Accouting Ratios Flashcards
Return on shareholders funds
Net profit (after tax) and preference dividend
———————————
(Average*) ordinary share capital and reserves
Return on capital employed
Operating profit
———————— X 100
Capital employed
Or all on statement except current liabilities
Operating profit margin
Operating profit
———————— X100
Sales revenue
Gross profit margin
Gross profit
———————. X100
Sales
Inventory turnover
Inventory
—————. X100
Cost of sales
Trade recievable days
Trade receivables
—————————. X100
sales
Trade payable days
Trade payables
———————- 365
Cost of sales
Sales revenue to capital employed
Sales revenue
———————
Capital employed
Current ratio
Current assets // current liabilities
1.5/2 =efficient
Below 1 indicates cash problems
High ratio means too much working capital
Acid ratio test
Current assets -inventory
————————————
Current liabilities
Bad for business if less then 1!!!
Capital gearing
Non-current liabilities
——————————-
Capital employed (share capital+ reserves+long term borrowings)
> 50% suggests problems in financing
Debt / equity ratios
Non-current liabilities
————————— X100
Equity
Interest cover
Profit before interest and tax
————————————
Interest payable
Dividend cover
Earnings got year year available for ordinary dividends
———————————-
Paid/ accounted ordinary dividends for the year
Earnings per share
Earnings available to ordinary shareholders
————————- X100
Number of ordinary shares in issue
Price/ earnings ratio
Market share price
——————————
Earnings per share
What do governments use financial statements of a business for?
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
What do customers use financial statements for
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
Lenders / banks
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
The business convention
Business and it’s owners are separate and distinct:
Needed from a liability perspective to ascertain what assets are available
The historic cost convention
Holds that the value of an assets shown on the financial position should be based in their historic cost (acquisition cost)
Prudence convention
Holds that caution should be exercised when making accounting judgements, all loses are recorded at once and in full
Dual aspect convention
Holds that each transaction has two aspects, both of which will affect the statement of financial position
Money measurement
Accountants do not account for items unless they can be quantified in money measurement
Going concern
Accountants assume that unless evidence to the contrary, a company is not going broke.
Consistency convention
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
Key characteristics of accounting info
- understandability
- relevance
- consistency
- comparability
- reliability
- objectivity
Limited company
A form of business unit that is granted separate legal existence from that of its owners
Companies acts 1986 /2006
Legal obljGtion for framework
