7 - Financial Ratio Analysis

Question 1

What Can Financial Data Be Used To Assess?

Answer 1

Potential and performance of the business.

Question 2

What Can The Financial Performance Of A Business Be Assessed Using?
(2 Points)

Answer 2

~ Balance sheet.
~ Income statement.

Question 3

What Is A Balance Sheet?
(2 Points)

Answer 3

~ Formal financial document
that summarises the net worth of a business at a given point in time.
~ It balances the net assets with total equity.

Question 4

What Is An Income Statement?

Answer 4

A formal financial document that summarises a businesses trading activities and expenses to show whether the business has made a loss or a profit.

Question 5

What Are Assets?

Answer 5

Item of value owned by a business.

Question 6

What Are Non-Current Assets, Give Some Examples Of Them?
(2 Points)

Answer 6

~ Likely to be kept by the business for more than one year.
~ Vehicles, premises and machinery.

Question 7

What Are Current Assets, Give Some Examples Of Them?
(2 Points)

Answer 7

~ Likely to be turned into cash within a year.
~ Inventories, receivables and cash equivalents.

Question 8

What Are Liabilities?

Answer 8

Money the business owes.

Question 9

What Are Non-Current Liabilities, Give Some Examples Of Them?
(2 Points)

Answer 9

~ Debts that the business has more than one year to repay.
~ Bank loans and mortgages.

Question 10

What Are Current Liabilities, Give Some Examples Of Them?
(2 Points)

Answer 10

~ Debts that the business may have to repay within one year.
~ Overdrafts and payables.

Question 11

What Are The 4 Financial Ratio Analysis Factors?

Answer 11

~ Profitability (ROCE).
~ Liquidity (Current Ratio).
~ Gearing.
~ Efficiency Ratios (Payable Days, Receivable Days and Inventory turnover).

Question 12

What Does Ratio Analysis Allow For?
(4 Points)

Answer 12

~ More meaningful analysis of published accounts.
~ Shows the relationship between figures.
~ Used for comparisons over time.
~ Intra and inter business comparisons.

Question 13

What Is ROCE?
(2 Points)

Answer 13

~ Return on capital employed.
~ A measure of how efficiently a business is using capital employed to generate profits.

Question 14

What Is The Formula For ROCE?

Answer 14

Operating Profit / Total Equity + Non-Current Liabilities x 100

Question 15

What Is Current Ratio?

Answer 15

A measure of a businesses ability to survive in the short term.

Question 16

What Is The Liquidity Ratio Formula?

Answer 16

Current Assets / Current Liabilities

Question 17

What Can A Business Do To Improve Liquidity?
(2 Points)

Answer 17

~ Increase current assets.
~ Reduce current liabilities.

Question 18

What Is Gearing?

Answer 18

Measures what proportion of a business capital is funded through long term loans (Debt).

Question 19

What Is The Formula For Gearing?

Answer 19

Non-Current Liabilities / Total Equity + Non-Current Liabilities x 100

Question 20

What Do Efficiency Ratios Assess & Look At?
(2 Points)

Answer 20

~ The internal management of a business.
~ Looks at the management of cash and inventory.

Question 21

What Is Payable Days?

Answer 21

A measure of how long it takes for a business to pay for supplies it has purchased on credit.

Question 22

Why Would A Business Have A Longer Payable Days Ratio?

Answer 22

To ease cash flow problems.

Question 23

Why Would A Business Have A Longer Payable Days Ratio?

Answer 23

To ease cash flow problems.

Question 24

What Could A Short Payable Days Result In For A Business?

Answer 24

Discounts from suppliers.

Question 25

What Could A Short Payable Days Result In For A Business?

Answer 25

Discounts from suppliers.

Question 26

What Is An Ideal Result For Payable Days?
(2 Points)

Answer 26

~ 30 - 90 days.
~ Higher is advantageous for the business.

Question 27

What Is The Formula For Payable Days?

Answer 27

Payables / Cost Of Sales x 365

Question 28

What Is Receivable Days?

Answer 28

A measure of how long it takes for customers to pay the business for goods and services it has payed on credit.

Question 29

Why May A Business Try To Have A Shorter Receivable Days?

Answer 29

To ease cash flow problems.

Question 30

What Is An Ideal Result For Receivable Days?

Answer 30

Lower the better.

Question 31

What Is The Formula For Receivable Days?

Answer 31

Receivables / Sales Revenue x 365

Question 32

What Is Inventory Turnover?

Answer 32

Measures how frequently a business turns over its inventory in a year.

Question 33

What Will Inventory Turnover Vary Depending On?

Answer 33

The nature of the firm.

Question 34

What Is The Formula For Inventory Turnover?

Answer 34

Cost Of Sales / Average Inventory Held

Question 35

What Are The Values Of Financial Ratios When Assessing Performance?
(3 Points)

Answer 35

~ Provides a tool for the interpretation of accounts.
~ Structure from which comparisons can be made.
~ Aids decision making.

Question 36

What Are The Limitations Of Financial Ratios When Assessing Performance?
(3 Points)

Answer 36

~Possibility that accounts have been window addressed.
~ Need to consider reasons behind ratios.
~ Quantitative information only.