Using Financial Data to Measure and Assess Performance

Definitions in Chapter 3 of AQA textbook

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Company Accounts

Balance Sheet: A document describing the financial position of a company at a particular point in time, by comparing the items owned by the organisation (it's assets) with the amounts that it owes (it's liabilities).

Income Statement: An account showing the income and expenditure (and thus the profit or loss) of a firm over a period of time (usually a year).

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Management Accounting: The creation of financial information for use by internal users in the business, in order to predict, plan, review and control the financial performance of the business.

Financial Accounting: The provision of financial information to show external users the financial position of the business, it concentates on historical data.

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Assets: Items that are owned by an organisation.

Non-Current Assets: Resources that can be used repeatedly in the production process, although they do wear out (depreciate) or lose value, for example, land, buildings, machinery and vehicles.

Tangible Assets: Non-current (fixed) assets that exist physically.

Intangible Assets: Non-current assets that do not have a physical presence, but are nevertheless of value to a firm (e.g. a brand name or patent).

Current Assets: Short term items that circulate in a business on a daily basis and can be expected to be turned into cash within 1 year.

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Further Definitions

Liabilities: Debts owed by an organisation to suppliers, shareholders, investors or customers who have paid in advance.

Total Equity or Total Shareholders' Equity: Funds provided by shareholders to set up the business, fund expansion and purchase fixed assets.

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Capital Expenditure, Revenue Expenditure and Depre

Revenue Expenditure: Spending on day-to-day items such as raw materials, inventories (stocks), wages and power to run the production process.

Capital Expenditure: Spending on non-current (fixed) assets- those assets used repeatedly in the production process, such as buildings, vehicles and machinery.

Depreciation: The fall in value of an asset over time, reflecting the wear and tear of the asset as it becomes older, the reduction in its economic use or its obsolescence.

Obsolescence: When an asset is still functioning but is no longer considered useful because it is out of date

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Working Capital

Working Capital (or Net Current Assets): the day-to-day finance used in a business, consisting of current assets (e.g. cash, inventories and receivables) minus current liabilities (e.g. payables, bank overdraft, dividends owed and tax owed)

Liquidity: The ability to convert an asset into cash without loss or delay.

Liquid Assets: Items owned by an organisation that can be converted into cash quickly and without loss of value. The most liquid asset that a business can possess is cash.

Working Capital Cycle (Or Cash Operating Cycle): The inflow and outflow of liquid assets and liabilities within a business.

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Income Statements

Gross Profit: Revenue minus cost of sales. The gross profit shows how efficiently a business is converting its raw materials or stock into finished products.

Operating Profit: The revenue earned from everyday trading munys the costs involved in carrying out those activities.

Earnings per share: how much a shareholder would earn if all of the profit were given to shareholders as dividents. In practice, this is unlikely to happen as some profit will be retained in the business. Earnings per Share is an excellent way of measuring how effectively a business is using it's shareholders' money to make profit.

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 or extraordinary circumstances that are unlikely to continue.

Profit Utilisation: The way in which a business uses it's profit or surplus

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Further Definitions

Trend: The underlying pattern of change shown within a set of numerical data.

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