1
Q
Gross profit =
A
Gross profit = Selling price - Cost price
2
Q
Markup =
A
Markup = Gross profit
3
Q
COGS =
A
COGS = Sales - Gross profit
4
Q
A businesses expense percentages may increase if…
A
Distribution cost
• There is a major advertising campaign to launch a new product, sales of the new product may be slow to begin with
Administrative expense
• There is an increase in the use of telecommunications such as cell phones, email or fax expenses which may increase by more than the increase in sales
Finance cost
• The business borrows more money on a loan or mortgage, interest expense may increase by more than the increase in sales
5
Q
Profit for year =
Profit for the year % =
A
Profit for year = Gross profit - expenses
Profit for the year % = Gross profit % - Expense %
6
Q
What the markup % shows us about a business…
A
The markup percentage of (%___) shows that on average, (business name) has added (%___) of the cost price of the (goods in context to business) onto the cost price to get the selling price in (year).
7
Q
Recommendations for improving markup %
A
- (business name) could increase the selling price of the (goods in context to the business). This will mean that (business name) will be able to generate more profit from each sale. This will increase the gross profit, (as gross profit = sales - COGS) and cause the markup % and gross profit % to increase.
- (business name) could find a cheaper supplier for its (goods in context to business) while keeping its selling prices the same, which will decrease COGS. This will increase the gross profit, (as gross profit = sales - COGS) and cause the markup % and gross profit % to increase.
- (business name) could change its ‘sales mix’ by selling different (goods in context to the business) with different markups. For example, it could try to sell more (goods in context to the business) with higher markups. By selling more (goods in context to the business) with a higher markup compared to (goods in context to the business) with a lower markup, this will increase the average markup % and increase the gross profit %.
8
Q
What the gross profit % shows us about a business…
A
The gross profit percentage of (%___) shows that (business name) earned ($___) of gross profit for every $1 of sales in (year).
9
Q
Recommendations for improving gross profit %
A
- (business name) could increase the selling price of the (goods in context to the business). This will mean that (business name) will be able to generate more profit from each sale. This will increase the gross profit, (as gross profit = sales - COGS) and cause the markup % and gross profit % to increase.
- (business name) could find a cheaper supplier for its (goods in context to business) while keeping its selling prices the same, which will decrease COGS. This will increase the gross profit, (as gross profit = sales - COGS) and cause the markup % and gross profit % to increase.
- (business name) could change its ‘sales mix’ by selling different (goods in context to the business) with different markups. For example, it could try to sell more (goods in context to the business) with higher markups. By selling more (goods in context to the business) with a higher markup compared to (goods in context to the business) with a lower markup, this will increase the average markup % and increase the gross profit %.
10
Q
What the distribution cost % shows us about a business…
A
The distribution cost percentage of (%___) means that (business name) spent ($___) of every $1 of sales on distribution costs, such as advertising, in (year).
11
Q
Recommendations for improving distribution cost %
A
- (business name) could reduce advertising costs by printing promotional posters in black and white instead of colour to reduce printing costs. This would decrease advertising costs, which would decrease distribution costs. Therefore, the distribution cost % and total expenses % would decrease and profit % would increase.
- (business name) could reduce shop electricity costs by turning off shop lights when not in use and switching to energy efficient light bulbs. This would decrease shop electricity costs, which would decrease distribution costs. Therefore, the distribution cost % and total expenses % would decrease and profit % would increase.
- (business name) could reduce shop rent costs by negotiating a better rent or moving to a cheaper premises. This would decrease shop rent costs, which would decrease distribution costs. Therefore, the distribution cost % and total expenses % would decrease and profit % would increase.
12
Q
What the administrative expense % shows us about a business…
A
The administrative expense percentage of (%___) means that (business name) spent ($___) of every $1 of sales on administrative expenses, such as insurance in (year).
13
Q
Recommendations for improving administrative expense %
A
- (business name) could reduce insurance costs by changing to a cheaper insurance provider. This would decrease insurance costs, which would decrease administrative expenses. Therefore, the administrative expenses % and total expenses % would decrease and profit % would increase.
- (business name) could reduce office electricity costs by turning off shop lights when not in use and switching to energy efficient light bulbs. This would decrease office electricity costs, which would decrease administrative expense. Therefore, the administrative expenses % and total expenses % would decrease and profit % would increase.
- (business name) could reduce office rent costs by negotiating a better rent or moving to a cheaper premises. This would decrease office rent costs, which would decrease distribution costs. Therefore, the distribution cost % and total expenses % would decrease and profit % would increase.
14
Q
What the finance cost % shows us about a business…
A
The finance cost percentage of (%___) means that (business name) spent ($___) of every $1 of sales on finance costs, such as interest on loan, in (year).
