3e-analysing account Flashcards
Q: What is financial analysis?
A: Financial analysis involves interpreting financial statements to assess a business’s performance and financial health.
Q: Why is financial analysis important?
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Helps businesses identify strengths and weaknesses.
Assists investors in making informed decisions.
Supports lenders in evaluating loan eligibility.
Aids in planning for growth and expansion.
Q: What are the main financial statements used in business analysis?
A:
Income Statement (Profit & Loss Account): Shows revenue, expenses, and net profit.
Balance Sheet: Displays assets, liabilities, and owner’s equity.
Cash Flow Statement: Tracks the movement of cash in and out of the business.
Q: How do financial statements help in business analysis?
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Income Statement: Assesses profitability.
Balance Sheet: Shows financial position and stability.
Cash Flow Statement: Evaluates liquidity and cash management.
Q: What are the key financial ratios used in analysis?
Profitability Ratios
Gross profit Margin
Gross Profit Margin: Measures profitability of sales before expenses.
Formula: (Gross Profit ÷ Revenue) × 100
Interpretation: Higher % means better cost control.
Q: What are the key financial ratios used in analysis?
Profitability Ratios
Net Profit margin
Net Profit Margin: Shows overall profitability after all expenses.
Formula: (Net Profit ÷ Revenue) × 100
Interpretation: Higher % indicates strong profitability.
Q: What are the key financial ratios used in analysis?
Profitability Ratios
Retrun on Capital employed (ROCE)
Return on Capital Employed (ROCE): Measures efficiency of using capital.
Formula: (Net Profit ÷ Capital Employed) × 100
Interpretation: Higher % means better returns on investments
Q: What are the key financial ratios used in analysis?
Liquidity Ratios
Current ratio
Current Ratio: Measures the ability to pay short-term debts.
Formula: Current Assets ÷ Current Liabilities
Interpretation: Ideal ratio is 1.5 - 2; below 1 indicates liquidity issues.
Q: What are the key financial ratios used in analysis?
Liquidity Ratios
Acid test ration
Acid Test Ratio (Quick Ratio): Evaluates liquidity without relying on inventory.
Formula: (Current Assets - Inventory) ÷ Current Liabilities
Interpretation: Below 1 suggests difficulty in meeting short-term liabilities.
Q: What are the key financial ratios used in analysis?
Efficiency Ratios
Inventory turnover
Inventory Turnover: Shows how often inventory is sold and replaced.
Formula: Cost of Sales ÷ Average Inventory
Interpretation: Higher turnover means efficient stock management.
Q: What are the key financial ratios used in analysis?
Efficiency Ratios
Debtor days
Debtor Days (Receivables Collection Period): Measures how long customers take to pay.
Formula: (Trade Receivables ÷ Revenue) × 365
Interpretation: Lower days indicate faster payments.
Q: What are the key financial ratios used in analysis?
Efficiency Ratios
Creditor days
Creditor Days (Payables Payment Period): Shows how long the business takes to pay suppliers.
Formula: (Trade Payables ÷ Cost of Sales) × 365
Interpretation: Longer period means better cash retention but may damage supplier relations.
Q: How do businesses use financial ratios?
A:
Identify financial problems early.
Compare performance over different years.
Benchmark against competitors.
Guide investment and financing decisions.
Q: What are the limitations of financial ratios?
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Does not account for external factors (e.g., economic conditions).
Does not consider non-financial data (e.g., customer satisfaction, employee morale).
Historical data only, not predictive of future performance.
Different businesses have different accounting policies, making comparisons difficult.
