5.5 Analysis of accounts

Question 1

Ratio analysis

Answer 1

Using accounting to measure monitor and compare the financial performance of a business over time and compare their status with other businesses

Question 2

Two types of comparing ratios

Answer 2

Historical
Comparing with past figures

Inter-firm
Comparing with other firms with same market

Question 3

Types of ratios

Answer 3

Profitability

Liquidity

ROCE

Question 4

Non - trading income

Answer 4

Income earned through means other than sales of business itself

Question 5

Gross profit margin

Answer 5

measures amount of gp earned as aproportion of total revenue

Question 6

Gross profit margin increases if

Answer 6

Sales revenue increases

Selling price increases without loss in sales

Rise in consumer demand

Less competition

Early payment discounts to debtors are removed

Cost of sales (cost to produce) fall
(gp = revenue - cost of sales)
(bulk buying or cheaper supplies)

Question 7

Gross profit decreases

Answer 7

Sales revenue decreases
- Loss in demand
- Decrease in GP

Selling price is decreased
- Increase in competition
- prices are reduced

Early payment discounts are increased
- to boost credit sales
- increase cash inflow
- less money coming in quicker

Cost in sales increase
- Supplier increases selling price
- GP = revenue - cost of sales