A Level Business

AQA

YEAR 2
 Quick Topic Review +
Exam Skills
Context:

Theory:

= PeCan connectives

Business Studies
Quick Topic Review + Exam Skills

Context:
LTD, niche sports car market, 1300 cars,
180 skilled workers, craftsmanship, high
price, popular, innovation, R & D ….etc

Theory:
 Quick Topic Review + Exam Skills
One factor that might influence the
price of a Morgan car is ………..
This means that Morgan can ………
………….because ……………..
Consequently/furthermore ...............

= PeCan1
Point [1]
Explained in
= PeCan2 context [2] Context: LTD, niche sports car market,
1300 cars, 180 skilled workers,
craftsmanship, high price, popular,
innovation, R & D ….etc
Showing effective analysis within the time constraints of the exam is all
about being coherent and concise.

In this task you are asked to create a comment under 140 characters in
length which uses analysis to link the two hashtags you are given.
#lowerinterestrates

#consumerspending
 #lowerinterestrates #consumerspending
Lower interest rates will reduce the cost of borrowing and the
benefit of saving. Consequently this provides reasons for
consumers to spend more; firstly via credit cards and loans as
these will be cheaper, but also because there is less incentive to
save. This will mean that a lowering of interest rates would
increase consumer spending which in turn would benefit many
businesses leading to increase sales.
 1

#ageingpopulation
# profits
Complete the following examination question;

Analyse one effect of an ageing population on the level

of profits of a private hospital business. [6]
Showing effective analysis within the time
constraints of the exam is all about being coherent
and concise.

Using the PeCan technique and a chain of

analysis, with good clear connections answer the
following 6 mark question.
 NEW Business Studies A ’level Course - AQA

Linear approach to the Content.

A-level (7132)
 Year 1: 3.1 – 3.6
Year 2: 3.7 – 3.10
Year 1 (AS) Year 2 (A2):
 3.1 What is business? 3.7 Analysing strategic performance
 3.2 Managers, leadership & decision
making 3.8 Choosing strategic direction
 3.3 Decision Making To Improve
marketing performance
 3.4 D.M.T.I. operational 3.9 Strategic methods
performance
 3.5 D.M.T.I. financial performance 3.10 Managing strategic change
 3.6 D.M.T.I. human resource
performance
 Understanding Financial objectives
In this topic you will learn about:

 Financial objectives

 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

 Assessing internal and external influences on the financial objectives

BUSS3.2 Understanding Financial Objectives

 Financial Objectives

Corporate Objectives

Functional Objectives

The monetary targets

a business wants to
Financial Objectives
achieve in a given
time period

BUSS3.2 Understanding Financial Objectives

 Lesson objectives

 Look at measures of performance to given strategic

advice to a business
 Ration analysis: calculate, interpret and analyse business
performance through ratios including: returns on capital and
profitability; return on investment; liquidity; solvency & activity.
 Introduction Ratios

 Analysing financial performance is about judging the

successes and failures of a business by considering a number
of financial measures. Most of these measures are known as
ratios.
 A ratio is a measure of one piece of information in
terms of another
 A non-financial ratio might be the numbers of boys to girls in
a class, or the number of GCE passes in business studies as a
percentage of all the GCE passes in the school.

 Ratios are normally compared with the previous years’

figures or with figures from competitors to see whether
the business has improved or not and whether it is better or
worse than a rival.
 Introduction Ratios

Year on Year
 Identify trends Helps a business
Intra-firm identify its internal
strengths and
 Within the same firm weaknesses.
 By product
These comparisons will
 By branch
allow the firm to
Inter-firm benchmark externally
against competitors.
Between different firms across
sectors
Informs the setting
Decision Making of future objectives.
Financial data will help inform
decision making and may even act as a constraint
 Ratio Analysis

Four main categories of ratios used to do this:

1. Profitability – how profitable the firm is

2. Liquidity – the businesses ability to pay

3. Financial Performance – how well the business is operating with its

assets

4. Financial Efficiency – looks at how well the business is financially

operating.
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 True False
Break-even = fixed/ variable cost per unit

A fixed cost never changes

A payable is a current liability

Contribution per unit = selling price per unit – variable

cost per unit
A balance sheet is a financial statement of what a business
owns and owns in a year.
Variances can be favorable and adverse
 How to Assess the Financial Performance of a business

“
 Understanding balance sheets

 Understanding income statements

 Using financial data for comparisons,

trend analysis and decision making
using ratios

A 'level only (Year 13)

Business Performance
Evaluate the success of ………..

• GROSS PROFIT • CURRENT RATIO

MARGIN
• NET PROFIT MARGIN
• ACID TEST
• ROCE RATIO

PROFITABILIT LIQUID
Y
ITY

FINANC FINANC
IAL IAL
EFFICIE PERFOR
• GEARING NCY MANCE • INVENTORY
TURNOVER
• ASSET • RECIEVABLE DAYS
TURNOVER • PAYABLE DAYS
 RATIO ANALYSIS Meaning ………

Use Ratios

Profitability Gross profit

margin

Profitability Net profit

margin

Profitability ROCE

Liquidity Current

Liquidity Acid Read the support sheet …..

