MBA - Managing finance

Question 1

What is liquidity?

Answer 1

Easily convertiable into cash

Question 2

3 measurements of liquidity

Answer 2

• Current Ratio = Current Assets / Current Liabilites
• Acid Test Ratio = (Current Assets - Inventories) / Current Liabilities
• Working Capital = Current Assets - Current Liabilities

Question 3

What do the figures 1.5 - 2, below 1.5 and above 2 mean in current ratio?

Answer 3

• 1.5 - 2: Ideal value - plently of working capital
• Below 1.5: Not enough CA to cover CL - debts could arise
• Above 2: Cash/assets is lying/idle around - could earn interest or invest to expand

Question 4

What do the figures above 1 and below 1 mean in acid test ratio?

Answer 4

• Above 1: Plently of working capital
• Below 1: Not enough CA to cover CL - debts could arise

Question 5

Why is the acid test ratio considered more reliable comapared to current ratio?

Answer 5

Takes into account the business’ stock as they may not sell all of it

Question 6

What’s the difference between assets and liabilites?

Answer 6

• Assets are what you own
• Liabilites are what you owe

Question 7

What are current assets?

Answer 7

Short term assets that are likely to be converted into cash within the next year of trading

Question 8

What are non-current assets?

Answer 8

Long term assets that aren’t likely to be converted into cash within the next year of trading

Question 9

What are examples of current assets?

Answer 9

• Cash
• Inventories
• Trade and other recievables

Question 10

What are examples of non-current assets?

Answer 10

• Intangible assets; copyright, goodwill, trademarks
• Tangible assets; property, plants, equipment
• **Deffered tax **assets; payment of taxes

Question 11

What are current liabilites?

Answer 11

Debts that are likely to be paid within the next year of trading

Question 12

What are non-current liabilites?

Answer 12

Debts that aren’t likely to be paid within the next year of trading

Question 13

What are examples of current liabilties?

Answer 13

• Borrowing; short-term loans and overdraft
• Current tax liabilities; corporation tax
• Provision for liabilites; money set aside to pay borrowings and tax

Question 14

What are examples of non-current liabilites?

Answer 14

• Borrowings; long-term loans
• Retirement benefit obligations; money owed to past employees in pensions
• Provisions for liabilites; money set aside for future expenses
• Other non-current liabilities; may be money for repairs

Question 15

What is equity?

Answer 15

The amount of money that could be returned to a company’s shareholders if all its assets liquidated and debts paid off

Question 16

What are examples of equity?

Answer 16

• Ordinary shares
• Retained earnings
• Share capital (raised by business from the sale of new shares)

Question 17

What are 3 uses of a balance sheet?

Answer 17

• Evaluate performance of the business
• Evaluate potential of a business to an investor
• Summary valuation of the business

Question 18

What are 3 limitations of a balance sheet?

Answer 18

• Value of assets stated may not be the same as the amount they will sell for
• Intangible assets may include goodwill, which is hard to put a value on
• It is a static snapshot of one day in a business

Question 19

What are 4 ways of improving liquidity?

Answer 19

• Reduce the amount of stocks
• Reduce credit periods - trade credit of 30 days to 15 days…
• Negotiate with supplier
• Increase borrowing long-term and clear short-term debts

Question 20

What is the structure of a balance sheet?

Answer 20

• Revenue
• Costs of sales
• GROSS PROFIT
• Overheads
• OPERATING PROFIT
• Tax and interest
• NET PROFIT

Question 21

What are the indirect and direct costs?

Answer 21

• Indirect costs: Cost of sales
• Direct costs: Overheads

Question 22

How do you find gross, operating and net profit?

Answer 22

• Revenue - Costs of sales
• Gross profit - Operating costs
• Operating Profit - Tax and interest

Question 23

How do you find gross, operating and net profit margin?

Answer 23

• Gross profit/Revenue x 100
• Operating profit/Revenue x 100
• Net profit/Revenue x 100

Question 24

What is overheads and an example?

Answer 24

The costs of running a business that aren’t directly related to producing a good or service.
- Rent, wages
- Transport, admin

Question 25

What does the liquidity ratio represent?

Answer 25

Represents the companys’ ability to convert sales into profit
- operating profit margin, gross profit margin and net profit margin

Question 26

What does the return ratio represent?

Answer 26

Represents the companys’ ability to generate return to the shareholders
- capital employed, gearing ratio

Question 27

How do you find ROCE?

Answer 27

Operating profit/Capital employed x 100

Question 28

How do you find capital employed?

Answer 28

Total equity - non-current liabilites

Question 29

What is total equity?

Answer 29

Current assets - Current liabilites

Question 30

The higher the figure, the higher the…

Answer 30

Rate of return

Question 31

How do you find gearing ratio?

Answer 31

Non-current liabilities/Capital employed x 100

Question 32

What does gearing ratio look at and if the % is above 50 or below, what does this mean?

Answer 32

Looks at long-term finance
- Above 50%: Problem, borrowing too much - risky (HIGHLY GEARED)
- Below 50%: Okay, most money is coming from owners (LOWELY GEARED)