Ratios

Question 1

Profitability Def

Answer 1

Profitability refers to the earning capacity of the business during the accounting period.

Question 2

Profit Ratio Def

Answer 2

The profit ratio shows the percentage of profit that is contained in each dollar of sales.

Question 3

Results for profit ratio

Answer 3

higher the better, ideal is any positive amount as negative amount indicates a loss has been made

Question 4

Factors that will increase trend for profit

Answer 4

selling a greater proportion of high profit items
cost of sales may have decreased
expenses may have decreased

Question 5

Factors that will decrease trend for profit

Answer 5

selling a higher proportion of low profit items
cost of sales may have increased
expenses may have increased

Question 6

Gross profit def

Answer 6

gross profit ratio is a measure of the level of profit available, after subtracting the cost of sale expense to cover remaining expenses of a business.

Question 7

gross profit results

Answer 7

higher the better
ideal is any psotive amount as negative amount shows that gross loss has een made

Question 8

gross profit increasing trend

Answer 8

increase in the selling price of the inventory higher than any increase in the purchasing price
business has purchased inventory at a lower price

Question 9

gross profit decreasing trend

Answer 9

increase in purchase price of the inventory higher than any increase in selling price.
decrease in selling price of inventory possibly caused by new competitor entering the market, a

Question 10

Expenses Ratio def

Answer 10

Expense ratio compares the sales to the total operating expenses, e.g. selling and distribution, general and administrative and financial expenses. From this ratio the owner of a business can see extent to which the operating expenses have affected the profit.

Question 11

Expenses result

Answer 11

Lower the better

Question 12

expenses increasing trend

Answer 12

expeneses has increased
net sales have decreased

Question 13

expenses decreasing trend

Answer 13

expenses have decreased
net sales have increased

Question 14

Rate on Return on Assets Def

Answer 14

Rate on return on assets ratio shows overall earning power of total assets before any payment to equity or debt providers

Question 15

Rate on return on assets results

Answer 15

higher the better
ideal is positive amount, as negative result indicates loss has been made

Question 16

rate on return on assets incrasing trend

Answer 16

money invested is being used more efficently
greater return earned from the same quantiy of assets

Question 17

rate on return on assets decreasing trend

Answer 17

business is using assets lless efficientyl
business might need to consider reducing the amount invested in assets - assets may be idle

Question 18

Actions to improve profitability

Answer 18

locating cheaper supplies
increasing prices
cutting operating costs such as wages and utilities

Question 19

Liquidity ratio def

Answer 19

Liquiditly ratio assist in assessing the business ability to meet its financial commitments in the short term

Question 20

working capital results

Answer 20

higher the ratio is the better, indicates strong liquidity
ideal level is 2:1 as this indicates that for every $1 of current laibilty business has $2 in current asset to meet this obbligation
If ratio is igger than 2:1, business may e missing investment oppurtunities.

Question 21

Working capital/current

Answer 21

working capital ratio shows short term det paying ability. it answers the question of wheter the business can meet its debts as they fall due in the normal course of business.

Question 22

trend increasing working capital

Answer 22

inventoory might be being sold more slowly
debtors may be taking longer to pay
there may be idle cash

Question 23

trend decreasing working capital

Answer 23

inventory beign sold more quickly
debotrs may e paying more promptly

Question 24

quick asset def

Answer 24

quick asset ratio is a measure of the abbiltiy of a business to pay its short term debts using only its more liquid current assets

Question 25

quick assets results

Answer 25

ideal levle is higher than 1:1, whic means usiness should e able to pay immediate debts

Question 26

quick assets increasing trend

Answer 26

debtors, short term investment or cash may hve increased
creditors may have decreased

Question 27

quick assets decreasing trend

Answer 27

debtors, short term investments cah may have decreased
creditors may haave increased

Question 28

ACTIONS TO IMPROVE LIQUIDITY

Answer 28

ADDITIONAL CAPITAL
non curreent asset sold for cash
using cheaper suppliers
increasing collections from debtors

Question 29

Leverage or gearing def

Answer 29

desrbies extent to which a business has funded its operation from borrowed funds rather than equity

Question 30

dEBT TO EQUITY DEF

Answer 30

Debt to equity ratio measures how the business has funded its assets comparing the total labilities to amount of contributed equity

Question 31

debt to wquity results

Answer 31

lower , safer fiancials are
ideal is less than 100% as this indicates business is less reliant in external finacial pressures

Question 32

actions ti improve leverage

Answer 32

paying off debt
contruting addtioanl capital
cutbacks on inventory purchases
delaying major capital investment