Chapter 18 - Monitoring The Business Flashcards
What does a profit and loss account do?
Records sales less expenses the Organisation has incurred throughout the financial year
What can we learn from a profit and loss?
Tells us gross profit and net profit and whether we need to spend less/ sell more or of everything is good
What does a balance sheet do?
It shows how much wealth a business has generated by providing a statement of it assets and liabilities as well as its sources of finance
How do you find working capital?
Current assets - current liabilities
What is working capital?
The amount of money available for the day to day running of a business
What is capital employed?
Total amount of money invested in a business
What is a debtor?
Individuals who owe a business money
What is a creditor?
Someone who money is owed to
What can we learn from a balance sheet?
Gearing and liquidity
How is capital employed calculated?
Ordinary share capital + retained earnings + long term loans + preference shares
Name the 3 profitability ratios.
Gross profit margin
Net profit margin
Return on investment
How do you calculate gross profit margin?
Gross profit x 100
_______________
Sales
How do you calculate net profit margin?
Net profit x 100
______________
Sales
How do you calculate return on investment?
Net profit x 100
______________
Capital employed
What are preference shares?
Shares that are entitled to a dividend, they are taken priority over ordinary shares
What are the 2 liquidity ratios?
Current ratio (working capital ratio) Acid test ratio (quick)
How do you calculate current ratio?
Current assets : current liabilities
What is the ideal ratio for current ratio?
2:1
How do you calculate acid test ratio?
Current assets - closing stock : current liabilities
What is the ideal ratio for acid test?
1 : 1
What is liquidity?
The ability to pay short term debts as they fall due
What is solvency?
The ability to pay all debts as they fall due
How can a business overcome a liquidity problem?
Credit control
Stock control
Raise finance
Financial planning
What is the gearing ratio?
Debt/equity ratio
