Budgeting/Financial Indicators

Question 1

Define budgeting

Answer 1

The process of predicting the financial consequences of future actions

Question 2

What does budgeting do

Answer 2

Budgets aid planning – future decisions, and decision making – current decisions

Question 3

Define profitability

Answer 3

The ability of a business to earn profit as expressed in relative terms by comparing profit against a base like sales, assets or owner’s equity

Question 4

Define Return on Owners Investment + formula

Answer 4

Indication of how effectively a business has used the owner’s capital to earn a profit (Profit earned per dollar of capital)

Net Profit/Average Capital *100

Question 5

Define debt ratio + formula

Answer 5

Indication of percentage of assets that are financed by liabilities

Total Liabilities/Total Assets *100

Question 6

Define Return on Assets + formula

Answer 6

indication of effectiveness a business has used assets to earn a profit (Net Profit per dollar of assets)

Net Profit/Average total Assets *100

Question 7

Define Asset Turnover + formula

Answer 7

Indication how effectively assets have been used to earn a revenue

Net Sales/Average Total Assets * 100

Question 8

Define Net Profit Margin + formula

Answer 8

Indication of expense control by calculating the percentage of Net sales revenue that is retained as Net Profit

Net Profit/Net Sales * 100

Question 9

Define Gross Profit Margin

Answer 9

Gross Profit/Net Sales * 100

Question 10

Define liquidity

Answer 10

The ability of a business to meet its short-term debts as they fall due

Question 11

Define Working Capital Ratio + formula

Answer 11

Indication of ability to meet short term debts

Current Assets/Current Liabilities = # of times : 1

Question 12

Define Quick Asset Ratio + formula

Answer 12

Indication of ability to meet short term debts using liquidatable assets

Current Assets - Inventory - Prepaid expenses / Current Liabilites - # of times : 1

Question 13

Define Cash Flow Cover + formula

Answer 13

Measures the number of times Net Cash Flows from Opperations is able to cover average current liabilities

Net Cash Flows from Operations/Average Current Liabilities

Question 14

Define Accounts Payable Turnover + formula

Answer 14

Average number of days taken for a business to pay Accounts Payable

Average Accounts Payable/Net credit purchases (plus GST) * 365 = Ave. # days

Question 15

Define Accounts Receivale Turnover + formula

Answer 15

Average number of days it takes for a business to receive cash from Accounts Receivable

Average Accounts Receivable/net Credit Sales (plus GST) * 365 = Ave. # days

Question 16

Define Inventory Turnover + formula

Answer 16

Average number of days it takes for a business to sell its inventory or convert its inventory into sales

Average Inventory/Cost of Goods sold * 365 - Ave. # days