2.3

Question 1

what is an income statement and why is it useful

Answer 1

shows the income and profit/loss over the last 12 months
1.compare with competitors
2.compare performance from previous years
3. for investors/bank loans

Question 2

gross profit

Answer 2

revenue - cost of sales (variable costs)

Question 3

operating profit

Answer 3

gross profit - expenses (fixed costs)

Question 4

profit for year (net profit)

Answer 4

operating profit - tax and financing costs

Question 5

how to work out profit margins

Answer 5

*profit / revenue x100
higher the better

Question 6

ways of improving profitability

Answer 6

• staff redundant
  -reducing wages
• moving to a cheaper location
• increasing prices

Question 7

what is liquidity

Answer 7

the ability to turn assets into cash

Question 8

balance sheet defintion

sn..

Answer 8

snapshot of what a business owns and owes at a point in time

Question 9

current liability

Answer 9

things you have to pay within a year e.g. overdraft

Question 10

non current liability

Answer 10

things you have to pay but not within a year

Question 11

current assets

Answer 11

assets a business has that are cash equivilants or things that can be turned into cash within the next 12 months
- cash (most liquid)
- bank
- debtors (own money)
- inventory (least liquid)

Question 12

non current assets

Answer 12

asset owned for more than one year and it depreciates

Question 13

current ratio -

Answer 13

identifies whether a business can pay back short term debts when due
current assets/ current liabilities :

Less than one would mean the business struggles to pay debts

Question 14

acid test ratio

Answer 14

more accurate way of testing liquidity
current assets - inventory / current liabilities

ideal figure = 1.0:1

Question 15

ways to improve liquidity

Answer 15

• encourage cash sales
• use overdraft
• destocking
• negotiate longer credit terms with suppliers
• delay payments

Question 16

working capital

Answer 16

money the business has to pay for day - to - day running costs
current assets - current liabilities

Question 17

internal causes of business failure

Answer 17

1. lack of planning
2. cash flow problems
   3.lack of funds
3. marketing problems
   5.poor leadership

Question 18

external causes of business failure

Answer 18

1. changes in legislation
2. competition
3. economic climate
4. change in market crisis