accounting Q5 interpretation of accounts

Question 1

return on capital employed

Answer 1

net profit + interest X100
_________________________
capital employed

this tells us what type of return the company is getting from the funds they have invested in the running of the company. we compare it to the 1-2% they would get from the bank or to the % they might be paying on any debentures

Question 2

return on equity funds

Answer 2

net profit - preference dividend x100
______________________________________

ordinary share capital + P&L balance

Question 3

current ratio

Answer 3

current assets
_______________
current liabilities

this tells us if the firm can pay its bills as they fall due. the recommended ratio is 2:1

Question 4

acid tests ratio

Answer 4

current assets - closing stock
______________________________

current liabilities

this is another liquidity ratio. the recommended ratio is 1:1

Question 5

interest cover

Answer 5

net profit + interest
____________________
interest

3000
_____ = 3 times
1000

how many times can we pay interest out of available profits

Question 6

gearing

Answer 6

debt capital ( debentures + preference shares) x100
________________________________________
capital employed

this is tell us what % of the capital employed is debt capital. if its higher than 50% it’s classed as high geared. lower than 50% is low geared. a company will aim to be low geared

Question 7

gross profit%

Answer 7

gross profit x100
_________________
sales

Question 8

dividend per share (DPS)

Answer 8

ordinary dividends x100
___________________________
No. of Ord shares issued

this tells us how much in cents each shareholder receives from each ordinary share

Question 9

earnings per share (EPS)

Answer 9

net profit - preference dividends x100
________________________________________
NO. of Ord shares issued

this tells us how much in cents each shareholder receives from each ordinary share. you want this as high as possible

Question 10

dividend yield

Answer 10

dividend per share (DPS) x 100
_________________________________________
market price per share

this tells us the % return we are getting from the money invested in buying shares. this can be compared to the 1-2% return from banks

Question 11

dividend cover

Answer 11

net profit - preference dividends
_________________________________
ordinary dividend

how many times can we pay dividends out of available profits. the bank would prefer for this to be increasing . a shareholder wouldn’t want it too high

Question 12

price earnings ratio

Answer 12

market price
_____________
earnings per share

how long it would take to recoup the value of the shares at present earnings

Question 13

how long it takes one ordinary share to recoup at present dividend pay-out

Answer 13

market price
_____________
dividend per share

Question 14

period of credit given to debtors

Answer 14

debtors x12
______________
credit sales

we will usually be asked to find cash sales

Question 15

period of credit given received from creditors

Answer 15

creditors x12
_____________
credit sales

we will usually be asked to find cash sales

Question 16

rate of stock turnover

Answer 16

cost of sales
___________
average stock

we will usually be asked to find opening stock