Paper 2- Theme 2.3 Managing Finance ✅

Question 1

gross profit margin

Answer 1

total revenue - cost of sales
——————————————— x 100
total revenue

Question 2

Operating profit margin

Answer 2

total revenue - cost of sales
- fixed overheads
——————————————— x 100
total revenue

Question 3

Net profit (profit for the year) margin

Answer 3

total revenue - cost of sales
- fixed overheads - financing costs and tax
————————————————————— x 100
total revenue

Question 4

Define statement of comprehensive income

Answer 4

-financial document that summarises a business’ main trading activity and expenses to show if profit or loss has been made

Question 5

Uses for profitability ratios

Answer 5

• shows if a business is growing
• —> attract investment, improve shareholder morale
• shows efficiency at turning costs into profit
• —-> may show need for training
• compare profit and costs with other companies in market
• —-> can identify where firm has competitive disadvantage
• shows where greatest costs come from
• —> inform targets and future budgets

Question 6

Ways to improve profitability

Answer 6

increase sppu 
decrease vcpu
increase output and quantity sold
decrease fixed costs
decrease financing costs
decrease tax

Question 7

Difference between profit and net cash flow

Answer 7

• timing differences
-business may not receive cash straightaway from customers (but will receive revenue) or have to pay their suppliers straightaway

•sources of finance (cash in, not revenue)
-revenue comes from one source sales to customers.cash flow comes from sales, sale of assets, bank loan

•the way fixed assets are accounted for

• payment for fixed assets (e.g. equipment) counts as cash outflow
• depreciation of fixed assets comes out of profit

Question 8

what is the measure of liquidity

Answer 8

statement of financial position (balance sheet)

Question 9

Define liquidity

Answer 9

a firms ability to pay its bills (short term liabilities and debts) on time

Question 10

Net current assets (……….) =

Answer 10

(working capital)

current assets - current liabilities

Question 11

Net assets =

Formula

Answer 11

(non current assets + current assets)
-
(non current liabilities + current liabilities)

Question 12

net assets is equal to (……)

what is (…….) made up off

Answer 12

total equity

share capital
retained profit (reserves)

Question 13

what are current assets

examples

Answer 13

-expected to be sold / used within the accounting year

cash balance
trade receivables
inventories

Question 14

what are current liabilities

examples

Answer 14

• liabilities that are to be paid within the accounting year

• trade payables
• short term borrowings (e.g. overdraft)

Question 15

current ratio formula

ideal value

Answer 15

current assets
———————— : 1
current liabilities

approx. 1.5 : 1

Question 16

Acid test formula

Ideal value

Answer 16

current assets - stock
———————————— : 1
current liabilities

0.75 - 1 : 1

Question 17

why deduct stock from current assets in acid test

Answer 17

• hardest asset to turn into cash without a loss in value
• stock may become obsolete
• may take long time to sell stock

Question 18

working capital is …

Answer 18

finance available for the day to day running of the business

Question 19

describe the working capital cycle

Answer 19

—- the model showing the length of time for a complete cycle from cash out (buying stock- usually on credit) to cash in (customers buying product- usually on credit)

• highlights importance of sufficient contingency finance to meet daily requirements and any uncertainties.

(sufficient funds will be needed to pay for additional expenditure until revenue comes in)

Question 20

importance of working capital

Answer 20

• too low could lead to bankruptcy
• too high leads to inefficiency
• ensures there is cash available to pay day to day bills, and ensure production

Question 21

causes of working capital problems

Answer 21

• excess stock (cash tied up)
• allowing too many trade receivables
• overtrading
• level of gearing
• unforeseen circumstances (e.g. demand falls, supply cost rises) resulting in less cash to pay short term bills then the sales forecast predicted - need contingency finance

Question 22

measures to improve liquidity (and working capital)

Answer 22

• sell under used fixed assets
• reduce payables
• reduce short term borrowing, increase long term
• sell shares to raise capital
• negotiate supply credit
• decrease stock level

Question 23

what are non current assets

examples

Answer 23

• assets that won’t reach full value, be consumed or sold within the accounting year

• land and buildings
• goodwill (value of customer base)
• brand name

Question 24

what are non current liabilities

Examples

Answer 24

• liabilities not due to payed within the accounting year

• long term borrowing (e.g. loan)
• mortgage

Question 25

receipts =

Answer 25

cash sales

Question 26

payments =

Answer 26

cash payments (outflows)

Question 27

trade receivables

Answer 27

cash set to be inflowed on trade credit

Question 28

trade payables =

Answer 28

money owed out on trade credit

Question 29

interpretations of profit margins

Answer 29

Gross Profit –> heavily depends on the costs of production in the industry
(e.g. 25% means for £1 of revenue, it costs £0.75)

Operating profit —> heavily depends on the amount of fixed assets needed