Leaving Cert Notes

Notes and Anki Decks for the Leaving Cert

On completion, you should be able to:

Explain the main ratios used for assessing a company’s financial performance
Illustrate the main uses of the income statement and the statement of financial position for a business
Calculate and interpret the main profitability, liquidity and debt and equity ratios
Recommend how to improve profitability, liquidity and debt and equity ratios
Understand the importance of accountancy and business data in the monitoring of the business enterprise
Identify the main limitations of ratio analysis when interpreting a company’s performance


Gross profit	Sales - cost of sales, direct cost of manufacturing
Net profit	Gross profit - expenses
Reserves	Retained earnings, net profit - dividends + previous reserves
Uses	Shows level of expenses (manager), level of dividends (investors)


Fixed assets	Value of long-term assets a business uses/owns
Current assets	Value of short-term assets (cash, debtors, closing stock)
Current liabilities	Value of short-term debts (trade creditors, overdraft)
Working capital	Short-term finance to run the company day-to-day (current assets - current liabilities)
Debt capital	Long-term borrowing (bank loans > 5 years + preference shares)
Equity capital	Long-term borrowing (issued share capital + reserves)
Capital employed	All long-term funding for the business (equity capital + debt capital)


Explanation	Percentage of sales a business keeps after deducting cost of sales
Formula
How to improve	Increase sales (advertising campaign). Reduce direct costs
Interested stakeholders	Employees (job security). Investor (measure against competitors). Manager (assess performance, earn bonuses)


Explanation	Percentage of sales a business keeps after deducting all expenses
Formula
How to improve	Increase sales (promotional campaign). Reduce expenses (change service provider)
Interested stakeholders	Employees (job security). Investor (measure against competitors)


Explanation	Percentage of net profit from the long-term capital invested
Formula
How to improve	Increase net profit (reduce expenses/increase sales). Reduce long-term loans/debts
Interested stakeholders	Investors (shows their expected return). Employees (with shares)

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Explanation	Compares value of current assets owned by the business with how much it owes in the short term. Removes closing stock from current ratio, as it can be slow to sell
Formula	(Current assets – Closing stock): Current liabilities = X:1 (ideal = 1:1)
How to improve	Sell slow-moving stock at a discount
Interested stakeholders	Employees (shows if there is enough cash to pay staff on time). Suppliers (shows the risk of the business becoming a bad debt)


Explanation	Compares long-term funding of the business – % debt to % equity funding
Formula	Debt capital : Equity capital = X:1
How to improve	<1:1 low geared; 1:1 neutral gearing; >1:1 highly geared
Interested stakeholders	Shareholders (high debt means high interest/repayments)


Changes to staffing	The business may have lost key personnel over the year. The business might not be as strong going into the next year, but this would not be shown in the figures
Valuation of assets	Assets may be under- or over-valued in order to affect ratios favourably for the business. This may not give a clear and fair representation of the current situation
Changes in business environment	Predicting the future based on past performance does not factor in changes to the business environment
Other economic variables	Ratios do not factor in changes in inflation rates. The prices at which the business buys stock could have increased. Sales revenue could have risen without the business actually selling more, if the business increased its prices