exam questions

Question 1

The info is from a companies annual accounts

Current assets: 3 million

Current liabilities: £2.4 million

Non-current liabilities: £4.2 million

Capital employed: £12 million

What is the Gearing ratio?

Answer 1

35%

Gearing = non current liabilities/ (non current liabilities + total equity) x 100

Capital employed = total assets - current liabilities

Total equity = assets - liabilities

So

4. 2m / (4.2 m +7.8m) x 100 = 35%
   (7. 8 m is from 12m -4.2m)

Question 2

Why would budgeting be good for a fast growing business?

Answer 2

It sets targets for revenues, costs and profits. These can motivate managers & provide a focus for financial decision making.

Budgets can be used to monitor targets & then review later on; they can be used as a control mechanism.

A fast-growing business may involve new outgoings, and managers may want to set targets for these to control spending; they may also want to try to ensure profits are made by setting revenue targets to focus efforts on achieving them.

In a fast-growing business new staff may be joining and budgets may help direct and coordinate actions.