15
Q
Recommendations for improving finance cost %
A
- (business name) could reduce interest on loan by renegotiating interest rates with their current bank. This would decrease interest on loan, which would decrease finance costs. Therefore, the finance cost % and total expenses % would decrease and profit % would increase.
- (business name) could reduce interest on mortgage by paying some of it off, which would reduce the amount of interest they would have to pay. This would decrease interest on mortgage, which would decrease finance costs. Therefore, the finance cost % and total expenses % would decrease and profit % would increase.
16
Q
What the total expenses % shows us about a business…
A
The total expenses percentage of (%___) means that (business name) spent ($___) of every $1 of sales on total expenses in (year). For example…
17
Q
Recommendations for improving total expenses %
A
• Could use any of the previous suggestions to improve DC % AE % or FC %
18
Q
What the profit for the year % shows us about a business…
A
The profit for the year percentage of (%___) means that (business name) earned a profit of ($___) of every $1 of sales in (year).
19
Q
Recommendations for improving profit for the year %
A
- Could use any of the previous suggestions to improve DC % AE % or FC %
- By decreasing the total expenses %, this will increase profit for the year and increase the profit for the year percentage (as profit for the year % = gross profit % - expenses %).
20
Q
What the % change shows us about a business…
A
The percentage change of (fees/sales/profit) of (%___) shows that (business name)s (fees/sales/profit) (increased/decreased) by (% in year 2) from (year 1) to (year 2).
21
Q
Sales and Profit trend description
A
From (year 1) to (year 2), (business name) (sales/profit) (increased/decreased) from ($___) in year 1 to ($___) in year 2, which is a (% change between the 2 years) (increase/decrease). This is a (positive/negative) trend for the business. This (increase/decrease) may have occurred due to …
22
Q
Recommendations for improving the % change in sales/fees
A
- (business name) could change the type of advertising they use. For example, from posters to television commercials, while focusing on the quality/new range/lower prices of (goods in context to business). The new advertising should attract more customers and increase the quantity of (goods in context to business) sold, which will increase (business name) sales in the future. By increasing sales, the percentage change in sales will increase also.
- (business name) could find a cheaper supplier for its (goods in context to business) so it can lower it selling prices to compete with (competitors store name) without further reducing its markup. The lower selling prices should attract more customers and increase the quantity of (goods in context to business) sold, which will increase (business name) sales in the future. By increasing sales, the percentage change in sales will increase also.
23
Q
Recommendations for improving the % change in profit
A
TBC…
24
Q
What the current ratio shows us about a business…
A
The current ratio of ___:1 in (year) shows that (business name) has ($___) of current assets to pay for every $1 of current liabilities. This shows that (business name) will likely be able to meet its current debts as they fall due within the next accounting period, usually of 12 months.
25
Why a current ratio about 5:1 is not ideal...
(Ratio must be greater than 1:1, ideal is from 2:1-5:1)
• A ratio higher than 5:1 means that the business may not be using its current assets effectively. They should invest some of their cash into non current assets (such as a term deposit) which would give a higher return compared to current assets (such as bank).
26
Recommendations for improving the current ratio
* (owners name), the owner of (business name) could improve the current ratio by investing more cash into the business. This investment of cash would increase the current asset bank, (if cash) or accounts receivable (if credit) without impacting liabilities. This will increase and therefore improve the overall current ratio for (business name) in (year).
* (business name) could improve the current ratio by selling more inventory at a profit. By selling more inventory at a profit, (business name) current asset bank (if cash) or accounts receivable (if credit) will increase by more than the decrease in inventory. This will result in a net increase for assets, while there will be no impact on current liabilities. This will increase and therefore improve the overall current ratio for (business name) in (year).
27
Consequence of improving current ratio
• By (recommendation), (business name) will be able to increase their current ratio above 1:1, which will enable them to meet their debt obligations in the next year (accounting period). This will ensure they have a good relationship with their credit suppliers.
28
Secured bank overdraft
Secured bank overdraft is when the overdraft limit is linked to a particular PPE for the business.
29
What the liquid ratio shows us about a business...
(Ratio must be greater than 1:1, ideal is from 1:1-3:1)
• The liquid ratio of ___:1 in (year) shows that (business name) has ($___) of liquid assets to pay for every $1 of liquid liabilities. This shows that (business name) will likely be able to meet its immediate debts as they fall due within the next 4-6 weeks.
30
Recommendations for improving the liquid ratio
• (owners name), the owner of (business name) could improve the liquid ratio by investing more cash into the business. This investment of cash would increase the liquid asset bank, (if cash) or accounts receivable (if credit) without impacting liquid liabilities. This will increase and therefore improve the overall liquid ratio for (business name) in (year).
