Ratio analysis

Question 1

Current Ratio formula

Answer 1

Current assets / Current liabilities

Question 2

Return on capital employed formula

Answer 2

Operating Profit / (Total Equity + Non-Current Liabilities)

                                 x100

Question 3

Inventory turnover formula

Answer 3

Cost of goods sold / Inventories

Question 4

Payable days

Answer 4

Payables / Cost of Sales

         x365

Question 5

Receivable days

Answer 5

Receivables / Revenue

          X365

Question 6

Gearing formula

Answer 6

Non-Current Liabilities / (Total Equity + Non-Current Liabilities)

                        x100

Question 7

Ratio analysis advantages

Answer 7

Monitor performance

Monitor targets

Inform shareholders of performance

Question 8

Ratio analysis disadvantages

Answer 8

Can be limited if there is no data to compare with

Accounts can be manipulated

Question 9

Current ratio measures what?

Answer 9

Liquidity

Question 10

Return on capital employed measures what?

Answer 10

Profitability

Question 11

Payable days measures what?

Answer 11

Efficiency

Question 12

Receivable days measures what?

Answer 12

Efficiency

Question 13

Gearing measures what?

Answer 13

Gearing

Question 14

Inventory turnover measures what?

Answer 14

Efficiency

Question 15

The ability to meet short term debts is shown in which ratio?

Answer 15

Current ratio

Question 16

Return on capital employed tells a business what?

Answer 16

The total resources that a business has available to it

Question 17

Inventory turnover shows what to a business?

Answer 17

How many times it sells all of its stock annually

Question 18

Payable days shows what?

Answer 18

How long it takes a business to repay its creditors e.g. suppliers

Question 19

Receivable days shows what?

Answer 19

How long it takes to receive payment from its debtors e.g. customers taking out finance

Question 20

Gearing shows a business what?

Answer 20

How much of the business is financed by long term debt

Question 21

A low payable days suggests the business can?

Answer 21

Pay its debts quickly

Question 22

Advantages of a low payable day?

Answer 22

Suppliers more likely to trust the business

Avoids interest fees

Could be more inclined to receive supplier discounts

Question 23

Disadvantages of a high payable day?

Answer 23

Suppliers less likely to give discounts

Suppliers less likely to trust the businesses reliability

Question 24

Advantages of a low gearing ratio?

Answer 24

Less of the business financed by long term debt

Less profits going to paying off debt

Maximises profits and dividends for shareholders

More appealing when looking for creditor to lend money e.g. bank loans

Question 25

Advantages of high payable days?

Answer 25

Gives the business more time to pay debts

Question 26

Advantages of high inventory turnover?

Answer 26

Shows the business is able to keep stock flowing through the business quickly

Shows they have the potential to keep up with changes in the market i.e. trends in a clothing market

Question 27

Advantages of current ratio above 1?

Answer 27

Able to meet short term debts

Question 28

Disadvantages of high current ratio?

Answer 28

Finance tied up in stock that could be used to invest elsewhere in the business