Chapter 8

Question 1

Profitability ratios? (6)

Answer 1

1 gross profit percentage
2 operating profit percentage
3 return on capital employed
4 return on shareholder funds
5 capital employed
6 expense/revenue percentage

Question 2

Liquidity ratios? (2)

Answer 2

1 current ratio
2 acid test (quick) ratio

Question 3

Efficiency ratios? (6)

Answer 3

1 working capital cycle
2 trade receivables collection period
3 trade payables collection period
4 assets turnover (non-current and net assets)
5 inventory holding period
6 inventory turnover

Question 4

Financial position ratios? (2)

Answer 4

1 interest cover
2 gearing percentage

Question 5

Gross profit percentage equation?

Answer 5

Gross profit x 100%
Revenue

Question 6

Purpose of gross profit percentage ratio?

Answer 6

Shows how much profit made for every £1 of sales revenue earned

Question 7

Operating profit percentage equation?

Answer 7

Operating profit x 100%
Revenue

Question 8

What is the purpose of operating profit percentage ratio?

Answer 8

Takes into consideration overheads and expenses

Question 9

Expense/revenue percentage equation?

Answer 9

Expense x 100%
Revenue

Question 10

Purpose of expense/revenue ratio?

Answer 10

To show how effective the chosen expenses are

Question 11

Return on capital employed equation?

Answer 11

Operating profit. x 100%
Capital employed

Capital employed = total equity + non-current liabilities

Question 12

Purpose of ROCE ratio?

Answer 12

Looks at business’ performance compared to its size

Question 13

Return on shareholder funds equation?

Answer 13

Profit after tax x 100%
Total equity

Question 14

Purpose of return on shareholder funds ratio?

Answer 14

Useful for ordinary share holders

Question 15

Current ratio equation?

Answer 15

Current assets
Current liabilities

Question 16

Purpose of current ratio?

Answer 16

Shows how many times over the company can pay for it’s liabilities using its current assets

Question 17

Acid test ratio equation?

Answer 17

Current assets - inventories
Current liabilities

Question 18

Purpose of acid test ratio?

Answer 18

Same as current ratio but minus the inventories as there is a delay in being able to sell them off

Question 19

Inventory holdings days equation?

Answer 19

Inventory. x 365
Cost of sales

Question 20

Purpose of inventory holding days ratio?

Answer 20

Shows how effectively the company sells its products

Question 21

Inventory turnover equation?

Answer 21

Cost of sales
Inventory

Question 22

Purpose of inventory turnover ratio?

Answer 22

Shows the average number of times the company has sold its total inventory over the period

Question 23

Receivables collection days equation?

Answer 23

Receivables x 365
Revenue

Question 24

Purpose of receivables collection days ratio?

Answer 24

Shows how often customers pay the company on average

Question 25

Payables collection days equation?

Answer 25

Payables. x 365 Cost of sales

Question 26

Purpose of payables collection days ratio?

Answer 26

Shows how often the company pays its suppliers on average

Question 27

Working cycle capital equation?

Answer 27

Inventory days + receivables days - payable days

Question 28

Purpose of working capital cycle ratio?

Answer 28

Shows how well the company is managing its working capital and if it may run into cash shortages

Question 29

Net asset turnover ratio?

Answer 29

Revenue Total assets - current liabilities

Question 30

Non-current assets turnover equation?

Answer 30

Revenue Non-current assets

Question 31

Purpose of asset turnover ratio?

Answer 31

Shows how well the company generates revenue with its assets

Question 32

Gearing percentage equation?

Answer 32

Non-current liabilities Total equity + non-current liabilities

Question 33

Purpose of gearing ratio?

Answer 33

Shows how much of the total value of the company is financed through debt

Question 34

Interest cover equation?

Answer 34

Profit from operations Interest

Question 35

Purpose of interest cover ratio?

Answer 35

Shows how many times over the company can pay its interest charges out of its profits