Monitoring the Business SAQ

A business can monitor its health and performance through financial information and ratio analyses.

Financial institutions use ratio analyses to evaluate a firm's ability to repay loans and assess its risk for lending.

Shareholders want to assess the performance of managers and estimate potential income from their investments.

<p>Suppliers assess a business’s capacity to repay its debts before offering goods on credit.</p> Signup and view all the answers

<p>Employees use ratio analyses to gauge the company's success and job security, aiding in negotiations for wage increases.</p> Signup and view all the answers

<p>Tax authorities use financial information to ensure accurate assessment of tax obligations for the firm.</p> Signup and view all the answers

<p>Identifying loss makers helps businesses recognize non-profitable products and decide whether to improve or discontinue them.</p> Signup and view all the answers

<p>Valuing net assets is essential for future borrowings and potential management buyouts.</p> Signup and view all the answers

<p>The current financial position helps determine resource allocation and strategic decisions for future operations.</p> Signup and view all the answers

<p>PLCs and LTDs must comply with the legal requirements of the Registrar of Companies and file certain accounts annually.</p> Signup and view all the answers

<p>Comparison helps identify trends, assess performance, and uncover problems that need attention.</p> Signup and view all the answers

<p>Ratios and percentages provide insights into how effectively management is utilizing business resources.</p> Signup and view all the answers

<p>An isolated review cannot capture non-financial factors like employee morale or market conditions that are crucial for a comprehensive assessment.</p> Signup and view all the answers

<p>Since analyses are based on past figures, they may quickly become outdated and provide limited future insights.</p> Signup and view all the answers

<p>Different accounting policies can lead to discrepancies in financial statements, making comparisons less accurate.</p> Signup and view all the answers

<p>Overvaluing or undervaluing assets can lead to skewed ratios that do not accurately reflect the company's financial situation.</p> Signup and view all the answers

<p>The income statement reveals whether management effectively used the business's resources by showing sales and expenses.</p> Signup and view all the answers

<p>Net profit is calculated as gross profit minus expenses plus gains.</p> Signup and view all the answers

<p>The statement of financial position shows the current status of the business on a specific date, including assets and liabilities.</p> Signup and view all the answers

<p>Liquidity refers to a company's ability to pay its short-term debts as they fall due.</p> Signup and view all the answers

<p>Current assets are assets that can be quickly converted to cash, important for paying short-term liabilities.</p> Signup and view all the answers

<p>Working capital is calculated as current assets minus current liabilities.</p> Signup and view all the answers

<p>Debt capital includes long-term loans and preference shares.</p> Signup and view all the answers

<p>Total capital employed is the sum of issued shares, reserves, and long-term loans.</p> Signup and view all the answers

<p>Authorised share capital is the maximum number of shares that can be issued, while issued share capital is the actual number sold.</p> Signup and view all the answers

<p>The gross profit margin ratio indicates the percentage of sales that exceeds the cost of goods sold.</p> Signup and view all the answers

<p>Debt capital is risky because it must be repaid regardless of the company's financial position, affecting cash flow.</p> Signup and view all the answers

<p>Reserves represent retained earnings and indicate the funds available for reinvestment or emergencies.</p> Signup and view all the answers

<p>A bank overdraft is a facility allowing a business to withdraw more funds than it has in its account, representing a current liability.</p> Signup and view all the answers

<p>Liquidity ratios help assess a company's ability to meet short-term obligations and financial stability.</p> Signup and view all the answers

<p>Increase sales through improved commission schemes and launch advertising campaigns.</p> Signup and view all the answers

<p>It indicates that for every €1 owed, the firm has €1.23 in current assets to cover it.</p> Signup and view all the answers

<p>To lower overall costs and improve profitability, especially if facing reduced sales.</p> Signup and view all the answers

<p>It excludes closing stock from current assets.</p> Signup and view all the answers

<p>The ideal acid test ratio is 1:1.</p> Signup and view all the answers

<p>It signifies that for every €1 in equity capital, the business has 46 cents in debt.</p> Signup and view all the answers

<p>Employees may not get paid on time, and suppliers might reduce credit facilities.</p> Signup and view all the answers

<p>Improve cash flow budgeting and credit control to enhance liquidity.</p> Signup and view all the answers

<p>It may face higher financial risk due to reliance on debt for funding.</p> Signup and view all the answers

<p>Outsource production to reduce costs or pay off some long-term loans.</p> Signup and view all the answers

<p>By increasing retained earnings or issuing more shares to finance operations.</p> Signup and view all the answers

<p>To assess the company's financial health relative to its peers and identify areas of improvement.</p> Signup and view all the answers

<p>The business may struggle to raise short-term finance and pay obligations as they arise.</p> Signup and view all the answers

<p>It can lower production costs, leading to improved profit margins.</p> Signup and view all the answers

<p>It indicates the percentage of total sales that the business retains as gross profit after deducting the cost of sales.</p> Signup and view all the answers

<p>NPP is calculated by dividing net profit by total sales and expressing it as a percentage.</p> Signup and view all the answers

<p>It suggests that the business may be facing challenges in managing costs or pricing its products effectively.</p> Signup and view all the answers

<p>Improving the commission scheme could incentivize sales personnel to increase total sales, potentially enhancing the GPM.</p> Signup and view all the answers

<p>A higher ROI indicates that the business is generating more profits relative to the capital invested, making it more attractive to investors.</p> Signup and view all the answers

<p>Investors, employees, and managers are key stakeholders interested in NPM as it affects dividend potential and job security.</p> Signup and view all the answers

<p>It implies that the business retains €22.92 as net profit for every €100 of sales after all expenses are deducted.</p> Signup and view all the answers

<p>Sourcing cheaper raw materials could reduce the cost of sales, potentially increasing the gross profit margin.</p> Signup and view all the answers

<p>The ideal comparison helps assess if a business's ratios are performing better, comparable, or worse than industry averages and competitors.</p> Signup and view all the answers

<p>It could lead to investors withdrawing their investments and seeking opportunities elsewhere due to less favorable returns.</p> Signup and view all the answers

<p>Trend analysis reveals year-over-year performance changes, helping to identify deterioration or improvement in financial health.</p> Signup and view all the answers

<p>It may indicate strong pricing power or effective cost management, potentially leading to a competitive advantage.</p> Signup and view all the answers

<p>Employees might face concerns about job security and may see reductions in bonuses or dividends tied to profit performance.</p> Signup and view all the answers

<p>One way is to reduce indirect expenses, such as by finding a more economical electricity provider.</p> Signup and view all the answers

<p>Cash flow negatively affects due to increased repayments, including both capital and interest.</p> Signup and view all the answers

<p>It may struggle to raise further debt because many of its assets are already collateral for existing obligations.</p> Signup and view all the answers

<p>Shareholders might see reduced dividends and increased financial risk for the company.</p> Signup and view all the answers

<p>Issuing more shares dilutes control as it increases the number of shareholder votes.</p> Signup and view all the answers

<p>Interest payments can be written off against taxable income, whereas dividends are paid from after-tax profits.</p> Signup and view all the answers

<p>Selling equity can avoid increasing debt levels and associated repayment risks.</p> Signup and view all the answers

<p>It risks bankruptcy due to its obligation to meet fixed interest payments regardless of profit.</p> Signup and view all the answers

<p>Debtholders get paid first, as their interest payments take precedence over shareholder dividends.</p> Signup and view all the answers

<p>Investors may be deterred by high gearing due to perceived financial risk.</p> Signup and view all the answers

<p>Low gearing typically indicates lower financial risk and more flexibility in financial decision-making.</p> Signup and view all the answers