8.1 Review of Key Topics

• 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
• The Profit and Loss Account is also known as the Income Statement
• What is the formula to calculate gross profit in the Profit and Loss Account?

  Sales Revenue - Cost of Sales
• If a company has Sales Revenue of £500,000 and Cost of Sales of £200,000, the Gross Profit is £300,000
• What is the fundamental accounting equation?

  Assets = Liabilities + Equity
• If a company has assets of £300,000, liabilities of £100,000, and equity of £200,000, the accounting equation balances correctly.

  True
• If a company has Sales Revenue of £500,000, Cost of Sales of £200,000, and Expenses of £100,000, the Operating Profit is £200,000
• The Statement of Cash Flows is useful for understanding a company's liquidity and ability to generate cash.

  True
• The Statement of Cash Flows can help identify potential cash flow issues.


  True
• What do profitability ratios measure?

  Ability to generate profits
• Gross Profit Margin measures the percentage of sales revenue retained after deducting the cost of goods sold
• What does the Operating Profit Margin measure?

  Profitability from core operations
• 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%
• What does the Balance Sheet show about a company?

  Financial position at a point in time
• The fundamental accounting equation is Assets = Liabilities + Equity.


  True
• Match the Balance Sheet component with its description:

  Assets ↔️ Resources owned by the company

  Liabilities ↔️ Amounts owed to external parties

  Equity ↔️ Owners' stake in the company
• 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
• Investing Activities relate to the purchase or sale of long-term assets
• What are examples of Financing Activities?

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

  Overall profitability
• The gross profit margin measures the percentage of sales revenue retained after deducting the cost of goods sold
• The operating profit margin measures profitability from core operations.


  True
• How is the net profit margin calculated?

  (Net Profit / Sales Revenue) x 100%
• A current ratio greater than 1 indicates the company has sufficient current assets to cover its current liabilities
• 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
• How is the Operating Profit Margin calculated in the Profit and Loss Account?

  (Operating Profit / Sales Revenue) * 100%
• Arrange the sections of the Statement of Cash Flows in their correct order:

  1️⃣ Operating Activities

  2️⃣ Investing Activities

  3️⃣ Financing Activities
• 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
• What are profitability ratios used to measure?

  Ability to generate profits
• 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%
• 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
• A Quick Ratio measures a company's ability to meet short-term obligations without relying on inventory.

  True
• Match the solvency ratio with its calculation:

  Debt-to-Equity Ratio ↔️ Total Debt / Total Equity

  Interest Coverage Ratio ↔️ EBIT / Interest Expense