Efficiency Ratios

Question 1

Expenses in relation to revenue =

Answer 1

Expenses
————— x 100
Revenue

Question 2

What does inventory turnover mean?

Answer 2

How quickly a business sells its inventory (times it goes through avg inventory a year or days)

Question 3

Inventory turnover (times) =

Answer 3

Average Inventory

Question 4

Inventory turnover (days) =

Answer 4

Average Inventory
————————— x 365
Cost of sales

Question 5

Average inventory =

Answer 5

                           2

Question 6

Trade receivables days =

Answer 6

Trade receivables
————————– x 365
Credit Sales

Question 7

Trade payables days =

Answer 7

Trade payable
———————— x 365
Credit purchases

Question 8

What does an increase in expenses in relation to revenue mean?

Answer 8

Biz has been less able to control expenses.

Decreasing financial efficiency

Question 9

What does an increase in inventory turnover in times mean?

Answer 9

Probably indicates higher sales and helps cash flow.

Increasing financial efficiency.

Question 10

How to improve inventory turnover in days

Answer 10

Reduce amount of inventory held, without decreasing sales.

Increase level of sales without increasing level of inventory.

Question 11

What does a decrease in receivables days indicate?

Answer 11

A loss of customers due to tighter credit control.

Question 12

What would an increase in payables days mean?

Answer 12

Its taking business longer to pay for its credit purchases which is good for cash flow but may mean discounts are lost for prompt payment.