Analysis Of Accounts

Question 1

Capital employed formula

Answer 1

Share holders equity + non-current liabilities

Question 2

Define liquidity

Answer 2

The ability of a business to pay back its short term debts

Question 3

Define profitability

Answer 3

Measurement of the profit made relative to the value of sales achieved
OR
the capital invested in the business

Question 4

3 profitability ratios

Answer 4

Return on capital employed
Gross profit margin
Net profit margin

Question 5

Return on capital employed formula

Answer 5

(Net profit / capital employed) x 100

Question 6

Gross profit margin formula

Answer 6

(Gross profit /Revenue) x 100

Question 7

Net profit margin formula

Answer 7

(Net profit/revenue) x 100

Question 8

Define Illiquid

Answer 8

Assets are not easily convertible into cash

Question 9

Two liquidity ratios

Answer 9

Current ratio
Acid test ratio

Question 10

Current ratio formula

Answer 10

Current assets/current liabilities

Question 11

Acid test/liquid ratio formula

Answer 11

(Current assets - Inventories) / Current liabilities

Question 12

Users of accounts

Answer 12

Managers
Shareholders
Creditors
Banks
Government
Workers and trade unions
Other businesses

Question 13

Working capital

Answer 13

Current assets - current liabilities

Question 14

Managers as a user of account

Answer 14

Use the accounts to help them keep control over the performance of each product/division .
Compare ratios either other competitors and with previous years.

Question 15

Shareholders as a user of accounts

Answer 15

From the income statements , profitability ratios and return on capital employed shareholders can see:
- Whether they should invest in the business by buying shares .
- Also compare the ratios with other companies and with previous years.
- How risky it will be to invest in the company (using liquidity ratios)

Question 16

Creditors as a user of account

Answer 16

Balance sheet and liquidity ratios they will tell :
The cash positions and debts of the business.
How risky it is (If there are liquidity problems they wont supply the business).

Question 17

Banks as a user of accounts

Answer 17

They will see:
How risky it is to lend to the business
Therefore only lend to profitable and liquid firms.

Question 18

Government as a user of accounts

Answer 18

Looks at the profits of the company to fix a tax rate.
If the business is profitable and liquid enough to continue its operations.
(If the workers jobs would be protected)