Gross profit and working capital Interpretation Flashcards
Increase in profit (seling price)
Increase in selling price per item (e.g. new customer, decrease in items)
Increase in profit (cost of sales)
Reduction in average cost per item (bulk buy discount)
Increase in profit (product)
Change in the product mix
Decrease in profit (selling)
Decrease in selling price per item (e.g. new competition)
Decrease in profit (cost of sales)
Increase in average cost per item (e.g. new supplier, better quality materials)
Decrease in profit (product)
Change in the product mix
What is meant by product mix?
Represents the contribution of each product
What doesn’t explain a change in sales volume?
A change in sales volume (unless it affects price and cost)
Higher revenue but lower cost of sales?
Price decrease was used to increase the revenue
Future for gross profit?
New market, customers, increased competition
Reason for working capital change (policy)
Change in inventory holding policy
Reason for working capital change (Timing)
Timing issue. Demand has fallen / increased competition
Increase in working capital days (Demand)
Demand has fallen, increased competition
Increase in working capital days (Goods)
Goods faulty/obsolete
Increase in working capital days (bulk)
Company has bulk bought goods to achieve cheaper price
Increase in working capital days (order)
Big order coming up
Decrease in working capital days (supply)
Improved supply
Decrease in working capital days (JIT)
Move to just-in-time inventory management
Decrease in working capital days (Management)
More efficient management of inventory
Link to future working capital (storage)
Insurance/storage costs for inventory (increases inventory)
Link to future working capital (delivery)
Increase in cost of delivering inventory can increase inventory days
What represents receivables days?
How long on average does it take to receive payment from a credit customer
What represents inventory days?
How long on average is inventory held from purchase to sale
What represents payable days?
How long on average does it take to pay a supplier
Settlement discounts?
Decrease payables. Acts as incentive for other two
Bulk buy discount for inventory?
Increases inventory days as there’s more inventory
Opening inventory overstatement effect on inventory holding period?
Indirectly increases inventory holding period. Decrease in current assets
Closing inventory understatement effect on inventory?
Indirectly increases inventory holding period. Decrease in current assets
Increase in COS effect on liquidity?
Decreases liquidity
Obsolete inventory
Fall in demand
Increases inventory days
Discounted selling prices?
Decrease inventory days as it decreases COS
Selling a loss making division?
Reduces revenue but increases profit
Purchases?
Debit inventory
In a period of falling prices, is WAC better for profitability?
Yes
COS inventory calculation?
Opening inventory + purchases/production costs - closing inventory
Where are staff redundancy costs included?
Debit operating expenses
What does service industry have?
Very little inventory
When can a ratio have artifical inflation?
When operating profit is far lower than gross profit
Improved interest cover reason?
Maybe debt has been repaid