(If you must include how it relates to the current ratio... This would also increase the current ratio, as bank/accounts receivable is a liquid and current asset which is increased)
• (business name) could improve the liquid ratio by selling more inventory at a profit. By selling more inventory at a profit, (business name) liquid asset bank (if cash) or accounts receivable (if credit) will increase by more than the decrease in inventory. This will result in a net increase for assets, while there will be no impact on liquid liabilities. This will increase and therefore improve the overall liquid ratio for (business name) in (year).
(If you must include how it relates to the current ratio... This would also increase the current ratio, as bank/accounts receivable is a liquid and current asset which is increased by more than the decrease in inventory)
31
Consequence of improving liquid ratio
• By (recommendation), (business name) will be able to increase their liquid ratio above 1:1, which will enable them to pay their immediate debts as they fall due within the next 4-6 weeks.
32
Possible reasons for a decrease in the trend of the liquid ratio
(cash)
This decrease in the liquid ratio for (business name) may have been caused by the liquid asset bank decreasing from ($___) to ($___). This was because of...
* (owners name) took large amounts ($___) of cash drawings from the business. This decreased the liquid asset bank, which decreased liquid assets without increasing liquid liabilities, as drawings is equity. This then caused the liquid ratio to decrease.
* (business name) repayed ($___) off it’s loan. This decreased the liquid asset bank, which decreased the liquid assets without increasing liquid liabilities, as loan is a non current liability. This then caused the liquid ratio to decrease
33
Possible reasons for a decrease in the trend of the liquid ratio
(credit)
This decrease in the liquid ratio for (business name) may have been caused by the liquid liability accounts payable increasing from ($___) to ($___). This was because of...
• (business name) purchased more inventory on credit to receive new (goods in context to business). This increased the liquid liability accounts payable, without increasing liquid assets, as inventory is not liquid. This then caused the liquid ratio to decrease.
34
Recommendation for decreasing the liquid ratio
• (business name) could improve the current and liquid ratio by investing some of the cash in the bank into a long term investment, Eg. Term deposit. By investing cash, (business name) asset bank will decrease, which will decrease the current and liquid assets. There will be no impact on current liquid liabilities and this will decrease and therefore improve the overall current and liquid ratios for (business name) in (year), bringing them closer to the industry averages this means that (business name) would be able to earn additional interest and income.
35
What the equity ratio shows us about a business...
(Ideal ratio is above 0.5:1)
• This equity ratio of (___:___) in (year) shows that (owners name) has financed ($___) of every $1 of assets which (business name) owns. This is satisfactory as it shows that (owners name) has confidence in their business as they have contributed more than outsiders.
36
Reason for decrease in trend of equity ratio
... (Trend)
• This decrease occurred due to the (liability name) (business name) took out for (reason). This increased liabilities, which caused the owners equity to decrease. This then caused the equity ratio to decrease also.
37
Recommendations for improving the equity ratio
* (owners name), the owner of (business name) could improve the equity ratio by investing more cash into the business (could also be investment of PPE). This investment would increase the asset bank, (if cash) or accounts receivable (if credit), which will increase total assets and the owners equity. There will be no impact on liabilities and this will therefore increase and improve the overall equity ratio for (business name) in (year).
* (business name) could improve the equity ratio by selling more inventory at a profit. By selling more inventory at a profit, (business name) asset bank (if cash) or accounts receivable (if credit) will increase by more than the decrease in inventory. This will result in a net increase for assets, while there will be no impact on liabilities. This will increase and therefore improve the overall equity ratio for (business name) in (year). By selling more inventory at a profit, profit will also increase, which will increase owners equity. This will also increase and therefore improve the overall equity ratio for (business name) in (year).
38
Consequence of improving equity ratio
• By (recommendation), (business name) will be able to increase their equity ratio above 0.5:1 and have a satisfactory equity ratio which shows that (business name) owner has confidence in the business as they have invested lots of their own money. This will encourage lenders to provide finance to the business.
39
Describing a trend
• From (year 1) to (year 2), (business name) (___) (increased/decreased) from (%___) in year 1 to (%___) in year 2, which is a positive/negative trend for the business. This (increase/decrease) may have occurred due to...
40
Explain one possible reason for the trend in markup/gross profit percentage
...
This would have increased (business name) cost of goods sold, and assuming (owners name) decided to keep their selling price the same and not pass of the increase in costs, would have also decreased their gross profit. As GP = Sales - COGS. This means that their markup percentage would have decreased, and their gross profit percentage would have decreased also.
41
Justify one recommendation to improve the (expense type) percentage, include how this recommendation is likely to impact on (business name) future profit
(Recommendation from on of the DC, AE or FC). By reducing the (expense type) expenses, (business name) total expenses will decrease and providing sales stay the same of increase, and other expenses do not increase, the profit for (business name) should increase in the future.
Accounting
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