2.3 Managing finance

Question 1

What is a statement of comprehensive income?

Answer 1

Shows the costs and revenue over a period of time (usually a year)

Question 2

How do you calculate Gross Profit?

Answer 2

Revenue - Cost of sales = Gross Profit

Question 3

How do you calculate operating profit?

Answer 3

Gross profit - fixed overhead costs = operating profit

Question 4

How do you calculate Net Profit?

Answer 4

Operating profit - financing costs = Net profit

Question 5

How to calculate profit margins

Answer 5

(Profit/revenue) x 100

Question 6

What do profit margins show?

Answer 6

What percentage of our revenue is profit

Question 7

Statement of financial position

Answer 7

Shows value of a business’ assets and liabilities on a specific date

Question 8

Non-current asset

Answer 8

Long term assets unlikely to be sold in the next year

Question 9

Current assets

Answer 9

Short term assets to become cash in the next 12 months

Question 10

Examples of current assets:

Answer 10

Cash in the bank
stock (inventory)
Receivables (money owed by customers)

Question 11

Current liabilities

Answer 11

Debts owed in the next 12 months

(Short term loans, tax)

Question 12

Non-current liabilities

Answer 12

Long term debts over 12 months

Question 13

Net assets

Answer 13

Assets - liabilites

Question 14

Total equity

Answer 14

Total investment in the business
(share capital + Retained profit)

Question 15

Current ratio

Answer 15

(Current assets / Current liabilities) = x:1

Question 16

Ideal current ratio

Answer 16

1.5-2, want more assets than liabilities, have no debts in the net 12 months

Question 17

Liquidity

Answer 17

Ability for business to generate cash and pay off debts.

Question 18

Why is the acid test ratio used?

Answer 18

indicate a company’s ability to pay off its current liabilities without relying on the sale of inventory.

Question 19

Acid test ratio

Answer 19

(Current assets - inventory / Current liabilities) = x:1

Question 20

Working capital

Answer 20

Cashflow on a day to day basis

Question 21

Difference between internal and external causes of finance

Answer 21

Internal causes - Mistakes the business has made

External causes - Factors out of business control

Question 22

4 internal causes of business failure

Answer 22

Cashflow issues
Poor Planning
Poor marketing
Poor leadership

Question 23

3 External causes of business failure

Answer 23

Economic changes
Changes in consumer taste
Legislation