Efficiency Asset
turnover
Efficiency Gearing

Performance Inventor
turnover
Performance Creditor
days
Performance Debtor days
Income Statement £m RATIO ANALYSIS
Revenue 35400
Cost of sales (30100)
Answer Ratios
Gross profit 5300 Gross profit margin
Expenses (720)
Operating profit 4580 Net profit margin
Finance income 300
Finance cost (260) ROCE
Profit before tax 4620
Taxation (1109) Current
Profit for the year 3511
# Dividend £150m Acid

Balance Sheet £m Asset turnover

Non-current assets 19550
Inventories 2375 Gearing
Receivables 1170
Cash & cash equivalents 2300 Inventor turnover
Total current assets 5845
Current liabilities * (8160) Payable days
Net current liabilities (2315)
Non-current liabilities (6000) Receivable days
Net assets 11235

Share capital 6000

Reserves & retained earnings 5235 * CL: Includes Payables £7000
Total equity 11235
Income Statement £m RATIO ANALYSIS
Revenue 35400
Cost of sales (30100)
Gross profit 5300
Expenses (720)
Operating profit 4580 Use Ratios
Finance income 300 Profitability Gross profit margin
Finance cost (260)
Profit before tax 4620 Profitability Net profit margin
Taxation (1109)
Profit for the year 3511 Profitability ROCE
# Dividend £150m
Liquidity Current

Balance Sheet £m Liquidity Acid

Non-current assets 19550
Inventories 2375 Efficiency Asset turnover
Receivables 1170
Efficiency Gearing
Cash & cash equivalents 2300
Total current assets 5845 Performance Inventor turnover
Current liabilities * (8160)
Net current liabilities (2315) Performance Payable days
Non-current liabilities (6000)
Net assets 11235 Performance Receivable days

Share capital 6000

Reserves & retained earnings 5235 * CL: Includes Payables £7000
Total equity 11235
 Profitability ratio
Balance Sheet £m
Income Statement £m
Non-current assets 19550
Revenue 35400
Inventories 2375
Cost of sales (30100)
Receivables 1170
Gross profit 5300
Cash & cash equivalents 2300
Expenses (720)
Total current assets 5845
Operating profit 4580
Current liabilities (8160)
Finance income 300
Net current liabilities (2315)
Finance cost (260)
Non-current liabilities (6000)
Profit before tax 4620
Net assets 11235
Taxation (1109)
Profit for the year 3511
Share capital 6000
Reserves & retained earnings 5235
Total equity 11235

Gross & Operating

Gross & Operating
GPM = 530/34500 X100 = 15.3 %
GPM = 530/34500 X100 = 15.3 %
NPM = 4580/34500 X 100 = 13.27 %
NPM = 4580/34500 X 100 = 13.27 %
Business Performance
Profitability
 Ratio Analysis - Liquidity
Why is liquidity
crucial for survival?

Liquidity
 A measure of a firms short term survival i.e. its ability to
meet short term debts
Liquidity
 Current ratio
 Current assets : current liabilities
 Acid test
 Liquid assets : current liabilities
 Liquid assets = Receivables + cash and cash equivalents
 Inventory is not included in current assets

as it is deemed the hardest to turn into cash quickly

 The acid test ratio is a tougher measure of liquidity
 Liquidity ratios
Balance Sheet £m
Current Ratio Non-current assets 19550
Inventories 2375
Current Assets : Current Liabilities
Receivables 1170
Cash & cash equivalents 2300
5845 : 8160 Total current assets 5845
= 0.716 : 1 Current liabilities (8160)
Net current liabilities (2315)
For every £1 of CL the firm owes it owns Non-current liabilities (6000)
£0.716 in CA Net assets 11235

Share capital 6000

Reserves & retained earnings 5235
Acid Test Total equity 11235
Liquid Assets : Current Liabilities

1170 + 2300 : 8160 Yard stick:

= 3470 : 8160
= 0.425 : 1
For every £1 of CL the firm owes it owns
Current ration – 1.5-2:1
£0.425 in CA Acid test – 1:1
Business Performance
Liquidity
 Ratios Analysis – financial performance

Financial performance
 Inventory (stock) turnover
 Cost of sales
average inventory held
 Average inventory held can be calculated by finding the average
of inventory at the start and end of the year
 You therefore also need the previous year’s balance sheet
 Alternatively you can just divide cost of sales by inventory
 Measures how frequently a business turns over its inventory in a
year
 Will vary depending upon the nature of the firm
 Hot dog stand (hopefully daily!)
 Fashion Retailer (at least each season)
 New car showroom (maybe twice a year)
 Financial performance ratio
Income Statement £m Balance Sheet £m
Revenue 35400 Non-current assets 19550
Cost of sales (30100) Inventories 2375
Gross profit 5300 Receivables 1170
Expenses (720) Cash & cash equivalents 2300
Operating profit 4580 Total current assets 5845
Finance income 300 Current liabilities (8160)
Finance cost (260) Net current liabilities (2315)
Profit before tax 4620 Non-current liabilities (6000)
Taxation (1109) Net assets 11235
Profit for the year 3511
Share capital 6000
Reserves & retained earnings 5235
Inventory Turnover Total equity 11235
On average for how long does this business
Cost of sales hold stock?
Inventory
What type of business might have this level of
30100 inventory turnover? Justify your answer
2375
Why might it be more accurate to divide by average
= inventory held rather than just inventory?
12.67 times per year
Business Performance
Financial Performance
 Ratios Analysis – financial performance

Financial performance
 Payables (creditors) days
 Payables x 365
cost of goods sold
 A measure of how long it takes on average for the business to
pay for supplies it has purchased on credit
 A business may try to have a longer payables day to ease cash
flow problems
 A short payables day may result in discounts from suppliers
 Financial performance ratio
Income Statement £m
Revenue 35400 Balance Sheet £m
Cost of sales (30100) Non-current assets 19550
Gross profit 5300 Inventories 2375
Expenses (720) Receivables 1170
Operating profit 4580 Cash & cash equivalents 2300
Finance income 300 Total current assets 5845
Finance cost (260)
Profit before tax 4620 Current liabilities
Taxation (1109) * Payables (7000)
Profit for the year 3511 * Overdraft (1160)

Net current liabilities (2315)

