Accounting

Question 1

Importance of the Profit and Loss

Answer 1

Selling price
Suppliers (C.O.G.S.)
Expenses

Question 2

Importance of the Balance Sheet

Answer 2

Collateral
working capital (over trading)
Financed by section

Question 3

If gross profit percentage decreases what does that show to the managers

Answer 3

Selling price has dropped
Suppliers have increased their prices
More theft of stock

Question 4

How can we improve the Gross profit percentage

Answer 4

Increase the selling price
Buying from a cheaper supplier
Bulk buy
Better security systems to stop theft

Question 5

If Net profit percentage decreases what does this tell the managers

Answer 5

Expenses could be increasing

Examples: Wages, Insurance

Question 6

How can we improve the Net Profit Percentage

Answer 6

Banning overtime

Cheaper insurance company

Question 7

If the Return on Investment decreases what does this tell the managers

Answer 7

Managers are not as good at turning business profits into profit

Question 8

how can we improve the Return on Investment

Answer 8

Hiring more efficient managers

Question 9

Current ratio - less than 2:1

Answer 9

Tells managers - Business does not have enough cash to pay its bills as they fall due
They could damage their credit rating
Improved by - Selling investments

Question 10

Current ratio - More than 2:1

Answer 10

Tells managers - Business has too much cash lying around - dead money
Improved by - Investing this excess cash

Question 11

Acid test ratio - Less than 1:1

Answer 11

Tells managers - the business is illiquid.
Business does not have enough cash to pay its bills as they fall due
Business may lose its credit rating
Improved by - Selling investments or selling stock at a massive discount

Question 12

Acid test ratio - More than 1:1

Answer 12

Tells managers - too much excess cash lying around

Improved by - investing this cash to make a profit

Question 13

Importance of debt equity ratio

Answer 13

Gearing - low - borrowed less than invested
Interest - high - highly geared - reduces business profits
Risk of bankruptcy - highly geared - Increased chance
Future loans - highly geared - hard to get a loan

Question 14

Users of ration information

Answer 14

Shareholders - Net Profit percentage, Return on investment
Suppliers - Working Capital Ratio, Acid test ratio
Employees - Profitability ratios, Debt/Equity ratio
Lenders - Liquidity ratios, Debt/Equity ratio