Analysis Of Published Accounts (AL)

Question 1

Current ratio

Answer 1

current liabilities

-lower ratio = less liquid (vice versa)
-high ratio = too many funds tied up in unprofitable inventories

Question 2

Acid test ratio

Answer 2

Current liabilities

-Selling inventories would improve ratio
-Previous years’ test results required for accurate assumption whether the test ratio result is favourable

Question 2

Methods to improve liquidity

Answer 2

-Selling or leasing fixed assets
-Selling of inventory to improve acid test ratio (no current ratio)
-Using JIT
-Increase loans to inject cash into the business and increase working capital

Question 3

Profitability

Answer 3

Relative measure of a business ability to make a profit from sales or a capital investment

Question 4

Gross profit margin ratio

Answer 4

gross profit
—————– X100
revenue

-Gross profit margin ratio represents how successful a business is at converting revenue into gross profit

Question 5

Operating profit margin

Answer 5

profit from operations
———————————– X100
revenue

-Measures how successful business is at converting sales into profit from operations

Question 6

Return on capital employed (RoCE)

Answer 6

profit from operations
———————————- X100
capital employed

-Compares operating profit and capital employed by the business
-Higher ratio value = greater roi

Question 7

Methods of improving profitability

Answer 7

-Reduce direct costs
-Increase prices
-Increase profit margins by reducing interest costs or overhead expenses

Question 8

Rate of inventory turnover

Answer 8

average inventory

-Record the number of times inventory has been bought in and sold out of the business within a period of time

Question 9

Trade receivables turnover (days)

Answer 9

trade receivables
————————- X365
Credit sales

-Measures the avg time taken to receive payments from customers who have bought products on credit

Question 10

Trade payables turnover (days)

Answer 10

trade payables
———————– X365
credit purchases

-measures the avg length of time taken for a business to pay its suppliers

Question 11

Methods of improving financial efficiency

Answer 11

-Increase inventory turnover by adopting JIT management
-Reduce credit times offered to consumers
-Delay payments to suppliers

Question 12

Gearing ratio

Answer 12

non current liabilities
——————————– X 100
Capital employed

-Measures the degree to which capital of a business is financed by debts

Question 13

Methods of improving gearing ratios

Answer 13

-Sell more shares and use capital raised to pay back loans
-Reduce dividends and retain more profit and use the finance to pay loans
-Sell assets to raise finance which is then used to repay loans

Question 14

Dividend yield ratio

Answer 14

Dividen per share
—————————- X 100
market share price

-Measures the percentage rate of return a shareholder receives

Question 15

Dividend cover ratios

Answer 15

annual dividends

-number of times the dividend could be paid from profits each year

Question 16

Price/earnings ratio

Answer 16

earnings per share

-measures the no. of years it would take at the current earnings per share to purchase one share at the current price

Question 17

Methods of improving investor returns

Answer 17

-Increase profits, which raises high dividend yield. This increases profitability and growth which would push up share prices.

However, in the short run
-More investment (costs) maybe needed to increase profit
-Company directors may reduce dividends to obtain retained profit for further investment