Profit and Loss Statement Balance Sheet Ratio Analysis Working Capital Investment Appraisal Potpourri

Answer: This is abnormal profit. ? Profit that is above minimum profit is called _____ profit.

? Another name for sales is _____. Answer: This is turnover.

? Which financial statement provides information for one day only—a profit and loss statement or a balance sheet? Answer: A balance sheet provides information for one day only—it is a static statement.

? Profit after expenses is known as _____ profit. Answer: This is net profit.

? If net profit is $50,000 and turnover is $75,000, the net profit margin is: Answer: The net profit margin is: net profit turnover x 100 = 66.7%

Answer: The answer is owe. ? A liability is an amount that you o__.

Answer: Office furniture is a fixed asset—it is expected to last for a long period of time. ? Office furniture is an example of which type of asset—fixed or current?

Answer: This is called working capital. ? Current assets less current liabilities is known as _____ _____.

Answer: This is called “cooking the books”. ? “Creative accounting” is also known as _____ _____ _____.

Answer: Generally Accepted Accounting Principles. These are the rules that accountants must follow. ? What is GAAP?

? Calculate the acid test ratio: current assets are $105,000; stocks are $5,000; current liabilities are $60,000. Answer: The acid test ratio is: current assets – stocks current liabilities $105,000-$5,000 $60,000 or 1.7

? Calculate stock turnover in days: Cost of goods sold is $75,000 and stock is $35,000. Answer: Stock turnover is: Stock Cost of goods sold $35,000 $75,000 x 365 = days

? Calculate the gearing ratio: Loan capital is $45,000 and total capital employed is $125,000. Answer: The gearing ratio is: loan capital total capital employed $45,000 $125,000 x 100 = 36%

? Events that occur within a business that change assets, liabilities, or capital are called _____. Answer: These are called transactions.

? Checking the financial records of a business is known as _____. Answer: This is called auditing.

? Name one time lag in the cash flow cycle. Answer: Paying suppliers; length of production process and costs; storage and transportation costs; length of time it takes customers to pay.

? Explain how seasonal factors can impact liquidity of a business. Answer: Theme parks have business only certain times of the year so their cash flow is heavy during those times and light at other times; farmers have a long span between planting and selling crops.

? If your credit policies are too _____, your company runs the risk of bad debts. Answer: These would be easy credit policies.

? An example of a liquid asset is: Answer: This is something that can be converted into cash easily: cash; accounts owed from your debtors, stock (merchandise) that can be sold quickly.

? Money flowing into and out of a business is known as the _____ _____ _____. Answer: This is known as the cash flow cycle.

? A _____ _____ _____ helps a business know if they have shortages or surpluses of cash from month to month. Answer: This is a cash flow forecast.

? These types of costs can be predicted pretty accurately from month to month: _____ costs. Answer: These are fixed costs such as the mortgage payment, loan payments, etc.

? If receipts are more than payments, there is a(n) _____ cash flow. Answer: This is a positive cash flow.

? The term p.a. means _____ _____. Answer: This term means per annum or per year.

? If profit per annum is $300 and the capital cost of a piece of equipment is $1,000, the average rate of return is: _____. Answer: The average rate of return is 30%. Net profit per annum Capital cost x 100 $300 $1,000 x 100 = 30%

? Identify what would occur in the following transaction: Bought $300 worth of supplies for the business. Answer: Supplies would increase by $300; cash would decrease by $300.

? Calculate cost of sales (cost of goods sold): Beginning stock was $50,000; purchases during the month were $35,000; ending stock was $40,000. Answer: Cost of sales (cost of goods sold) were $45,000. Beginning stock--$50,000 plus Purchases--$35,000 less Ending stock--$40,000 = $45,000

Answer: Total assets are $205,000 Fixed assets--$200,000 plus Current assets--$80,000 less Long-term liabilities--$50,000 less Current liabilities--$25,000 ? Calculate total assets: fixed assets are $200,000; current assets are $75,000; long-term liabilities are $50,000; current liabilities are $25,000.

Answer: This is B) Gearing ratio. If your company is highly geared, it may have too much debt. ? This type of ratio lets you know if your business has a high debt to equity ratio: A) Profitability ratio B) Gearing ratio C) Efficiency ratio

? This type of ratio is used to determine solvency (ability to pay all debts) of a business: A) Profitability ratio B) Liquidity ratio C) Efficiency ratio This is a B) Liquidity ratio.

? If a piece of machinery cost $50,000 and the expected cash flow was $10,000 for Year 1, $15,000 for Year 2, $20,000 for Year 3, and $30,000 for Year 4, how many years and months is the payback period? Answer: 3 years and 2 months Year 1: $10,000 Year 2: $15,000 Year 3: $20,000 Year 4: $5,000 $30,000 x 12 = 2 months