U4 Ch.18 Monitoring

Question 1

What is the Debt/Equity Ratio

Answer 1

proportion of capital acquired through debt capital compared with that raised through retained earnings and issued share capital

Question 2

Profit and loss account

Answer 2

records the sales less all the expenses incurred throughout the financial year

Question 3

Balance sheet

Answer 3

shows how much wealth generated with a statement of assets and liabilities as well as sources of finance

Question 4

Debtors

Answer 4

individuals/businesses that owe money after buying on credit

Question 5

Creditors

Answer 5

individuals/businesses that owe money to. Goods bought on credit and will be payed for at agreed future date

Question 6

Authorised share capital

Answer 6

amount/limit of stock a company can issue

Question 7

Issued share capital

Answer 7

how much shares have been issued to shareholders

Question 8

Gross profit margin formula

Answer 8

(GP x 100) / Sales

Question 9

Net profit margin formula

Answer 9

(NP x 100) / Sales

Question 10

Return on Investment formula

Answer 10

ROI (NP x 100) / Capital Employed

Question 11

Capital Employed

Answer 11

money invested by shareholders and banks
1. Ordinary share cap. +
2. retained earn. +
3. long-term loans +
4. preference shares]

Question 12

GPM definition

Answer 12

Gross Profit Margin. percentage profit on all items sold. Profit percentage on trading. Higher percentage leaves more money to cover overheads

Question 13

what is NPM [Net Profit Margin]

Answer 13

overall percentage profit after covering all costs including overhead expenses. Higher = more profit

Question 14

what is ROI

Answer 14

profit from investments. Often compared with interest rate on deposit accounts

Question 15

Current Ratio / Working Capital Ratio Formula

Answer 15

CA : CL

Question 16

Acid Test Ratio / Quick Ratio Formula

Answer 16

(CA - CS) : CL

Question 17

what does Current Ratio show?

Answer 17

shows ability to pay CL as they fall due. Ideal is 2:1

Question 18

what is Acid Test Ratio

Answer 18

excludes closing stock as it may not be possible to sell it quickly to pay bills. Ideal is 1:1

Question 19

Liquidity

Answer 19

ease with which an asset can be converted to ready cash without affecting its market price

Question 20

Liquidity of a business

Answer 20

ability to convert assets to cash to pay short term liabilities

Question 21

Solvency of a business

Answer 21

ability to pay ALL debts as they fall due

Question 22

How to deal with liquidity problem

Answer 22

-limit credit to costumers.
-Minimize stock levels.
-raise finance(e.g. sell shares).
-Plan for shortfalls with cash flow forecast

Question 23

Debt/Equity ratio formula

Answer 23

DC : EC

Question 24

Debt Capital made up of:

Answer 24

bank loans + debentures + preference shares

Question 25

Equity Capital made up of:

Answer 25

ordinary share capital + retained earnings

Question 26

Gearing Ratio

Answer 26

debt compared to equity. High indicates risk of collapse

Question 27

High Gearing

Answer 27

Debt > Equity

Question 28

Limitations of Ratio Analysis

Answer 28

1.Industrial Relations. 2.Different Accounting policies 3.Ethics. 4. Staff Retention. 5.based on past figure not projected future. 6. Inflation may impede comparison from one period to another

Question 29

Who uses financial information

Answer 29

1. investors[liquidity: pay loans Gearing:affect new loans would have] 2. Government[Prof: insure correct tax Liquidity:grants. to ensure business isn’t is financially stable and able to pay current liabilities] 3. Competitors[Prof: compare to own Gearing:examine debt when considering takeover]