ANALYSIS AND INTERPRETATION

ANALYSIS AND INTERPRETATION

1. What is the other name of Gross Profit Ratio?
Gross profit as a percentage of Turnover.

2. What is the formula to find out the GP%?
GP x 100
Sales

3. What would be the reason for the increase in GP%? Give 2 reasons.
(a) Selling goods, at higher prices.
(b) Buying the goods at cheaper prices.


4. What would be the reason for decrease in the GP%? Give 2 reasons.
(a) Selling goods at higher prices.
(b) Offering Trade discounts.
(c) Not passing on increase prices.
(d) Holding seasonal sales.

5. What is the formula to find out NP Ratio?
NP x 100;
Sales

6. What is the other name of NP Ratio?
NP as a % of sales
7. What is meant by liquidity?
It is the ability of the business to convert its assets into cash.

8. What is meant by working capital?
It is the money required to meet its every day expenses.

9. What does current Ratio measure?
It measures the ability of the business to meet its current liability as they fall due.

10. What is the standard current Ratio for a business?
Somewhere between 1.5 – 2:1.

11. What are the effects of not having enough working capital?
(i) Problems in meeting debts as they fall due.
(ii) Inability to take advantage of cash discount.
(iii) Difficulty in obtaining further supplies.
(iv) Inability to take advantage of business opportunity as they arise.

12. Quote 5 ways of improving working capital.
(i) Introduction of further capital.
(ii) Obtaining long-term loan.
(iii) Reducing owners drawings.
(iv) Selling out useless fixed assets.

13. What is the other name of Quick ratio?
Acid test Ratio

14. What is the formula to find out Quick Ratio?
CA – stock
CL

15. What is the standard quick ratio?
1:1

16. What is the formula to calculate stock turnover ratio?
Cost of goods sold
Average stock

17. In what way knowing the rate of stock turnover will be useful to the businessmen.

(i) For stock replacement.
(ii) For comparison.
(iii) For corrective action.
(iv) For identifying causes of changes.

18. What are the other names of debtors ratios?
Debtors Ratio/ Sales Ratio.


19. Give 4 ways of improving the collection period from debtors.
(i) Offer cash discount.
(ii) Charge interest on over dues.
(iii) Refuse further supplies.
(iv) Send regular reminder.


20. Give four ways of reducing the risk of bad debts.
(i) Obtain reference from new customers.
(ii) Fix a limit for each credit customer.
(iii) Follow up over dues promptly.
(iv) Refuse further supplies until old dues are paid.

21. Give two problem of inter-firm comparison.
1. All businesses are not same in all sense.
2. Different businesses follow different accounting policies.
3. One business may not be of the same size like the other.
4. Location of the business may not be at the same place.
5. They might have started at different dates.

22. Give four users of accounting information.
1. owner.
2. bank manager
3. business manager.
4. creditor






23. What are the limitations of ratio analysis?
Answer:
Accounting statements and ratio analysis provide valuable information about the business’s performance but it’s important to remember, however that they do have limitations. The comparison with other firms or previous years should be undertaken with caution for the following reasons:
(i) Difference in the type of stock which affects the rate of stock turnover and the gross profit margin.
(ii) Difference in the firm’s policy because some firms are selling on cash and on credit terms. Others do not use the same policy.
(iii) Difference in experience because some firms may not operate profitably in their early years of trading but this should not necessarily be the case expected in future years.
(iv) Difference in management: Because small firms such as a sole trader are not expected to use an efficient managers as well as large firms.
(v) Difference in location: because income and tastes and perhaps government policies may vary from one area to another, which will affect the performance of the firm.
(vi) Different accounting periods: because different firms are not expected to start their trading activities at the same date.
(vii) Difference in capital employed because some firms may have enough capital employed to finance purchases of premises and machinery while others do not and forced to pay more expenses.
(viii) Difference in accounting policies such as the application of the accounting concepts and methods of depreciation