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Business > UNIT 5 - Chap 26: Analysis of accounts > Flashcards

UNIT 5 - Chap 26: Analysis of accounts Flashcards

1
Q

Are profit and profitability the same and explain?

A

No, profitability is how profitable the business is based on percentage and profit is just revenue - cost of sales

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2
Q

Profitability is the measurement of profit maderelative to either what 2 things? (2)

A
  1. The value of sales achieved
  2. The capital invested in the business
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3
Q

What kind of number is profitability number?

A

Percentage

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4
Q

Who is profitabilityimportant for?

A
  1. Investors when deciding whether to invest
  2. Directors and managers to assess whether thebusiness is becomingmore or less successful.
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5
Q

What are the 5 Profitability ratios? (5)

A
  1. Gross profit margins
  2. Net profit margin
  3. Return on Capital Employed
    (ROCE)
  4. Current test ratio
  5. Acid test ratio
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6
Q

What is the definition of liquidity?

A

Liquidity is the ability of a business to pay back its short term debts. E.g. suppliers and overdrafts. If they can’t pay them they will be illiquid. ​

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7
Q

What is the formula for gross profit margin?

A

Gross Profit/Revenue x100

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8
Q

Why might have gross profit margin increased?

A
  1. Prices have risen
  2. Costs of sales have reduced
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9
Q

Is it better to have a high or lower % of gross profit?

A

The higher this % the better.

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10
Q

What is the formula for net profit margin?

A

Net Profit/Revenue x100

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11
Q

Why might have net profit margin increased?

A
  • If this increases this may mean managers are more efficient by cutting expenses
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12
Q

Is it better to have a high or lower % of net profit?

A
  • The higher this result the more successful managers are at making profit from sales.
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13
Q

Which is better NPM or GPM?

A

-Well NPM takes into account all other expenses compared to the GPM but it depends on the business

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14
Q

What is the formula for Return onCapitalEmployed?

A

Net profit/Capital Employed x100

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15
Q

What is the definition for capital employed?

A

Capital Employedis the money invested intothe business usually from shareholders andloans.

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16
Q

Is it better to have a high or lower % of Return onCapitalEmployed?

A

The higher the result, the more successful themanagers are at gaining shareholders a goodreturn on their investment

17
Q

What is the formula for Return oncurrent ratios?

A

current assets/current liabilities

18
Q

What is a number too high for current ratios and why?

A

If the current ratio higher than two, it means it is too high and the cash is better spent somewhere else for example advertising

19
Q

What is a safe current ratio?

A

A ‘Safe’ Current ratio would be between 1.5 and 2. ​

20
Q

What is a number too low for current ratios and why?

A

Current assets that are less than 1 mean businesses will have cash flow problems and will not be able to pay its short-term debts

21
Q

Why are acid test ratios more realistic than current ratios?

A

The Acid Test ratio is said to be more realistic than the current ratio as it doesn’t count inventories as a current asset. ​

22
Q

What is a safe acid test ratio?

A

A result of one and above is said to be acceptable as this means business can pay off its short-term debts

23
Q

What is a managers interests in the accounts of a business?

A

Will help a manager assess whether the business is profitable and has strong liquidity. If not, theycan then find solutions​

24
Q

What is a shareholder interested in the accounts of a business?

A

Shareholders will want to see the GPM, NPM and ROCE. They want to see if they will get a goodreturn on their investment​

25
Q

What is a creditors (suppliers) interested in the accounts of a business?

A

They will want to see the business liquidity ratios. They will want to see if is a business is able topay back its debts on time. If the business has a low liquidity ratio, the supplier may not tradewith the business.​

26
Q

What is a banks interested in the accounts of a business?

A

The bank will want to see the liquidity ratios. They will not lend to a business that is at risk ofbeing illiquid andcan notpay debts​

27
Q

What is the government interested in the accounts of a business?

A

Will want to see a business Income statement as they will want to see how much corporation taxthey will be receiving​

28
Q

What is a employees interested in the accounts of a business?

A

Employees may want to see a business Income statement to see if they business is very profitableIf so then they could try to negotiate a pay rise.​

Business (26 decks)

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