Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

VCE Accounting Units 1&2 > Unit 2 Acc Chapter 17 Review Questions > Flashcards

Unit 2 Acc Chapter 17 Review Questions Flashcards

1
Q

RQ 17.1 // Analysis & Interpretation

Q1. Explain the difference between analysing and interpreting financial information.

A
  • Analysing involves examining the reports in great detail to identify changes or differences in performance.
  • interpreting involves examining the relationships between the items in the reports in order to explain the cause and effect of those changes or differences.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

RQ 17.1 // Analysis & Interpretation

Q2. Define profitability

A

The ability of the business to earn a profit, as compared against a base such as sales, assets or owner’s equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

RQ 17.1 // Analysis & Interpretation

Q2. Define liquidity

A

The ability of the business to meet its short-term debts as they fall due

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

RQ 17.1 // Analysis & Interpretation

Q2. Define efficiency

A

The ability of the business to manage its assets and liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

RQ 17.1 // Analysis & Interpretation

Q2. Define stability

A

The ability of the business to meet its debts and continue its operations in the long term.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

RQ 17.1 // Analysis & Interpretation

Q3. Explain how trends can be used in an assessment of performance

A

Trends can be useful in identifying changes in areas of business performance over a number of periods that form a pattern. They can indicate improvement or decline in business performance over a number of periods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

RQ 17.1 // Analysis & Interpretation

Q3. Explain how variances can be used in an assessment of performance

A

A variance is identified by comparing the actual figures against the budgeted or expected figures to identify areas in which performance has been below –or hopefully – expectations. Any unfavourable variances can be corrected by taking remedial action.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

RQ 17.1 // Analysis & Interpretation

Q4. List three benchmarks which can be used to assess business performance.

A
  • Comparing current performance against performance in a previous period
  • Comparing current performance against budgeted performance
  • Comparing a firm’s performance against performance of a similar business or industry averages
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

RQ 17.1 // Analysis & Interpretation

Q5. Explain how financial indicators can be used to assess business performance.

A

A financial indicator is a measure that expresses business performance in terms of the relationship between two different elements of that performance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

RQ 17.1 // Analysis & Interpretation

Q6. List the indicators which can be used to assess profitability.

A
  • Return on Owner’s Investment (ROI)
  • Return on Assets (ROA)
  • Asset Turnover (ATO)
  • Net Profit Margin (NPM)
  • Gross Profit Margin (GPM)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

RQ 17.1 // Analysis & Interpretation

Q7. List the indicators which can be used to assess liquidity

A
  • Working Capital Ratio (WCR)

* Quick Asset Ratio (QAR)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

RQ 17.1 // Analysis & Interpretation

Q8. Explain how turnover indicators affect liquidity.

A

The turnover indicators (Stock Turnover, Debtors Turnover and Creditor Turnover) affect liquidity by determining the speed at which cash is generated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

RQ 17.2 // Assessing Profitability

Q1. State the two basic factors on which the ability to earn a profit is dependent.

A

The firm’s ability to earn profit is dependent on its ability to earn revenue and control its expenses.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

RQ 17.2 // Assessing Profitability

Q2. Explain why an evaluation of business performance assesses profitability rather than just profit.

A

Profitability is more than just assessing profit; it is about assessing the firm’s capacity or ability to earn profit, assuming all other factors (such as size of business, size of investment of owner and the level of sales when comparing to another business) are equal.
Expressing profit relative to another measure therefore allows for comparisons between different firms and different periods.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

RQ 17.3 // Return on Owner’s Investment (ROI)

Q1. State what is measured by Return on Owner’s Investment (ROI).

A

Return on Owner’s Investment assesses how effectively a business has used the owner’s capital to earn profit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

RQ 17.3 // Return on Owner’s Investment (ROI)

Q2. Show the formula to calculate Return on Owner’s Investment.

A

Net Profit
——————— x 100
Average Capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

RQ 17.3 // Return on Owner’s Investment (ROI)

Q3. List three benchmarks that could be used to assess the adequacy of the Return on Owner’s Investment.

