Chapter 14 - Interpretation Of Financial Statements

Question 1

Profitability Expense/Revenue percentage

Answer 1

Specified expense/Revenue X 100

Question 2

PROFITABILITY Operating profit percentage

Answer 2

Profit from operations/revenue X 100 (Profit before finance costs and tax)

Question 3

Profitability Gross profit percentage

Answer 3

Gross profit/Revenue X 100

Question 4

PROFITABILITY Return on capital employed

Answer 4

* ordinary share capital + reserves

** plus preference shares if any

Question 5

USE OF RESOURCES Inventory holding period (days)

Answer 5

Inventories/cost of sales X 365 days

Question 6

PROFITABILITY Return on shareholders funds

Answer 6

Profit after tax/total equity X 100

Question 7

LIQUIDITY Current ratio (aka working capital ratio)

Answer 7

Current assets/current liabilities = X:1

Question 8

LIQUIDITY Acid test ratio (aka quick ratio/liquid capital ratio)

Answer 8

(Current assets - inventories)/current liabilities = X:1

Question 9

USE OF RESOURCES Inventory turnover (times per year)

Answer 9

Cost of sales/inventories = X times

Question 10

USE OF RESOURCES Trade receivables collection period (days)

Answer 10

Trade receivables/revenue X 365 days

Question 11

USE OF RESOURCES Trade payables payment period (days)

Answer 11

Trade payables/cost of sales X 365 days

Question 12

USES OF RESOURCES Working capital cycle

Answer 12

Inventory days + receivable days - payable days (The length of time between paying out cash for inventory and receiving the cash for goods/services supplied

Question 13

USE OF RESOURCES Asset turnover (Total assets) Asset turnover (Net assets)

Answer 13

Revenue/Total assets Revenue/(Total assets - current liabilities

Question 14

FINANCIAL POSITION Gearing

Answer 14

Non Current liabilities/(Total equity + Non-current liabilities) x 100

Question 15

FINANCIAL POSITION Interest cover

Answer 15

Profit from operations/Finance Costs