Ratios And Percentages

Question 1

What are financial ratios meant to do?

Answer 1

Compare the results of the current year to the results of the previous year

Question 2

What are the four types of ratios?

Answer 2

Profitability
Return on owner’s equity
Solvency
Liquidity

Question 3

How many profitability ratios are there?

Answer 3

Five

Question 4

What are the five profitability ratios?

Answer 4

Percentage gross profit on turnover
Percentage gross profit on cost of Sales
Percentage operations profit on sales
Percentage operating expenses on sales
Percentage net profit on sales

Question 5

How are profitability ratios expressed?

Answer 5

As percentages

Question 6

What figures are used for the percentage gross profit on turnover?

Answer 6

Gross profit over Net sales

Question 7

What values are used for the percentage gross profit on cost of Sales?

Answer 7

Gross profit over cost of Sales

Question 8

What does the percentage gross profit on cost of Sales give us?

Answer 8

The mark-up achieved

Question 9

How can we interpret the percentage gross profit on sales?

Answer 9

It is good if it has gone up

Question 10

How can we interpret the percentage gross profit on cost of Sales?

Answer 10

If it is greater than the proposed mark-up it is good

Question 11

What figures will you use for the percentage operating profit on sales?

Answer 11

Operating profit over net sales

Question 12

What figures will you use for the percentage operating expenses on sales?

Answer 12

Operating expense over net sales

Question 13

What figures will you use to get the percentage net profit on sales?

Answer 13

Net profit over net sales

Question 14

What does the return on owner’s equity tell the owner?

Answer 14

How profitable his investment in the business is

Question 15

When does the owner know his business is profitable?

Answer 15

The return on owner’s equity will be greater than that which he can obtain through a Fixed deposit

Question 16

What is the formula for the return on owner’s equity percentage?

Answer 16

Net profit over average owner’s equity multiplied by one hundred

Question 17

How do you work out the average owner’s equity?

Answer 17

Owner’s equity at the beginning of the year added to the owner’s equity at the end of the year
Total divided by two

Question 18

What does the solvency ratio tell us?

Answer 18

It reveals whether the business is able to meet its liabilities

Question 19

When is a business said to be solvent?

Answer 19

When the value of its assets is greater than that of its liabilities

Question 20

How is the solvency ratio calculated?

Answer 20

Total assets divided by total liabilities

Question 21

How is the solvency ratio represented?

Answer 21

Total liabilities is put on the left and is made equal to one
The total assets is put relative to the one

Question 22

How can you interpret solvency from the solvency ratio?

Answer 22

If the total assists value is greater than one, the business is solvent

Question 23

What does liquidity deal with?

Answer 23

The ability of a business to meet its short-term obligations

Question 24

What are the two types of liquidity ratios?

Answer 24

Current ratio

Acid test ratio

Question 25

What is the ideal current ratio?

Answer 25

Current assets should be higher than current liabilities, but not too high

Question 26

Why shouldn't the current ratio be too high?

Answer 26

This indicates too many funds are tied up in things that do not earn a return It could also mean that cash is in excess, and should rather be invested in places where it will earn a greater return

Question 27

How do work out the current ratio?

Answer 27

Similarly to the solvency ratio, only using current assets and current liabilities instead

Question 28

What is another name for the acid test ratio?

Answer 28

The quick ratio

Question 29

What does the acid test ratio tell us?

Answer 29

It test the ability of a business to meet its liabilities under abnormal conditions

Question 30

What kind of abnormal conditions would the acid test ratio be testing for?

Answer 30

Where there is a decline in sales | i.e when Stock is devalued

Question 31

How is the acid test ratio different form the current ratio?

Answer 31

Current ratio includes stock | Acid test ratio does not

Question 32

How do you work out the acid test ratio?

Answer 32

Similarly to the current ratio | Exclude trading Stock from the current assets figure

Question 33

How do you interpret the acid test ratio?

Answer 33

If the acid test ratio reveals that current assets without trading Stock is less than your current liabilities, that is bad

Question 34

Why is having current assets less trading Stock less than your current assets bad?

Answer 34

Too much money is tied up in stock | If the market crashes, the business will not be able to meet its current liabilities