Ratios

Question 1

What are ratios used for?

Answer 1

They analyse the information provided by financial statements e.g. income statements or statements or financial positions

Question 2

What is the purpose of a ratio analysis?

Answer 2

• To compare the business performance qith previous years
• To compare with competition
• To compare against the industries average
• To highlight areas of weakness
• To aid decision making in the future

Question 3

What are ratio limitations?

(use examples in answers)

Answer 3

• The info is hystorical (out-dated)
• They don’t take into account internal or external factors
• They don’t tke into account roduct development
• ## They don’t tell us financial development

Question 4

What types of ratios are there?

Answer 4

Profitability, liquidity, efficiency

Question 5

What is profitability?

Answer 5

This is a ratio used to measure how profitable a business is

Question 6

What are profitability ratio examples?

Answer 6

Gross profit, profit for the year, return on equity employed percentage

Question 7

What is the gross profit % ratio?

Answer 7

This is calculated using:
Gross profit
— ———— x 100
revenue
This is percent of profits from buying and selling. Improves by increasing sales, prices or finding a cheaper supplier

Question 8

What is profit for the year % ratio?

Answer 8

It is calculated using:
Profit for the year
————————- x100
Revenue
This is teh percent of profits made after expenses are deducted from gross profit. Improved by Reducing expenses, increasing revenue and improving gross profit

Question 9

What is return on equity employed percentage ratio?

Answer 9

This is calculated using:
Profit for the year
————————-x100
Equity
This is the percent of investment returned to investores e.g. shareholders. Improved by increasing profit for the year

Question 10

What is liquidity?

Answer 10

The is the businesses ability to convert their assets into cash and meet its short term debts

Question 11

What are liquididty ratio examples?

Answer 11

Current ratios and acid test ratios

Question 12

What are current ratios?

Answer 12

They can be calculated using:
Current assets
—————.
Revenue
This is the businesses ability to pay back a short term debt (ideally 2:1) If it is higher the business must secure more current assets by selling non-current assets, and they should reduce current liabilities. If too high they should invest more.

Question 13

What are acid test ratios?

Answer 13

They can be calculated using:
(current assets - closing inventory)
—————————————————.
current liabilities
This measures the ability of the business to pay back short term debts in a crisis situation (1:1 ration acceptable)
If less than 1:1 they should secure more current assets.
If current ratio is ok and acid test too low money is ties up in stock and JIT should be implimented

Question 14

What is efficiency?

Answer 14

This measures how well a busines uses their resources

Question 15

What is the efficiency ratio example?

Answer 15

Rate of inventory turnover

Question 16

What is rate of inventory turnover?

Answer 16

This is calculated using:
Cost of sales
————————–.
average inventory^
This measures the amount of time a business restocks in a year. If high stock is selling well, if low impliment JIT

^calculated using (opening inventory +closing inventory)÷2