Unit 3 L

Question 1

What is sales revenue?

Answer 1

The money that the business earns from selling its goods and services to customers exclusively, meaning it does not include other sources

Sales revenue is a key indicator of a company’s financial health.

Question 2

What does cost of goods sold (COGS) include?

Answer 2

Expenses and costs directly related to the production of goods, excluding overheads, sales, and marketing

COGS is crucial for calculating gross profit.

Question 3

How is cost of goods sold calculated?

Answer 3

Cost of goods sold = open inventory + purchases - closing inventories

This formula helps businesses track their inventory costs effectively.

Question 4

What does the term ‘inventory’ refer to?

Answer 4

All the assets the business owns

Inventory management is vital for maintaining cash flow and profitability.

Question 5

Define gross profit.

Answer 5

The profit a business makes after deducting the costs associated with making and selling their products, or the costs associated with providing its services

Gross profit is a key metric for assessing a company’s profitability.

Question 6

What is the formula for gross profit?

Answer 6

Gross profit = goods sold - revenue

This calculation helps determine how efficiently a company is producing its goods.

Question 7

What are expenses in a business context?

Answer 7

The cost of operations that a company incurs to generate revenue, such as payments to suppliers, employees, wages, etc.

Managing expenses is crucial for maintaining profitability.

Question 8

What does depreciation represent?

Answer 8

An accounting method of allocating the cost of tangible or physical assets over its useful life or life expectancy

Depreciation affects the net profit by reducing taxable income.

Question 9

What is net profit?

Answer 9

The measurement of the company’s profit once operating costs, taxes, interest, and depreciation are accounted for

Net profit is often referred to as the bottom line and is a key indicator of financial performance.

Question 10

What are prepayments?

Answer 10

When an expense is made in advance of the period where it’s used.

Example: Paying rent in advance means you would divide the prepayment on your financial statement.

Question 11

What are accruals?

Answer 11

When an expense is paid before the period it was incurred.

Example: Utility bills.

Question 12

How is percentage change calculated?

Answer 12

New - Old divided by Old.

Question 13

What is a statement of financial position?

Answer 13

It shows what the business owns vs what it owes.

Question 14

What are assets?

Answer 14

Resources owned by the business.

Question 15

What are liabilities?

Answer 15

Debts a business owes.

Question 16

Define tangible assets.

Answer 16

Assets that can be physically touched.

Question 17

Give examples of tangible assets.

Answer 17

• Premises:
• Vehicles
• Fixtures and fittings

Question 18

Define intangible assets.

Answer 18

Assets that cannot be touched.

Question 19

Give examples of intangible assets.

Answer 19

• Patents:the legal protection of an invention such as a unique feature or process
• Goodwill:the name and reputation of a brand which determines its selling price
• trademark:a feature of the business that’s recognised by customers
• brandname:a symbol,logo,etc that sets the business apart from competitors

Question 20

What are current liabilities?

Answer 20

Debts or obligations that are due within one year.

Question 21

What is working capital?

Answer 21

Current assets - Current liabilities.

Question 22

What is the working capital if current assets are £44,000 and current liabilities are £15,000?

Answer 22

£29,000.

Question 23

What are non-current liabilities?

Answer 23

Obligations that are due beyond one year.

Question 24

What are net assets?

Answer 24

Total assets - total liabilities.

Question 25

What’s the formula for net profit?

Answer 25

Total revenue - total costs

Question 26

What’s the formula for gross profit margin

Answer 26

Gross profit/revenue x 100

Question 27

How do you calculate depreciation

Answer 27

You decrease the price by 20% or whatever the question says

Question 28

What are liquidity ratios used for?

Answer 28

To determine whether the business has enough current assets to pay off any debts that may need repaying

Question 29

What indicates a liquidity crisis in a business?

Answer 29

The business does not have enough money to pay any debts

Question 30

How is the current ratio calculated?

Answer 30

Current ratio = current assets / current liabilities

Question 31

What is the formula for liquid capital?

Answer 31

Liquid capital = (current assets - inventory) / current liabilities

Question 32

What can a business do if it needs short-term cash inflow?

Answer 32

Sell small assets

Question 33

Is inventory considered liquid?

Answer 33

No, inventory is not liquid as it takes time to sell

Question 34

What are trade receivables days?

Answer 34

The time it takes for debtors to pay for goods they have purchased.

Trade receivables days indicate the efficiency of a company’s credit policies and cash flow management.

Question 35

How do you calculate trade receivables days?

Answer 35

Trade receivables / credit sales x 365

This formula helps assess how quickly a company collects cash from its credit sales.

Question 36

If you can’t find the amount of sales made on credit, what can you use instead?

Answer 36

Overall sales

Using overall sales provides a broader perspective, although it may not be as accurate for assessing trade receivables.

Question 37

What is the formula for inventory turnover?

Answer 37

inventory turnover = average inventory / costs of goods sold x 365

This formula calculates how often inventory is sold and replaced over a period.

Question 38

How is average inventory calculated?

Answer 38

average inventory = (opening inventory + closing inventory) / 2

This calculation provides a mean value of inventory held during a period.

Question 39

What does inventory turnover indicate?

Answer 39

The average number of days stock is held within the business before it is sold.

A higher number of days may indicate that items are not selling quickly.

Question 40

True or False: A high average number of days in inventory turnover means items are selling quickly.

Answer 40

False

A high average number of days suggests that items could go out of date.

Question 41

Fill in the blank: Inventory turnover shows the average number of days stock is held within the business before it is _______.

Answer 41

[sold]

This highlights the importance of managing inventory effectively.