THEME 2: SECTION 3 (MANAGING FINANACE)

Question 1

Formula for gross profit

Answer 1

Gross profit = Total revenue - cost of sales

Question 2

Formula for operating profit

Answer 2

operating profit = gross profit - other expenditure

Question 3

Formula for net profit

Answer 3

net profit = operating profit - tax (interest)

Question 4

What is a statement of comprehensive income and how can it be used?

Answer 4

(should be remembered as a profit and loss account)

• shows how much money has been coming into the business (revenue) and how much has been going out (expenses)
• Used to assess businesses financial performance/stability

Question 5

What is a profit margin?

Answer 5

Measures the relationship between the profit made and the revenue, telling you what percentage of a selling price is profit.

Question 6

Formula for gross profit margin

Answer 6

GPM = gross profit / revenue x100

Question 7

Formula for operating profit margin

Answer 7

OPM = operating profit /revenue x 100

Question 8

Formula for net profit margin

Answer 8

NPM = net profit / revenue x 100

Question 9

what is the difference between profit and cash?

Answer 9

• Profit is what the business has after costs have been taken from revenue, which will then be used to pay shareholders and buy more resources etc
• Cash is what a business needs to operate day-to-day

Question 10

Define liquidity

Answer 10

Liquidity shows how able a business/ individual is of selling off their current assets and how easy it is to turn to cash

Question 11

What does it mean if a business or asset is liquid?

Answer 11

A liquid asset is a reference to cash on hand or an asset that can be readily converted to cash

Question 12

What is a statement of financial position?

Answer 12

• (balance sheet) Is a document used to track a businesses current and non-current assets and liabilities and is a snapshot of businesses finances at a fixed point in time.

Question 13

Formula for the current ratio

Answer 13

Current ratio = current assets / current liabilities

Question 14

Formula for the acid test ratio

Answer 14

Acid test ratio = (current assets - inventory) / current liabilities

Question 15

What does the current ratio show and what is its major drawback?

Answer 15

It shows you how much of its current assets can be used to pay off current liabilities.
- A business cannot sell off all of its inventory which is what makes up a lot of there current assets

Question 16

What does the acid test ratio show?

Answer 16

It shows how much of a business current assets can be used to pay off liabilities but is a harsher measure as it takes into account that inventory may not shift.

Question 17

How can a business improve liquidity?

Answer 17

• Reduce overheads
• Get rid of unproductive assets
• Pay off liabilities sooner

Question 18

What is working capital and the formula?

Answer 18

Working capital is the amount of cash a business has available to pay its day-to-day debts.
Working capital = current assets - current liabilities

Question 19

What are the MAIN internal reasons for business failure (financial and non-financial)?

Answer 19

Financial :

• Bad management of working capital /funds
• Poor efficiency
• Bad decision making

Non-financial:

• Poor communication
• Bad research and analysis
• Bad marketing

Question 20

What are the MAIN external reasons for business failure (financial and non-financial)?

Answer 20

Financial :

• Economic recession
• change in exchange rates

Non - financial

• Action of competitors
• Change in consumer trends
• Poor communication

Question 21

what is business failure?

Answer 21

• when a business can no longer afford to produce or stay open