Unit 23 Flashcards
Q1. What is profit margins %?
A1. Ratio between profit and tax revenue.
Q2. What is gross profit margin %?
A2. Ratio between gross profit and cost of goods.
Q3. What is adding value?
A3. Selling a product for more value than required to produce it.
Q4. What is return on capital employed?
A4. Ratio between profit and capital employed before tax.
Q5. What is liquidity?
A5. The ability of a business to pay short-term fees and debts.
Q6. What is the current ratio?
A6. Ratio between current assets and current liabilities.
Q7. What is the acid test ratio?
A7. Ratio between liquid assets and current liabilities.
Q.8 What are the factors to consider of properly interpreting financial statements?
A.8
(1) Identify strengths and weaknesses then change and make decisions depending on these factors.
(2) Show whether or not the business is meeting the objectives.
(3) Improve future business performance.
Q.9 What are the Methods of improving gross profit margin?
A.9
(1) Increasing revenue without increasing cost of production as much.
(2) Decreasing cost of production without changing cost of sales by changing suppliers.
Q.10 What are the methods of improving profit margin
A.10
(1) Improve gross profit margin.
(2) Reduce expenses.
Q.11 Why is this party interested in ratio analysis: Owners/shareholders.
A.11 They want to know about their return on investment from the business.
Q.12 Why is this party interested in ratio analysis: Potential investors.
A.12 They want to know how well the business is already doing and if it will be profitable for them to invest.
Q.13 Why is this party interested in ratio analysis: Managers.
A.13 They are responsible for the efficient running of the business, thus, they need to make sure work is getting done properly and on time.
Q.14 Why is this party interested in ratio analysis: Employees
A.14 A more profitable business offers better job security for the business, a higher profit may also mean the business will share a portion of the extra profit with employees.
Q.15 Why is this party interested in ratio analysis: Trade payable.
A.15 Most of the goods and services provided to the business from suppliers is purchased with a credit purchase agreement and will want more liquidity from the business to pay trades payable.
Q.16 Why is this party interested in ratio analysis: Lenders.
A.16 Banks and other organizations the business owes money to will want to know if the business can pay back the loaned amount with interest.
Q.17 Why is this party interested in ratio analysis: government.
A.17 The government earns funding from the taxes the businesses pay upon income.
Q.18 Why is this party interested in ratio analysis: Customers
A.18 They would want to know if the business can continue to supply them with products and services.
Q.19 What are the methods to understand the profitability of a business?
A.19
(1) Gross profit margin.
(2) Profit margin.
(3) Return on capital employed.
Q.20 What is the Importance of measuring added value?
A.20 Added value can be measured with gross profit or profit margin. Improvement in the margins means more added value and means the product is increasing in added value.
Q.21 What is the Importance of understanding the financial position of the business?
Q.21 A business cannot survive on profit alone and needs to make plans to keep shareholders happy and keep the business running smoothly. The information provided on income statements and statements of financial position can be used to analyze the situation the business is in and make further decisions.
Q.22 What is the Importance of measuring return on capital employed?
Q.22 This method shows the amount of profit before taxes and allows the business to understand how much output is being produced by the business per $1 invested.
Q.23 What is the Importance of liquidity?
Q.23 Liquidity gives the business the ability to make transactions with other businesses and customers. Thus the survival of a business depends on the amount of liquidity possessed by the business.
Q.24 What is the Benefits of ratio analysis?
Q.24
(1) Ratios can be compared to identify trends.
(2) Results compared to determine position with other businesses.
Q.25 What are the Limitations of ratio analysis?
Q.25
(1) Only past data is used.
(2) Results do not contain all strength and weaknesses of the business.
(3) Different businesses may use different methods to perform ratio analysis.
(4) Impacts to the business caused by external events are not shown.
Q.26 What are the methods that can be used to monitor a business’s liquidity?
Q.26
1) Current ratio.
2) Acid test ratio.
Q.27 What is the use of Current ratio?
Q.27 Shows the difference between current assets and current liabilities.
Q.28 What is the use of Acid test ratio?
Q.28 Separates current assets from inventories as some assets are harder to liquidize than others.
Q.29 What makes inventories less liquid?
Q.29
(1) Finished inventories need to be sold.
(2) Sold on credit, business needs to wait for customers to pay.
Q.30 Difference between profitability and liquidity?
Q.30 Profitability allows the business to earn more money and pay off debts. However, liquidity allows the business to make daily transactions that allows the business to earn profit and function.
Q.31 What is the importance of liquidity?
Q.31 If a business does not have cash to pay for immediate expenses and short term debts, it cannot function and continue trading. Therefore a business must monitor the liquidity at all times.
