# Shared Flashcard Set

## Details

Analysis and Interpretation
Analysis measures
33
Accounting
09/09/2013

Term
 What does the Mark-Up Percentage mean?
Definition
 Percentage of the cost price that you add to the cost price to get selling price.E.g. 50% mark-up percentage means if the item cost \$1 it will be sold at \$1.50
Term
 How do you improve the mark-up percentage?
Definition
 1. Find a cheaper while keeping the selling price the same2. Increase the selling price
Term
 What is a good mark-up percentage?
Definition
 This varies for different types of industries. Needs to be high enough to make a good profit but not so high it scares away the customers
Term
 What does the gross profit percentage mean?
Definition
 The percentage of sales that is left as gross profit to cover expensesE.g. If gross profit was 60% then for every \$1 of sales 60c is left as gross profit in the business
Term
 How do you improve the gross profit percentage?
Definition
 1. Decrease cost of goods sold e.g. find a cheaper supplier or decrease freight inwards2. Increase the mark-up percentage by increasing the selling price
Term
 What is a good gross profit percentage?
Definition
 The higher the better
Term
 What does the net profit percentage mean?
Definition
 Percentage of sales left in the business after all expenses have been accounted for.E.g. if the business has a net profit of 10% for every \$1 of sales in the business 10c remains as profit after all expenses have been accounted for.
Term
 How do you improve the net profit percentage?
Definition
 1. Decrease expenses (give specific examples)2. Increase gross profit by finding a cheaper supplier 3. Increase mark-up percentage by putting up the selling price
Term
 What is a good net profit percentage?
Definition
 The higher the better. As long as the percentage is positive the business is making a profit
Term
 What does the expense percentage mean?
Definition
 Percentage of sales that is being used by each group of expense groupE.g. if distribution costs percentage is 25% then for every \$1 of sales 25c is spent on distribution costs
Term
 How do you improve the expense percentage?
Definition
 1. Decrease particular expenses (make sure you give examples) 2. If financial expenses have either increased or decreased check the level of liabilities or whether there has been a change in interest rates DO NOT GIVE ADVICE TO REDUCE STAFFING LEVELS
Term
 What is a good expense percentage?
Definition
 The lower the better Remember that the business sometimes has to spend money such as advertising
Term
 What does the average return on owner's equity mean?
Definition
 This shows the percentage return the business is making on the assets invested by the ownerE.g. If return on owners equity is 23% then the business has generated a return of 23% on the assets invested by the owner
Term
 How do you improve return on owner's equity
Definition
 1. Decreasing expenses (give specific examples2. Increasing gross profit by finding a cheaper supplier3. Increasing the mark up percentage by putting up the selling price
Term
 What is a good return on owners equity
Definition
 The higher the betterIf the percentage has fallen from previous years check whether or not the owner has invested mire assets into the business, if so this decrease is expected and acceptable
Term
 What does the rate of return on total assets mean?
Definition
 It measures how efficiently the business is using its asset to generate profite.g. if rate of returns on total assets was 16% this means it has generated a return of 16% this would indicate the business is not using its assets effectively
Term
 How do you improve the total return on assets?
Definition
 - To increase the total return on assets increase Net Profit1. Decreasing Expenses (give specific example)2. Increasing gross profit by finding a cheaper supplier of the inventory purchases3. Increasing mark-up percentage by putting up the selling price- Sell off any unused or inefficient assets- Ensure that the business is not carrying excess inventory
Term
 What is a good rate if return on total assets?
Definition
 The higher the betterIf it has decreased check to see whether the business has acquired more assets in this period as this will decrease the rate of return initially.
Term
 What is the current ratio?
Definition
 This shows the businesses ability to repay its short term debts (within a year)E.g. if a businesses current ratio 3.1:1 they have \$3.10 worth of current assets to repay every \$1 of current liabilities
Term
 How do you increase the current ratio?
Definition
 - Owner investing more money in the business- Getting a bank loan
Term
 What is a good current ratio?
Definition
 Should fall between 2:1 and 5:1 but anything over 1:1 is satisfactory. Anything less and the business will not be able to repay its short term debts as they fall due in the normal course of business. Anything over 5:1 could indicate the business is not utilising its assets well
Term
 What is the liquid ratio?
Definition
 Shows the business's ability to repay immediate debts (in the next 4-6) as they fall due in the normal course of business. e.g. if the liquid ratio is 0.85:1 this means the business has 85cents of liquid to repay every \$1 of liquid liabilities
Term
 How do you increase the liquid ratio?
Definition
 - Owner investing more money into the business- Getting a bank loan
Term
 What is a good liquid ratio?
Definition
 Ratio must be over 1:1 to show the business can pay its immediate debts as the fall due. Ideally it should be between 1.1:1 and 3:1 any higher and the business may not be investing its funds as wisely as it could be.
Term
 What is the equity ratio?
Definition
 Shows the percentage of the businesses total assets that have been FUNDED by the owner e.g. if the business had a ratio of 0.85:1 this would mean that the owner has funded 8.5 cents for every \$1 of total assets
Term
 How do you improve the equity ratio?
Definition
 - Owner invests more assets into the business- Decrease liabilities by using money obtained from the owner- Improve net profit to increase closing equity by decreasing expenses or increasing the mark-up percentage
Term
 What is a good equity ratio?
Definition
 Should fall between 0.6:1 and 0.85:1 if it falls below 0.5:1 this could indicate instability in the business. If it is too high this means the business is not taking advantage of debt financing and may not be exoanding at the levels it is capable of
Term
 What is the inventory turn over?
Definition
 Shows how many times the inventory on hand was turned over in the previous periodE.g. If inventory turnover was 5.6 times in the period being looked at this means the business on average sold the equivalent to its inventory on hand 5.6 times last year
Term
 How do you improve the inventory turnover?
Definition
 - Tighten the ordering policies so that the correct amount of stock is ordered and carried at any point in time- Increase marketing and advertising (However this can decrease profit)
Term
 What is a good inventory turnover?
Definition
 The higher the better providing the business is carrying a good stock level. Good inventory turnover depends on the industry average as well
Term
 What is age of accounts receivable?
Definition
 Shows the average number of days it takes the business to receive money from its credit sales (debtors) e.g. if the age accounts receivable is 30 days this means that on average it takes debtors 30 days to repay their accounts
Term
 How do you improve age of accounts receivable?
Definition
 - Tighten credit policy in new credit sales- Ensure there are good credit checks done for every credit sale and stop credit if the account is overdue- Introduce insentives (e.g. charge intrest on overdue accounts or discounts for prompt payment)- Send out reminder letters
Term
 What is a good age of Accounts receivable?
Definition
 The fewer days the better. No greater than 42 days (6 weeks)
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