performance measurement and control

Question 1

Gross profit margin formula

Answer 1

gp/revenue x 100

Question 2

operating profit margin formula

Answer 2

Operating profit/revenue x 100

Question 3

why is a high operating profit margin desirable

Answer 3

A high operating profit margin is desirable. It indicates that either sales prices are high or that all costs are being kept well under control

Question 4

what is Return on capital employed (ROCE)

Answer 4

It is the operating profit as a percentage of the capital
employed. The ROCE shows the operating profit that is generated from each $1 of assets employed.

Question 5

how to calc ROCE 2 formulas

Answer 5

ROCE = Operating profit/Capital employed ×100

OR

ROCE = operating profit margin × asset turnover

Question 6

what is capital employed

Answer 6

total assets less current liabilities or total equity plus long-term debt.

Question 7

how to achieve a desirable ROCE 2

Answer 7

• Increasing operating profit, e.g. through an increase in sales price or through better control of
  costs.
• Reducing capital employed, e.g. through the repayment of long term debt

Question 8

what is turnover

Answer 8

the amount of money taken by a business in a particular period.

Question 9

how to calculate asset turnover

Answer 9

turnover/capital employed

Question 10

what does a high asset turnover show

Answer 10

a high asset turnover ratio means a company is performing efficiently, as the ratio means they are generating more revenue per dollar of assets.

Question 11

how to achieve a high asset turnover

Answer 11

• Increasing turnover, e.g. through the launch of new products or a successful advertising
  campaign.
• Reducing capital employed, e.g. through the repayment of long term debt

Question 12

what is liquidity

Answer 12

Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.

Question 13

how to calculate current ratio

Answer 13

current assets/ current ratio

Question 14

what does current ratio show

Answer 14

The ratio measures the company’s ability to meet its short term liabilities as they fall due.

A ratio in excess of 1 is desirable but the expected ratio varies between the type of industry but lewer means can’t pay debts

Question 15

how to calculate acid test, quick ratio

Answer 15

current assets - inventory / current liabilities

Question 16

how to calc inventory holding period

Answer 16

inventory/ cost of sales x 365

Question 17

what does inventory holding period show

Answer 17

This indicates the average number of days that inventory items are held for.

Question 18

what does an increase in holding period show

Answer 18

An increase in theinventory holding period could indicate that the company is having problems selling its products and could also indicate that there is an increased level of obsolete inventory. The company
should take steps to increase inventory turnover,

Question 19

what does a decrease in holding period show

Answer 19

A decrease in the inventory holding period could be desirable as the company’s ability to turn
over inventory has improved and the company does not have excess cash tied up in inventory

Question 20

how to calc receivables collection period

Answer 20

receivables/ collection period. x 365

Question 21

what does this show

Answer 21

This is the average period it takes for a company’s debtors to pay what they owe.

Question 22

why is a low period good

Answer 22

A decrease in the receivables collection period may indicate that the companies has improved its management of receivables. However, a receivables collection period well below the industry average may make the company uncompetitive and profitability could be impacted as a result

Question 23

how to reduce the collection period

Answer 23

• Credit checks on customers to ensure that they will pay on time
• Improved credit control, e.g. invoicing on time, chasing up bad debts

Question 24

how to calc payables collection period

Answer 24

payables / collection period x 365

Question 25

what does a payables collection period show

Answer 25

This is the average period it takes for a company to pay for its purchases. If credit purchases are not available, ‘purchases’ or ‘cost of sales’ should be used.

Question 26

what does a decrease in collection period show

Answer 26

A decrease in the company’s payables period could indicate that the company’s ability to pay for its purchases on time is improving. However, the company should not pay for its purchases too early since supplier credit is a useful source of finance

Question 26

what does an increase in collection period shows

Answer 26

An increase in the company’s payables period could indicate that the company is struggling to pay its debts as they fall due. However, it could simply indicate that the company is taking better advantage of any credit period offered to them

Question 27

what does financial gearing show

Answer 27

A high level of gearing indicates that the company relies heavily on debt to finance its long term
needs.

This increases the level of risk for the business since interest and capital repayments must be made on debt, where as there is no obligation to make payments to equity

Question 28

how to calculate financial gearing

Answer 28

debt/ equity x 100

or

debt / debt + equity. x 100

Question 29

how to improve the ratio

Answer 29

The ratio could be improved by reducing the level of long term debt and raising long term
finance using equity.

Question 30

what is interest cover

Answer 30

The interest coverage ratio (ICR) is a financial ratio that measures a company’s ability to handle its outstanding debt.

Question 31

how to calculate interest cover

Answer 31

operating profit / finance cost

Question 32

what does a decrease in interest cover show

Answer 32

A decrease in the interest cover indicates that the company is facing an increased risk of not being able to meet its finance payments as they fall due