Ratios

Question 1

Operating Profit

Answer 1

Revenue less operating expenses, day to day expenses, cost of goods sold

Question 2

Operating Profit Margin

Answer 2

Operating Profit / Revenue x 100

Question 3

Gross Profit

Answer 3

Gross profit / Revenue x 100

Question 4

Expenses

Answer 4

Expense / Revenue x 100

Question 5

Capital Employed

Answer 5

Total equity + non-current liabilities

Question 6

ROCE

Answer 6

Operating profit / capital employed x 100

Question 7

Return on shareholders funds ratio

Answer 7

Profit after tax / total equity x 100

Question 8

current ratio

Answer 8

current asset / current liabilities

Question 9

quick / acid ratio

Answer 9

current assets (less inventory) / current liabilities

Question 10

inventory turnover

Answer 10

cost of sales / inventories

Question 11

inventory holding period (days)

Answer 11

inventories / cost of sales x 365

Question 12

trade payables (days)

Answer 12

payables / cost of sales x 365

Question 13

trade receivables

Answer 13

receivables / revenue x 365

Question 14

working capital cycle

Answer 14

inventory holding period + receivables - payables

Question 15

asset turnover (net assets)

Answer 15

revenue / (total assets - current liablilites)

Question 16

asset turnover (non-current assets)

Answer 16

revenue / non-current assets

Question 17

interest cover

Answer 17

operating profit / finance cost

Question 18

gearing

Answer 18

total debt / total debt + equity x 100

Question 19

what does ROCE mean

Answer 19

how well the money invested is being used to generate profit

Question 20

what does shareholders funds ratio show

Answer 20

how well their investment in the company is performing

Question 21

what does the current ratio show

Answer 21

the number of times current liabilities are covered by current assets

Question 22

what does the quick ratio show

Answer 22

the liquidity of the business - the ability to pay current liabilities on time

Question 23

what does inventory turnover show

Answer 23

the amount of times in a year the inventory is full replaced

Question 24

what does asset turnover show

Answer 24

how well assets are generating sales - the number of times the value of assets has been generated in revenue

Question 25

what does interest cover show

Answer 25

an indication of the impact of debt - how many times the interest can be covered by the operating profits

Question 26

what does gearing show

Answer 26

how much of an organisation is funded by borrowing - the lower the better

Question 27

Reasons for higher interest cover

Answer 27

- higher profits - lower interest payments or interest rates - may be easier or cheaper to obtain finance in future

Question 28

Reasons for longer payable days

Answer 28

- paying suppliers later - may hav agreed credit terms - may have cash flow issues - be cautious has could get bad reputation with suppliers

Question 29

Reasons for better current ratio

Answer 29

- more solvent - may have more current assets - may have less current liabilities

Question 30

Reasons for better ROCE

Answer 30

- capital employed working more efficiently to generate profits - may have higher profits - may have lower equity - may have less non-current liabilities

Question 31

Reasons for increased operating profit

Answer 31

- increased selling prices - decreased cost of sales - overheads / expenses may be better controlled

Question 32

Reasons for worse acid / quick test

Answer 32

- More current liabilites in comparison to current assets - Increased current liabilities - possible solvency issues (could struggle paying short-term debts)

Question 33

Reasons for better gearing

Answer 33

- more is financed by equity not debt - less non-current liabilities - higher equity - company is less financially risky

Question 34

Reasons for worse inventory turnover

Answer 34

- turning over inventories less times in the year - may have higher levels of inventory held - inventory takes longer to sell - inventory could be poorly managed

Question 35

Cost of sales

Answer 35

Opening inventory + Production - Closing Inventory

Question 36

How to convert % into 1 in e.g. 2%

Answer 36

Convert % to decimal (0.02) then divide 1 by that 1/0.02 = 50 so will be 1 in 50

Question 37

Reasons for material variances

Answer 37

change in amount paid (price variance) price difference will likely affect quality quality affects wastage can cause change in usage variance

Question 38

Reasons for labour variance

Answer 38

quality of materials affects speed of work idle time - broken machine or poor communication between warehouse and production

Question 39

Reasons for overhead variance

Answer 39

if production level drops not enough overhead is absorbed poor budgeting

Question 40

4 types of standard

Answer 40

ideal - assumes ideal conditions and not attainable basic - based on historical information which can become out of date. good for long term information to identify trends normal - expected cost under normal manufacturing conditions target - more challenging for team as linked to target costing. target costing is where product cost must be kept below a set level to acheive the determined profit margin