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accounting - module 2 - unit 4
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- 1What are the profitability ratios?1. Gross margin
2. Mark up
3. Profit in relation to revenue
4. Overheads in relation to revenue
5. Return on capital employed (ROCE) - 2What is the Gross profit margin and what does it measure?Gross Profit Margin % = Gross Profit / Revenue x 100
Measures the percentage of revenue that is gross profit. - 3How can the trader increase the gross margin?Raise the selling price and kept the cost price unchanged.
Raise the cost price and kept the selling price unchanged. - 4What is the mark up and what does it measure?Mark Up % = Gross Profit / Cost of Sales
x 100
Measures the percentage added to the cost price to arrive at the selling price. - 5What does an increase in the mark-up imply?The business has either:
-Raised the selling price and kept the cost price unchanged
-Raised the cost price and kept the selling price unchanged - 6What is the relationship between mark-up and the gross margin?It is positive:
A fall in the mark-up will mean a lower gross margin. - 7How is profit in relation to revenue calculated, and what does it measure?Profit in Relation to Revenue % = Net Profit / Revenue x 100
This represents the percentage of revenue that is net profit after all overheads in running the business have been deducted. - 8How is overheads in relation measured, and what does it represent?Overheads in Relation to Revenue % = Overheads / Revenue x 100
Represents the proportion of revenue represented as overheads. - 9What does a rise and fall in the Overheads in relation to revenue ratio mean?Rise - the buiness has become less efficient because overheads account for a higher proportion of sales revenue.
Fall - the buiness is more efficient because overheads account for a lower proportion of sales revenue. - 10How is Return on capital employed calculated for a sole trader and limited company?-Sole Trader = net profit / capital employed x 100
-Limited Company = operating profit / capital employed x 100
(Capital employed = Owner's capital + Loan capital) - 11What does ROCE represent?ROCE represents the return generated on capital employed in the business, and is the most important measure of how well the business is using its resources to generate profit.
- 12What does a rise in ROCE mean?A rise in the ROCE implies the business is using its assets more efficiently to generate profits.
- 13What are the liquidity ratios?1. Net Current Asset ratio
2. Liquid Capital ratio - 14What is the net-current asset ratio and what does it mean?Net Current Asset ratio = current assets / current liabilities : 1
Expresses current assets as a ratio to current liabilities. - 15What wouls a net current asset ratio of 2 imply?The current assets are twice the value of current liabilities.
The business has £2 of current assets for every £1 of current liabilities. - 16What is the Liquid capital ratio?Liquid Capital ratio = (current assets - stock) / current liabilities : 1
Expresses liquid assets as a ratio to current liabilities. - 17What are liquid assets?Liquid assets are current assets less stock. Stock is not a liquid asset because it takes time to sell, and may even be unsaleable.
Liquid assets can be used to generate cash in the next financial year to pay current liabilities as they fall due. - 18What are the credit control ratios?1. Receivable days - debtor collection period.
2. Payable days - creditor payment period. - 19How are receivable days calculated?Receivable days (Debtor collection period) = Trade receivables / Credit Sales x 365 days
Measures the time taken in days to collect money from trade debtors. - 20What does it mean by a rise in receivable days?A rise in receivable days means credit collection has worsened because it is taking longer to collect money from customers, increaing the risk of bad debts.
- 21What does it mean by a fall in receivable days?A fall in the receivable days mans credit collection has improved because it is taking less time to collect money from credit customers.
- 22How are payable days calculated?Payable days (Creditor payment period) = Trade payables / credit purchases x 365 days
Measures the time taken in days to to pay money to trade creditors. - 23How does a rise in payable days put the trader at risk?A rise in payable days means credit control has worsened because the trader is taking longer to pay suppliers, increasing the risk of losing discounts or incurring an interest charge on late payment.
- 24How can a fall in the payable days benefit the trader?A fall in the payable days means credit control has improved because the trader is paying suppliers eariler, and can benefit from trade discounts.
- 25How can a business benefit if the payable days exceed receivable days?This will mean the trader is receiving payments before paying the supplier, and this will improve cash flow and the bank balance.
- 26What may happen if the receivable days exceed the payable days?The trader is having to pay suppliers before receiving money from customers, resulting in negative cash flow, and possibly cause the bank to become overdrawn.
- 27What is the stock (inventory) turnover ratio?Inventory (stock) Turnover = cost of sales / Average inventories
Average inventories = (opening + closing inventories) / 2
Number of times average inventories of business are replaced during the year. - 28What does a rise in inventory turnover mean?The business in selling more stock, or holding less stock.
The business therefore has more cash to pay current liabilities. - 29What can cause a rise in the stock turnover?A reduction in the by cutting selling prices can lead to a rise in sales, and a higher rate of inventory turnover.
- 30What does a fall in the inventory turnover mean?The business is selling less stock, or holding more stock.
The business is generating less cash to pay its creditors.
Holding fewer inventoris should also improve the liquid ratio. - 31What is the gearing ratio and what does it measure?Gearing Ratio % = Loan capital / total equity x 100
Measures the degree of risk for the owners of the business, and represents the percentage of loan capital as a percentage of total equity. - 32What is a high and a low geraing ratio?A gearing ratio above 100% is high
A gearing ratio below 100% is low - 33What does a high gearing ratio mean for the business?-The company has more non-permanent capital than permanent capital
-The company is less able to borrow money in the future - 34What does a high gearing ratio mean for the shareholders?-High interest rates will reduce profits available as dividends to shareholders
-In the event of administration, the shareholders are unlikely to get their money back - 35How does a low gearing ratio benefit the company?-The company has more permanent capital than non-permanent capital
-The company can issue more loans in the future to raise finance - 36How does a low gearing ratio benefit the shareholders of the company?-Interest payments are low meaning profits are higher, higher dividends are available to shareholders
-In administration, shareholders are more likely to get their money back - 37What are the 3 benefits of using ratios?· Assists management in identifying strengths and weakness of business.
· A measure of business of performance.
· Can be used to set targets. - 38What are 3 weaknesses of using ratios to analyse business performance?· Must compare businesses of a similar size and in similar markets.
· Only as accurate as data on which they are based.
· Ratios do not identify causes of problems. - 39How can using ratios to analyse a business be made more reliable?Compare performance over a 3-5 year period instead of a 1 year period.
Ratios should be compared to an industry average.
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- A-levels Accounting - Module 2 Fichas sobre accounting - module 2 - unit 4, creado por Amardeep Kumar el 08/05/2015.
- Creado por
- Amardeep Kumar
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