Section 3 - 3.5 profitablity and ratio analysis

Question 1

The acid ratio test

Answer 1

Is a liquidity ratio that measures affirms ability to meet it’s short term debts. Ignore stocks because not all inventories can be easily turned into cash in a short timeframe

Question 2

Capital employed

Answer 2

Is the value of all long-term sources of finance for a business e.g. bank loans, share capitals and reserves

Question 3

Current ratio

Answer 3

Is a short term liquidity ratio that calculates the ability of a business to meet at depts within the next 12 months

Question 4

Efficiency ratio’s

Answer 4

Indicate how well a firms resources have been used, such as the amount of profit generated from the available capital used in the business

Question 5

Gross profit margin (GPM)

Answer 5

Is a profitability ratio that shows the percentage of sales revenue that turned into gross profit

Question 6

Liquid assets

Answer 6

Are the positions of a business that can be turned into cash quickly without losing their value i.e. cash, stocks and debtors

Question 7

Liquidity crisis

Answer 7

Refers to a situation where a firm is unable to pay it short term debts i.e. current liabilities exceed current assets

Question 8

Liquidity ratios

Answer 8

Look at the ability of a firm to pay it short term liabilities, such as comparing working capital to short-term debts

Question 9

Net profit margins (NPM)

Answer 9

Shows the percentage of sales revenue that turns into net profit i.e. the proportion of sales revenue left over after all direct and indirect costs have been paid

Question 10

Profitability ratios

Answer 10

Exam profit in relation to other figures e.g. the GPM and NPM ratios period these ratios tend to be relevant to profit seeking businesses rather than for nonprofit organizations

Question 11

Ratio analysis

Answer 11

Is a quantitative management tool that compares different financial figures to examine and judge the financial performance of a business. It requires the application of figures found in the financial accounts (the balance sheet and profit and loss account)

Question 12

Return on capital employed (ROCE)

Answer 12

Is an efficiency ratio (Although it also reveals the first profitability)measuring the profit of a business in relation to its size(as measured by capital employed)