Interpreting Financial Statements

Question 1

What does ‘Percentage change for Sales or Fees’?

Answer 1

The Sales for business has increased by x percentage in 2020 to x percentage in 2021.

Question 2

What does ‘Mark-up Percentage’ mean?

Answer 2

On average the business adds 50c (x%) to the cost price, to arrive at the selling price of $1.50.

Question 3

What does ‘Gross Profit Percentage’ mean?

Answer 3

For every dollar of sales, the business has generated 50c (50%) of gross profit.

Question 4

What does ‘Distribution Expense Percentage’ mean?

Answer 4

For every dollar of Sales, the business has spent 50c (50%) on Distribution Costs, such as advertising.

Question 5

What does ‘Administrative Expense Percentage’ mean?

Answer 5

For every dollar of Sales, the business has spent 50c (50%) on administrative expenses such as, office wages.

Question 6

What does ‘Finance Cost Percentage’ mean?

Answer 6

For every dollar of Sales the business has spent 50c (50%) on finance costs such as, interest on loans.

Question 7

What does ‘Net Profit Percentage’ mean?

Answer 7

For every $1 of Sales the business has generated 50c (50%) in profit for the year.

Question 8

What does ‘Current Ratio’ mean?

Answer 8

For every dollar of current liabilities the business has $2 (2:1) of current assets to meets them. This tells the owner that the business should (or not) be able to pay off its current debts in the upcoming 12 months, or 52 weeks. The ratio must be at least 2:1

Question 9

What does ‘Equity Ratio’ Mean?

Answer 9

For every $1 of total assets of the business, the owner has contributed 75cents (0.75.1). This tells us that the owner is financially stable due to less than 50% of the business being owned by outside lenders. The business, therefore, has a lower risk when trying to get a loan to expand. The ratio must be at least 0.5:1

Question 10

What does ‘Liquid Ratio’ mean?

Answer 10

For every $1 of liquid liabilities the business has 90c (0.9:1) of liquid assets to meet them. This tells the owner that the business may not be able to pay its immediate debts falling due in next 2 months (or 8 weeks) as they do not have adequate (at least $1) funds. The ratio must be at least 1:1.

Question 11

What are reasons for the trend in Percentage Change for Sales or Fees

Answer 11

Decrease/increased advertising
Selling price has been changed

Question 12

Recommendations to improve Percentage Change for Sales or Fees:

Answer 12

Increase advertising via a promotional campaign

Question 13

What are reasons for the trend in Mark-up Percentage:

Answer 13

Petrol prices changes so Freight Inwards change, so COGS change
Supplies costs have changed
Business has decreased selling price to promote sales

Question 14

Recommendations to improve Mark-up Percentage:

Answer 14

Improve the Mark-up Percentage:
Changing Sales Mix through stocking based on current fashion, promoting higher Mark-up items
Reduce costs by:
Finding a cheaper supplier with the same quality, finding cheaper transportation, bulk buy stock/raw materials to get discount on costs.
Change selling price

Question 15

What are reasons for the trend in Gross Profit Percentage:

Answer 15

Petrol prices changes so Freight Inwards change, so COGS change
Supplies costs have changed
Business has decreased selling price to promote sales

Question 16

Recommendations to improve Gross Profit Percentage:

Answer 16

Improve the Mark-up Percentage:
Changing Sales Mix - (stocking based on current fashion, promoting higher Mark-up items)
Reduce costs by:
Finding a cheaper supplier
Finding cheaper transportation,
Change selling price

Question 17

What are reasons for the trend in Distribution Cost Percentage?

Answer 17

• Implemented a major promotional advertisement and either worked or didn’t
• Petrol prices change means delivery expenses change
• Hired sales staff means sales wages change

Question 18

Recommendations to improve Distribution Cost Percentage:

Answer 18

• Cheaper way of advertising (use social media rather than traditional more expensive methods)
• Purchase more fuel-efficient vehicles

Question 19

What are reasons for the trend in Administrative Expense Percentage?

Answer 19

• Electricity prices change so office electricity changes
• Increased stationary wastage so stationary expense increases
• Increased use of internet so internet costs increase
• Minimum wag increase or hired more office staff means office wages change

Question 20

Recommendations to improve Administrative Expense Percentage:

Answer 20

• Change electricity provider
• Negotiate a cheaper internet plan
• Negotiate cheaper rent/lease for office, or find a cheaper location

Question 21

What are reasons for the trend in Finance Cost Percentage?

Answer 21

• Interest rates have changed
• Business has increased their lean to purchase PPE

Question 22

Recommendations to improve Finance Cost Percentage:

Answer 22

Use retained profits or owners investment to repay some of the loan, overdraft, or mortgage
- Refinance a lower interest rate with the bank or another bank

Question 23

What are reasons for the trend in Net Profit Percentage - Profit for the year Percentage?

Answer 23

Same as Gross Profit Percentage or Expense Percentage reasons (above)

Question 24

Recommendations to improve Profit for the Year Percentage:

Answer 24

Same as Gross Profit Percentage or Expense Percentage reasons (above)

Question 25

What are reasons for the trend in Current Ratio?

Answer 25

A high current ratio:
- Too much inventory - may become obsolete (expired etc)
- High accounts receivable - problem of bad debts
- Too much cash-better invested in term deposit to earn interest

A low current ratio (less than 1:1)
- Purchased PPE using cash
Excessive drawings of cash by owners

Question 26

Recommendations to improve Current Ratio:

Answer 26

High current ratio:
- Discounts/interest on overdue accounts to lower accounts receivable
- Have a discount sale to sell off stock fast to get cash
- Invest cash in a term deposit
Low current ratio:
- Owner invest more cash into business
- Refinance overdraft to long-term loan
- Get a long-term loan to get cash
- Sell off an unproductive PPE to get cash

Question 27

What are reasons for the trend in Liquid Ratio?

Answer 27

Mainly inventory…
High Liquid Ratio:
- High accounts receivable - problems of bad debt
- Too much cash-better invested in a term deposit to earn interest
Low Liquid Ratio:
- Purchased PPE using cash
- Excessive drawings of cash by owner

Question 28

Recommendations to improve the Liquid Ratio:

Answer 28

High Liquid Ratio:
- Discounts/interest on overdue accounts to lower accounts receivable
- Invest cash in a term deposit
Low Liquid Ratio
- Have a discount sale to sell off stock fast to get cash
- Owner invest more cash into business
- Refinance overdraft to long term loan
- Get a long term loan to get cash
Sell off an unproductivePPE to get cash

Question 29

What are reasons for the trend in Equity Ratio?

Answer 29

• Purchased PPE using a loan
• Excessive drawings above profit

Question 30

Recommendations to improve Equity Ratio:

Answer 30

• Owner invests cash into the business to pay off loans
• Retain more profits in business by lowering drawings and using the cash to pay off loans