Theme 2.3: Managing Finance Part 2: Final Accounts

Question 1

What are the main measures of profit

Answer 1

. Gross profit
. Operating profit
. Profit for the year (net profit)

Question 2

Gross profit

Answer 2

Turnover minus Variable costs, usually known as cost of sales

Question 3

Operating Profit

Answer 3

Gross profit minus fixed costs (overheads)

Question 4

Profits for the year (Net profit)

Answer 4

Operating profit minus tax and interest (can be both positive and negative)

Question 5

Statement of comprehensive income (Profit and loss account)

Answer 5

Sets out figures for sales revenue and deducts each different groups of costs to get a figure that represents either a profit or a loss

Question 6

Statement of comprehensive income calculation steps

Answer 6

. Revenue - cost of sales = Gross profit
. Gross profit - other operating expenses = operating profit
. Operating profit - taxes and interest = profit for the year

Question 7

Profitability

Answer 7

The ability a business has to make profit from its resources. Related to the size of the business.

Question 8

Profit margin

Answer 8

What percentage of turnover is actually profits for example turnover may be 100,000 and profit 23,000 so the profit margin is 23%

Question 9

Calculating profit margin

Answer 9

Profit divided by turnover times by 100 expressed as a percentage

Question 10

Gross profit margin calculations

Answer 10

Gross profit divided by turnover times 100

Question 11

Operating profit margin calculations

Answer 11

Operating profit divided by turnover times 100

Question 12

Profit for the year margin calculations

Answer 12

Profit for the year divided by turnover times 100

Question 13

Ways to improve profitability

Answer 13

. Increase the difference between revenue and costs
. Alter price by increasing it to secure more money per unit, whether this works depends on the price elasticity of demand
. Increase the quantity sold which would improve profitability plus fixed costs can be spread over a greater amount of products thus lowering the average
. Reduce the cost to allow for a bigger profit margin
. Increase efficiency so that more is made in less time so less staff needed, less hours needed and so on.

Question 14

Difference between cash and profit

Answer 14

Cash is usually in the form of money or bank deposits, profits is the difference between total sales revenue and total production cost

Question 15

Reasons for cash flow problems

Answer 15

. Delay in payments from customers
. Overtrading 
. Working capital
. Debts
. Poor financial maintenance

Question 16

Overtrading

Answer 16

When a business expands too quickly and tries to engage in more business than their investment in working capital will allow I.e money isn’t coming in quick enough

Question 17

Working capital

Answer 17

Cash used to pay bills and wages

Question 18

Liquidity

Answer 18

The ability a business has to pay its debts low liquidity means a business will struggle to pay its debts high liquidity means it is much easier to pay their debts

Question 19

Statement of financial position

Answer 19

Shows the assets, liabilities and net worth of a business on a given date. Useful in highlighting problems with liquidity and can help obtain further financial information

Question 20

Difference between an income statement and statement of financial position

Answer 20

. Income statement represents a period in time

. Statement of financial position represents a single moment in time

Question 21

Total Equity

Answer 21

The same as Net Assets, represents the worth or value of the business and is calculated by doing total assets minus total liabilities so basically the money they have minus the money the owe.

Question 22

Non-Current (fixed) assets

Answer 22

Assets that have lasting value to the business, this includes tangible items I.e land, buildings and machinery plus some intangible items such as brands, patents and so on. These assets can lose value over time which is known as depreciation.

Question 23

Depreciation

Answer 23

When something looses its value over time for example when you buy a car it goes down in value as soon as it leaves the garage

Question 24

Current assets

Answer 24

Assets that businesses have for a short period of time such as inventory, debtors and cash. Inventory includes inputs and outputs which can be sold to cover debts, usually can be turned into cash within one year

Question 25

Current liabilities

Answer 25

Debts that business need to pay within the next year and often sooner than that, includes money owed to creditors, bills and tax

Question 26

New current assets

Answer 26

Current assets minus current liabilities, represents the working capital of the business

Question 27

Net Assets

Answer 27

The worth or value of a business calculated by total assets minus total liabilities

Question 28

Non-current liabilities

Answer 28

Long term debts that a business lays off over several years such as bank loan repayments

Question 29

Shareholders equity

Answer 29

Money put into a business by a shareholder, isn’t gained back in the case of insolvency unless all other debts are paid

Question 30

Retained earnings

Answer 30

Includes both retained profits and increase in asset value such as property, count as a liability as they are a source of finance

Question 31

Current ratios

Answer 31

The number of times liquid assets exceeds current liabilities, current ratio equals current assets divided by current liabilities and is expressed as a ratio

Question 32

Acid test ratio

Answer 32

Acid test ratio refers to how much money a business has to pay its debts, expressed as a ratio for example if the ratio is 1.25:1 it means for every £1 of debt they have, they have £1.25 to pay it so are okay. A low acid test ratio means a business will struggle to pay debts and this could have huge negative impacts so needs to be investigated. High acid test ratios can also be negative as it means they could be investing in other things rather than holding onto money.

Question 33

Ways to improve liquidity

Answer 33

. Increase revenue 
. Decrease cost of production
. Increase profitability 
. Try to minimise any future debts
. Sell current assets to increase cash
. Persuade customers to pay quicker
. Use trade credit to the full
. Implement a just in time system to lower costs

Question 34

Internal causes of business failure (Financial)

Answer 34

. Liquidity

. Poor accounting

Question 35

Internal causes of business failure (Non-financial)

Answer 35

. Management error
. Wrong strategy
. Poor communication
. Failed expansion
. Poor quality of products
. Lack of investment and innovation 
. Poor marketing

Question 36

External causes of business failure (Financial)

Answer 36

. Exchange rates
. Interest rates - high interest encourages low spending and more saving, low interest encourages investment and less saving
. Lack of finance
. Recession
. Financial crisis

Question 37

External causes of business failure (Non-financial)

Answer 37

. Structural change
. Competition
. Natural phenomenon for example when a volcano erupted in Iceland, it caused huge problems for businesses in the uk especially for planes
. Government regulations
. Supplier problems e.g KFC UK had a chicken shortage when they switched to a new supplier causing massive problems with the majority of stores remaining closed and custom lost