Accounts Analysis Flashcards
What is the formula for gross profit margin?
Gross Profit Margin = (Gross Profit ÷ Revenue) × 100
What does gross profit margin show?
How efficiently a business produces goods by comparing gross profit to sales.
What is the formula for operating profit margin?
Operating Profit Margin = (Operating Profit ÷ Revenue) × 100
What does operating profit margin show?
How well the business controls its operating costs.
What is the formula for markup?
Markup = (Gross Profit ÷ Cost of Sales) × 100
What does markup show?
The percentage added to costs to reach the selling price.
What is the formula for Return on Capital Employed (ROCE)?
ROCE = (Operating Profit ÷ Capital Employed) × 100
What does ROCE measure?
How efficiently a business uses its capital to generate profit.
What is the formula for current ratio?
Current Ratio = Current Assets ÷ Current Liabilities
What does the current ratio show?
Whether the business can pay off short-term debts — ideal ratio is around 1.5–2:1.
What is the formula for acid test ratio?
Acid Test Ratio = (Current Assets − Inventory) ÷ Current Liabilities
What does the acid test ratio show?
Liquidity without relying on stock — a more strict test than the current ratio.
What is liquidity?
A business’s ability to pay its short-term debts.
Why is liquidity important?
A business must be able to pay bills and suppliers on time to avoid insolvency.
Why compare liquidity over time or with competitors?
Shows improvement or decline
Helps identify financial risks
Useful for investors and managers
How are financial documents used to assess business performance?
Identify strengths and weaknesses
Measure profitability and liquidity
Spot financial trends
How do financial documents support decision making?
Help plan costs and budgets
Guide investment or borrowing decisions
Inform strategies for growth or survival
