2.5

Question 1

what is the margin of safety

Answer 1

difference between actual sales and break even point

Question 2

what are fixed costs

Answer 2

costs that do not vary with the level of output or sales

Question 3

what are variable costs

Answer 3

costs that change based on how much a company produces and sells

Question 4

what is the equation for gross profit

Answer 4

sales revenue - cost of sales

Question 5

equation for gross profit margin

Answer 5

(gross profit/sales revenue) X100

Question 6

what is operating profit

Answer 6

gross profit - expenses

Question 7

what is operating profit margin

Answer 7

(operating profit/sales revenue) X100

Question 8

equation for net profit

Answer 8

operating profit - interest

Question 9

equation for net profit margin

Answer 9

(net profit/sales revenue) X100

Question 10

disadvantages of cash flow forecasting

Answer 10

overinflate
business is dynamic
human error
cannot take into account unexpected factors

Question 11

state 3 ways to fix cash flow forecast issues

Answer 11

short term loan
reduce expenses
delay paying bills

Question 12

factors influencing cash flow

Answer 12

customer trends - increase in decrease in sales
economic variables - growth or decline in economy
competitors actions - innovation, new products, reputation gain

Question 13

give examples of cash inflow and outflow

Answer 13

cash inflow: owners capita;
investors
loan
grant
sales revenue
cash outflow: loan repayment
rent
stock costs
wages
advertising
expansion

Question 14

what is cash flow forecast

Answer 14

predicts the amount of money that will flow into and out of the business

Question 15

why does a business need a business plan

Answer 15

gain certain forms of finance
reduce risk
map out route to a business objectives
attract investors

Question 16

define retained profit

Answer 16

profits which are reinvested into the business to help it grow

Question 17

how do you calculate contribution

Answer 17

selling price - variable costs (per unit)

Question 18

how do you calculate break even

Answer 18

fixed costs/contribuation

Question 19

what are the limitations of break even analysis

Answer 19

doesn’t take into account external factors
time consuming
assumes every item produced is sold
some businesses fixed costs are shared across a portfolio of products

Question 20

what is a budget

Answer 20

financial plan and an agreed spending limit within a business based on objectives

Question 21

what is historical figures budget + one pro one con

Answer 21

budget set based on current financial figures
+/ realistic
-/business is dynamic

Question 22

what is zero based budget + one pro & one con

Answer 22

based on potential performance
+/ justifies expenses
-/ takes a long time

Question 23

2 advantages & 2 disadvantages of budgets

Answer 23

+/ allocated resources
promotes forward thinking
-/ requires lots of planning
may cause conflict

Question 24

what is favorable variance

Answer 24

manager has underspent or sold more than expected

Question 25

what is adverse variance

Answer 25

manager has overspent or sold less than expected

Question 26

what is profit

Answer 26

profit is recorded straight away
total revenue - total costs

Question 27

what is cash

Answer 27

not recorded until its paid out, it is immediately available to the business

Question 28

define liquidity

Answer 28

ability of a business to turn assets into cash

Question 29

what is a balance sheet

Answer 29

shows a business assets balanced by the sources of finance that have funded them

Question 30

what are non-current assets (give examples)

Answer 30

long term assets not expected to be sold within a year
e.g. equipment
taxes

Question 31

what are current assets (give examples)

Answer 31

short term assets which are likely to be turned into cash within the next year
e.g. raw materials
trade debtors

Question 32

what are non-current liabilities (give examples)

Answer 32

debts which are not expected to be paid off in the next year
e.g. long term loans
pensions

Question 33

what are current liabilities (give examples)

Answer 33

debts which are expected to be paid within the next year
e.g. short term loans
corporation tax

Question 34

what are the uses and limitations of balance sheets

Answer 34

+/ investors can see a businesses assets
summarises valuations of a business
-/ its a snap shot, doesn’t show how a business is doing over time
uses figures not margins
intangibles are hard to put value on

Question 35

what does liquidity tell you about a business

Answer 35

indicates to an investor the ability of a business to pay its debts
measured by calculating current ration & acid test ratio

Question 36

how do you calculate the current ratio

Answer 36

current assets/
current liabilities

Question 37

what does the current ratio tell you

Answer 37

estimates whether the business can pay debts due within one year out of the current assets

Question 38

how do you calculate the acid ratio test

Answer 38

current assets - stock/
current liabilities

Question 39

how can you improve liquidity

Answer 39

reduce the amount of stock that a business holds
reduce credit period offered to customers
pay suppliers later
increase borrowing long term & clear short term debt

Question 40

how do you calculate working capital

Answer 40

current assets -
current liabilities

low value indicates issues paying expenses

Question 41

state 4 financial reasons reasons why businesses fail

Answer 41

poor cash flow management
lack of funds to pay tax bill
lack of capital which leads to excessive borrowing
borrowing from expensive sources

Question 42

give some non-financial reasons why businesses fail

Answer 42

failure to innovate
poor marketing
strong pound
competition
civil unrest
government policies
natural disasters