A
  • Previous period’s Return on Owner’s Investment
  • Budgeted Return on Owner’s Investment
  • Return on Owner’s Investment of similar firms/industry averages
  • Rate of return on alternative investments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

RQ 17.3 // Return on Owner’s Investment (ROI)
Q4. Explain the significance of the return on similar investments as a benchmark for assessing the Return on Owner’s Investment.

A

When assessing Return on Owner’s Investment, it is important to remember that the owner has given up the opportunity to invest their money elsewhere, and therefore forgone the return that might be earned by investing in property, shares, financial products or other valuables.
Thus, the return achievable from these alternative investments is crucial in assessing the Return on Owner’s Investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

RQ 17.3 // Return on Owner’s Investment (ROI)

Q5. State what is measured by the Debt Ratio.

A

The Debt Ratio is a stability indicator that assesses the extent to which the business relies on borrowed funds to finance the purchase of its assets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

RQ 17.3 // Return on Owner’s Investment (ROI)

Q6. Explain how the Debt Ratio can affect the Return on Owner’s Investment.

A

An increase in the Debt Ratio (business is more reliant on borrowed funds) will increase the Return on Owner’s Investment because the business has borrowed more funds to purchase assets that, in turn, produce more profit.
The owner still receives all the profit, but the business is using someone else’s funds in order to achieve this.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

RQ 17.4 // Return on Assets (ROA)

Q1. State what is measured by Return on Assets (ROA).

A

Return on Assets is a profitability indicator that assesses how effectively a business has used its assets to earn profit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

RQ 17.4 // Return on Assets (ROA)

Q2. Show the formula to calculate Return on Assets.

A

Net Profit
————————— x 100
Average Total Assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

RQ 17.4 // Return on Assets (ROA)

Q3. List three benchmarks that could be used to assess the adequacy of the Return on Assets.

A
  • Return on Assets from previous periods
  • Budgeted Return on Assets
  • Return on Assets of a similar firm/industry average.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

RQ 17.4 // Return on Assets (ROA)

Q4. Explain why a firm’s Return on Owner’s Investment will always be higher than its Return on Assets.

A

Return on Owner’s Investment will always be higher because the total assets of a business will always be higher than its owner’s equity due to its liabilities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

RQ 17.4 // Return on Assets (ROA)

Q5. Explain how Return on Assets is affected by the Asset Turnover and Net Profit Margin.

A

Assuming assets do not change, a change in Return on Assets will be solely the result of a change in profit, which may itself be the result of a change in the firm’s ability to earn revenue, or control its expenses (or both).
As a result, the Return on Assets will depend heavily on the firm’s ability to earn revenue (as measured by the Asset Turnover) and control its expenses (as measured by the Net Profit Margin).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

RQ 17.5 // Earning Revenue: Asset Turnover (ATO)

Q1. State what is measured by Asset Turnover (ATO).

A

Asset Turnover is an efficiency/profitability indicator that assesses how productively a business has used its assets to earn revenue.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

RQ 17.5 // Earning Revenue: Asset Turnover (ATO)

Q2. Show the formula to calculate Asset Turnover.

A

Average Total Assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

RQ 17.5 // Earning Revenue: Asset Turnover (ATO)

Q3. List three benchmarks that could be used to assess the adequacy of a firm’s Asset Turnover.

A
  • Asset Turnover from previous periods
  • Budgeted Asset Turnover
  • Asset Turnover of a similar firm/industry average
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

RQ 17.5 // Earning Revenue: Asset Turnover (ATO)

Q4. Explain the relationship between Asset Turnover and Return on Assets.

A

Both the Return on Assets and Asset Turnover assess the firm’s ability to use its assets; the only difference being that the Return on Assets measures profit, whereas Asset Turnover measures only revenue.
Theoretically, a higher Asset Turnover should mean a higher Return on Assets; however, revenue does not always translate into profit – expense control is also required.

30
Q

RQ 17.6 // Controlling Expenses: Net Profit Margin (NPM)

Q1. Define the term ‘expense control’.

A

Expense control is the firm’s ability to manage its expenses so that they either decrease or, in the case of variable expenses, increase no faster than sales revenue.

