3.6 Finance and Accounts

Question 1

is the stock turnover ratio an avarage

Answer 1

yes, because sales and therfore stock turnover often varies over the course of a year
this can be due to seasonal changes like climate changes or holiday periods.

Question 2

stock turnover ratio (inventor ratio)

Answer 2

measures the number of times, on average, that a company sells and therefore replenishes its stock within a period of time, usually a year

Question 3

the more frequently the stock is “turned over”

Answer 3

the more efficient the business is

Question 4

stock turnover ratio formula ( number of times)

Answer 4

cost of sales/ average stock

Question 5

stock turnover ( number of days)

Answer 5

(average stock/ cost of sales) x 365

Question 6

average stock formula

Answer 6

(opening stock + closing stock)/2

Question 7

what can a low inventory ratio suggest

Answer 7

slow sales due to poor quality or range of goods
inadequate promotion
overstocking
factors related to sales

Question 8

debtors

Answer 8

a person or business that has bought products on credit from another business, but has not yet paid for their products

Question 9

what happens if a business takes to long to recievemoney from debtors

Answer 9

there could be cashflow problems

Question 10

debtor days ratio

Answer 10

measures the average number of days it takes the business to collect its debts. typically, credit periods can be 30, 60, 90 days

Question 11

the shorter the debtor days

Answer 11

the better it is for the business

Question 12

creditor days ratio

Answer 12

indicator of the average number of days it takes a business to pay its debts.

Question 13

creditor days ratio

Answer 13

creditors/cost of sales x 365

Question 14

the longer the creditor days

Answer 14

the better it is for the business
the business does not have to spend cash in the working capital cycle as quickly
reduces the pressure of the working capital

Question 15

gearing ratio

Answer 15

a measure of how much of a business capotal employed is finances by long-term debt

Question 16

the higher the gearing ratio

Answer 16

the more of the business operations are funded by long-term debt.

Question 17

what gearing ratios are low hugh and normal

Answer 17

25%= low
50%= normal
above 50%= hugh

Question 18

gearing ratio formula

Answer 18

(non- current liabilities/ capital employed) x 100

Question 19

capital employed formula

Answer 19

capital employed= non- current liabilities + equity

Question 20

strategies to reduce stock turnover ratio

Answer 20

• supplying a narrower range of goods
• selling obselete stock, stocking goods in high demand
• just in time stock control

Question 21

supplying a narrower range of goods benefits and limitations

Answer 21

benefit: simplifies stock, increases the control over stock and can reduce stock quntities
limitation: simplifying the product portfolio and offering reduced choice to customers may negativley affect sales revenues if the fewer items are sold as a result

Question 22

selling obselete stock, stocking goods in high demand benefits and limitations

Answer 22

benefits- reducing unpopular stock items can reduce stocks. selling goods in high deman will increase sales of stocks. this can also save on storage costs.
limitation: simplifying the product portfolio and offering reduced choice to customers may negativley affect sales revenues if the fewer items are sold as a resul

Question 23

just in time stock control benefits and stock control

Answer 23

benefits- stock could be ordered only when needed for the production process. ensures there is no excess
limitations- delays in supply chains, cause business stock to run out, reducing sales, revenues and causing customer disatisfaction

Question 24

strategies to improve debtor days

Answer 24

having customers pay in cash- offer discount for cash payments, charge interest on credit payments, reduce amount of outstanding purchases on credit
shortening the credit period- debtors paying sooner
improving credit control- business could only givcredit trade to certain customers + stricter criteria
refusing to do business with costumers who pay late
threatening legal action or imposing penalty

Question 25

limitations of strategies that reduce debtor days

Answer 25

These strategies may upset some customers leading to a decline in sales revenue. A business needs to balance its own need to reduce debtors with its customers’ needs for flexible payment options.

Question 26

strategies to improve creditor days

Answer 26

negotiating longer credit periods good stock control system looking for different suppliers

Question 27

benefits and limitations of negotiating longer credit periods

Answer 27

benefits: businesses can develop close relationships with their suppliers (creditors), helping them negotiate longer credit periods asking for longer credit periods can threaten relationships with suppliers, who themselves need to payment for their own working capital cycles

Question 28

good stock control system ( creditor days) benefits and limitations

Answer 28

benefits: stock could be ordered ony when needed limitations- delay in stock, reducong sales, disatisfaction

Question 29

looking for different supply chains benefits and limitations

Answer 29

- working with different suppliers might help businesses get better credit terms and might extend credit periods - businesses will havev to establish new relationships with suppliers. these may not have the trust needed to extend credit periods

Question 30

strategies to improve gearing ratio

Answer 30

- paying off liabilities: business can pay their long term liabilities to reduce the gearing rayio, but paying off long term liabilities will mean less cash for daily operations which can reduce sales revenue - increasing retained profit- can be achieved through the cost minimisation and increasing revenue. this increases the value of the denominator in the formula, therby decreasing the gearing ratio, however this could mean reducing dividens for shareholders - selling more shares, will increase the denominator and consequently decrease the gearing ratio.. the value of equity will increase however selling more shares will dilute ownership and reduce dividens for shareholders

Question 31

insolvency

Answer 31

situation were an individual or a business in not able to pay debts. happens when the working capital cycle does not funtion effectivley

Question 32

how will insolvency occur

Answer 32

- debtor days are too long: customers take a long time to pay for products, which reduces the cash flow in the business - loss of sales revenue: this can occur due to internal factors such as poor quaity products or hugh labour turnover, or external factors like increased copetition or poor economic conditions - increased cost due to internal facors or external - legal action- business sued etc