Finance Unit 3 HL/SL 3.5-3.9

Profitability and Liquidity Ratio Analysis 3.5
1. Profitability Ratios
  1. Gross Profit Margin
    1. GPM = (Gross Profit / Sales Revenue) X 100
    2. Calculated by dividing the gross profit by the sales revenue, expressed as a percentage
  2. Net Profit Margin
    1. NPM = (Net Profit Before Interest and Tax / Sales Revenue) X 100
    2. Calculated by dividing Net profit before Interest and Tax by Sale Revenue, expressed as a percentage
2. Efficiency Ratios
  1. Return on Capital Employed
    1. Capital Employed = Long-term Liabilities + Share Capital + Retained Profit
    2. ROCE = (Net profit before Interest and Tax / Capital Employed) X 100
    3. Assesses the Return a firm is making from its Capital employed
3. Liquidity Ratios
  1. Current Ratio
    1. Current Ratio = Current Assets / Current Liabilites
    2. A ratio that compares a firm's current assets to its current liabilities
  2. Acid Test [Quick] Ratio
    1. Acid Test Ratio = (Current Assets - Stock) / Current Liabilities
    2. A stringent ratio that subtracts stock from the current assets and compares this to the firm's current liabilities
Efficiency Ratio Analysis (HL) 3.6
1. Stock Turnover Ratio
  1. Stock Turnover Ratio (Number of Times) = Cost of goods sold / average stock
  2. Stock Turnover ratio (Number of Days) = (Average Stock / Cost of goods sold) X 365
  3. Measures how quickly a firm's stock is sold and replaced over a given period
2. Debtor Days
  1. Debtor days Ratio (Number of Days) = (Debtors / Total Sales Revenue) X 365
  2. Measures on average, the number of days it takes for a firm to collect its debts
3. Creditor Days
  1. Creditor days Ratio (Number of Days) = (Creditors / Cost of Goods sold) X 365
  2. Measures the average number of days a firm takes to pay its creditors
4. Gearing Ratio
  1. Gearing Ratio = (Loan Capital / Capital Employed) X 100
  2. Measures the extent to which the Capital Employed by a firm is financed from Loan Capital
Cash Flow 3.7
1. Cash Flow
  1. Net Cash Flow = Cash Inflow - Cash Outflow
  2. Money that flows in and out of a Business over a given period of time
2. Profit
  1. Profit = Sales Revenue - Total Costs
  2. The Positive difference between Sales Revenue and Total Costs
3. Insolvency
  1. A situation where a Business runs out of cash but may still be profitable
4. Working Capital Cycle
  1. Working Capital
    1. The difference between current assets and current liabilities
  2. The period of time between payment for goods supplied to a Business and the Business receiving cash from their sales
  3. Liquidation
    1. A situation where all a firm's assets are sold off to pay any funds owing
5. Cash Flow Forecast
  1. Opening Cash Balance
    1. This is the cash that a Business starts with every month. It is the cash held by a Business at the start of the trading year
  2. Total Cash Inflows
    1. This is the summation of all the Cash Inflows during a particular month
  3. Total Cash Outflows
    1. This is the summation of all the Cash Outflows during a particular month
  4. Net Cash Flow
    1. This is the difference between the Total Cash inflows and the Total Cash outflows
  5. Closing Cash Balance
    1. This is the estimated cash available at the end of the month. It is found by adding the net cash flow of one month to the opening balance of the same month.
  6. The future prediction of a firm's cash inflows and outflows over a given period of time
  7. Investment
    1. The act of spending money on purchasing an asset with the expectation of future earnings
Investment Appraisal (3.8)
1. Payback Period
  1. Payback Period = Initial Investment Cost / Annual Cash flow from Investiment
    1. (Extra Cash Inflow Required / Annual cash in that year) X 12 Months
  2. The length of time required for an investment project to pay back its initial costs outlay
2. The quantitative techniques used in evaluating the viability or attractiveness of an investment proposal
3. The Average Rate of Return
  1. AAR = (((Total Returns - Capital Cost) / Years of Usage) / Capital Cost ) X 100
  2. Measures the annual Net Return on an investment as a percentage of Capital Cost
4. Net Present Value (HL)
  1. Discounted Cash Flows
    1. Uses a discount factor that converts future cash inflows to their present value
  2. The difference in the summation of present values of future returns and the original cost of investment
  3. NPV = Total Present Values - Original Cost
Budgets (HL) 3.9
1. A quantitative financial plan that estimates the revenue and expenditure over a specified future time period
2. Budget Holder
  1. A person involved in the formulation and achievement of a budget
3. Cost and Profit Centres
  1. Cost Centre
    1. A section of Business where cost are incurred and recorded
  2. Profit Centre
    1. A section of a Business where both cost and revenues are identified and recorded
  3. Roles
    1. Aiding in Decision Making
    2. Better Accountability
    3. Tracking problem areas
    4. Increasing motiviation
    5. Benchmarking
  4. Problems of Cost and Profit Centres
    1. Indirect cost Allocation
    2. External Factors
    3. Centre Conflicts
    4. Staff Stress
4. Variance Analysis
  1. The difference between the budgeted figure and the actual figure
  2. Favourable Variance
    1. When the difference between the budgeted and actual figure is financially beneficial to the firm
  3. Adverse Variance
    1. When the difference between the budgeted and actual amounts is financially costly to the firm
  4. Strategic Planning
    1. An organization's systematic process of defining its future direction and deciding on how to allocate its resources accordingly to fulfil this vision

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Finance Unit 3 HL/SL 3.5-3.9

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