31
Q

RQ 17.6 // Controlling Expenses: Net Profit Margin (NPM)

Q2. State two reasons why some expenses must increase in the pursuit of profit.

A
  • Expenses such as Cost of Sales and Wages must increase as sales revenue increases.
  • Expenses such as Advertising may, in fact, have to increase in order to generate greater sales.
32
Q

RQ 17.6 // Controlling Expenses: Net Profit Margin (NPM)

Q3. State what is measured by the Net Profit Margin (NPM).

A

The Net Profit Margin is a profitability indicator that assesses expense control by calculating the percentage of sales revenue that is retained as Net Profit.

33
Q

RQ 17.6 // Controlling Expenses: Net Profit Margin (NPM)

Q4. Show the formula to calculate the Net Profit Margin.

A

Net Profit
——————- x 100
Sales Revenue

34
Q

RQ 17.6 // Controlling Expenses: Net Profit Margin (NPM)

Q5. Explain the relationship between Asset Turnover, Net Profit Margin, and Return on Assets.

A

The Return on Assets will be a function of the Asset Turnover and the Net Profit Margin (NPM): if these indicators change, then so too will the Return on Assets.
This is because the Asset Turnover measures the firm’s ability to use its assets to generate sales revenue, while the NPM measures the firm’s expense control.
If the firm’s revenue earning capacity improves (Asset Turnover) and expense control is maintained or improved (NPM), then the Return on Assets should also improve.
However, a business may improve its Asset Turnover, meaning revenue earning capacity has improved, but if it has been unable to control its expenses (as seen in a decrease in NPM), then the Return on Assets may actually worsen/decrease and indicate that while the firm was able to use its assets effectively to generate revenue, it was unable to use them effectively to generate profit due to poor expense control.

35
Q

RQ 17.7 // Gross Profit Margin (GPM)

Q1. State what is measured by the Gross Profit Margin (GPM).

A

The Gross Profit Margin assesses the average mark-up by calculating the percentage of sales revenue that is retained as Gross Profit.

36
Q

RQ 17.7 // Gross Profit Margin (GPM)

Q2. Show the formula to calculate the Gross Profit Margin.

A

Gross Profit
——————- x 100
Sales Revenue

37
Q

RQ 17.7 // Gross Profit Margin (GPM)

Q3. Explain two ways a business could increase its average mark-up.

A
  • Increase the selling price.

* Decrease the cost price by finding a cheaper supplier.

38
Q

RQ 17.7 // Gross Profit Margin (GPM)

Q4. Explain how an increase in mark-up could actually lead to a decrease in Gross Profit.

A

By increasing the selling price, the mark-up will also increase; however, it runs the risk of lowering demand, and thus reducing the volume of sales.
If the drop in demand outweighs the increase in the selling price, then Gross Profit in dollar terms will actually fall.

39
Q

RQ 17.8 // Vertical Analysis of the Income Statement

Q1. Explain what is shown in a vertical analysis of the Income Statement.

A

Vertical analysis is a report that expresses every item as a percentage of a base figure (in this case, sales revenue).

40
Q

RQ 17.8 // Vertical Analysis of the Income Statement

Q2. Explain one benefit of preparing a vertical analysis as a pie chart.

A

Given that not all business owners are accountants, presenting a vertical analysis in a pie chart is one way of ensuring Understandability in the accounting reports, making it easier for the reader to comprehend its meaning.

41
Q

RQ 17.9 // Assessing Liqudity

Q1. Define the term ‘liquidity’.

A

Liquidity assesses the firm’s ability to meet its short-term debts as they fall due.

42
Q

RQ 17.9 // Assessing Liqudity

Q2. Explain the role of the Cash Budget in evaluating liquidity.

A

The Cash Budget predicts cash inflows and cash outflows for the coming year, allowing the owner to assess exactly whether the business will have enough liquid funds to meet its short-term debts.

43
Q

RQ 17.9 // Assessing Liqudity

Q3. Suggest four strategies the owner may implement to address a predicted cash deficit.

