Week 9- Business organisations/Ratios

Question 1

how do different types of businesses finance themselves?

Answer 1

Sole traders /partnerships: Capital

Private and public limited companies: Share capital (ordinary and preference shares) rewarded through payment of dividends

Question 2

What are preferential shareholders?

Answer 2

They receive preferential treatment in receiving dividends and in the distribution of profits during liquidation but cant vote at an AGM

Question 3

What are ordinary shareholders?

Answer 3

They have voting rights at the AGM but receive dividends after preferential shareholders

Question 4

explain the two ways in which shares can be issued

Answer 4

1) At par value: whe shares are issued at face value eg A par value of £1 means the company benefits by £1 per share sold
2) At a premium: When shares are issued at the par value plus an amount reflecting the increase in the value of the shares eg. shares issued at £1.25, share capital per share sold is £1 so the share premium is 25p per share

Question 5

Are dividends an expense?

Answer 5

No, they are a distribution of profit to shareholders

Question 6

how are dividends quoted for ordinary shareholders?

Answer 6

In pence per share

Question 7

how are dividends quoted for preferential shareholders?

Answer 7

quoted based upon the return of the share eg. 2% of preferential shares receive a 2% return on their investment

Question 8

Do dividends have to be declared by a PLC every year?

Answer 8

No, if the business has financial problems eg. weak cash flow then they can decide to not pay dividends and retain the profits instead. However, this needs to be approved by ordinary shareholders at an AGM

Question 9

How else are preferential and ordinary share dividends different?

Answer 9

pref dividends are paid by the period of time that they have been held for, like interest. Ordinary dividends are paid to the current holder of the share regardless of how long they have held it.

Question 10

what are distributable reserves?

Answer 10

Another name for retained earnings, thus a business must have funds in this account to distribute dividends

Question 11

what are non-distributable reserves?

Answer 11

Share capital (ordinary and preferential), share premium and revaluation reserve. Dividends cannot be paid from these reserves

Question 12

what is the role of ratio analysis?

Answer 12

Compares the figures from financial statements to previous years

Question 13

What do profitability ratios show?

Answer 13

The higher the profit percentage the more profitable the firm

Question 14

What are all the profitability ratios?

Answer 14

Gross profit percentage
Operating profit percentage
Profit before tax percentage
profit after tax/ net profit percentage

Question 15

How do you calculate a profitability ratio?

Answer 15

Example: Gross profit/sales x 100 = gross profit percentage ratio

Question 16

why are profitability ratios important

Answer 16

They show that larger profits don’t specifically indicate greater success or an improvement from past years.

Question 17

What does the return on capital employed show?

Answer 17

The higher the percentage, the better the return on the capital which was used

Question 18

how do you calculate the return on capital employed?

Answer 18

Operating profit / capital employed x 100

Question 19

what are the two liquidity ratios that we need to know?

Answer 19

Current ratio and Acid test ratio

Question 20

What does the current ratio show?

Answer 20

The ratio is expressed as Current assets: Current liabilities. The higher the CA the more able the business is able to pay CL and therefore better the ratio.

Question 21

what doe the acid test ratio show?

Answer 21

The acid test ratio is the same as the current ratio but excludes inventory from the calculation. Thus the ratio is expressed as Current assets- Inventory: Current liabilities. The higher the CA-INV the better the ratio as more able to pay CL.

Question 22

what are the benefits of using ratios?

Answer 22

• Compare a company’s performance from one year to the next

- Useful comparison between companies

Question 23

how do you calculate the current ratio?

Answer 23

current assets / current liabilites

Question 24

how do you calculate the acid test ratio?

Answer 24

Current assets- Inventory / Current liabilites