Chapter 26 - Analysis Of Accounts

Question 1

Current assets (3)

Answer 1

Inventory/trading stock
Cash/cash equivalents
Debtors/account/trade receivables

Question 2

Current liabilities (3)

Answer 2

Overdraft
Creditors/trade/account payables
Short term loans

Question 3

Why does the acid test ratio remove inventory

Answer 3

Inventories/trading stock may take longer to sell and turn into cash

Question 4

Capital employed

Answer 4

Shareholders’ equity plus non-current liabilities and is the total long-term and permanent capital invested in a business

Question 5

Liquidity

Answer 5

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

Question 6

Profitability

Answer 6

The measurement of the profit made relative to either the value of sales achieved or capital invested in the business

Question 7

Who profitability is important to

Answer 7

Investors when deciding which business to invest in
Directors + managers to assess the success of the business

Question 8

Profitability ratios (3)

Answer 8

Return on capital employed
Gross profit margin
Net profit margin

Question 9

Return on capital employed formula

Answer 9

(Net profit/capital employed) x 100

Question 10

Gross profit margin

Answer 10

(Gross profit / Revenue) x 100

Question 11

Net profit margin

Answer 11

(Net profit / Revenue) x 100

Question 12

Illiquid

Answer 12

Means that assets are not easily convertible to cash

Question 13

Liquidity ratios (2)

Answer 13

Current ratio
Acid test

Question 14

Current ratio

Answer 14

Current assets/current liabilities
If between 1.5 and 2 the business is safe, lower than 1 the business has a cash flow problem

Question 15

Acid test ratio

Answer 15

(Current assets - inventories) / current liabilities
Ideally 1:1, if lower, the business should be concerned

Question 16

Internal users of accounts (3)

Answer 16

Managers
Workers and trade unions
Shareholders

Question 17

External users of accounts (4)

Answer 17

Banks
Government
Creditors
Other businesses

Question 18

What managers use accounts for

Answer 18

To help them analyse and keep control over the performance of each product/division of the business and to aid in decision making.

Question 19

What type of company is owned by shareholders

Answer 19

Limited companies

Question 20

What shareholders use accounts for

Answer 20

To see how big of a profit or loss a company has made, assess the liquidity and decide if they want to buy shares.

Question 21

What creditors use accounts for

Answer 21

To check the ability of the business to pay back its debts to them on time and deciding whether to supply on credit

Question 22

What the government uses accounts for

Answer 22

To check the profit tax paid by the company as if the business makes a loss it’s bad for the governments control of the economy

Question 23

What workers and trade unions use accounts for

Answer 23

To assess whether the future of the business is secure or not

Question 24

Limitations of using accounts and ratio analysis (4)

Answer 24

Different companies use different accounting methods leading to different ratio results making comparisons difficult
Accounting data is affected by inflation making it misleading to compare data between years
Ratios are based on past accounting data and may not indicate how a business will perform in the future
External users only have access to published accounts which contain only the legally required data