Equations

Question 1

What is the formula for gross margin?

Answer 1

(gross profit/revenue)*100

Question 2

How can gross margin be improved?

Answer 2

Increase the selling price of the goods
Buy the goods from a cheaper supplier

Question 3

What does it suggest if the gross margin decreases?

Answer 3

The goods are being sold at a cheaper price than in previous years (allowing more trade discounts has the same effect)
The costs of goods have increased but their selling price has remained the same

Question 4

What is the formula for mark-up?

Answer 4

(gross profit/cost of sales)*100

Question 5

How can mark-up be improved?

Answer 5

Increase the selling price of the goods
Buy the goods from a cheaper supplier

Question 6

What is the formula for profit margin?

Answer 6

(profit for the year/revenue)*100

Question 7

How can profit margin be improved?

Answer 7

Increase the gross profit (increase selling prices, buy goods from cheaper suppliers)
Increase income from other sources
Reduce expenses such as staff salaries, marketing or administrative costs

Question 8

What does a decreasing profit margin suggest?

Answer 8

Gross profit has decreased from previous years
The business is paying more for expenses
The business is not earning as much other income as in previous years

Question 9

What is the formula for return on capital employed (ROCE)?

Answer 9

(operating profit for the year/capital employed)*100

Question 10

What is capital employed?

Answer 10

Capital employed = Equity (or capital) + Non-current liabilities

Question 11

How can the ROCE be improved?

Answer 11

Increase the profit for the year (increase income, decrease expenses)
Reduce non-current liabilities such as bank loans

Question 12

What are liquidity ratios?

Answer 12

Liquidity ratios are ways to measure how quickly a business can convert assets into cash (compare current assets to current liabilities)

Question 13

What is the formula for the current ratio?

Answer 13

Current assets/current liabilities

Question 14

What is working capital?

Answer 14

Current assets - current liabilities

Question 15

How can the current ratio be increased?

Answer 15

Increase current assets by introducing capital or selling non-current assets
Reduce current liabilities, such as overdrafts and trade payables

Question 16

What is the ideal current ratio?

Answer 16

2:1

Question 17

What does it mean if the current ratio is less than 1:1?

Answer 17

The business does not have enough current assets to cover its current liabilities

Question 18

What does it mean if the current ratio is too high?

Answer 18

The business could have too much inventory or trade receivables
They need to improve their inventory control
They need to encourage credit customers to pay faster

Question 19

What is the formula for the liquid (acid test) ratio?

Answer 19

(current assets-inventory)/current liabilities

Question 20

How can the liquid (acid test) ratio be improved?

Answer 20

Increase current assets, especially cash, by introducing capital or selling non-current assets
Reduce current liabilities, such as overdrafts and trade payables

Question 21

What is the ideal liquid (acid test) ratio?

Answer 21

1:1

Question 22

What does it mean if the liquid (acid test) ratio is above 1:1?

Answer 22

The business has enough current assets to cover its short-term debts even if the inventory cannot be sold

Question 23

What does it mean if the liquid (acid test) ratio is too high?

Answer 23

The business could be owed too much by trade receivables
They need to encourage credit customers to pay faster