Non-current liabilities (6000)
Net assets 11235

Payables (Creditors) days Share capital 6000

Reserves & retained earnings 5235
Payables x365 Total equity 11235
cost of sales
Assume payables is the only current
7000 x365
liability, how would this alter the
30100 payables days?
=
84.88 days Why might a business be willing to have
a payables days of 60 – 90 days?
Business Performance
Financial Performance
 Ratios Analysis – financial performance

Financial performance
 Receivables (debtors) days
 Receivables x 365
revenue
 A measure of how long it takes on average for customers to pay the
business for products or services it has purchased on credit
 The customer is a debtor of the business
 A business may try to have a shorter receivables day to ease cash
flow problems
 Financial performance ratio
Income Statement £m
Revenue 35400 Balance Sheet £m
Cost of sales (30100) Non-current assets 19550
Gross profit 5300 Inventories 2375
Expenses (720) Receivables 1170
Operating profit 4580 Cash & cash equivalents 2300
Finance income 300 Total current assets 5845
Finance cost (260) Current liabilities (8160)
Profit before tax 4620 Net current liabilities (2315)
Taxation (1109) Non-current liabilities (6000)
Profit for the year 3511 Net assets 11235

Share capital 6000

Reserves & retained earnings 5235
Total equity 11235

Receivables (Debtors) days

Payables are compared to cost of sales and
receivables to revenue.
Receivables x 365
Use Business Studies terminology to explain the
Revenue
relationship between these variables.
1170 x 365
What might be the expected receivables days of
35400
a) A high street coffee chain
=
b) A commercial print company
12 days
Justify your answers.
Business Performance
Financial Performance
 Ratios Analysis – financial efficiency

Financial efficiency
 Asset turnover
 Revenue
net assets
 Measures how efficiently the assets of the business are being
utilised to generate revenue
 Helps identify whether the business is operating efficiently
 A capital intensive industry may have a lower asset turnover
than a labour intensive one
 Financial Efficiency ratio
Income Statement £m Balance Sheet £m
Revenue 35400 Non-current assets 19550
Cost of sales (30100) Inventories 2375
Gross profit 5300 Receivables 1170
Expenses (720) Cash & cash equivalents 2300
Operating profit 4580 Total current assets 5845
Finance income 300 Current liabilities (8160)
Finance cost (260) Net current liabilities (2315)
Profit before tax 4620 Non-current liabilities (6000)
Taxation (1109) Net assets 11235
Profit for the year 3511
Share capital 6000
Reserves & retained earnings 5235
Total equity 11235
Asset Turnover
For every £1 of net assets in the business
Revenue how much is being generated in revenue?
Net assets
What is meant by the term sweating your assets?
35400
11235 Why might asset turnover help a business assess
= 3.15 times operational efficiency between factories?
Business Performance
Financial Efficiency
 Ratio Analysis - Gearing
Gearing
 Gearing (%)
 Non-current liabilities x 100
total equity plus non-current liabilities
 Measures what proportion of a business’ capital is funded
through long term loans
 Loans are “compulsory interest bearing”
 You have to pay interest on them even if profits are low or non-
existent
Explain how this is different to equity capital

 A high gearing is of greater risk if interest rates are likely to

increase
 Interest rates are a cost to a business

Explain where interest rates would appear on an income statement

and which profit figure(s) would be affected.
 Gearing ratio
Income Statement £m
Revenue 35400 Balance Sheet £m
Cost of sales (30100) Non-current assets 19550
Gross profit 5300 Inventories 2375
Expenses (720) Receivables 1170
Operating profit 4580 Cash & cash equivalents 2300
Finance income 300 Total current assets 5845
Finance cost (260) Current liabilities (8160)
Profit before tax 4620 Net current liabilities (2315)
Taxation (1109) Non-current liabilities (6000)
Profit for the year 3511 Net assets 11235

Share capital 6000

Reserves & retained earnings 5235
Total equity 11235
Gearing

Non-Current Liabilities x 100

total equity + non-current liabilities For every £1000 invested in this business how
much of it is from long term loans?
6000 x 100
(11235 + 6000) Why might a high gearing be more of a concern to
a business with small profit margins?
=
6000 x 100 Gearing Hi >50%
17235 Low <50%
= 35%
Business Performance
Financial Efficiency
 RATIO ANALYSIS ………

Use Ratios

Profitability Gross profit

margin

Profitability Net profit

margin

Profitability ROCE

Liquidity Current

Liquidity Acid

Efficiency Asset
turnover
Efficiency Gearing

Performance Inventor
turnover
Performance Creditor
days
Performance Debtor days
 RATIO ANALYSIS Test ………

Use Ratios

Profitability Gross profit margin

Profitability Net profit margin

Profitability ROCE

Liquidity Current

Liquidity Acid

Efficiency Asset turnover

Efficiency Gearing

Performance Inventor
turnover
Performance Creditor days

Performance Debtor days

You are the Teacher!!!

http://www.classtools.net/education-games-php/fruit_machine
 How to Assess the Financial Performance of a business

“
 Understanding balance sheets

 Understanding income statements

 Using financial data for comparisons,

trend analysis and decision making
using ratios

A 'level only (Year 13)

 Understanding Financial objectives
In this topic you will learn about:

 Financial objectives

 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

 Assessing internal and external influences on the financial objectives

BUSS3.2 Understanding Financial Objectives

 Lesson Objectives

To apply your K & U of the key financial ratios to exam

questions
 RATIO ANALYSIS

Use Ratios

Profitability Gross profit

margin

Profitability Net profit

margin

Profitability ROCE

Liquidity Current

Liquidity Acid

Efficiency Asset
turnover
Efficiency Gearing

Performance Inventor
turnover
Performance Creditor
days
Performance Debtor days
1. Acid Test (quick) Ratio

2. ROCE Ratio

RATIO FORMULA TEST 1

3. Gearing Ratio

4. Operating profit Margin

5. Inventory Turnover
 RATIO ANALYSIS

Use Ratios Which ratio(s) would you expect it to select, to

Profitability Gross profit margin
help answer each of the following questions:

Profitability Net profit margin 1. How effective is stock control in the business?

