Ratio analysis

Question 1

what does ratio analysis show

Answer 1

the significance of figures in financial statements

Question 2

what is a ratio analysis used to compare business performance with?

Answer 2

• previous years to asses improved performance
• main business rivals
• benchmark to try match their figures/performance
• what was predicted/expected

Question 3

what is annual account ratios to highlight in an organisation?

Answer 3

Profitability
Liquidity
Efficiency

Question 4

what is profitability

Answer 4

are profits satisfactory from the owners POV

Question 5

what is liquidity

Answer 5

how able is the business to pay its short term debts

Question 6

what is efficiency

Answer 6

how effectively the business is using its limited resources

Question 7

how do you calculate the gross profit percentage

Answer 7

gross profit/sales x 100

Question 8

what does the gross profit percentage measure

Answer 8

buying and selling inventory

Question 9

how could a business improve their GP%

Answer 9

• increase price
• find cheaper suppliers
• negotiate discounts
• monitor inventory levels

Question 10

how do you calculate the profit for the year percentage

Answer 10

profit for the year/sales x 100

Question 11

what does the profit for the year percentage measure

Answer 11

the final profit available for distribution after all business costs are paid

Question 12

how can a business improve the PFY%

Answer 12

• improve GP%
• cut unimportant expenses
• identify revenues that could be increased

Question 13

how can you calculate the return on equity employed

Answer 13

profit for the year/opening equity x 100

Question 14

what calculations show profitability?

Answer 14

• GP%
• PFY%
• return on equity employed%

Question 15

what does the return on equity employed % measure

Answer 15

how much the owner gets back for their investment

Question 16

how can a business improve their return on equity employed %

Answer 16

-improve profit for the year

Question 17

what calculations can you do to show liquidity

Answer 17

• Current ratio

- Acid test ratio

Question 18

how do you calculate the current ratio

Answer 18

Current Assets : Current Liabilities

big/small

Question 19

what does the current ratio measure

Answer 19

wether a business can pay its short term debts.

suitable ratio is usually 2:1

Question 20

how do you calculate the acid test ratio

Answer 20

(CA-inventory) : CL

Question 21

what does the acid test ratio measure

Answer 21

wether the business can pay short time debts in a crisis situation

Question 22

how can a business improve their acid test ratio

Answer 22

• increase liquid current assets

- decrease current liabilities

Question 23

what calculations can you do to show efficiency

Answer 23

-rate of inventory turnover

Question 24

what is the calculation for the rate of inventory turnover

Answer 24

cost of sales/average inventory

Question 25

what does the rate of inventory turnover show?

Answer 25

how many times the business replaces the average value of inventory it holds in a year

Question 26

how can a business improve the rate of inventory turnover

Answer 26

• increase sales
• cheaper supplier
• Use JIT

Question 27

what are the pros to ratio analysis

Answer 27

• comparison with previous years
• comparison with bench mark
• comparison with comp

Question 28

what are the cons to ratio analysis

Answer 28

• could be out of date

- different companies use different calculation methods so comparison is difficult