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Abi Accounting 2017 > Ratios And Percentages > Flashcards

Ratios And Percentages Flashcards

1
Q

What are financial ratios meant to do?

A

Compare the results of the current year to the results of the previous year

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2
Q

What are the four types of ratios?

A

Profitability
Return on owner’s equity
Solvency
Liquidity

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3
Q

How many profitability ratios are there?

A

Five

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4
Q

What are the five profitability ratios?

A 
Percentage gross profit on turnover
Percentage gross profit on cost of Sales
Percentage operations profit on sales
Percentage operating expenses on sales
Percentage net profit on sales
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5
Q

How are profitability ratios expressed?

A

As percentages

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6
Q

What figures are used for the percentage gross profit on turnover?

A

Gross profit over Net sales

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7
Q

What values are used for the percentage gross profit on cost of Sales?

A

Gross profit over cost of Sales

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8
Q

What does the percentage gross profit on cost of Sales give us?

A

The mark-up achieved

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9
Q

How can we interpret the percentage gross profit on sales?

A

It is good if it has gone up

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10
Q

How can we interpret the percentage gross profit on cost of Sales?

A

If it is greater than the proposed mark-up it is good

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11
Q

What figures will you use for the percentage operating profit on sales?

A

Operating profit over net sales

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12
Q

What figures will you use for the percentage operating expenses on sales?

A

Operating expense over net sales

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13
Q

What figures will you use to get the percentage net profit on sales?

A

Net profit over net sales

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14
Q

What does the return on owner’s equity tell the owner?

A

How profitable his investment in the business is

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15
Q

When does the owner know his business is profitable?

A

The return on owner’s equity will be greater than that which he can obtain through a Fixed deposit

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16
Q

What is the formula for the return on owner’s equity percentage?

A

Net profit over average owner’s equity multiplied by one hundred

17
Q

How do you work out the average owner’s equity?

A

Owner’s equity at the beginning of the year added to the owner’s equity at the end of the year
Total divided by two

18
Q

What does the solvency ratio tell us?

A

It reveals whether the business is able to meet its liabilities

19
Q

When is a business said to be solvent?

A

When the value of its assets is greater than that of its liabilities

20
Q

How is the solvency ratio calculated?

A

Total assets divided by total liabilities

21
Q

How is the solvency ratio represented?

A

Total liabilities is put on the left and is made equal to one
The total assets is put relative to the one

22
Q

How can you interpret solvency from the solvency ratio?

A

If the total assists value is greater than one, the business is solvent

23
Q

What does liquidity deal with?

A

The ability of a business to meet its short-term obligations

24
Q

What are the two types of liquidity ratios?

A

Current ratio

Acid test ratio

25
Q

What is the ideal current ratio?

A

Current assets should be higher than current liabilities, but not too high

26
Q

Why shouldn’t the current ratio be too high?

A

This indicates too many funds are tied up in things that do not earn a return
It could also mean that cash is in excess, and should rather be invested in places where it will earn a greater return

27
Q

How do work out the current ratio?

A

Similarly to the solvency ratio, only using current assets and current liabilities instead

28
Q

What is another name for the acid test ratio?

A

The quick ratio

29
Q

What does the acid test ratio tell us?

A

It test the ability of a business to meet its liabilities under abnormal conditions

30
Q

What kind of abnormal conditions would the acid test ratio be testing for?

A

Where there is a decline in sales

i.e when Stock is devalued

31
Q

How is the acid test ratio different form the current ratio?

A

Current ratio includes stock

Acid test ratio does not

32
Q

How do you work out the acid test ratio?

A

Similarly to the current ratio

Exclude trading Stock from the current assets figure

33
Q

How do you interpret the acid test ratio?

A

If the acid test ratio reveals that current assets without trading Stock is less than your current liabilities, that is bad

34
Q

Why is having current assets less trading Stock less than your current assets bad?

A

Too much money is tied up in stock

If the market crashes, the business will not be able to meet its current liabilities

Abi Accounting 2017 (8 decks)

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