Unit 5 - Finances and accounting

Question 1

Current ratio (CR) calculation

Answer 1

Current assets / Current liabilities

Question 2

Acid Test Ratio (AR) calculation

Answer 2

(Current assets - Stock) / Current liabilities

Question 3

What is liquidity?

Answer 3

The measure of how easily a business could meet its short term debts

Question 4

What should a current/acid test ratio be to?
a) x:2
b) x:1
c) x:11

Answer 4

b - x:1 always

Question 5

What can a business do to improve liquidity? (and analyse)

Answer 5

• Sell fixed assets for cash (Might not achieve its full value due to depreciation)
• Sell inventories for cash (reduce GPM and brand image may be damaged)
• Use JIT inventory management (Stock may be needed to meet customer needs)
• Increase their loans to inject cash into the business (will also increase gearing ratio)

Question 6

What is the net realisable value?

Answer 6

The amount for which inventory can be sold minus the cost of selling it

Question 7

Calculate the NRV for the following :
A furniture retailer has a dinning table that has been in stock for six months. It was brought from the manufacturer for £60. It has been damaged, the cost of repair is going to be £20. The shopkeeper thinks after repairs it can be sold for £70.

Answer 7

£70 - £20 = £50
NRV = £50

Question 8

What is depreciation?

Answer 8

The decline in the estimated value of a non-current asset over time

Question 9

What is :
1 - Historical cost
2 - Expected Life
3 - Residual value

Answer 9

1 - The cost of an asset when it was first purchased
2 - How long an asset is expected to be used within a business
3 - The value of an asset when it is disposed of by the business, for example: resale value

Question 10

What is the calculation for depreciation? (straight line depreciation)

Answer 10

(Historic value - expected residual value) / Expected useful life of asset (in years)

Question 11

Net book value calculation

Answer 11

Asset worth - depreciation

Question 12

Calculate depreciation for :
A company buys a fleet of cars for £500,000 and expects the fleet to last them 10 years and the fleet to be worth £245,000 at the end of 8 years.

Answer 12

(500,000-245,000) / 8 = 31,875
At the end of 10 years = 181,250

Question 13

What is window dressing?

Answer 13

When someone manipulates the figures of worth of the intangible assets so people pay more for the business

Question 14

What is goodwill?

Answer 14

Arises when a business is valued at or brought for more than the value of its assets
Buying for more than its worth as the business is already is set up