two partners are running a car accessories shop that mostly imports products fro
ID: 410697 • Letter: T
Question
two partners are running a car accessories shop that mostly imports products from China. There are many similar shops in the same street and everybody is complaining of lack of sales. In the last week of December, his partner calculated some ratios that would help show the financial position of their business. his partner hates maths and doesn’t understand anything about accounting. He has come to you for help. Explain the following to him:
the partner has an Average Inventory Turnover Ratio = 1.23/yr. Explain to him what that means?
What are the three basic financial statements an entrepreneur must understand and explain what each one shows?
What do the different types of liquidity ratios show?
Why does an entrepreneur need to calculate a break-even point?
Explanation / Answer
Ans1= Inventory turnover ratio computes how quickly a firm is selling its inventory &this is usually compared against industrial averages. A low turnover means less sales &, thus, excessive inventory. A high turnover means either high sales levels or heavy discounts.
Ans 2=
Ans 3= Liquidity ratios are essential as they tell you whether a firm will be able to pay off its short-run debt. They concentrate on short-run liabilities as liquidity is about day-to-day income & expenditures. A profitable firm won’t survive too long if it can’t pay its day-to-day expenditures.
Ans 4= The break even point is essential as it is the easiest way for a firm to ascertain if what it charges for its goods will cover the costs of manufacturing the goods . The greater the fixed expenses for the firm, the higher the breakeven point is, implying that it will have to sell more offerings.
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