# AQA Unit 3 finance and accounts formulas and calculations a level

these are the formulas and how to interpret the answers for:

• liquidity ratios
• efficiency ratios
• profitability ratios
• shareholders ratios
• investment appraisal

however it is not ALL of the finance and accounts part so make sure you don't just revise off this :)

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AQA A LEVEL BUSINESS STUDIES UNIT 3

FINANCE AND ACCOUNTS CALCULATIONS + RATIOS

THOSE WITH * * ARE NOT ON THE FORMULAE SHEET AT THE
BEGINNING OF THE QUESTION PAPER THEREFORE NEED

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LIQUIDITY RATIOS - CURRENT RATIO
Measures the ability of a business to meet it's liabilities or debts over the next year or so.

Current assets
Current liabilities
Eg. If the answer is 0.83:1, the company would only be able to pay off 83p per £1 of debt.
1.5:1 is ideal…

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LIQUIDITY RATIOS - ACID TEST
Measures the short term liquidity of a business/the ability of a firm to pay it's bills over a
period of two or three months without requiring the sale of stock. It provides a more
accurate indicator of liquidity than the current ratio as stock can…

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LIQUIDITY RATIOS - GEARING
Gearing measures how much of the capital employed is borrowed.

non-current liabilities x 100%
total equity + non-current liabilities
Over 50% is considered high

This measure of a business's performance is important because by raising too high a
proportion of capital through fixed interest capital firms…

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EFFICIENCY RATIOS ­ ASSET TURNOVER RATIO
Measures a business's sales in relation to the assets used to generate these sales.

sales (revenue/turnover)
net assets

It is difficult to give a standard figure for this ratio as it varies significantly according to the

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Income statement

EFFICIENCY RATIOS ­ STOCK TURNOVER RATIO
Measures a company's success in coverting stock into sales by comparing the value of
stock with sales achieved valued at cost. This ratio is only relevant to manufacturing
businesses, as firms providing services do not hold significant quantities of stock. The stock…

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Balance sheet
Income statement

EFFICIENCY RATIOS ­ DEBTORS COLLECTION PERIOD
Also referred as debtor days, calculates the time typically taken by a business to collect the
money that is owed. The answer is in days.

debtors x 365
turnover
This is an important ratio because granting customers lengthy periods of…

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What is needed:
Balance sheet
Income statement

*PROFITABILITY RATIOS ­ GROSS PROFIT MARGIN*
Compares the gross profit achieved by a business with its sales turnover. Gross profit is
earned before direct costs such as administration expenses are deducted. The ratio
calculates the percentage of the selling price of a product…

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improved by increasing prices although this may result in lower turnover. Alternatively,
reducing direct costs will also improve the figure.
What is needed:
Income statement

*PROFITABILITY RATIOS ­ NET PROFIT MARGIN*
Calculates the percentage of a product's selling price that is net profit (ie. After all the
costs have been…

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control indirect costs effectively. Improvements in the net profit margin may be achieved
through higher selling prices or tighter control of costs, particularly indirect costs.
What is needed:
Income statement

PROFITABILITY RATIOS ­ RETURN ON CAPITAL EMPLOYED
A vital ratio comparing the operating profit earned with the amount of capital…