Profitability ROCE 2. Are suppliers providing the business with good

credit terms?
Liquidity Current
3. is the business likely to be able to avoid a liquidity
Liquidity Acid
problem in the short term if it can convert all of its
Efficiency Asset turnover liquid assets into cash?

Efficiency Gearing 4. How successful is the business at generating

profit?
Performance Inventor turnover
5. How quickly is the business receiving money from
Performance Payable days
customers who buy goods on credit?
Performance Receivable days
6. Is the business likely to experience a liquidity
problem in the long-term?
 What analysis
would you make
of this businesses
performance?
 What analysis
would you make
of this businesses
performance?

0.3 or 30%
8 times or 45.6
days
What analysis would you make of this businesses performance?

0.3 or 30%
8 times or 45.6
days
 How to Assess the Financial Performance of a business

“
 Understanding balance sheets

 Understanding income statements

 Using financial data for comparisons,

trend analysis and decision making
using ratios

A 'level only (Year 13)

1. Payable Days

2. Current Ratio

RATIO FORMULA TEST 2

3. ROCE Ratio

4. Gross profit Margin

5. Asset Turnover
 Klick - Analysis
Read the source information on KLICK PLC
 Klick – Financial Analysis
What ratios can we calculate
from this information?

We can calculate the

following;

1. ROCE
2. Current Ratio
3. Gearing
4. Payables days
5. Receivables days
 Klick - Analysis
Using the source information on KLICK PLC answer
the following question;

Assess the current performance of KLICK plc to address the concerns

of the directors about the proposal from Mehvish’s. [16]
Klick – Financial Analysis
ADD the 2016 & Industry
Average to you sheet.
- for year ending31/12/16

Calculate the following;

1. ROCE
2. Current Ratio
3. Gearing
4. Payables days
- for year ending31/12/17
5. Receivables days
2017 2017

2017
 Klick - Analysis
Assess the current performance of KLICK plc to address the concerns of the
directors about the proposal from Mehvish’s .

 Calculate Ratios
2016
 Make
comparison
 Make a
comment about
each
2017

2017 2017
2017
 Klick - ROCE
2017 What is the formula for ROCE?
2017 2017
 Klick - ROCE
2017 What is the formula for ROCE?
2017 2017

ROCE = (operating profit/capital

employed=NCL)*100

ROCE = (1250/12500+1500)*100

ROCE = 8.9%

APPLICATION [AO2] & ANALYSIS [AO3]

• ROCE has risen from 8% to 8.9% and 3.9% since 2010

• Calculating ROCE for 2017 and drawing a comparison of this from 8% in 2016 and 5%
2010– GAp
• Significant cost savings have been made – GAn.
 Klick - ROCE
2017 What is the formula for ROCE?
2017 2017

ROCE = (operating profit/capital

employed=NCL)*100

ROCE = (1250/12500+1500)*100

ROCE = 8.9%

What questions can we answer with this information:

Analysis for and against proposal with recommendation for course of action to be taken:
• AGAINST – the ROCE demonstrates that the business is still fairly profitable but below industry
average – RAp
• 2017 – 20%
• 2017 – 8.9%
• FOR - High rate of growth in apps market provides opportunities for increased revenue and
profitability – RAp
• AGAINST – Business is still reasonably profitable in it’s current operation – RAp.
 Klick – Current Ratio
2017 What is the formula for the Current
2017 2017
Ratio
 Klick – Current Ratio
2017 What is the formula for the Current Ratio
2017 2017
Current ratio =
current assets/current liabilities

Current ratio =
1300/800

Current ratio =
1.625:1

APPLICATION [AO2] & ANALYSIS [AO3]

• Current ratio has improved from 1.4:1 to 1.625:1 but this is still below the industry
average of 2:1 – RAp
• A well developed line of argument that shows understanding of the improvement in
the current ration due to the fact that the company has £0.4bn in cash, which could be
used to solve the potential liquidity issues – GAn.
• No need for concern as business still has good liquidity as indicated by improvement of
current ratio due to £400m in cash – REv.
 Klick – Gearing
2017 What is the formula for Gearing?
2017 2017
 Klick – Gearing
What is the formula for Gearing?
2017

2017 2017
Gearing =
(Non-current liabilities/total equity + non-current
liabilities)*100

Gearing =
(1500/12500+1500)*100

Gearing = 10.7%

APPLICATION [AO2] & ANALYSIS [AO3]

• As with ROCE, you could link gearing to ability to raise finance to help solve potential
liquidity problems.
• currently low geared at 10.7% - RAp.
• strong financial position in terms of gearing – additional funds are likely to be available
to finance the proposal – RAn.
 Klick – Payables days
2017 What is the formula for payable days?
2017 2017

What are the payable days?

 Klick – Payables days
2017
What is the formula for payables days?

2017 2017
Payables days =
(Payables/cost of sales)*365

Payables days =
(600/4250)*365

Payables days =
51.5 days

APPLICATION [AO2] & ANALYSIS [AO3]

• Payables days measures the length of time the business takes to pay it’s creditors – AO1 (must write
definition, no credit for just writing formula).
• Correctly calculating both the payables AND receivables for 2017 and linking these to the 2016 figures
and/or industry average – GAp AO2.
• Payables days has increased by 6.5 days indicating that creditors are having to wait longer for payment
– RAn AO3.
• A line of argument recognising the potential liquidity problems and the potential problems in
relationships with creditors and investors – GAn AO3.
 Klick – Receivables days
2017 What is the formula for Receivables days?
2017 2017

What are the Receivables days?

