ratio analysis

Question 1

suggest a reason for a difference in the gross profit percentage

increase and decrease

Answer 1

one reason for an increase in the gross profit percentage is if the business has decreased purchase costs by finding a cheaper supplier or buying in bulk and therefore receiving discounts

one reason for a decrease in the gross profit percentage is if there has been an increase in purchase costs for the business if the supplier has increased their prices

Question 2

suggest a reason for a difference in the current ratio

increase and decrease

Answer 2

One reason for an increase in the current ratio is if the business has sold off unwanted non current assets

One reason for a decrease in the current ratio is if the selling price has decreased. If the sales are lower there would be less money in the bank and the business is less capable of paying off its debts.

Question 3

suggest a reason for a difference in the trade receivables collection period

Answer 3

One reason for an increase in the trade receivables collection period is if customers are not being offered cash discount to encourage prompt payment.

One reason for a decrease in the trade receivables collection period is if customers are being offered cash discount to encourage prompt payment or if the business has tightened credit control procedures.

Question 4

suggest one method of improving the rate of inventory turnover

Answer 4

One method of improving the rate of inventory turnover over is by increasing the quantity of inventory sold by having an advertising campaign

Question 5

suggest one method of improving the acid test ratio

Answer 5

one method of improving the acid test ratio is to sell off any unwanted non - current assets

Question 6

suggest one method of improving the trade payables payment period

Answer 6

One method of improving the trade payables payment period is to encourage trade receivables to pay us more promptly so we can pay our own bills.