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2 - Statement of financial position - Answers

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1 - Statement of comprehensive income - Answers

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Interpretation of Financial Statements - Anforme

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1 - Interpretation of financial statements

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1 - Interpretation of financial statements - questions

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Interpretation of financial Statements - definitions - explanations

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Overtrading happens when a business expands too quickly without having the financial resources to support such a quick expansion. If suitable sources of finance are not obtained, overtrading can lead to business failure.

Importantly, overtrading can occur even a business is profitable. It is an issue of working capital and cash flow.

Overtrading is, therefore, essentially a problem of growth.

It is particularly associated with retail businesses who attempt to grow too fast.

Overtrading is most likely to occur if:

Growth is achieved by making significant capital investment in production or operations capacity before revenues are generated

Sales are made on credit and customers take too long to settle amounts owed

Significant growth in inventories is required in order to trade from the expanding capacity

A long-term contract requires a business to incur substantial costs before payments are made by customers under the contract

Classic Symptoms of Overtrading

High revenue growth but low gross and operating profit margins

Persistent use of a bank overdraft facility

Significant increases in the payables days and receivables days ratios

Significant increase in the current ratio

Very low inventory turnover ratio

Low levels of capacity utilisation

Managing the Risk of Overtrading

The most effective steps to avoid overtrading are essentially those that would be taken as part of a sensible cash flow and working capital management. For example:

Reducing inventory levels

Scaling back the pace of revenue growth until profit margins and cash reserves have improved

Leasing rather than buying capital equipment

Obtaining better payment terms from suppliers

Enforcing better payment terms with customers (e.g. through prompt-payment discounts)

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Overtrading happens when a business expands too quickly without having the financial resources to support such a quick expansion. If suitable sources of finance are not obtained, overtrading can lead to business failure. Importantly, overtrading can occur even a business is profitable. It is an issue of working capital and cash flow.

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Value and Limitations of Ratio Analysis | tutor2u Business

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Ratio analysis is widely used in practice in business. Teams of investment analysts pour over the historical and forecast financial information of quoted companies using ratio analysis as part of their toolkit of methods for assessing financial performance. Venture capitalists and bankers regularly use ratios to support their analysis when they consider investing in, or loaning to businesses.

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Profitability Ratios (Revision Presentation) | tutor2u Business

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The main profitability ratios (gross profit margin, operating profit margin and ROCE) are explained in this revision presentation.

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Financial information is always prepared to satisfy in some way the needs of various interested parties (the " users of accounts"). Stakeholders in the business (whether they are internal or external to the business) seek information to find out three fundamental questions:

(1) How is the business trading?

(2) How strong is the financial position?

(3) What are the future prospects for the business?

For outsiders, published financial accounts are an important source of information to enable them to answer the above questions.

To some degree or other, all interested parties will want to ask questions about financial information which is likely to fall into one or other of the following categories, and be about:

Profitability

Is the business making a profit?

How efficient is the business at turning revenues into profit?

Is it enough to finance reinvestment?

Is it growing?

Is it sustainable (high quality)?

How does it compare with the rest of the industry?

Financial efficiency

Is the business making best use of its resources?

Is it generating adequate returns from its investments?

Is it managing its working capital properly?

Liquidity and gearing

Is the business able to meet its short-term debts as they fall due?

Is the business generating enough cash?

Does the business need to raise further finance?

How risky is the finance structure of the business?

Shareholder returns

What returns are owners gaining from their investment in the business?

How does this compare with similar, alternative investments in other businesses?

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Ratio Analysis (Introduction) | tutor2u Business

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Financial information is always prepared to satisfy in some way the needs of various interested parties (the " users of accounts"). Stakeholders in the business (whether they are internal or external to the business) seek information to find out three fundamental questions: (1) How is the business trading?

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This revision video introduces the concept of ratio analysis.

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Cash is King... Profit is Prince! | tutor2u Business

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A great starter activity taken from James Watts, co-founder of BrewDog and author of "Business for Punks". A simple table and activity that helps to demonstrate to students the importance of cash over profit, and the problems that can occur when a business grows too quickly.

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Balance Sheet (A Level Business Revision Quiz)

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The balance sheet is a snapshot of the assets and liabilities of a business at a moment in time and how those net assets are financed by capital and reserves. This short revision video introduced and outlines the main features of a standard balance sheet.

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Balance Sheet (Revision Presentation) | tutor2u Business

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We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores. For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).