 Klick – Receivables days
2017
What is the formula for Receivables days?

2017 2017
Receivables days =
(receivables/revenue)*365

Receivables days =
(900/6000)*365

Receivables days =
54.75 days

APPLICATION [AO2] & ANALYSIS [AO3]

• Receivables days is the length of time the business has to wait before receiving payment from its debtors(must
write definition, no credit for just writing formula). AO1
• Correctly calculating both the payables AND receivables for 2017 and linking these to the 2016 figures and/or
industry average – GAp AO2.
• Both payables and receivables are significantly worse than the industry average which may result in shareholders
losing confidence and deter potential investors – RAn AO3.
• Receivables days as increased by 12.75 days indicating that customers are taking longer to pay – RAn AO3.
• A line of argument recognising the potential liquidity problems and the potential problems in relationships with
creditors and investors – GAn AO3.
 Klick - Analysis
Assess the current performance of KLICK plc to address the concerns of the
directors about the proposal from Mehvish’s .

 What overall
2016
analysis would
you make of the
businesses
current
performance?
2017

2017 2017
2017
 Klick - Analysis
Using the source information on KLICK PLC answer
the following question;

The Finance Director is more concerned about the changes in Payables and
Receivables days between 2016 and 2017. He worries that the company is giving
too much trade credit to its advertisers. Assess whether the F.D should he be
concerned? [16]

 Use appropriate
Ratios
 Make comparison
 Yes concerned
because
 No concerned
because

 Overall
Klick – Payables/Receivables days
2017 Concerned or Not?
Payables days = 51.5 days
2017 2017
Receivables days = 54.75 days
 Klick – Payables/Receivables days
2017
2017 2017 Concerned or Not?
Payables days = 51.5 days

Receivables days = 54.75 days

Extent of agreement with Finance Director over in relation to concerns over payables and receivables days:
• Must write definitions, no credit for just writing formula. AO1
• Correctly calculating both the payables AND receivables for 2017 and linking these to the 2016 figures
and/or industry average – GAp AO2.
• Receivables days as increased by 12.75 days indicating that customers are taking longer to pay – RAn
AO3.
• Payables days has increased by 6.5 days indicating that creditors are having to wait longer for payment –
RAn AO3.
• Both payables and receivables are significantly worse than the industry average which may result in
shareholders losing confidence and deter potential investors – RAn AO3.

• A line of argument linking the change in payables and receivables days and effects on cash flow and
resulting issues – GAn AO3.
• A line of argument recognising the potential liquidity problems and the potential problems in
relationships with creditors and investors – GAn AO3.
 Klick – Payables/Receivables days
2017
2017 2017 Concerned or Not?

Extent of agreement with Finance Director over in relation to concerns over payables and receivables days:

• The FD is correct to be concerned as the business is taking longer to pay it’s creditors
and this may lead to a deterioration in its relationship with them – REv AO4.
• There is a significant increase in receivables days resulting in business paying creditors
before receiving payment from its customers – REv AO4
• However the business still has good liquidity as indicated by current ratio and £400m in
the bank – REv AO4.
• A conclusion that directly answers the questions – GEv AO4.
• A recognition that the FD should be concerned due to the figures deteriorating between
2016 and 2017 as well as being significantly worse than the industry average – GEv AO4.
Activity – Simms PLC

Review the performance from

the viewpoint of a key
stakeholder. 1. Shareholders
2. Management and
 Select the ratios you feel employees
are most appropriate 3. Customers and
 Make and justify a suppliers.
judgement based on your 4. Banks and other
analysis (use the ratios). financial organisations
Explain fully your reasons 5. Government.
for looking at these ratios 6. Trade Unions
and what they tell you
about the business

 Feedback to ……
Financial ratio Formula & Calculation Answers
Operating Profit Margin (%)
 
Operating profit / Turnover x 100 %
 
 16.48%
  2017 118/716 x 100 % 15.37%
2018 113/735 x 100 %
Gross profit margin (%) Gross profit / Turnover x 100 %  
   
  2017 239/716 x 100 %
2018 252/716 x 100 %
Return on capital employed % Operating Profit before tax / (Total Equity + Non-Current Liabilities) x 100 %  
(ROCE)  
  2017 118/ (222+539) x 100 %
2018 113/ (267+459) x 100 %
Current ratio    
 
 
 
Acid test ratio    
 
 
 
Asset turnover    
 
 
 
Inventory (stock) turnover    
 
 
 
Payables (creditor) days    
   
 
 
Receivables (debtor) days    
   
 
 
Gearing    
 
 
 
 RATIO ANALYSIS Exercises ………
• Conduct a ratio analysis for the SIMMS PLC
• Use your ratio sheet and calculate the
appropriate ratio for both years shown.
• Compare the performance between the years
and comment on how you feel this business
has done regarding its …..
1. Profitability
2. Liquidity
3. Financial Efficiency
4. & Gearing
 Understanding Financial objectives
In this topic you will learn about:

• Financial objectives
• Assessing influences of
financial objectives
• Analysing balance sheets
• Analysing income statements
• Using financial data (ratios) for comparisons, trend analysis and decision
making

• Assessing strengths and weaknesses of financial data in

judging performance
 Ratio QUIZ !!!!
USES & USERS:

https://www.tutor2u.net/business/quiz/
ratiosusesusers/quiz.html
 N T
M E
SS IE
S E CK
S I
A QU
 Ratio Analysis [AO3]

• Allows for a more meaningful analysis of published accounts –

balance sheet & income statement. It shows the relationship
between these figures.
• True & Fair view
• Trends over time – between years
• Inter and intra firm comparisons
• Ratios can be used to measure the key financial indicators of :
– Liquidity
– Profitability
– Financial Efficiency
– Gearing
 strengths and weaknesses [AO3]: Page
382-85