A
  • Defer the purchase of non-current assets, or use credit facilities or a loan for their purchase.
  • Defer loan repayments.
  • Reduce cash drawings.
  • Make a cash capital contribution.
  • Organise (or extend) an overdraft facility.
44
Q

RQ 17.9 // Assessing Liqudity

Q4. Suggest two strategies the owner may implement to use a predicted cash surplus.

A
  • Purchase more/newer non-current assets.
  • Increase loan repayments.
  • Increase cash drawings.
  • Expand trading activities by increasing advertising, employing more staff, etc.
45
Q

RQ 17.10 // Working Capital Ratio (WCR)

Q1. State what is measured by the Working Capital Ratio (WCR).

A

The Working Capital Ratio assesses the firm’s ability to meet its short-term debts as they fall due by measuring the ratio of current assets to current liabilities.

46
Q

RQ 17.10 // Working Capital Ratio (WCR)

Q2. Show the formula to calculate the Working Capital Ratio.

A 
Current Assets (CA)
---------------------------
Current Liabilities (CL)
47
Q

RQ 17.10 // Working Capital Ratio (WCR)

Q3. Explain why the Working Capital Ratio should be at least 1:1.

A

A Working Capital Ratio of 1:1 or more indicates that the business has sufficient current assets to cover current liabilities and is therefore able to meet its short-term debts as they fall due. If the ratio is less than 1:1 (for example 0.8:1), this indicates that for every $1 of current liabilities, the business only has 80 cents of current assets, indicating they will have difficulty meeting short-term debts as they fall due.

48
Q

RQ 17.10 // Working Capital Ratio (WCR)

Q4. Explain one problem associated with an excessive Working Capital Ratio.

A

A Working Capital Ratio that is too high may indicate that the business has current assets that are nothing. For example:
• Excess cash in the bank account is likely to earn relatively little interest.
• Excess stock can create problems in terms of storage costs, stock loss and obsolescence.
• Excessive debtors balance may mean that debtors are not paying (on time or at all), and that debts are less likely to be collected.

49
Q

RQ 17.10 // Working Capital Ratio (WCR)

Q5. State the actions the owner may be required to take if the Working Capital Ratio is too low.

A

• too low:
i make a cash capital contribution
ii seek additional finance by entering into (or extending) an overdraft facility
iii take out a loan for the purchase of non-current assets

50
Q

RQ 17.10 // Working Capital Ratio (WCR)

Q5. State the actions the owner may be required to take if the Working Capital Ratio is too high.

A

• too high
i employ cash to repay debt; expand the business (via non-current asset purchases, advertising, or hiring staff)
ii increase drawings
iii allow stock levels to run down before reordering
iv contact debtors to collect amounts outstanding.

51
Q

RQ 17.11 // Quick Asset Ratio (QAR)

Q1. State what is measured by the Quick Asset Ratio (QAR).

A

The Quick Asset Ratio assesses the firm’s ability to meet its immediate debts by measuring the ratio of quick assets to quick liabilities.

52
Q

RQ 17.11 // Quick Asset Ratio (QAR)

Q2. Show the formula to calculate the Quick Asset Ratio.

A 
Current assets (excl. stock&prepaid expenses)
----------------------------------------------------------      
Current liabilities (excluding bank overdraft)
53
Q

RQ 17.11 // Quick Asset Ratio (QAR)

Q3. Explain why stock is excluded from the calculation of the Quick Asset Ratio

A

• stock – a business cannot assume that it will be able to liquidate all its stock just because the firm is facing liquidity problems, and there is virtually no chance of this happening

54
Q

RQ 17.11 // Quick Asset Ratio (QAR)

Q3. Explain why prepaid expenses are excluded from the calculation of the Quick Asset Ratio

A

• prepaid expenses – may not be able to be liquidated at all, especially if the business has entered into a written contract with the supplier

55
Q

RQ 17.11 // Quick Asset Ratio (QAR)

Q3. Explain why bank overdraft are excluded from the calculation of the Quick Asset Ratio

A

• bank overdraft – it is unlikely that a bank overdraft will be called in (for repayment).

