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Accounting Ratios > Accouting Ratios > Flashcards

Accouting Ratios Flashcards

1
Q

Return on shareholders funds

A

Net profit (after tax) and preference dividend
———————————
(Average*) ordinary share capital and reserves

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2
Q

Return on capital employed

A

Operating profit
———————— X 100
Capital employed
Or all on statement except current liabilities

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3
Q

Operating profit margin

A

Operating profit
———————— X100
Sales revenue

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4
Q

Gross profit margin

A

Gross profit
———————. X100
Sales

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5
Q

Inventory turnover

A

Inventory
—————. X100
Cost of sales

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6
Q

Trade recievable days

A

Trade receivables
—————————. X100
sales

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7
Q

Trade payable days

A

Trade payables
———————- 365
Cost of sales

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8
Q

Sales revenue to capital employed

A

Sales revenue
———————
Capital employed

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9
Q

Current ratio

A

Current assets // current liabilities

1.5/2 =efficient
Below 1 indicates cash problems
High ratio means too much working capital

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10
Q

Acid ratio test

A

Current assets -inventory
————————————
Current liabilities

Bad for business if less then 1!!!

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11
Q

Capital gearing

A

Non-current liabilities
——————————-
Capital employed (share capital+ reserves+long term borrowings)

> 50% suggests problems in financing

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12
Q

Debt / equity ratios

A

Non-current liabilities
————————— X100
Equity

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13
Q

Interest cover

A

Profit before interest and tax
————————————
Interest payable

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14
Q

Dividend cover

A

Earnings got year year available for ordinary dividends
———————————-
Paid/ accounted ordinary dividends for the year

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15
Q

Earnings per share

A

Earnings available to ordinary shareholders
————————- X100
Number of ordinary shares in issue

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16
Q

Price/ earnings ratio

A

Market share price
——————————
Earnings per share

17
Q

What do governments use financial statements of a business for?

A

Governments wants to know about sales, profit etc to calculate whether tax is paid correctly. Also interested in growth, employment prospects and contribution to the local/ national economy

18
Q

What do customers use financial statements for

A

Want to know about profitability, liquidity and solvency to assess whether to choose/ continue using this company as a supplier - will they be reliable? Also want to assess profitability regarding whether the price they’re paying is fair or they’re being overcharged

19
Q

Lenders / banks

A

Want to know about profitability, cash generation, how much existing debt (gearing) as wants to asses whether to to lend/more, how much and at what interest rate and assess risk of default

20
Q

The business convention

A

Business and it’s owners are separate and distinct:

Needed from a liability perspective to ascertain what assets are available

21
Q

The historic cost convention

A

Holds that the value of an assets shown on the financial position should be based in their historic cost (acquisition cost)

22
Q

Prudence convention

A

Holds that caution should be exercised when making accounting judgements, all loses are recorded at once and in full

23
Q

Dual aspect convention

A

Holds that each transaction has two aspects, both of which will affect the statement of financial position

24
Q

Money measurement

A

Accountants do not account for items unless they can be quantified in money measurement

25
Q

Going concern

A

Accountants assume that unless evidence to the contrary, a company is not going broke.

26
Q

Consistency convention

A

Valuation method are used the same way year to year, or period to period, companies are required to disclose why they may change them and explain impact of change

27
Q

Key characteristics of accounting info

A
  • understandability
  • relevance
  • consistency
  • comparability
  • reliability
  • objectivity
28
Q

Limited company

A

A form of business unit that is granted separate legal existence from that of its owners

29
Q

Companies acts 1986 /2006

A

Legal obljGtion for framework

Accounting Ratios (2 decks)

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