3.5- Managing Change

Question 1

What is a statement of comprehensive income

Answer 1

This document shows if the business has made a profit or a loss during the year

Question 2

Key info on a profit and loss account (SOCI)

Answer 2

Revenue
Gross profit
Expenses
Operating profit

Question 3

What is revenue

Answer 3

Revenue is money into the business through ordinary trading.

Formula for sales revenue is Q xP

Question 4

What is gross profit

Answer 4

Revenue – cost of sales

Question 5

What is operating profit

Answer 5

GP-expenses

Operating profit is a true measure of how much profit (or loss) the business has made over the year

Question 6

What’s costs of sales

Answer 6

Cost of sales, or cost of goods is the direct costs to make the goods that have been sold; raw materials , wages, labour

Question 7

What are expenses

Answer 7

Expenses are costs not involved in producing the goods; advertising, promotion, wages of admin staff

Question 8

What are shareholders interests

Answer 8

want to know the final profit figure which dividends will be paid out on

Question 9

What are investors interests

Answer 9

want to know the profitability of the business – is it worth investing or will it be a risk

Question 10

What is a statement of financial position

Answer 10

This document shows what the business owns and owes on one day of the year.
• It is often described as a snapshot of the business.

A =L +C
• Where assets = liabilities plus capital

Question 11

Information on a balance sheet

Answer 11

Current assets
• Non-current assets
• Current liabilities
• Long-term liabilities

Question 12

What are current assets

Answer 12

Current assets are items that the business owns that will pay the business in under 1 year. Three things fall into this category:

Stock
Debtors
Cash

Question 13

What are non current assets

Answer 13

Fixed assets are items that a business owns but that will pay the business back after 1 year

E.g
Machinery
Vehicles
Property

Question 14

What are current liabilities

Answer 14

These are items that the business owes, that need to be paid by the business, within 1 year

E.g materials

Question 15

What are long term liabilities

Answer 15

These are items that the business needs to pay, but that is not due for total payment within one year

E.g a loan

Question 16

What is a ratio in business

Answer 16

A ratio measures a company’s ability to meet financial obligations.

Question 17

Current ratio formula

Answer 17

Current assets/ current liabilities

Question 18

What is a current ratio

Answer 18

Also known as working capital ratio

Ideal around 2:1

the business might not have enough working capital to cover all their bills
• They may be over borrowing or over trading and will have cash flow problems

Question 19

What is the acid test ratio formula

Answer 19

Current assets - inventory / current liabilities

Question 20

What is the acid test ratio

Answer 20

The acid test ratio is also known as the quick ratio and is the most commonly used ratio to judge the financial health of a business

A result of less than 1:1 means that the current assets do not meet their current liabilities and they will struggle to pay their bills

Question 21

What is the gearing ratio formula

Answer 21

Non current liabilities/ capital employed x 100

Question 22

What is the gearing ratio

Answer 22

The gearing ratio looks at the long-term finance of the business and where it comes from

• A result of over 50% means the business is highly geared, most of the money comes from loans, this is very risky for a potential investor

• A result of less than 50% means the business is low geared and most of the money comes from the owners, a better risk for an investment

Question 23

What is the ROCE ratio formula ( return on capital employed)

Answer 23

Operating profit / capital employed x 100

Question 24

What does ROCE (return on capital employed) mean ?

Answer 24

Return on Capital employed is a measure of the profitability of the business

The higher the ROCE figure the better

• Demonstrates how hard the business made the money invested work

Question 25

What are the limitations of using ratios when looking at balance sheets

Answer 25

The balance sheet is just a snapshot of the business on one day, if the ratios are based on this figure, then it’s a ratio of just one day in the business and as markets are dynamic figures could change

• The ratios are only as good as the information provided in the balance sheet and the profit and loss

Ratios must be seen in an industry context. In some supermarkets the current ratio is very low as the stock is sold so fast , so a low current ratio or acid ratio would not be a worry