/
receivables
Assets are the things the business owns:
Businesses can use capital to buy assets that will generate more revenue in the future- investment
§ Assets (machinery and stock) provide a financial benefit to the business, given a monetary value on the balance
sheet. Can be classified as non- current assets (fixed assets) or current assets
§ Non- current assets are assets that the business is likely to keep for more than one year e.g. property, land,
production equipment, desks and computers. The ‘total non – current assets’ value on the BS is the combined value
of all the business’ non-current assets. often lose value over time, so they’re worth less every year= depreciation.
Businesses should factor in depreciation to give a realistic value of their non – current assets on the balance sheet.
§ Current assets are assets that the business is likely to exchange for cash within the accounting year, before the next
balance sheet is made. All the current assets are added together to give the ‘total current assets’ value on the
balance sheet
§ Current assets include receivables (money owed to the business) and inventories or materials that will be used to
make products , that will be sold to customers)
§ The business’ current and non- current assets are added together then current and non-current liabilities are
deducted to give the figure for ‘net assets’ on the balance sheet
Liabilities are debts the business owes
§ Current liabilities are debts which need to be paid off within a year. They include overdrafts, taxes due to be paid,
payables, and dividends due to be paid to shareholders. Total current liabilities are deducted from total fixed and
current assets to give the value of assets employed
§ Non- current liabilities are debts that the business will pay off over several years e.g. mortgages and loans
Bad debts are debts that debtors won’t ever pay
§ Sometimes debtors default on their payments- debts which don’t get paid are ‘’bad debts’’-
§ Bad debts can’t be included on the balance sheet as an asset- as they don’t get money for them
§ Puts these as an expense on the profit and loss account- shows the business has lost money
Tangible fixed assets= total fixed assets- intangible assets
Working capital is the finance available for day to day spending
§ It’s the amount of cash that the business has available to pay tis day to day debts. The more working capital – the
more liquid
§ Working capital= net current assets
§ Working capital shouldn’t be tied up in inventories or receivables- cant use these pay their current liabilities until
they’re turned into cash
§ Businesses need enough cash to pay s/t debts- shouldn’t have too much cash- opportunities
§ Businesses with a long cash flow cycle need more cash as they have to wait for money to come in
§ Firms need more cash when inflation is high
§ When a business expands, in needs more cash to avoid overtrading- expanding too quickly that the business
can’t afford to pay its suppliers until it gets paid by customers
Liquidity ratio shows how much money is available to pay the bills
§ Business that doesn’t have enough current assets to pay its liabilities when they are due is insolvent. It either has
to quickly find money to pay them, cease trading or go into liquidation
§ Liquidity can be improved by decreasing stock level, speeding up collection of debts, or slowing down payments
to creditors
§ A liquidity ratio shows how solvent a business is
§ 1.5 – 2= good, healthy
§ >2, unused cash reserved that could productively be invested to increase profitability or given to
shareholders as dividends
Low liquidity ratios Suggest business may have difficulty in paying its s/t debts, bills especially If stock cannot be sold
quickly
§ More working capital may be needed
§ Risks should be assessed and action taken
High liquidity ratios:
§ Suggest business Is liquid
§ Cash could be invested to produce a return
, Businesses need finance for capital expenditure
§ Fixed capital (capital expenditure) means money used to buy non- current assets. These are thing used over and
over again to product goods – factories, equipment
§ Businesses need capital expenditure to start up, grow and replace worn out equipment. Must set aside enough
money to stop non- current assets from wearing out and then decide how much money to invest in growth=
allocating capital expenditure
§ Capital expenditure= non -current assets
§ Capital employed: All l/t liabilities that don’t have to be paid back by a certain time e.g. shareholder/ investor
funds, retained profit
Shareholder funds:
§ Includes money involved in buying shares
§ Liability as the business is a separate legal entity, owes money to shareholders
Stock is valued at cost or at net realisable value- whichevers lower
§ Accounting conventions say that stock values must be realisable. The net realisable value is the amount the company
could get by selling the stock right now in its current state (raw materials or finished products)
§ The realisable value might be lower than cost value or may be higher
§ Company must record stock value in its account as the lower value out of cost or net realisable value
Accounts reflect the depreciation of assets:
§ Businesses calculate depreciation each year to make sure that an assets value on the balance sheet is a true reflection
of what the business would get from selling it
§ Building depreciation into each year’s account avoids the fall in value hitting all at once when the business sells the
asset-. Spreading out the cost of the depreciation over several years is a truer reflection of the situation and allows the
business to make comparisons between financial years more easily
§ The amount lost through depreciate is recorded on the income statement- expense.
Balance sheet shows the s/t financial status of the company
§ Suppliers are interested in working capital and liquidity -= look at balance sheet to see how liquid assets- better at
paying bills more liquid they are. Helps to decide whether to offer the business supplies on credit and how much
credit to offer
§ The balance sheet shows sources of capital. Ideally long-term loans or mortgages are used to finance the purchase
of fixed assets.
§ s/t information helps assets internal strengths, weaknesses.
Comparing balance sheets= long term trends
§ A quick increase in non- current assets indicates that the company has invested in property or machinery- investing in
a growth strategy- increase profits – useful for shareholders and potential
§ Increases in reserves – suggest increase in profits
§ Identify strength and weaknesses.
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