3.5.1 Interpretation of financial statements, 3.5.2 Ratio analysis

Question 1

Corporation tax

Answer 1

a tax levied as a percentage of a companies profits

Question 2

cost of sales

Answer 2

all the costs arising form sales to customers

Question 3

Dividends

Answer 3

regular payments to shareholders as reward for their investment

Question 4

Gross profit

Answer 4

revenue less costs of goods sold, profit made on trading activities

Question 5

Liability

Answer 5

a debt

Question 6

liquidity

Answer 6

a measurement of a firms ability to pay its short term bills

Question 7

Operating profit

Answer 7

gross profit minus expenses

Question 8

Prudent

Answer 8

an accounting term meaning cautious

Question 9

Reserves

Answer 9

a company’s accumulated, retained profit, it forms part of the company’s total equity

Question 10

Revenue

Answer 10

sales revenue; also known as turnover

Question 11

Bad debts

Answer 11

money owed to the business that will never be repaid; perhaps a customer has gone into liquidation

Question 12

Inter-firm comparisons

Answer 12

comparisons of financial performance between firms; to be valuable, these comparisons should be with a firm of similar size within the same market

Question 13

Liquidity

Answer 13

the ability of a firm to meet its short term debts

Question 14

Net realisable value

Answer 14

the price that can be obtained for second-hand stock after deducting the selling costs

Question 15

profit quality

Answer 15

this assesses the likelihood of the source of the profit made by a business continuing in the future