Define the term gross profit margin.
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Define the term gross profit margin.
Gross profit margin is the proportion of revenue that is turned into gross profit, expressed as a percentage.
What is the formula to calculate the gross profit margin?
Formula.
Define the term profit margin.
The profit margin is the proportion of revenue that is turned into profit before interest and tax, expressed as a percentage.
What is the formula to calculate the profit margin?
Formula.
What is the return on capital employed?
The return on capital employed is a measure of how effectively a business uses capital invested to generate profit, expressed as a percentage.
What is the formula to calculate return on capital employed?
Formula.
True or False?
A higher return on capital employed is generally better.
True.
A higher return on capital employed is generally better, as it indicates that the business is profitable and using its capital efficiently.
How is capital employed calculated?
Formula.
True or False?
Return on capital employed can be compared over time and also with competitors and other potential capital investments.
True.
Return on capital employed can be compared over time and also with competitors and other potential capital investments.
State one way the gross profit margin can be increased.
The gross profit margin can be increased by:
Increasing the value of sales to increase sales revenue
Increasing the volume of sales to increase sales revenue
Reducing direct costs
State two ways a business may reduce its overhead costs.
Overhead costs may be reduced by:
Reducing staffing levels
Relocating to cheaper premises
Changing utility companies
Reducing administration costs
True or False?
Buying stock in greater quantities will reduce direct costs.
False.
Buying stock in greater quantities may lead to bulk buying discounts but may require investment in increased storage space
What is meant by the term liquidity?
Liquidity is the cash and other current assets businesses have available to quickly pay bills and meet short-term financial obligations.
What is the formula to calculate the current ratio?
Formula.
How does the acid test ratio differ from the current ratio?
The acid test ratio is a more precise way to measure liquidity than the current ratio, excluding stock from current assets.
What is the formula to calculate the acid test ratio?
Formula.
True or False?
The acid test ratio is also known as the liquid capital ratio.
True.
The acid test ratio is also known as the liquid capital ratio.
Why is stock excluded from the acid test ratio?
Stock is excluded in the acid test ratio because it is the least liquid form of current assets and may take time to sell, so would be of little use in meeting immediate financial obligations.
In the UK, what does a current ratio of 2:1 mean?
A current ratio of 2:1 means a business has £2 of current assets to cover each £1 of short-term debt.
True or False?
Increasing the credit period offered to customers can improve liquidity.
False.
Reducing the credit period offered to customers can improve liquidity by collecting money owed more quickly.
State one drawback of selling assets such as machinery or property, to improve liquidity?
Drawbacks of selling assets to improve liquidity include:
It will worsen the balance sheet position of the business
Assets are no longer available for a business to use
What are drawings?
Drawings are amounts of money withdrawn from a business by its owners.