56
Q

RQ 17.11 // Quick Asset Ratio (QAR)

Q4. Explain what is indicated if the Working Capital Ratio is satisfactory, but the Quick Asset Ratio is unsatisfactory

A

While the business is able to meet its short-term debts in the next 12 months, they probably have an over-investment in stock, which, when removed in the Quick Asset Ratio calculation, makes it unsatisfactory to meet its immediate debts. Together, the indicators suggest that if the business can sell its stock, it will be able to meet its debts as they fall due; if not, liquidity problems may result.

57
Q

RQ 17.12 // The Speed of Liquidity
Q1. Explain how a firm with a high turnover may avoid liquidity problems despite an unsatisfactory Working Capital Ratio.

A

A business can survive in spite of an unsatisfactory level of liquidity if the speed of their trading cycle is fast enough. If a business can sell its stock – and collect the cash from its customers – before that cash is needed, it will survive even with a very low Working Capital Ratio.
Businesses such as this can survive because their turnover (Stock Turnover/Debtors Turnover) is so fast.

58
Q

RQ 17.12 // The Speed of Liquidity

Q2. State what is measured by Stock Turnover (STO).

A

Stock Turnover measures the average number of days it takes for a business to convert its stock into sales.

59
Q

RQ 17.12 // The Speed of Liquidity

Q3. Show the formula to calculate Stock Turnover.

A

Average Stock
———————— x 365
Cost of Goods Sold

60
Q

RQ 17.12 // The Speed of Liquidity

Q4. State what is measured by Debtors Turnover (DTO).

A

Debtors Turnover measures the average number of days it takes for a business to collect cash from its customers.

61
Q

RQ 17.12 // The Speed of Liquidity

Q5. Show the formula to calculate Debtors Turnover

A

Average Debtors
——————— x 365
Credit Sales

62
Q

RQ 17.12 // The Speed of Liquidity

Q6. State what is measured by Creditors Turnover (CTO).

A

Creditors Turnover measures the average number of days it takes for a business to pay its creditors.

63
Q

RQ 17.12 // The Speed of Liquidity

Q7. Show the formula to calculate Creditors Turnover.

A

Average Creditors
———————– x 365
Credit Purchases

64
Q

RQ 17.12 // The Speed of Liquidity

Q8. Explain the importance of Stock and Debtors Turnover, and Creditors Turnover, for liquidity.

A

The firm’s ability to pay its creditors on time (Creditors Turnover) will rely heavily on its ability to sell its stock quickly (Stock Turnover), and then collect cash from its debtors promptly (Debtors Turnover).

65
Q

RQ 17.12 // The Speed of Liquidity

Q9. Explain why it is advantageous for a trading firm to buy on credit, but sell on cash.

A

The best circumstance for a trading business is to sell stock for cash and to buy stock on credit. This approach provides time for the business to sell its stock before paying their creditors, and this should minimise liquidity problems.

66
Q

RQ 17.13 // Non-Financial Information
Q1. State three limitations of relying solely on the financial statements and financial indicators to evaluate performance.

A
  • The reports use historical data.
  • Reports contain incomplete information.
  • Firms use different accounting methods.
67
Q

RQ 17.13 // Non-Financial Information

Q2. Define the term ‘non-financial information’.

A

Non-financial information is any information that cannot be found in the financial statements, and is not expressed in dollars and cents, or reliant on dollars and cents for its calculation.

68
Q

RQ 17.13 // Non-Financial Information

Q3. State two measures that could be used to assess the firm’s relationship with its customers

A
  • customer satisfaction surveys
  • the number of repeat sales
  • the number of sales returns
  • the number of customer complaints
69
Q

RQ 17.13 // Non-Financial Information

Q3. State two measures that could be used to assess the suitability of stock

A
  • the number of sales returns
  • the number of purchase returns
  • the number of customer complaints
70
Q

RQ 17.13 // Non-Financial Information

Q3. State two measures that could be used to assess the firm’s relationship with its employees

A
  • performance appraisals
  • the number of days lost due to sick leave/industrial action
  • the staff turnover/average length of employment
71
Q

RQ 17.13 // Non-Financial Information

Q3. State two measures that could be used to assess the state of the economy

A
  • examining interest rates
  • examining the unemployment rate
  • the level of inflationiv the number of competitors in the market.

VCE Accounting Units 1&2 (54 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions