Liquidity Ratios
What is the formula for the current ratio?
Current Assets ÷ Current Liabilities
What is the formula for the gross profit margin?
Gross Profit ÷ Sales × 100
What is solvency in accounting?
A business's ability to pay all its long-term debts.
What King Code principle promotes transparency?
Accountability and openness
What does a high quick ratio indicate about a business?
The business can meet its short-term debts quickly without relying on inventory.
What does Return on Equity (ROE) measure?
How much profit a company generates from shareholders’ equity.
What is the formula for the debt-to-equity ratio?
Total Liabilities ÷ Total Equity
What is a conflict of interest in financial reporting?
When personal interests influence professional decisions, it reduces objectivity.
Why is inventory excluded from the quick ratio?
Inventory is not always easily converted to cash, so it’s excluded for a more accurate liquidity measure.
What does it suggest if the net profit margin is decreasing?
The company’s expenses are increasing relative to its revenue, reducing profitability.
What does a high gearing ratio imply about a company?
It relies heavily on borrowed funds and is considered high-risk.
Why is corporate governance important?
It ensures ethical behaviour, accountability, and trust in business practices.
Calculate the current ratio if CA = R30,000 and CL = R20,000.
1.5:1
A company buys expensive equipment. How might this affect ROA?
It may decrease temporarily due to higher asset base, reducing return on assets.
List two risks of having high debt levels.
Interest burden, financial instability, and bankruptcy risk.
Give an example of unethical reporting in an annual report.
Hiding losses, overstating profits, or misleading stakeholders.
Suggest two ways a company can improve liquidity.
Reduce expenses, collect debts faster, or increase short-term assets.
Why might a company show high profit but have low liquidity?
Profits may be tied up in credit sales or non-cash assets.
Interpret this: Total Assets = R100 000; Total Liabilities = R80 000.
The business is solvent; 80% of assets are financed by debt.
Suggest one improvement you’d make to an Independent Auditor’s Report.
Include clearer commentary on financial risks or company controls.