Paper 2

Question 1

Gross profit margin

Answer 1

= (Gross profit ÷ Sales revenue) × 100
- Profitability ratio that shows a gross profit expressed as a percentage of its sales revenue.
- Improve by introducing new products or cutting prices of products sold in a highly competitive market market

Question 2

Net profit margin

Answer 2

= (Net profit before interest and tax ÷ Sales revenue) × 100
- Measures a firm’s overall profit as a percentage of its sales revenue.
- Managers can strive to reduce excessive and unnecessary day-to-day expenses.

Question 3

Return on capital employed (ROCE)

Answer 3

= (Net profit before interest and tax ÷ Capital employed) × 100
- measures a firm’s efficiency and profitability in relation of its size
- increase the level of a firms sales revenue or reduce production costs

Question 4

Current ratio

Answer 4

= Current assets ÷ Current liabilities
- calculates the ability of a business to meet its debts within the next 12 months.
- Attract more customers or use its cash balance to pay off short-term debts

Question 5

Stock turnover

Answer 5

= Cost of goods sold ÷ Average stock
- Measures the days it takes a business to sell its stock
- improve by reducing the firms level of stock or offer a narrower range of products.

Question 6

Debtor days

Answer 6

= (Debtors ÷ Sales revenue) × 365
- Measures the average number of days a business takes to collect debts from its customers who have bought goods and services on trade credit.
- Encourage customers to pay by cash or reduce the credit period offered to clients

Question 7

Creditor days

Answer 7

= (Creditors ÷ Cost of goods sold) × 365
- measures the average number of days a business takes to repay its creditors
- negotiate extended credit periods or seek alternative suppliers

Question 8

Gearing ratio

Answer 8

= Loan capital ÷ capital employed x 100
- Reveals the degree to which a business is financed by loan capital
- Paying off some long term liabilities or by improving working capital

Question 9

Payback period

Answer 9

= Initial investment ÷ Annual net cash flow
- is the amount of time it takes for a business to recover the initial cost of an investment project.
- Suitable when focus on time or pursue a quick return

Question 10

Average rate of return (ARR)

Answer 10

= (Average annual profit ÷ Initial investment) × 100
- calculates the average annual profit of an investment project expressed as a percentage of the initial amount invested.
- simple to understand and focuses on profitability

Question 11

Net present value (NPV)

Answer 11

= Σ (Net cash flow × Discount factor) – Initial investment
- calculates the real value of an investment project by discounting the value of future cash flows.
- considered future net cash flow and is more accurate.

Question 12

Cost centres

Answer 12

It is a department or division within an organization that is responsible and held accountable for its own costs.

Question 13

Profit centre

Answer 13

Is a department or division whithin an organization that is responsible and held accountable for both its own costs and revenues.

Question 14

Favourable Variance

Answer 14

exists when the difference between the actual and budgeted figure is beneficial to the business

Question 15

Adverse variance

Answer 15

exists when the difference between the actual and budgeted figure is disadvantageous to the business