Ratio analysis

Question 1

What can a decrease in profit for the year be caused by

Answer 1

a reduction in gross profit %
an increase in expenses

Question 2

What can an increase in the profit for the year % be caused by

Answer 2

an increase in the gross profit %
a reduction in expenses

Question 3

What can a decrease in gross profit % be caused by

Answer 3

suppliers may have increased their price
a spate of theft or wastage
a reduction in your selling price

Question 4

What can an increase in the gross profit % be caused by

Answer 4

suppliers may have reduced their prices
you have found a cheaper supplier
a reduction in theft or wastage
an increase in your selling price

Question 5

What can a decrease in the return on equity employed be caused by

Answer 5

management may have made poor decisions
the profit for the year may have fallen
an increase in expenses

Question 6

What can cause an increase in the ROEE be caused by

Answer 6

management has made more efficient use of resources and monies available
the profit for the year may have increased
expenses have fallen

Question 7

What does it mean when a businesses liquidty is the above the ideal 2:1

Answer 7

can pay off debts within a year
business should reduce its current assets or increase its current liabilities

Question 8

What does it mean when the business liquidity is below the ideal 2:1

Answer 8

can struggle to pay off debts within a year
the business should increase its current assets or reduce current liabilities

Question 9

What does it mean when the businesses acid test is above the ideal 1:1

Answer 9

can pay off debts immediately

Question 10

What does it mean if the businesses acid test is below the ideal 1:1

Answer 10

struggle to pay off debts immediately

Question 11

What can cause a decrease in the rate of inventory turnover

Answer 11

may have ordered too much stock
stock may have been stolen
sales may have reduced leaving excess stock

Question 12

What can cause an increase in rate of inventory turnover

Answer 12

the amount of stock held has been reduced
sales may have increased

Question 13

What is the purpose of using ratio analysis

Answer 13

can compare with last years figures
can compare to other similar businesses
can help identify trends
can highlight problem areas so they can be solved

Question 14

Limitations of ratio analysis

Answer 14

all information used is historic
different accounting procedures can be used
different methods can be used to value inventory
do not represent staff morale or turnover
do not show the effects of new or declining products
do not take external factors into consideration
have to be compared with a similar sized business in the same industry
difficult to compare with other companies as only limited information is published