5

Question 1

How do you calculate interest cover ratio?

Answer 1

Net profit before interest and tax
÷
Interest paid

Determines how easily a company can pay back debt

Question 2

How do you calculate working capital ratio (current ratio) ?

Answer 2

Current assets ÷ current liabilities

Question 3

What does the working capital ratio tell you?

Answer 3

How much current asset cover there is for each £1 of liabilities (gives an indication of business ability to pay back short term debt)

Question 4

How is liquid ratio calculated?

Answer 4

Current net assets - stock ÷ current liabilities

Question 5

How do you calculate operating ratios?

Answer 5

Fixed costs ÷ sales x 100

Question 6

How do you calculate a break even ratio?

Answer 6

Fixed costs ÷ Gross margin %

Question 7

Why is a breakeven ratio important?

Answer 7

Enables you to identify the sales volume necessary to cover all costs and start making profit.

Question 8

How do you calculate gross margin %?

Answer 8

Gross profit ÷ sales x 100

Question 9

How is stock turnover calculated?

Answer 9

Stock ÷ cost of sales x 365

Question 10

How do you calculate net profit ratio?

Answer 10

Net profit ÷ sales x 100

Question 11

How do you calculate return on capital employed?

Answer 11

Net profit ÷ owners stake x 100

Question 12

When examining profitability of business what are the 3 ratios to consider?

Answer 12

Gross profit ratio, net profit ratio and return on capital employed

Question 13

How do you calculate gross profit ratio?

Answer 13

Gross profit ÷ sales x 100

Question 14

How do you calculate how long a period of credit is given to customers?

Answer 14

Debtors ratio:

Debtors ÷ credit sales x 365

Question 15

How do you calculate how much time it has taken to pay suppliers?

Answer 15

Credit ratio:

Creditors ÷ cost of sales x 365

Question 16

What measurements are commonly used to assess customers debit?

Answer 16

EBIT, EBITA & EBITDA as well as operating cash flow

Question 17

What are examples of intagible assets?

Answer 17

Trade marks, patents, goodwill, development costs

Question 18

What is amortisation?

Answer 18

Decrease the value of intangible assets over a number of years.

Question 19

What is depreciation

Answer 19

An accounting method spreading the cost of an asset over a number of years, usually its useful life

Question 20

What is net current assets?

Answer 20

Total current assets / total current liabilities

Question 21

How is the figure for net tangible assets found?

Answer 21

Medium and long term liabilities - net current and fixed assets

Question 22

What two questions need to be asked with audited accounts?

Answer 22

What date were the accounts produced and who audited them

Question 23

What do you do if accounts are several months old?

Answer 23

Obtain previous years accounts to compare (at least 3 years)

Question 24

What are intangible assets?

Answer 24

Only have value if the business can be sold financially stable. So should not be included in ratio calculations.

Question 25

Why is capital adequacy ratio calculated?

Answer 25

To show how much money the owners have in the business

Question 26

When capital adequacy ratio is below 50% what is essential to calculate?

Answer 26

Gearing ratio:

Proprietors funds ÷ medium and long term borrowings

Question 27

What does a highly geared business mean?

Answer 27

One which has a lot of borrowing or high levels of debt

Question 28

How do you calculate gearing ratio as a percentage?

Answer 28

All interest - bearing debt ÷ properietors funds x 100

Question 29

Why are preference shares included as borrowing?

Answer 29

Because they pay a fixed rate like interest.

Question 30

How is capital adequacy ratio calculated? CAR

Answer 30

Proprietors’ funds ÷ total tangible assets x 100

Ratio of a banks capital in relation to its risk weighted assets and current liabilities.

Question 31

What are intangible assets?

Answer 31

Assets in the balance sheets which only have a value if the business can be sold as a going concern, such as goodwill

Question 32

How is the interest cover ratio calculated?

Answer 32

Net profit before interest and tax ÷ interest paid

Used to determine how easily a company can pay interest on outstanding debt.

Question 33

What explains the current ratio?

Answer 33

Current assets ÷ current liabilities

Question 34

What is operating cash flow?

Answer 34

Earnings before interest, tax, depreciation and amortisation adjusted for changes in stock, debtors and creditors

Question 35

What creditor has the first claim on the assets if the company?

Answer 35

Holders of a standard security over property

Question 36

Mock

How is the capital adequacy ratio calculated?

Answer 36

Proprietors’ funds/ divided by total assets less intangibles x 100

Question 37

Mock

The operating ratio is important in financial analysis. What does it show?

Answer 37

All fixed costs as a proportion of sales

Question 38

Mock

What is meant by a breakeven analysis?

Answer 38

Identifies the sales volume necessary to cover all costs and make a profit

Question 39

What does working capital ratio show?

Answer 39

Indicates whether a business could meet its debts as they fall due.

Question 40

There is no requirement by law for the following to have their accounts audited - but instead certified by accountants.

Answer 40

sole traders, partnerships and small companies