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CIMA - BA3 > 17. Interpretation of Financial Statements > Flashcards

17. Interpretation of Financial Statements Flashcards

1
Q

What comparatives might we use when assessing company performance?

A

Prior periods, budgets, competitors and industry averages

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2
Q

What are the 5 ratios of profitability?

A
  1. Gross Profit Margin
  2. Operating Profit Margin
  3. Net Profit Margi
  4. Return on Capital Employed
  5. Asset Turnover
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3
Q

Who is interested in profitability ratios?

A

Investors (shareholders) and management

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4
Q

What are the 5 ratios of liquidity?

A
  1. Current ratio
  2. Quick ratio (acid test)
  3. Receivables collection period
  4. Payables collection period
  5. Inventory turnover
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5
Q

Who is interested in liquidity ratios?

A

Creditors and investors

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6
Q

What are the 2 risk ratios?

A
  1. Gearing

2. Interest cover

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7
Q

Who is interested in risk ratios?

A

Creditors and investors

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8
Q

What is a companies working capital?

A

Net current assets –> Inventories + receivables - payables

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9
Q

What is the formula for gross profit margin?

A

Gross Profit / Revenue

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10
Q

What is gross profit margin used for?

A

To make pricing decisions

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11
Q

What might cause fall in gross profit margin?

A

Increased costs or reduced prices to buy market share

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12
Q

Is gross profit margin affected by volume of sales?

A

No

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13
Q

What is the formula for operating profit margin?

A

(Operating Profit (Before Interest and Tax))/Revenue

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14
Q

What is the formula for net profit margin?

A

(Net Profit (Before Tax))/Revenue

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15
Q

What do the profit margin ratios help to show?

A

How efficiently the business is being run

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16
Q

What is the formula for asset turnover?

A

Revenue/(Total assets - current liabilities)
OR
Revenue/(Share capital + Reserves + NCL)

17
Q

What does asset turnover measure?

A

How much sales revenue is generated for every £ of net assets employed - are they working efficiently and have they improved performance

18
Q

What is the formula for non current asset turnover?

A

Revenue/NCA

19
Q

What is the formula for Return on Capital Employed?

A

(Profit before interest and tax)/(Total assets - current liabilities)
OR
(Profit before interest and tax)/(Share capital + Reserves + NCL)

20
Q

Why is ROCE called the primary ratio?

A

It is the only ratio which compares profits to the overall size of the business

21
Q

What is an alternative equation for ROCE?

A

Operating Profit Margin x Net Asset Turnover

22
Q

Order current assets from most to least liquid:

A

Cash, Receivables, Inventory

23
Q

What is the calculation for Working Capital?

A

Current Assets - Current Liabilities

24
Q

What is the current ratio?

A

Current Assets/Current Liabilities

25
Q

What does the current ratio measure?

A

How easily a company can meet its current obligations

26
Q

What value of the current ratio would be a cause for concern?

A

Less than one - CL > CA, cannot meet obligations as they fall due

27
Q

What is the quick ratio?

A

(Current Assets - Inventory)/Current liabilities

28
Q

What is the formula for receivables collection period?

A

(Average trade receivables)/Credit Sales x 365

29
Q

What is the formula for payables payment period?

A

(Average trade payables)/(Credit Purchases or COS) x 365

30
Q

What is the formula for inventory days?

A

Inventory/COS x 365

31
Q

What is the formula for inventory turnover?

A

COS/Inventories

32
Q

What is the formula for the operating (or cash) cycle?

A

Inventory days + Receivables days - Payables Days

33
Q

What is high gearing?

A

A company has a high proportion of borrowing (loans) compared to equity

34
Q

What is low gearing?

A

A company has a high proportion of equity compared to borrowing?

35
Q

What is the gearing ratio?

A

(Interest bearing debt (excl. overdrafts but inc preference shares)) / (Share Capital + Reserves - NCL)

36
Q

What is the advantage of high gearing?

A

Debt is cheaper than equity (interest is fixed and tax deductible)

37
Q

What is the disadvantage of high gearing?

A

Harder to raise extra finance (from lenders or new shareholders)

38
Q

What is the formula for interest cover?

A

(Profit before interest and tax)/(Interest/finance Costs)

CIMA - BA3 (18 decks)

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