Financial Statements Analysis (Only for 4E and 5N students) - Theory

Question 1

Suggest 2 ways to improve/ increase gross profit margin.

Answer 1

1) Increase selling price of its goods

2) Buy goods at lower cost prices by looking for cheaper suppliers

Question 2

Suggest 2 ways to improve/ increase profit or profit margin.

Answer 2

1) Increase other income earned such as commission income

2) Reduce expenses (give examples to support e.g. pay lower wages, lower rent)

Question 3

Name 2 effects/problems if a business has insufficient liquidity.

Answer 3

1) Insufficient cash to pay for goods and services
2) Insufficient cash to pay expenses
3) Insufficient cash to pay creditors

Question 4

Suggest 2 ways to improve working capital/ liquidity.

Answer 4

1) Owner contribute additional capital in the form of cash
2) Sell excess non-current assets
3) Take up a bank loan

Question 5

Name 2 disadvantages of holding excessive inventory.

Answer 5

1) Cash is tied up
2) Higher chances of inventory being obsolete
3) Extra cost may be incurred in keeping the excess stock (e.g. warehousing expense)

Question 6

Suggest 2 ways to improve inventory turnover rate.

Answer 6

1) Reduce selling price to increase sales of goods
2) Offer discounts/promotions to encourage customers to make frequent or bulk purchases
3) Reduce inventory on hand by not buying excessive inventory and keeping just sufficient goods to meet customers’ demand