Assessing strengths and weaknesses of financial data in

judging performance

• Strengths • Weaknesses

https://www.youtube.com/watch?v=UuahUYKvV1k
 Value and Limitations of Ratio Analysis 382-384
Page

• Strengths • Weaknesses
– Provides a tool for the – Possibility that accounts have
interpretation of accounts – been window dressed
quick & easy (manipulated)
– You need to consider the
– Structure from which
reasons behind the ratios –
comparisons can be made – caution on interpretation
what rather than why? • E.g. is ROCE lower than
– Aids decision making previous year because of an
• Internally investment programme
• Externally - by investors – Focus on Quantitative
information only – what about
the none numerical factors
(qualitative)
– Averages – deceiving!
 strengths and weaknesses of Ratio Analysis

WINDOW DRESSING

• This is where a business uses legal methods to give a favourable appearance to the ratios in their
published accounts. Some of the window dressing methods include:
– placing a value on its brand name (intangible asset)
– Income statements to include profit made on the sale of fixed assets (has nothing to do with it’s
profitability)
– The date that the accounts are published - usually either side of Christmas when stocks are up/down
from the normal!

AUDITING ACCOUNTS

• Companies must get independent accountants to check their accounts, they produce an auditors report.
This usually states that in their opinion the annual accounts represent a 'true and fair view'.
Value of Ratio Analysis
In April 2017 a rival business
was considering taking over
Marks and Spencer plc. How
useful do you think the data
provided in Appendices A & B,
might have been to this rival
business when deciding whether
to make a take-over bid?
Justify your answer. [16 marks]
 How to Assess the Financial Performance of a business

 Understanding balance sheets “

 Understanding income statements

 Using financial data for comparisons,

trend analysis and decision making
using ratios

A 'level only (Year 13)

Ratio Test !!!!
Ratio Test !!!!
 NEW Business Studies A ’level Course - AQA

Linear approach to the Content.

A-level (7132)
 Year 1: 3.1 – 3.6
Year 2: 3.7 – 3.10
Year 1 (AS) Year 2 (A2):
 3.1 What is business? 3.7 Analysing strategic performance
 3.2 Managers, leadership & decision making
 3.3 Decision Making To Improve marketing 3.8 Choosing strategic direction
performance
 3.4 D.M.T.I. operational performance
 3.5 D.M.T.I. financial performance 3.9 Strategic methods
 3.6 D.M.T.I. human resource performance
3.10 Managing strategic change
   £ £ £
Non-current Assets (Fixed      
Assets)
Activity – Funky Stuff ltd Premises (leased), Fixtures &     72,094
Fittings
       
Current Assets      
Inventories (Stock) 37,494    
  £ Cash and Cash Equivalents 15,624    
Revenue (Turnover) 431,745 (Cash)
Cost of Sales 278,000     53,118  
Gross Profit 153,745 Current Liabilities      
Total Expenses 97,117 Bank overdraft 5,447    
Operating Profit (Net Profit) 56,628 Trade and other Payables 27,071    
Finance Income 0 (Creditors)
Finance Costs (Interest) 5,976 Tax due 10,637    
Profit before Tax 50,652     43,155  
Taxation 10,637 Net Current Liabilities (Net     9,963
Profit for the Year (Profit after Tax) 40,015 Current Assets)
       
Total Assets less Current     82,057
Liabilities
       
Conduct a full ration analysis for this Non-current Liabilities      
(Long-term Liabilities)
company Long Term Bank Loan     60,00
0
Net Assets     22,057
       
Shareholders’ Equity (Capital      
and Reserves)
Ordinary share capital   20,00  
£10,000 x 2 0
Retained Earnings   2,057  
Total Equity (Shareholders’     22,057
Funds)
 Ooops I did it again…

Somehow, when I was making you this financial ratio reminder

sheet, I managed to leave some boxes blank!! Can you fill in the
gaps?
Ooops I did it again…
 How to Assess the Financial Performance of a business

“
 Understanding balance sheets

 Understanding income statements

 Using financial data for comparisons,

trend analysis and decision making
using ratios

 Assess the value of this analysis

A 'level only (Year 13)

Based on the game of Scrabble, using the
template provided and using only one
letter per square as per the rules of
scrabble. You must make Financial terms
and/ or words that relate to the topics
covered so far – Balance sheets, Income
statements & Ratios.
Keep a record of your score
 NEW Business Studies A ’level Course - AQA

Linear approach to the Content.

Year 1: 3.1 – 3.6

Year 2: 3.7 – 3.10
Year 1 (AS) Year 2 (A2):
 3.1 What is business? 3.7 Analysing strategic performance
 3.2 Managers, leadership & decision making
 3.3 Decision Making To Improve marketing 3.8 Choosing strategic direction
performance
 3.4 D.M.T.I. operational performance
 3.5 D.M.T.I. financial performance 3.9 Strategic methods
 3.6 D.M.T.I. human resource performance
3.10 Managing strategic change
 How to Assess the Financial Performance of a business

 Understanding balance sheets “

 Understanding income statements

 Using financial data for comparisons,

trend analysis and decision making
using ratios

 Assess the value of this analysis

A 'level only (Year 13)

 Analysing Strategic Options

 3.7.3-3.7.7

 3.7.8

 Investment Appraisal

 Payback
 ARR

 NPV
 Investment Appraisal

 Define technique
 Give pro/con
 Calculate using
technique
 Evaluate Answer
 Lesson Objectives
• To understand the use of investment
techniques for making business decisions
• Be able to assess an investment using a
suitable techniques - calculate using Payback,
ARR & NPV.
 Reading & Learning

• From your textbook – read the section/chapter

on Investment Appraisal [467-470]
• Make appropriate notes on the following;

– Definition and pros/cons of payback & the Average

Rate of Return (ARR)
– Illustrate with worked example for both techniques
 Task
Having graduated with a first class degree in Finance from a well respected university you have
been training as an accountant in the Advisory Practice within KPMG. You are part of a young
team of management consultants.

