12ACC Unit 6

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58 Terms

1
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What is the formula for Return on Capital Employed (ROCE)?

(Profit from operations x 100) / Capital employed.

2
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How is Gross Profit Margin calculated?

(Gross profit / Revenue) x 100.

3
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What does a Gross Profit Margin of 20% indicate?

For every $1 of revenue, gross profit is 20 cents.

4
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What is included in the calculation of Capital Employed?

Capital employed = Equity + Non-current liabilities.

5
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What does a Gross Profit Margin of 20.93 cents per dollar of capital employed indicate?

The business returns 20.93 cents as profit for every $1 of capital employed.

6
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What is the formula for Current Ratio?

Current Assets / Current Liabilities.

7
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What does a Current Ratio of 2:1 mean?

For every $1 of current liabilities, the business has $2 of current assets.

8
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What are some ways to improve Gross Profit Margin?

Increase markup, reduce cost of sales, or sell higher-margin products.

9
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What can cause a decrease in Gross Profit Margin?

Lower selling price, increased trade discounts, or higher supplier costs not passed on.

10
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What problems can arise from a high Current Ratio?

High trade receivables, too much inventory, or excess cash not invested.

11
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What does the Mark-up Percentage formula represent?

(Gross profit / Cost of sales) x 100.

12
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What does a Mark-up Percentage of 30% indicate?

For every $1 of cost, the business adds 30 cents to the selling price.

13
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What is the Operating Expense Ratio?

(Operating expenses x 100) / Revenue.

14
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What does a lower Operating Expense Ratio indicate?

Costs are effectively controlled and money is spent wisely.

15
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What are potential issues with a low Current Ratio?

Trouble meeting due payments, missing cash discounts, or losing business opportunities.

16
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How is Profit Margin calculated?

(Profit for the year x 100) / Revenue.

17
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What does a Profit Margin of 15.38% indicate?

For every $1 of sales, profit is 15.38 cents.

18
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What is the liquid ratio?

(Current Assets - Inventory) / Current Liabilities

19
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What does a liquid ratio of 1:1 to 1.5:1 indicate?

It indicates an optimum level of liquidity for a business.

20
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What is the significance of the liquid ratio?

It is the best indicator of a business's liquidity.

21
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What are some causes of a decrease in the liquid ratio?

Fall in gross profit margin and increase in expenses.

22
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What does the cost of sales ratio indicate?

It shows how long, on average, the business takes to sell its inventory.

23
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Why is holding too much slow-moving inventory harmful?

It can harm cash flow and deprive the business of holding faster-moving inventory.

24
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What is the collection period for trade receivables?

Trade receivables x 365 / Net Revenue.

25
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How can a business improve its liquid ratio?

By collecting receivables faster, converting short-term liabilities to long-term, and investing more capital.

26
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What is the acceptable collection period for trade receivables?

30-35 days.

27
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What does the non-current asset turnover ratio measure?

It measures how well a business uses its long-term assets to generate revenue.

28
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What is the payment period of trade payables?

Trade Payables x 365 / Total book value of non-current assets.

29
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What does a high rate of inventory turnover indicate?

It indicates that a business is efficiently managing its inventory by frequently replacing sold products.

30
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What are the consequences of a long payment period for trade payables?

Missing out on cash discounts and being denied further purchases on credit.

31
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What is the average inventory formula?

(Opening Inventory + Closing Inventory) / 2.

32
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What strategies can improve the collection period for receivables?

Offering cash discounts, sending reminders, charging interest on overdue accounts, and effective credit screening.

33
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What is the impact of obsolete inventory on cash flow?

It can negatively affect cash flow and profitability.

34
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What does the rate of inventory turnover tell a business?

It indicates how many times a business sells and replaces its inventory in a year.

35
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What is the formula for calculating the rate of inventory turnover?

Cost of Sales / Average Inventory.

36
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What can a business do to turn obsolete inventory into cash?

Conduct clearance sales, although it may reduce profit.

37
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What is trend analysis in financial performance?

Comparing performance over several years to identify improvements or declines.

38
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What is benchmarking in a business context?

Comparing performance with other businesses in the same industry.

39
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How does decision support assist managers?

It helps managers make pricing, investment, and operational decisions.

40
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How is inventory turnover calculated?

Average inventory x 365.

41
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What is the purpose of identifying problems in financial analysis?

To pinpoint areas needing improvement for future performance.

42
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What are some limitations of using financial ratios?

Management judgment, business model differences, year-end distortions, and potential window dressing.

43
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What is the significance of trend analysis?

It looks at financial ratios over several years to determine if a business is improving, stable, or declining.

44
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What are inter-firm comparisons in financial analysis?

Comparing financial ratios and performance metrics between different companies.

45
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What are some challenges with inter-firm comparisons?

Timeliness of data, accuracy of disclosure, and differences in accounting policies.

46
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What is window dressing in financial reporting?

Deliberate manipulation of financial statements to make results appear better than they are.

47
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What are internal stakeholders in a business?

Individuals or groups within the company, such as owners, shareholders, managers, and employees.

48
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What is income smoothing?

Deliberate manipulation to reduce fluctuations in reported profit over time for perceived stability.

49
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Who are external stakeholders in a business?

Individuals or groups outside the company, including lenders, investors, suppliers, customers, and government bodies.

50
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What are some limitations of using financial statements for external stakeholders?

Delay in availability, incomplete disclosure, and different classifications or policies affecting comparability.

51
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What is the role of trade unions in a business context?

To protect employees and negotiate pay and working conditions.

52
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What is the purpose of financial ratios?

To assess a company's financial performance and compare it with industry standards.

53
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What can cause year-end distortions in financial ratios?

Choosing a year-end during a slow season may understate inventory and receivables.

54
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What does liquidity refer to in financial analysis?

The ability of a company to meet its short-term obligations.

55
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What is profitability in the context of financial performance?

A measure of a company's ability to generate income relative to its revenue, assets, or equity.

56
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What is efficiency in financial terms?

The ability of a company to use its resources effectively to generate profits.

57
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What is the impact of inflation on financial analysis?

In high inflation environments, historic-cost figures can be misleading.

58
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What is the significance of trade associations in financial benchmarking?

They collect and publish industry averages for comparison purposes.