Chapter-23 Flashcards
Analysis of accounts
Why must a business check its performance regularly?
i) To identify its strengths and weaknesses, allowing it to decide if any policies or strategies need to be changed
ii) To show whether the business is meeting its objectives
iii) To improve future business performance
What is the gross profit margin percentage?
The gross profit margin percentage is the ratio between gross profit and revenue.
What is the profit margin percentage?
The profit margin percentage is the ratio between profit before tax and revenue.
How can a business improve its gross profit margin?
i) Increasing revenue without a similar increase in cost of sales, possibly through price increases.
ii) Reducing cost of sales without a similar decrease in revenue, such as by buying cheaper supplies.
What does “adding value” mean in business?
“Adding value” means selling a product for more than it cost to produce it.
How can a business improve its profit margin?
i) Improving the gross profit margin (as discussed above)
ii) Reducing expenses.
What is Return on Capital Employed (ROCE)?
Return on Capital Employed (ROCE) is the ratio between profit before tax and capital employed.
What is liquidity in a business context?
Liquidity is the ability of a business to pay its short-term debts.
What is the current ratio in business?
The current ratio is the ratio between current assets and current liabilities.
What is the acid test ratio in business?
The acid test ratio is the ratio between liquid assets and current liabilities.
Why are inventories considered the least liquid of current assets?
i) Finished goods inventories need to be sold.
ii) When sold on credit, the business must wait for customers to pay.
What are the benefits of using financial ratios to assess a business?
i) Comparative analysis: Ratios allow users to compare results with similar businesses, helping to evaluate performance against competitors.
ii) Trend identification: By comparing ratios over time, users can identify trends in the business’s performance.
iii) Easy access to key information: Ratios simplify the identification of important factors, such as profitability and liquidity, without needing to analyze all financial statements.
What are the limitations of using financial ratios to assess a business?
i) Past data focus: Financial ratios are based on past data, while stakeholders are more interested in future performance.
ii) External factors: Ratios do not account for external influences like legislation, exchange rates, and economic conditions.
iii)Non-financial factors: Financial statements do not reflect non-financial elements, such as employee skills and quality.
iv) Inconsistent reporting: Different businesses may prepare financial statements in varying ways, making direct comparisons difficult.
