Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Business > Monitoring a business- Ratio Analysis > Flashcards

Monitoring a business- Ratio Analysis Flashcards

1
Q

Who are the people interested in business ratios?

A

Stakeholders
Managers
Employees
Investors
Suppliers
Government

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Why are stakeholders interested in business ratios?

A

Interested in profitability and dividends.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Why are managers interested in business ratios?

A

Interested in profitability, budgets and cash flow. Need to meet targets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Why are suppliers interested in business ratios?

A

Interested in getting paid for goods and services. Focus on liquidity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Why are employees interested in business ratios?

A

Interested in profitability and liquidity. Jobs and wages will depend on good profit levels and liquidity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Why are investors interested in business ratios?

A

Interested in liquidity and repayment of debts. Also focus on gearing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Why is the government interested in business ratios?

A

Concerned with profitability and payment of taxes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is ratio analysis?

A

Ratio analysis provides a useful set of tools that allows all interested stakeholders to evaluate the financial health of a business.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How is a business monitored?

A

A firm is monitored under three headings:

Profitability: the firms’ ability to make a healthy profit.
Liquidity: the firms ability to pay its bills as they fall due.
Gearing: Debt/Equity: how the firm is financed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How do you figure out gross profit?

A

Gross Profit Margin:
Gross Profit/Sales x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the average gross profit margin in Ireland?

A

On average: 20% is the gross margin earned by firms in Ireland.

This means that for every €1 taken in from customers the business keeps 20c in profit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are reasons for a reduction in profitability?

A

Sales volume has fallen
Sales price has fallen
Cost of sales has risen.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How could a business solve a decline in profitability?

A

The business should shop around for a cheaper supplier of goods or offer discounts to increase sales.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is gross profit?

A

It is the money made from the buying and selling of goods alone

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is net profit?

A

It is the money made from factoring a companies day to day expenses like heating and staff wages on top of the buying and selling of goods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How do you calculate net profit?

A

Net Profit Margin: Net Profit/ Sales x100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What net profit margin should a business have to be able to survive?

A

A net profit margin for a firm should be greater than 5% to survive in the long run.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

How do you calculate Return on Capital Employed/ Return on Investment

A

Net Profit/Capital Employed x100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Which is better net profit or gross profit to show business its profitability\/

A

This is more accurate indicator of a firms profitability as it accounts for a firms expenses.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is Return on Capital Employed/ Return on Investment

A

The ROI/ROCE shows the return earned by the firm on all money invested in it.
It must exceed the return earned in a financial institution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What does ROI/ROCE stand for?

A

Return on Capital Employed/ Return on Investment

it is a profitability ratio that estimates the amount of profit a business can generate using the capital it employs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is liquidity?

A

This is a firms ability to pay its debts when they fall due and still continue on in business.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What ratio can be used to fin a firms liquidity/

A

Working Capital/ Current Ratio =
Current Assets / Current Liabilities.
An ideal working capital ratio is 2:1

2:1 means it owns twice as much money as it owes

230,00/140,000= 1.64
Ratio= 1.64:1

24
Q

What would a worsening liquidity ratio indicate?

A

A worsening current ratio:
The firms current liabilities have increased.
The firms current assets have decreased

25
Q

What would a solution be to a worsening liquidity ratio?

A

The business could sell some of its investments to raise cash to improve its liquidity.

The business should have a sale and sell off some closing cash so it can raise it’s cash.

26
Q

What is another test to see a businesses liquidity\/

A

Acid Test Ratio = Current Assets-Closing Stock : Current Liabilities
An ideal acid test ratio is 1:1
1:1 means it owns just enough money to cover what it owes

27
Q

What liquidity test is better acid test or working capitol ratio?

A

The acid test ratio is a more real indication of how liquid the business is.

28
Q

What is closing cash?

A
29
Q

What are gearing ratios?

A

The gearing ratio looks at a firms debt compared to its equity.

30
Q

What is equity?

A

equity is the total amount of money that a shareholder is eligible to receive if all of a company’s debts are paid off and its assets liquidated

Equity = share capital + reserves+ Retained Earnings

31
Q

What is the formula for calculating gearing ratio?

A

Formula = Debt: Equity

32
Q

What does the gearing ratio show?

A

High= grEATER THAN 1:1
A high percentage for debt equity tells the business that it is using a large proportion of its profits to cover interest repayments on loans.- eg 2:1 means that for every £1 in equity capitol the business has used £2 in debt to und the business

Neutral= 1:1
Equity and debt capitol are the same

Low= LESS THAN 1:1
Means for every £1 in equity capitol the business has used £0.46 in debt to to fund the buiness

33
Q

Why may a business have a high debt equity ratio?

