Chapter 18 - Ratio Analysis

Question 1

Types of Ratios

Answer 1

1. Profitability Ratios
2. Liquidity Ratios
3. Capital Structure Ratios

Question 2

3 reason why interested parties are interested in Ratio Analysis

1. Banks
2. Government
3. Suppliers

Answer 2

1. Banks - Who are being asked to lend money to finance the business.
2. Government - E.G HM Revenue & Customs, that want to it is receiving the amount due for VAT and the tax payable on the profits of the business
3. Suppliers - Who want to know if they are likely to be getting paid.

Question 3

What do profitability Ratios do?

2 reasons

Answer 3

1. Try to examine wheatear the business is making a profit

2. Relationship between sales revenue and profits

Question 4

Gross Profit Margin

Equation

Answer 4

(Gross Profit / Sales Revenue) x 100

Question 5

Gross Profit Mark Up

Equation

Answer 5

(Gross profit / Cost of Sales) x 100

Question 6

Over Head/ Turn Over Margin

Equation

Answer 6

(Overhead / Sales Revenue) x 100

Question 7

Net Profit Margin

Equation

Answer 7

(Net Profit Margin / Sales Revenue) x 100

Question 8

Gross Profit Margin

Answer 8

1. It’s a percentage

2. Should be similar from year-to-year for the same business

Question 9

Gross Profit Mark Up

Answer 9

1. Has to be a percentage

2. Should be similar from year-to-year for the same business

Question 10

Overheads in relation to revenue

Answer 10

1. Has to be a percentage

2. It should fall as revenue increases, this is because not all overheads are variable

Question 11

Net profit margin / Profit in relation to Revenue

Answer 11

1. Should be similar from year-to-year for the same business

2. Should increase from year-to-year

Question 12

ROCE

Answer 12

1. Calculation of return on Capital Employed

(Net profit / Capital Employed) x 100

Question 13

Cash

For Profitbilty

Answer 13

It is the actual amount of money held in the bank or as cash

Question 14

Profit

For Profitabilty

Answer 14

1. It is calculated figure
2. Shows surplus of income over expenses for the year
3. It takes note of adjustments for accurate and prepayments and non-cash items
4. Such as depreciation and provision for doubtful debts

Question 15

Why do you need Net current assets

Liquidity

Answer 15

Needed by all business in order to finance day-to-day trading activities

Question 16

Net current assist Ratio

Liquidity

Answer 16

Current assets : Current liabilities

Question 17

Liquid Capital Ratio

Liquidity

Answer 17

(Current assets - Inventories) / (Current liabilities)

Question 18

Rate of inventory turnover

1. What is it
2. Equation

Answer 18

1. Number of days inventory held on average
   2.
   (Cost of sales) / (Average inventories)

Question 19

Trade Receivables Days

Liquidity

1. What is it

Answer 19

1. How many days on average, a trade receivable takes to pay, for goods sold to them by the business

Question 20

Trade payables Day

Equation

Liquidity

Answer 20

(Trade payables / Purchases) x 365 days

Question 21

Gearing ration

Equation

Capital Structure

Answer 21

Debt x ( loan capital + preference shares) /

equity x (ordinary shares + reserves)

1. Can also be expressed as a percentage

Question 22

Users of Ratios

Answer 22

Banks
Government 
Managers
Customers
Employees
Investors
Shareholders
Creditors