8.1 Review of Key Topics

• The Profit and Loss Account is also known as the Income Statement
• The Gross Profit Margin is calculated as (Gross Profit / Sales Revenue) * 100%


  True
• Match the Balance Sheet component with its description:

  Assets ↔️ Resources owned by the company

  Liabilities ↔️ Amounts owed by the company

  Equity ↔️ Owners' stake in the company
• The fundamental accounting equation must always balance
• If a company has assets of £300,000, liabilities of £100,000, and equity of £200,000, the accounting equation balances correctly.

  True
• What is the purpose of the Statement of Cash Flows?

  Understanding liquidity and cash generation
• The Statement of Cash Flows is divided into three main sections
• What do profitability ratios measure?

  Ability to generate profits
• A higher Gross Profit Margin indicates greater profitability.


  True
• Analyzing trends in profitability ratios over time can help identify areas for improvement
• Cost of Sales (COGS) is calculated as Beginning Inventory + Purchases - Ending Inventory
• What is Operating Profit equal to in the Profit and Loss Account?

  Gross Profit - Expenses
• Match the key margin with its calculation:

  Gross Profit Margin ↔️ (Gross Profit / Sales Revenue) x 100%

  Operating Profit Margin ↔️ (Operating Profit / Sales Revenue) x 100%
• The fundamental accounting equation is Assets = Liabilities + Equity.


  True
• What are liabilities divided into on the Balance Sheet?

  Current and Non-Current
• Operating Activities include cash receipts from sales and payments to suppliers.


  True
• What are examples of Financing Activities?

  Issuance of shares, loan repayment
• What does the net profit margin measure?

  Overall profitability
• How is the net profit margin calculated?

  (Net Profit / Sales Revenue) x 100%
• What does the quick ratio measure?

  Short-term debt repayment ability
• A higher debt-to-equity ratio suggests lower financial risk.

  False
• The interest coverage ratio measures a company's ability to cover its interest expenses with its operating earnings
• How is the debt-to-equity ratio calculated?

  Total Debt / Total Equity
• What is the formula for gross profit margin?

  (Gross Profit / Sales Revenue) x 100%
• If sales revenue is £500,000 and cost of sales is £200,000, what is the gross profit?

  £300,000
• The fundamental accounting equation states: Assets = Liabilities + Equity
• Match the financial statement section with its corresponding value:

  Assets ↔️ £300,000

  Liabilities ↔️ £100,000

  Equity ↔️ £200,000
• What are the three main sections of the Statement of Cash Flows?

  Operating, Investing, Financing
• Match the Statement of Cash Flows section with its description:

  Operating Activities ↔️ Cash flows from day-to-day business operations

  Investing Activities ↔️ Cash flows from the purchase or sale of long-term assets

  Financing Activities ↔️ Cash flows related to debt, equity, and dividends
• The Statement of Cash Flows helps identify potential cash flow issues
• Match the profitability ratio with its calculation:

  Gross Profit Margin ↔️ (Gross Profit / Sales Revenue) x 100%

  Operating Profit Margin ↔️ (Operating Profit / Sales Revenue) x 100%

  Net Profit Margin ↔️ (Net Profit / Sales Revenue) x 100%
• A higher Gross Profit Margin indicates greater profitability
• Profitability ratios provide insights into a company's pricing power and cost control.


  True
• What are liquidity ratios used to measure?

  Short-term financial obligations
• A Current Ratio above 1 indicates a company's ability to cover its short-term debts
• What are solvency ratios used to measure?

  Long-term financial obligations
• A higher Debt-to-Equity Ratio suggests higher financial risk
• LIFO results in a lower cost of goods sold during periods of rising costs
• The choice of inventory valuation method can significantly impact a company's gross profit and net income.


  True
• What is the cost of goods sold under FIFO if 40 units are purchased at £10 each and 10 units at £15 each?

  £550