A

A firm may have a high debt/equity if:
Its just starting off and needs initial start up money.
The owners prefer to borrow rather than sell shares.
The firm could earn more with the money invested in it than it cost to borrow.

34
Q

What are business with a high equity debt ration called?

A

Firms that have a high debt/equity percentage are said to be highly geared.

A rise in the debt equity means that the firm will be under pressure to keep paying off the fixed interest on loan repayments.
It will also make it more difficult for the firm to take out new loans.

35
Q

What are business with a low equity debt ratio called?

A

Firms that have a low debt/equity percentage are said to be lowly geared.

A lowly geared firm is one where most of the profits made are available for use in the business or the owners have supplied most of the capital.
A lowly geared firm will find it easier to avail of a loan.

36
Q

What would cause rise in the debt equity ratio/

A

The firm has borrowed more money to finance the business.
The interest repayments on existing loans have increased.

37
Q

wHAT IS A SOLUTION FOR A RISE IN THE DEBT EQUITY RATIO?

A

To reduce the debt/equity ratio, the business could reinvest more profits or sell off shares to pay off long term loans.

38
Q

wHAT IS SOLVENCY?

A

solvency- the ability of a business to pay all liabilities( long term and short) as they fall due.

39
Q

What is liquidation?

A

Liquidation-when a business is unable to pay debts as they fall due, suppliers can have a liquidator appointed to try raise the cash to pay the supplier.

39
Q

What are preference shares?

A

Preference shares- these shares entitle the holder to a fixed dividend that will be paid in priority over the dividend payments to ordinary shareholders.

40
Q

What is receivership?

A

Receivership- the business fails to pay the interest on a debenture, the lender can take legal action and appoint a receiver to take ownership of the asset used secured the loan.

41
Q

What is a balance sheet?

A

A balance sheet is a snapshot of the financial health of a business at a point in time.

It shows how much wealth a business has generated by providing a statement of its assets and liabilities as well as its sources of finance.

42
Q

In a balance sheet what are fixed assets?

A

Fixed Assets: These are items owned by a business and intended for long term use. E.g. Machinery, vehicles.

43
Q

In a balance sheet what are current assets?

A

Current Assets: Cash, or any asset which can be converted to cash within 1 year. Examples include cash, bank deposits, debtors and closing stock.

44
Q

What are current liabilities\/

A

These are short term debts owed by the buiness and falling due within a year
eg bank overdrafts, unpaid bills

45
Q

What is working capitol?

A

It is the level of cash avaiable to run the business in the short term

46
Q

How can you calculate working capital?

A

Current assets-current liabilities

47
Q

What are current assets?

A

Current Assets is an account listed on a balance sheet that shows the value of the assets owned by a company that can be converted to cash

eg cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.

48
Q

What is net worth?

A

It shows what the business would be worth if it sold off all its assets and pay its short term debts

49
Q

How can you calculate net worth?

A

fixed assets+(current assets-current liabilities)

50
Q

What are fixed assets?

A

Fixed assets are long-term tangible assets that are used in the operations of a business and provide long-term financial benefits.

51
Q

What does the capitol employed contain?

A

Capital Employed-
Details of the business’s share capital
Details of long term loans taken out by the business
Retained profits or reserves held by the business for future reinvestment.

52
Q

What is the issued shared capitol of a business/

A

The issued share capital of a company indicates the number of shares which the company has actually issued (sold) to date.

53
Q

What is the authorised share capitol?

A

When a company is being set up the owners must set an upper limit for the amount of share capital that can be issued. This maximum limit is called the authorised share capital.

54
Q

Why is financial information important?

A

It allow the firm to analyse trends in performance over the years.

Ratios can be compared with that of previous years.

Ratios can also be compared to that of similar firms to gage progress.

It allows the firm to take necessary steps to avoid problems in the future.

55
Q

What are limitations of financial statements?

A
  1. Industrial relations- Staff relations with Management not considered/the climate in business is difficult to assess.
  2. Assets may not be shown at their true value.
  3. Past performance- Ratios are based on past figures and not on projected future figures.
  4. Final Accounts- only hold for a certain year/Balance Sheets are only true for the day they are written.

5.Does not consider business environment i.e., Competition/recession/outside influences etc.

  1. Inflation/deflation may impede the comparison of ratios from one period to another.

7.Ethical behaviour- Ratios do not show if the business is acting sustainably or ethically.

8.Accounting policies- Different accounting policies distort comparisons.

Business (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions