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Accounting and Finance Year 11 ATAR > Topic 10: Ratios > Flashcards

Topic 10: Ratios Flashcards

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1
Q

What is the definition of Profitability?

A

The ability of a business to control its expenses to earn a profit.

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2
Q

What is the definition of the Profit (Margin) Ratio?

A

The percentage of profit (after tax) that is contained in each dollar of sales.

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3
Q

What is the trend in the Profit (Margin) Ratio when it Increases?

A

An increase in profit in proportion to sales.

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4
Q

What is the trend in the Profit (Margin) Ratio when it Decreases?

A

A decrease in profit in proportion to sales.

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5
Q

What are some reasons behind an Increase in the Profit (Margin) Ratio?

A
  • decrease in expenses
  • increase in selling price
  • decrease in cost of sales
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6
Q

What are some reasons behind a Decrease in the Profit (Margin) Ratio?

A
  • increase in expenses
  • decrease in selling price
  • increase in cost of sales
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7
Q

What are some suggested strategies for improving the Profit (Margin) Ratio?

A
  • decrease expenses
  • increase selling price
  • decrease cost of sales / find cheaper suppliers
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8
Q

What is the definition of the Gross Profit Ratio?

A

The percentage of profit the business has earned from its inventory.

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9
Q

What is the trend in the Gross Profit Ratio when it Increases?

A

An increase in gross profit in proportion to sales.

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10
Q

What is the trend in the Gross Profit Ratio when it Decreases?

A

A decrease in gross profit in proportion to sales.

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11
Q

What are some reasons behind an Increase in the Gross Profit Ratio?

A
  • increase in selling price
  • selling more high profit items
  • decrease in cost of sales
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12
Q

What are some reasons behind an Decrease in the Gross Profit Ratio?

A
  • decrease in selling price
  • selling more low profit items
  • increase in cost of sales
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13
Q

What are some suggested strategies for improving the Gross Profit Ratio?

A
  • increase selling price
  • decrease cost of sales / find cheaper suppliers
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14
Q

What is the definition of the Expense Ratio?

A

The percentage of expenses (exc. cost of sales) that is contained with each dollar of sales.

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15
Q

What is the trend in the Expense Ratio when it Increases?

A

An increase in expenses in proportion to sales.

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16
Q

What is the trend in the Expense Ratio when it Decreases?

A

A decrease in expenses in proportion to sales.

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17
Q

What are some reasons behind an Increase in the Expense Ratio?

A
  • increase in expenses
  • inclusion of an extra-ordinary expense
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18
Q

What are some reasons behind a Decrease in the Expense Ratio?

A
  • decrease in expenses
19
Q

What are some suggested strategies for improving the Expense Ratio?

A
  • increase profit through increasing sales while maintaining expenses
  • decrease expenses
20
Q

What is the definition of the Rate of Return on Assets Ratio?

A

How efficiently a business has used its assets to generate a profit.

21
Q

What is the trend in the Rate of Return on Assets Ratio when it’s High?

A

Good performance of assets or effective use of assets to generate profit.

22
Q

What is the trend in the Rate of Return on Assets Ratio when it’s Low?

A

Poor performance of assets/non-effective use of assets to generate profit.

23
Q

What are some reasons behind an Increase in the Rate of Return on Assets Ratio?

A
  • increase in sales
  • decrease in expenses
  • decrease in total assets
24
Q

What are some reasons behind a Decrease in the Rate of Return on Assets Ratio?

A
  • decrease in sales
  • increase in expenses
  • increase in total assets
25
Q

What are some suggested strategies for improving the Rate of Return on Assets Ratio?

A
  • increase profitability by better control of expenses
  • better use of assets
26
Q

What is the definition of Liquidity?

A

How easy it is to turn assets into cash in order to pay debts as they fall due.

27
Q

What is the definition of the Current Ratio?

A

The ability to pay off short term debts (less than 12 months) using current assets.

28
Q

What is the trend in the Current Ratio when it is below 100%?

A

It will be difficult to pay off debts.

29
Q

What is the trend in the Current Ratio when it is between 100% and 200%?

A

Should be easy to pay off debts (ideal/safe).

30
Q

What is the trend in the Current Ratio when it is above 200%?

A

It is easy to pay off but current assets are not being used efficiently.

31
Q

What are some suggested strategies for improving the Current Ratio?

A
  • better credit policy (improve acc. rec.)
  • improve stock turn-over (decrease inventory)
  • monitor expenses
  • pay back acc. payable
  • reduce short term loans
32
Q

What is the definition of the Quick Asset Ratio?

A

The ability to meet immediate debts using very liquid assets.

33
Q

What is the trend in the Quick Asset Ratio when it is below 100%?

A

Should be able to pay off debts.

34
Q

What is the trend in the Quick Asset Ratio when it is above 100%?

A

Will find it difficult to pay off debts.

35
Q

What are some suggested strategies for improving the Quick Asset Ratio?

A
  • better credit policy (improve acc. rec.)
  • improve stock turn-over (decrease inventory)
  • monitor expenses
  • pay back acc. payable
  • reduce short term loans
36
Q

What is the definition of Leverage?

A

The amount of borrowings of a business.

37
Q

What is the definition of the Debt to Equity Ratio?

A

Compares how much a company borrows externally compared to how much they borrow internally.

38
Q

What is the trend in the Debt to Equity Ratio when it is above 100% (high)?

A

Reliant on external finance which can cause concern as we have to pay interest payments.

39
Q

What is the trend in the Debt to Equity Ratio when it is below 100% (low)?

A

Not too reliant on external finance so will be able to pay off easily.

40
Q

What are some reasons behind an Increase in the Debt to Equity Ratio?

A

Not necessarily bad because even though we pay interest, the borrowed funds can be used to expand operations (higher growth and sales).

41
Q

What are some reasons behind a Decrease in the Debt to Equity Ratio?

A

Typically a good sign because less risk (manage interest payments) but the future growth of the business can slow down because there is a lack of expansion.

42
Q

What are some suggested strategies for improving the Debt to Equity Ratio?

A
  • increase capital contributions
  • decrease drawings
  • refinance or find loans with lower interest rates
  • reinvest profits
43
Q

What are three different limitations to ratio analysis?

A

Historic Focus not Future Focus: ratios reflect historic performance and do not predict future performance
Need for Comparison: ratios need to be compared with other information to be most useful
Data Manipulation: data could me manipulated to make data appear more desirable. This will impact ratio calculations & comparisons.

44
Q

What are some things Ratios can be compared with?

A
  • budgeted/predicted results
  • previous years results
  • industry averages
  • other businesses

Accounting and Finance Year 11 ATAR (10 decks)

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