3.7.2

Question 1

what are the 6 main features of an income statement?

Answer 1

1. cost of goods sold
2. gross profit
3. rent
4. operating cost
5. exceptional expenses and income
6. net profit

Question 2

what does it mean by goods sold?

Answer 2

direct costs associates with the production of sales

Question 3

what does it mean by gross profit? definition and Equation

Answer 3

profit - direct cost

indication of success of trading activity

Question 4

what does it mean by rent?

Answer 4

indirect/operating costs

Question 5

what does it mean by operating costs? definition and equation

Answer 5

direct and indirect costs - profit

Question 6

what does it mean by exceptional expenses and income?

Answer 6

expenses or incomes not associates with the direct activity if the business

Question 7

what does it mean by net profit/profit of the year?

Answer 7

what the business has left over after tax is deducted

Question 8

what are the 7 main features of a balance sheet?

Answer 8

1. non-current assets
2. current assets
3. current liabilities
4. net current assets
5. non-current liabilities
6. net assts
7. total equity

Question 9

what does it mean by non-current assets?

Answer 9

owned for over a year, fixed assets?

land, machinery

Question 10

what does it mean by current assets?

Answer 10

assets expected to be used or sold within a year

inventories/debtors

Question 11

what does it mean by current liabilities?

Answer 11

payments due within a year

Question 12

what does it mean by net current assets? definition and equation

Answer 12

current assts - current liabilities

working capital available

Question 13

what does it mean by non-current liabilities?

Answer 13

debts not expected o be payed within a year

Question 14

what does it mean by net assets?

Answer 14

total assets - total liabilities

the value of the business

Question 15

what does it mean by total equity?

Answer 15

always the same as net assets

re[resents how it has been financed

Question 16

what are the 4 types of financial ratio?

Answer 16

1. profitability ratio
2. efficiency ratio
3. liquidity ratios
4. gearing ratio

Question 17

what is profitability ratio?

Answer 17

key measure of success when comparing profit to revenue and investment.

Question 18

what are the profitability ratios?

Answer 18

profit margin ratios

ROCE

Question 19

what are profit margin ratios? what are the there types of profit margins?

Answer 19

comparing profit o revenue generated over a period of time.

gross profit margin, operating profit margin, net profit margin

Question 20

what is ROCE ratio? what if the equation for capital employed? what is the equation for ROCE?

Answer 20

compared operating profit with the amount of capital employed by the business.

capital employed = total equity + any non current liabilities.

operating profit/capital employed

Question 21

what is the efficiency ratio?

Answer 21

gives an indication of how well parts of the business is being managed.

Question 22

what is a type of efficiency ratio?

Answer 22

Payables days ratio
Receivables days ratio
Inventory turnover ratio

Question 23

what is liquidity ratio?

Answer 23

assesses the ability of a business to pay its debts

Question 24

what is a type a of liquidity ratio?

Answer 24

current ratio

Question 25

what is current ratio? definition and equation

Answer 25

compared current assets to current liabilities, this shows if the business has enough working capital to pay its short term debts] current assets/current liabilities

Question 26

what does gearing ratio do?

Answer 26

assesses the extent to which a business is based on borrowed finance.

Question 27

what is a type of gearing ratio?

Answer 27

gearing ratio

Question 28

what is getting ratio?

Answer 28

how the business has raised long term finance

Question 29

how do you interpret current ratio?

Answer 29

e.g. expresses as 2:1, means £2 current assets to £1 current liabilities

Question 30

how do you interpret gearing ratio?

Answer 30

highly geared means more than 50% of capital in he form of a loan. Business is vulnerable to increased interest rates low geared have opportunity to borrow funds to expand

Question 31

what three things are financial ratio used for?

Answer 31

1. performance as a trend 2. the economic environment 3. benchmarkerss and industry average

Question 32

what does benchmarkers and industry average mean?

Answer 32

manufacturers have lower operating profit margins. business needs to know the industry

Question 33

what is inventory turnover ratio? definition and equation

Answer 33

measures the success of turning inventory into revenue it compares the value of inventory with the sales achieved cost of goods sold/average inventories held

Question 34

how do you interpret inventory turnover ratio?

Answer 34

the lower the number the more efficient ratio only really apply's to manufacturers perishable goods?

Question 35

what are receivable days ratio? definition and equation

Answer 35

the time it takes for the business to revive its debts owed (receivables/revenues) x 365

Question 36

how do you interpret a receivables days ratio?

Answer 36

the shorter the period the quicker they have cash trade credit links to a long waiting period

Question 37

what is a payables days ratio? definition and equation

Answer 37

calculates how long it takes for the business to pay its creditors (payables/cost of sales) x 365

Question 38

how do you interpret a payables days ratio?

Answer 38

the longer the period the longer they have a lot of short term cash. can damage relationships and can make future deals difficult

Question 39

what are the 4 main categories financial accounts are used by?

Answer 39

1. managers 2. potential investors and lenders 3. shareholders 4. government

Question 40

what do managers use financial accounts for?

Answer 40

assess performance and efficiency

Question 41

what do shareholders use financial accounts for?

Answer 41

assess possible dividends

Question 42

what do governments use financial accounts for?

Answer 42

calculate tax liability

Question 43

what do potential investors and lenders use financial accounts for?

Answer 43

assess businesses security and liquidity

Question 44

what are 4 benefits of ratio analysis?

Answer 44

1. can compare and calculate trends 2. greater insight into financial accounts 3. information can be used against benchmarkers data 4. assess performance of other functional areas

Question 45

what are 3 limitations of ratio analysis?

Answer 45

1. no account for qualitative issues like brand issues 2. no account for impact of long-term decisions 3. economic climate

Question 46

What 5 stakeholders are interested in profitability ratios?

Answer 46

1. Shareholders 2. Creditors 3. Managers 4. Competitors 5. Employees

Question 46

What 3 stakeholders are interested in liquidity ratios?

Answer 46

1. Creditors 2. Suppliers 3. Managers

Question 47

What 3 stakeholders are interested in gearing ratios?

Answer 47

1. Shareholders 2. Managers 3. Creditors

Question 48

What 4 stakeholders are interested in efficiency ratios?

Answer 48

1. Shareholders 2. Managers 3. Employees 4. Competitors

Question 49

What is the equation for gearing?

Answer 49

(Non-current liabilities/capital employed) x 100