Define the term gross profit margin .

Gross profit margin is the proportion of revenue that is turned into gross profit , expressed as a percentage.

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 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.

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.

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.

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 .

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

Drawings are amounts of money withdrawn from a business by its owners.

IBBusinessDPBusiness ManagementHLFlashcards3. Finance & Accounts3.5 Profitability & Liquidity Ratio Analysis

3.5 Profitability & Liquidity Ratio Analysis (DP IB Business Management)

Flashcards

1/22

0Still learning

Know0

FrontProfitability Ratios
Define the term gross profit margin.

Enjoying Flashcards?
Tell us what you think

Cards in this collection (22)

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.
$Gross profit margin = \frac{Gross profit}{Sales revenue} \times 100$
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.
$Profit margin = \frac{Profit before interest & tax}{Sales revenue} \times 100$
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.
$Return on capital employed = \frac{Profit before interest & tax}{Capital employed} \times 100$
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.
$Capital employed = Non - current liabilities + Equity$
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.
$Current ratio = \frac{Current assets}{Current liabilities} = ? : 1$
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.
$Acid test ratio = \frac{Current assets - stock}{Current liabilities} = ? : 1$
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.

Previous:3.4 Final AccountsNext:3.6 Efficiency Ratio Analysis

1. Introduction to Business Management

2. Human Resource Management

3. Finance & Accounts

4. Marketing

5. Operations Management

6. The Business Management Toolkit

6.1 The Business Management Toolkit