1.5 - Analysis

Question 1

Gross profit =

Answer 1

Gross profit = Selling price - Cost price

Question 2

Markup =

Answer 2

Markup = Gross profit

Question 3

COGS =

Answer 3

COGS = Sales - Gross profit

Question 4

A businesses expense percentages may increase if…

Answer 4

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

Question 5

Profit for year =

Profit for the year % =

Answer 5

Profit for year = Gross profit - expenses

Profit for the year % = Gross profit % - Expense %

Question 6

What the markup % shows us about a business…

Answer 6

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).

Question 7

Recommendations for improving markup %

Answer 7

1. (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.
2. (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.
3. (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 %.

Question 8

What the gross profit % shows us about a business…

Answer 8

The gross profit percentage of (%___) shows that (business name) earned ($___) of gross profit for every $1 of sales in (year).

Question 9

Recommendations for improving gross profit %

Answer 9

1. (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.
2. (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.
3. (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 %.

Question 10

What the distribution cost % shows us about a business…

Answer 10

The distribution cost percentage of (%___) means that (business name) spent ($___) of every $1 of sales on distribution costs, such as advertising, in (year).

Question 11

Recommendations for improving distribution cost %

Answer 11

1. (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.
2. (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.
3. (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.

Question 12

What the administrative expense % shows us about a business…

Answer 12

The administrative expense percentage of (%___) means that (business name) spent ($___) of every $1 of sales on administrative expenses, such as insurance in (year).

Question 13

Recommendations for improving administrative expense %

Answer 13

1. (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.
2. (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.
3. (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.

Question 14

What the finance cost % shows us about a business…

Answer 14

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).

Question 15

Recommendations for improving finance cost %

Answer 15

1. (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.
2. (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.

Question 16

What the total expenses % shows us about a business…

Answer 16

The total expenses percentage of (%___) means that (business name) spent ($___) of every $1 of sales on total expenses in (year). For example…

Question 17

Recommendations for improving total expenses %

Answer 17

• Could use any of the previous suggestions to improve DC % AE % or FC %

Question 18

What the profit for the year % shows us about a business…

Answer 18

The profit for the year percentage of (%___) means that (business name) earned a profit of ($___) of every $1 of sales in (year).

Question 19

Recommendations for improving profit for the year %

Answer 19

• 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 %).

Question 20

What the % change shows us about a business…

Answer 20

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).

Question 21

Sales and Profit trend description

Answer 21

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 …

Question 22

Recommendations for improving the % change in sales/fees

Answer 22

• (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.

Question 23

Recommendations for improving the % change in profit

Answer 23

TBC…

Question 24

What the current ratio shows us about a business…

Answer 24

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.

Question 25

Why a current ratio about 5:1 is not ideal…

Answer 25

(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).

Question 26

Recommendations for improving the current ratio

Answer 26

• (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).

Question 27

Consequence of improving current ratio

Answer 27

• 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.

Question 28

Secured bank overdraft

Answer 28

Secured bank overdraft is when the overdraft limit is linked to a particular PPE for the business.

Question 29

What the liquid ratio shows us about a business…

Answer 29

(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.

Question 30

Recommendations for improving the liquid ratio

Answer 30

• (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)

Question 31

Consequence of improving liquid ratio

Answer 31

• 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.

Question 32

Possible reasons for a decrease in the trend of the liquid ratio

(cash)

Answer 32

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

Question 33

Possible reasons for a decrease in the trend of the liquid ratio

(credit)

Answer 33

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.

Question 34

Recommendation for decreasing the liquid ratio

Answer 34

• (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.

Question 35

What the equity ratio shows us about a business…

Answer 35

(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.

Question 36

Reason for decrease in trend of equity ratio

Answer 36

… (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.

Question 37

Recommendations for improving the equity ratio

Answer 37

• (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).

Question 38

Consequence of improving equity ratio

Answer 38

• 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.

Question 39

Describing a trend

Answer 39

• 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…

Question 40

Explain one possible reason for the trend in markup/gross profit percentage

Answer 40

…
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.

Question 41

Justify one recommendation to improve the (expense type) percentage, include how this recommendation is likely to impact on (business name) future profit

Answer 41

(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.