Your manager has assigned your team the Scott Electronics Plc as a client and you have been
asked to produce a presentation in the next 20 minutes to feedback to the Financial Director at
Scott Electronics your view on the financial performance of the company.

Using relevant ratios to support your arguments; prepare a presentation which analyses the
financial performance of Scott Electronics Plc. You should indicate to the FD potential
information which will please the directors and shareholders and potential information
which will displease them. Also any strengths/weaknesses in your analysis. Give the
FD an overall indication of how you team believes the business is doing.
Scott Electronics plc
Internal: Judging performance using financial data

What ratios can your team calculate

from this information?
Presentation: Scott Electronics plc
Intro – the opening to your
presentation – how you looked at the
financial information.
Financial analysis – relevant
calculations/ratios used and why
Explanation of what results show
about the performance of the
business
However, limitations of analysis
Conclusion – summarising key
points, those most significant to
ATQ
ATQ – how do you think the
business is doing?
 Task

Using the data in Appendix A and the case study, analyse the financial performance of
Superstyle plc between 2011 and 2012. (20 marks)

Having graduated with a first class degree in Finance from a well respected university you
have been training as an accountant in the Advisory Practice within KPMG.

Your manager has assigned Superstyle Plc to you as a client and you have been asked to
produce a presentation which you will use to feedback to the Financial Director at SS plc
about the financial performance of the company.

Using relevant ratios to support your arguments; prepare a presentation which analyses
the financial performance of SuperStyle Plc. You should indicate to the FD
potential information which will please the shareholders and potential information
which will displease them. Give the FD an overall indication of how you believe
the shareholders may feel.
 SWOT/Aims/Key Points
Stengths What is the business good
at? What is going well for
them?
Weaknesses What are they not so good
at? Has anything negative

Case Study Opportunities

happened?
Is anything happening
outside the business they
they could take advantage
of?
Threats From competitors? Lack of
investors? Inability to raise
finance?
Aims What do the
shareholders/directors/oth
er stakeholders want to
achieve?
Key points Most important points
made.

Read through the case study and label each

sentence accordingly. You have 6 minutes
for this individual task.
Using the data in Appendix A and the case study, analyse the financial performance of
Superstyle plc between 2011 and 2012. (20 marks)

Can you benchmark the

How many marks/What skills are
you being examined on here? ratios?
Against a competitor?
Against a previous year?

How will you structure this What has caused the

answer? changes?

What ratios will you What might be the effect of

calculate? the changes?
 Using the data in Appendix A and the case study, analyse the financial
performance of Superstyle plc between 2011 and 2012. (20 marks)

Suggested structure:
Intro: How you are going to analyse the performance

Next para: analysis of the change in profitability using relevant ratios.

Explain possible causes and effects of this to Superstyle plc.

Next para: analysis of the change in liquidity using relevant ratios.

Explain the causes and effects of this to Supertyle plc.

Next para: analysis of the change in efficiency using relevant ratios.

Explain the causes and effects of this to Supertyle plc.

ATQ: Overall, suggest what the performance of the business is and why
you have made this comment.
 Mark another student’s answer

APPLICATION
Swap with another member of the class. Good application can be demonstrated in three ways.
• By being consistently in context. An answer may be in context throughout with each
argument related to the scenario.
• By combining data. An answer may link separate items of information from the case
Go through it sentence by sentence study and/or appendices.
• By including relevant calculations using data from the case study and/or appendices
and combining these with another aspect of the case study.

What is good about it? • Reasonable application could typically be awarded by correctly calculating an
appropriate financial ratio, ie for correctly selecting the right figures from the data and
Annotate GAn/GAp then using them in the correct way.
• Also this can be awarded for an answer that uses a relevant piece of data or information
from the case study to support a relevant argument.
• Limited application would be shown by correctly identifying a piece of data from the
What is not so good about it? case study.
For application to be creditworthy it must be used as part of a relevant argument. Some
Annotated RAn/RAp/LAn/LAp students simply copy out part of the case. This should not receive credit.

ANALYSIS
• Limited analysis would be displayed by a student offering a simple yet valid statement
How would you improve it? of cause and/or effect within their answer. For example, increased spending on advertising
could lead to increased sales.
• Reasonable analysis will be shown through less developed chains of argument or those
Write three specific ways that you think it with a less clear focus on the question. For example, increased spending on advertising
could be improved. would create increased interest and awareness which could result in increased sales.
• Good analysis is shown when a student develops a chain of argument with a clear focus
This could be related to content or technique. on the question.
Simple points or ideas expressed without any development should be rewarded with
knowledge marks.
 Ratio Analysis

Issues for analysis (AO3)

 Calculate and interpret results
 How can the company improve ratio results?
 The drawbacks of taking action e.g. using cheaper materials…

Evaluation (AO4)
 What is the most effective way to improve ratio?
 What will be the impact on the firm's stakeholders?
 Is the ratio focused on the best way to measure the firm's
success/perfroamce

BUSS 3.4 Interpreting Published Accounts

A Level Business

AQA

YEAR 2
Activity – Interpreting published accounts

 In pairs choose 2 businesses who operate in the same

industry e.g. 2 supermarkets, 2 football clubs
 Go onto the internet and print off their Balance Sheet
and Income Statement (Google company
name/investors)
 The layout will vary from company to company but
you should be able to identify the key information
 Prepare a presentation comparing the performance of
the two businesses
 Present your findings to the rest of the class
Based on the game of Scrabble, using the
template provided and using only one
letter per square as per the rules of
scrabble. You must make business terms
and/ or words that relate to the topics
covered so far.
 Ratio Analysis - Shareholders

