Business Equations

Question 1

Current ratio equation

Answer 1

Current assets /Current Liabilities = current ratio

Question 2

Reading of current ratio

Answer 2

Ratio of 1.5 - 2.0 would suggest efficient management of working capital

Low ratio e.g. below 1 indicates cash flow problems

Question 3

Acid test ratio equation

Answer 3

(Current assets - stocks) / Current liabilities = acid test ratio

Question 4

Receivables days (debtors days) equation

Answer 4

(Trade receivables / Revenue (sales)) x 365 = receivables days

Question 5

Trade receivables (debtors)

Answer 5

Amounts owed to a business by customers

Question 6

Trade payables (creditors)

Answer 6

Amounts owed by a business to suppliers and others

Question 7

Receivables days

Answer 7

The avaerage length of time taken by customers to pay amounts owed

Question 8

Payables days

Answer 8

The average length of time taken by a business to pay amounts it owes

Question 9

Payables equation

Answer 9

(Trade payables / Revenue (sales)) x 365 = payable days

Question 10

ARR (%)

Year - net cash flow
0 - (150,000(initial investment))
1 - 220,000
2 - 120,000
3 - 50,000
4 - 20,000

Answer 10

Year - net cash flow
0 - (150,000(initial investment))
1 - 220,000
2 - 120,000
3 - 50,000
4 - 20,000

+ all the years = 220,000 + 120,000 + 50,000 + 20,000 = 410,000
All the years - initial investment = 410,000 - 150,000 = 260,000
Previous answer / number of years = 260,000 / 4 = 65,000
Previous answer / initial investment = 65,000 / 150,000 = 0.4333
X 100 = 0.4333 x 100 = 43.33%

Question 11

Allocation

Allocation costs product Z 80,000

…………- sal,reven-Dir,Lab,cos-Dri,Mat,cos
prod x - 413,400—192,500—-202500
Prod y - 290,000—87,500——21,400
Prod Z - 380,000- 120,000—- 190,600

Answer 11

…………- sal,reven-Dir,Lab,cos-Dri,Mat,cos
prod x - 413,400—192,500—-202500
Prod y - 290,000—87,500——21,400
Prod Z - 380,000- 120,000—- 190,600

+ all direct labour costs = 192,500 + 87,500 +120,000 = 400,000

product Z Dir,lab,cos / previous answer = 120,000 / 400,000 = 0.3

Allocation amount x previous = 80,000 x 0.3 = 24,000

Previous answer + Prodz DLC + ProdZ DMC =
24,000 + 120,000 + 190,600 = 334,600

Previous answer - Prod Z sales revenue = 380,000 - 334,000 = 46,000

Question 12

contribution per unit equation
&
Break even

Answer 12

Break even point = fixed costs / contribution per unit

Selling price - variable cost per unit

£6 - £2,75 = £3,25

Break even = fixed costs / £3,25

4000 / 3.25 = 1230.76 units

1231 units per month

Question 13

payback period equation

Answer 13

Total return - initial investment

Question 14

break even output (units)

Answer 14

Fixed costs (£) / contribution per unit (£)