Ratio Analysis Flashcards
(47 cards)
What’s the formula for gross profit on sales
Gross profit/sales x 100
Formula for gross profit/cost of sales
Gross profit/cost of sales x 100
Comment on gross profit on sales
-sales prices incorrectly marked
-too much trade discounts
-goods are being sold for less than mark up policy
Recommendation for gross profit on sales
-check pricing
-avoid too much discount
Explain gross profit on sales
It shows what percentage of selling price is available to cover operating expenses
Comment on gross profit on cost of sales
-prices are incorrectly marked
-too much trade discount
-goods are being sold for less than the markup policy
Explain operating profit on sales
Determines whether expenses are being managed well or not
Comment on operating profit on sales
-If lower,insufficient control over expenses
-The higher the better expenses are being managed
Recommend for operating profit on sales
If amount got lower increase the control over expenses
Explain net profit on sales
Tells us how efficiently business is being managed
Comment on net profit on sales
It should not be lower than 1/3 of percentage gross profit on sales
Explain percentage operating expenses on sales
Shows the part of gross profit used for operating
Tells us how much control we have over stocks
Comment on operating expenses on sales
Lower the percentage the better expenses are being managed
If amount decreased there was better cost control
If amount increased there was poor control over expenses
Recommend for operating expenses on sales
There must be better control over costs
Advertising expenses should be in relation to sales
When is a business regarded as solvent
When total assets are more than total liabilities
When is a business regarded as insolvent
When the total assets are less then the total liabilities
Solvency ratio
When the ratio is 1:1 or more the business is regarded as solvent
Insolvency ratio
When the ratio is less then 1:1
What is working capital
Current assets -current liabilities
What does liquidity tell us
How much cash we have to cover our liabilities
Comment on liquidity
If ratio is too high (<2:1)
-there is too much stock
-wrong stock
-prices are too high
If ratio is too low (>2:1)
-obsolete stock
-stock valued higher than realistic value
-increase in credit sales
Recommend if current ratio is too low
Check stock levels
Check obsolete stock
Check whether or not prices are too high
Explain acid test ratio
Explains whether or not business can cover short term expenses or not without having to sell stock
Explain the ratios for acid test ratio
If the ratio is less than 1:1 business can’t afford to cover short term expenses without selling stock
And vice versa
