IGCSE Business: Analysis of Accounts-Questions and Answers Graded A+

IGCSE Business: Analysis of Accounts-Questions and Answers Graded A+ What do businesses analyse their accounts? - ANSWER-1. Identify strength and weaknesses as well as the strategies to deal with it. 2. Check if the business meets its objective. 3. Improve future business performance The margins that measure business's profitability are: - ANSWER-1. Gross profit margin 2. Profit margin 3. Return on Capital Emplyoed Gross profit margin - ANSWER-shows how much gross profit is earned per $1 of revenue. Gross profit margin (formula): - ANSWER-gross profit/revenue x 100 Ways to improve gross profit margin: - ANSWER-1. Increase revenue without increasing cost of sales 2. Reduce cost of sales without decreasing revenue Profit margin - ANSWER-shows how much profit is earned per $1 of revenue Profit margin (formula) - ANSWER-profit/revenue x 100 Ways to improve profit margin: - ANSWER-1. Improve gross profit margin 2. Reduce expenses Define adding value - ANSWER-selling a product for more than it cost to produce it; both gross profit and profit margin measures how well the business adds value and control costs. Return on capital employed - ANSWER-shows how much profit is earned per $1 invested into the business; how efficiently did the business use its finance? Return on capital employed (formula) - ANSWER-Profit/Capital Employed x 100 Liquidity - ANSWER-the ability of a business to pay its short-term debts These ratios are used to monitor a business's liquidity: - ANSWER-1. Current Ratio 2. Acid test ratio Current Ratio - ANSWER-shows the ratio between current assets and current liabilities What is the perfect range for current ratio? - ANSWER-[ 1.5:1 < perfect range < 2:1 ] 1.5:1 means cash might be running out 2:1 means too much cash is tied up in unprofitable assets Acid Test Ratio - ANSWER-a ratio that excludes inventories from current assets Acid Test Ratio (formula): - ANSWER-(current assets - inventories)/current liabilities