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Grade 10 Accounting > Ratios > Flashcards

Ratios Flashcards

1
Q

What are the 3 profitability ratios?

A

Return on capital employed (ROCE)
Net profit margin
Gross margin

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2
Q

What is the formula for return on capital employed?

A

(Profit for the year i.e. net profit / capital employed) x 100/1

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3
Q

What are the two ways that capital employed can be calculated?

A

Owner’s capital + Non-current liabilities

OR

Non-current assets + Net current assets i.e. current assets - current liabilities

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4
Q

What is the formula for the net profit margin?

A

(Net Profit / Sales) x 100/1

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5
Q

What does the net profit margin indicate?

A

How well a business controls its expenses.

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6
Q

How can the net profit margin be improved?

A

Increasing the gross margin
Controlling expenses
Increasing incomes

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7
Q

What are the 2 liquidity ratios?

A

Current ratio
Acid test / Quick ratio

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8
Q

What is the formula for current ratio?

A

current assets : current liabilities

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9
Q

Between what values should the current ratio be?

A

Between 1.5:1 and 2:1

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10
Q

What can a business that is short of working capital encounter?

A

Cannot meet liabilities when due
Experience difficulties obtaining further credit
Cannot take advantage of cash discounts

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11
Q

How can the current ratio be improved?

A

Introduce further capital
Obtain long term loans
Sell surplus non-current assets
Increase profit
Reduce drawings

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12
Q

What is the formula for the acid test / quick ratio?

A

(current assets - inventory) : current liabilities

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13
Q

Between what values should the acid test / quick ratio be?

A

Between 0.5:1 and 1:1

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14
Q

What does the acid test / quick ratio indicate?

A

Can the business settle its debt without selling the inventory

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15
Q

What is the formula for the rate of inventory turnover?

A

For days, it is:

Cost of sales / Average inventory (1/2 x (opening inv. + closing inv.))

For times, it is:

(Average inventory / Cost of sales) x 365/1

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16
Q

How can a lower rate of inventory turnover be caused?

A

Lower sales
Inventory over-purchased
Too high selling price
Falling demand
Business inefficiency

17
Q

What is the formula for trade receivables turnover?

A

(trade receivables / credit sales) x 365/1

18
Q

What does the trade receivables turnover indicate?

A

Indicates the average time your debtors take to pay you

19
Q

How can the trade receivables turnover be improved?

A

Improving credit control policy
Offer cash discounts
Change interest on overdue accounts
Refuse further supplies until outstanding debt is paid

20
Q

What is the formula for trade payables turnover?

A

(Trade payables / credit purchases) x 365/1

21
Q

What does the trade payables turnover indicate?

A

Indicates the average time the business takes to settle the debt with creditors

22
Q

What effects happen when the business is taking longer to pay its creditors?

A

Supplier refusing more credit
Loss of cash discounts
Damage to relationship

23
Q

What are the 5 problems of inter-firm comparison?

A

Businesses may apply different accounting policies
Non-monetary items are not in the accounting records but are important
Different operating policies
Relates to one financial year only - not possible to see trends
Financial years may be on different dates

24
Q

Who are the 7 users of accounting statements?

A

Owners - see the profitability and liquidity position of the business
Managers - access past performance and plan for the future
Bank manager - if business requires a loan/overdraft
Trade payables - if the business is in a position to pay back its debt
Potential buyers - if the business is successful
Government - correct amount of tax is being paid
Employees/ trade union - salary / wage negotiations

25
Q

What are the 4 limitations of accounting statements?

A

Time factor - record of what happened in the past
Historic cost - can only record at actual cost price - difficult to compare as a result of inflation
Accounting policies - all businesses should apply prudence and consistency. There are several policies that could be different.
Money measurement - only rewards items that can be measured

Grade 10 Accounting (21 decks)

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