Shareholder
 Dividend per share (in pence)
 Total dividends
number of issued ordinary shares
 The return paid to shareholders’ for their investment
 Money paid in dividends reduces retained profit
 Will be influenced by financial objectives

If a dividend of £6m was paid out to a total of 7.5 m shareholders

the dividend per share would be:
£6m / 7.5m = 0.80p
For every 1 share owned the shareholder would receive 80p in dividends
 Dividend per share
Income Statement £m
Revenue 35400 Balance Sheet £m
Cost of sales (30100) Non-current assets 19550
Gross profit 5300 Inventories 2375
Expenses (720) Receivables 1170
Operating profit 4580 Cash & cash equivalents 2300
Finance income 300 Total current assets 5845
Finance cost (260) Current liabilities (8160)
Profit before tax 4620 Net current liabilities (2315)
Taxation (1109) Non-current liabilities (6000)
Profit for the year 3511 Net assets 11235
* Dividends to be paid 150
Share capital (£1 ordinary Shares) 6000
Reserves & retained earnings 5235
Total equity 11235
Dividend per Share

Total dividend
number of issued ordinary shares
For every 1 share owned
150m
(6000m @ £1) the shareholder
would receive 2.5p in dividends
150,000,000
6,000,000,000 = £0.025
 Ratio Analysis - Shareholders
Shareholder
 Dividend yield
 Ordinary share dividend (in pence) x 100
current market price (in pence)
 Measures the return on the investment as a percentage of
current market price
 Market price fluctuates on a regular (constant basis)
 Allows for a more accurate comparison of the value of the
shareholders’ investment compared to other investment
opportunities

If dividend per share is 80p and the current market share price £15
the dividend yield is:
0.80 / 15.00 x 100 = 5.3%
Do you consider this to be a good return?
How does this compare to savings accounts, ISAs, other share options?
 Dividend Yield
Income Statement £m
Revenue 35400 Balance Sheet £m
Cost of sales (30100) Non-current assets 19550
Gross profit 5300 Inventories 2375
Expenses (720) Receivables 1170
Operating profit 4580 Cash & cash equivalents 2300
Finance income 300 Total current assets 5845
Finance cost (260) Current liabilities (8160)
Profit before tax 4620 Net current liabilities (2315)
Taxation (1109) Non-current liabilities (6000)
Profit for the year 3511 Net assets 11235
* Dividends to be paid 150
Share capital (£1 ordinary Shares) 6000
Reserves & retained earnings 5235
Total equity 11235

Dividend Yield # Market Price per share £2.40

Ordinary share dividend (in pence) x 100

Current market price (in pence)

£0.025 X 100
Measures the return on
£ 2.40 the investment as a
percentage of current
= 1.04% market price
A Level Business

AQA

YEAR 2
 OVERALL
Performance of a business

 How to analyse data (non-financial) “

 Importance of core competences

 Assessing short & long term

performance

 Value of different measures

A 'level only (Year 13)

 OVERALL Performance of a business
ICT Research

Methods of assessing 1. Research and explain what is

meant by the ‘Balanced
overall business Scorecard’?
performance to  Give business examples of how
this as been applied in practice.
include:

 Kaplan and Norton’s 2. Research and explain what is

meant by the ‘ Triple Bottom
Balanced Scorecard model Line’?
 Explain in detail what each of
the 3 bottom lines are.
 Elkington’s Triple  Give business examples of how
this as been applied in practice.
Bottom line.
 OVERALL
Performance of a business

 Kaplan and Norton’s  Explanation:

Balanced Scorecard model

 Scored card presentation

 https://
www.youtube.com/watch?v=M_IlOlywry
w
 http://
www.tutor2u.net/business/presentation
s/strategy/balancedscorecard/default.ht
ml

 Video – Robert Kaplan, the

Balance Scorecard
https://
www.youtube.com/watch?v=oNy8kupW8oI&i
ndex=2&list=PLMYJuXb3F_KvhhlyyDdTjCsUz
AEgKnu5U
 OVERALL
Performance of a business

 Elkington’s Triple  Explanation:

Bottom line (Profit, People,  
Planet).
 Bottom line presentation
 https://
www.youtube.com/watch?v=RTqLFnkfE
QQ
 https://
www.youtube.com/watch?v=K1ezwDSij
6M

 Video – Nova Nordisk, the

triple bottom line
 Southwest Airlines – 2013
triple bottom line report
 The economist – triple bottom
line
 Overall Performance

Balanced Score Card Triple Bottom Line

 The balanced scorecard is a  The Triple Bottom Line is a way

strategic planning and of measuring an organisation's
management system that is used impact on people and the
extensively in business to align its environment as well as its finances.
activities to the vision and  Some companies find that using it
strategy of the organisation, to monitor more than just the
improve internal and external financial line helps them improve
communications, and monitor the way that they treat people both
organisational performance within and outside the
against strategic goals. organisation, and reduce their
adverse impact on the
environment.
 Overall Performance

In what ways, other than financial analysis can a

business assess its ‘overall performance’?
 Overall Performance

In what ways, other than financial analysis can a

business assess its ‘overall performance’?
Ways [re-cap Year 1 Content]:
3.3.1 market share
3.4.2 labour productivity, unit costs, capacity and capacity
utilisation
3.6.2 labour turnover and retention rates, employee costs as a
percentage of turnover and labour cost per unit
 Overall Performance
Define the terms market How to these help judge
size, market share & the internal performance
market growth. of a business?

Define the terms

productivity & capacity

Define the terms labour

turnover and labour
retention rates.