Business - 5.5

Question 1

liquidity - definition

Answer 1

the ability of a business to pay back its short-term debts

Question 2

profitability - definition

Answer 2

the measurement of the profit made relative to either the value of sales achieved or the capital invested in the business

Question 3

return on capital employed - formula

Answer 3

net profit / capital employed x 100

Question 4

gross profit margin (%) - formula

Answer 4

gross profit / revenue x 100

Question 5

net profit margin (%) - formula

Answer 5

net profit / revenue x 100

Question 6

current ratio - formula

Answer 6

current assets / current liabilities

Question 7

acid test ratio - formula

Answer 7

current assets - inventories / current liabilities

Question 8

users of accounts

Answer 8

1. managers - decision making & controlling operations
2. shareholders - check companys performance
3. creditors - check companys performance
4. banks - check companys performance
5. government - check companys performance
6. workers & trade unions
7. other business - comparison

Question 9

purpose of gross profit margin

Answer 9

• shows profit after production costs
• helps check cost of sales

Question 10

purpose of net profit margin

Answer 10

• actual profit after all expenses
• shows real profitability

Question 11

purpose of ROCE

Answer 11

• how efficiently the business is using the money invested in it
• high ROCE = good use
• help compare with other investment options

Question 12

purpose of current ratio

Answer 12

• shows if business can pay its short-term debts
• 1.5 or 2 is healthy
• less than 1, business may struggle

Question 13

purpose of acid test ratio

Answer 13

• stricter test of liquidity
• ignores inventory, bec not easy to turn into cash
• tests true ability to pay debts back fast
• helpful during emergencies / recessions

Question 14

liquidity - overall

Answer 14

• ratio is more than 1 = good liquidity
• more liquid = good financial stability and is able to pay back
• suppliers have more confidence