Unit 3.3 using financial data to measure and assess performance

Syllabus

Candidates should be able to:• Define working capital, depreciation (not

calculate), profit utilisation and profit quality

• Analyse balance sheets• Analyse income statements• Use financial data for comparisons, trend

analysis and decision making• Assess strengths and weaknesses of

financial data in judging performance

Annual reports and users of accounts

Firms produce annual reports which show their financial performance. They normally include a copy of the balance sheet and an income statement.Who uses accounts?

Balance sheets

A balance sheet is a financial statement recording the a_______ and l__________ of a business at the end of the accounting period.It compares the items owned by a firm (the a______) with the amount that it owes (l_________).

Income statement

An income statement (previously called a profit and loss account) is an account showing the r__________ and e_____________ (and thus the profit or loss) of a firm over a period (usually one year).

Comparisons

Accounts are a valuable source of information but other information is also useful. Both balance sheets and income are based on h_________ data and show what has happened.

In order to be useful, balance sheets or income statements need to be compared either over time (________ comparisons) or with competitors (__________ comparisons).

Trend analysis

Trend analysis: why do firms need to track their performance over time?

Decision making: decisions should be influenced by the current financial situation and should consider the impact on the f_______ performance.

Limitations

What are the limitations of published accounts?

Working capital and depreciationOther key financial terms:Working capital shows a firm’s ability to meet its day-to-day debts. The formula is:

A firm needs about twice as many current assets as current liabilities (1.5 would do) but firms with quick turnover can manage with l_Depreciation shows the loss in value of a firm’s assets over time. Why does this occur?

Using financial data

Other key financial terms:• profit utilisation refers to the way a business uses its profits. Typically they are used to pay __________to shareholders or as retained profits for future __________ etc.• profit quality – a measure of whether profit is sustainable in the long run. High quality profit is profit that will continue, low quality profit arises from exceptional circumstances that are unlikely to continue e.g.