Question

1. explain operating gearing and its relationship to contribution.

2. explain what is meant by ‘corporate social responsibility’. Provide two examples.

3. explain (i) why liquidity analysis of a company is important and (ii) why inventory and/or prepayments are excluded in the calculation of the acid test ratio.

4. explain, from your perspective, whether you think ‘limited liability’ is a good thing.

Answer 1

Ans. 1- Operating gearing also known as operating leverage, it may be defined as tendency of the operating profit to vary disproportionality with volume of sales. It occurs when there is fixed cost that must be paid regardless of volume of sales, simply with fixed cost the percentage change in operating profit is greater than percentage change in sales     

Contribution is measure of operating gearing, when there is higher the contribution signifies lesser the variable cost, higher the chances in increase in profit.

Ans. 2- Corporate social responsibility is management concepts that integrates the social and environmental concerns in their business and interact with stakeholders,

In simple language CRS is a concept where the corporates becomes towards the society , because it is the society who made the corporate successful in their operations in the society,

Example

- Carbon footprint reduction

- Fair labour policies

- Charitable contribution

Ans.3- (i) Analysis of liquidity is very much important for every company, as it gives the measurement of ability of company to meet its short term obligations,

(ii) Payment of inventory excludes from acid test ratio, because it takes long time to convert raw material into finished goods and, acid test ratio includes and acid test ratio includes only highly liquid assets.

Ans.4- Yes , limited liability is a good thing, as unlimited liability may result into personal liability also , but limited liability never result in personal liability

As business is separate legal entity and personal asset must not indulge in business.