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Business Case

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d) For decision making purpose explain the relationship between total liabilities and equity

Generally having low liabilities will allow a business to have access to cheap finance as banks willingly invest considering the business as low risk. However having high liabilities and a low equity will make banks increase interest rates on borrowings as they feel the business is more risky and may face difficulties in its ability to pay.

Also the owner's equity is considered to be more expensive than liabilities for funding business as bank will always be paid first.

e) Explaining the reason for inventory being listed as an asset and at times being listed as cost of goods in a balance sheet

Inventory when purchased and is under the control of the business is listed as a asset and when that inventory has been sold then the expenses with that inventory sale can be listed under the expenses for the business. Thus the same inventory can be listed as a asset or expense depending on the ownership or control of the inventory.

f) Factors to be considered when setting your target gross margin

The gross margin profit relates the gross profit of the business with sales generated for the same time. Gross profit is the difference between sales and the cost of sales. The gross profit represents the profit from simply buying cost and selling price of goods without taking into account any other expense or income. The general rule for gross profit is to make the profit as large as possible without decreasing demand of product/service.

g) Other revenue column in terms of measuring profits

The other revenues column is quite ambiguous and does not provide a true indication of the businesses status. Are the profits accumulated from pre-paid expenses, or the profits accumulated from other sources. The other revenues column does not adequately explain the whole costs associated with the revenue.

h) Responsibility of the purchasing manager for interest expense

The purchasing manager has the responsibility to have the business inventory level enough to satisfy business operations however the manager must also ensure the inventory levels are not overdone as that will result in increased interest costs. A low operating expense will inevitably increase net profits.

i) Purchasing managers impact on interest expense

The operating expense rate is derived directly from the owners equity divided by sales costs. Thus a high inventory level that results in high interest expense will directly impact owner's equity. Furthermore net profit is divided by average asset generally



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