2.3 & 3.5 - Managing Finance/assesing competitivness

Question 1

What is a statement of comprehensive income also known as?

Answer 1

A profit and loss account

Question 2

Gross profit = ?

Answer 2

Turnover - cost of sales

Question 3

Operating profit = ?

Answer 3

Gross profit - other operating services

Question 4

Profit for the year = ?

Answer 4

The final profit:

(Operating profit + any exceptional items) - interest payable

Question 5

How do you work out a profit margin

Answer 5

The type of profit / sales revenue x 100

Question 6

What are non current assets?

Answer 6

Assets with a life of more than 1 year eg land and vehicles

Question 7

What are current assets?

Answer 7

Assets a business will use within 1 year
- cash
- stock
- debtors/receivables

Question 8

What are non current liabilities?

Answer 8

Owed more than 1 year eg loans/mortgages

Question 9

What are current liabilities?

Answer 9

To be repaid within a year eg creditors, bank, overdraft

Question 10

What Is capital employed?

Answer 10

The money put into your business:

Equity + non current liabilities + share capital + retained profit

Question 11

What’s the formula for gearing ratio?

Answer 11

Non current liabilities/capital employed x 100

Question 12

What does it mean if a business is highly geared?

Answer 12

(50% or higher) debt equity - Most capital has come from loans

Question 13

What does it mean if a business is lowly geared?

Answer 13

Not a lot of debt equity - not a lot of loans to repay

Question 14

What % is normally geared

Answer 14

25-50%

Question 15

What’s the formula for return on capital employed (ROCE)?

Answer 15

Operating profit/capital employed x 100

Question 16

What are examples of non debt equity?

Answer 16

Share capital, personal equity, retained profot

Question 17

Why can it be bad if a business is highly geared?

Answer 17

They are vulnerable to an increase in interest rates

Question 18

How do you improve gearing?

Answer 18

• focus on growth
• buy back shares

Question 19

How do you reduce gearing?

Answer 19

• repay long term loans
• improve profits

Question 20

What is the meaning of liquidity ?

Answer 20

The ability of a business to pay its debts in cash when they are due

Question 21

What are the 3 ways of measuring liquidity?

Answer 21

• current ratio
• acid test ratio
• working capital

Question 22

What is the ideal number for current ratio

Answer 22

Between 1.5:1 and 2:1

Question 23

Describe current ratio (liquidity) and how to calculate it

Answer 23

• will be written as X:1

Formula = current assets/current liabilities

Question 24

Describe acid test ratio (liquidity) and how to calculate it

Answer 24

• will be written as X:1
• ideally 1:1

Formula: (current assets - stock) / current liabilities

Question 25

Why should current ratio not be too high? (liquidity)

Answer 25

may mean u have too many current assets eg perishable stock laying around or you may have too many people owing you money

Question 26

What should current ratio not be too low? (liquidity)

Answer 26

• business will struggle to pay its short term debts
• or they are over borrowing or over trading

Question 27

Describe working capital (liquidity) ?

Answer 27

The amount of money needed to pay for day to day trading. Needed for wages, raw materials etc

Formula: current assets - current liabilities

Question 28

What are some ways to improve liquidity?

Answer 28

• reduce current liabilities
• raise current assets (eg sell off stock or make people pay u in cash)