Chapter 15 - Financial Performance Measurements

Question 1

What are the main areas To analyse of the financial statements

Answer 1

Profitability (GRAN)
-net profit margin
– gross profit margin
– return on capital employed
-asset turnover

Liquidity (QiAAC)
- current ratio
- quick ratio (acid test)
- inventory days
- average collection period
- average payment period

Gearing
- gearing

Question 2

What is the net profit margin ratio

Answer 2

Profit before interest and tax / revenue

Question 3

What is the gross profit margin

Answer 3

Gross profit / revenue

Question 4

What is the return on capital employed

Answer 4

Profit / long term capital (capital + reserves + long term liabilities )

Question 5

What is the assets turnover ratio

Answer 5

Revenue / Total long-term capital

How well are you using your assets to generate revenue (turnover)

Question 6

What is the current ratio

Answer 6

Current Assets / current liabilities

Question 7

What is the quick ratio/acid test

Answer 7

Current asset - inventory / current liability

Question 8

What is the inventory days

Answer 8

Inventory / cost of sales x 365

Question 9

Average collection period/receivable days ratio

Answer 9

Trade receivables / Revenue x 365

Question 10

What is the average payment period/payables days ratio

Answer 10

Trade payables / purchases x 365

Question 11

What is the gearing ratio

Answer 11

Long term liabilities / shareholders funds

Gearing shows the extent to which a firm’s operations are funded by lenders versus shareholders

Question 12

What is Idle time different in this exam to F2

Answer 12

Enough to we looked at idle time as something that was not budgeted for whereas here we budget for idle time for example if a company budgets for each unit will take 7.6 hours to make and 5% of the hours paid will be ideal then in total it takes eight hours and similarly if the rate of pay is £5.70 per hour then it’s more likely to be £6 per hour once we consider the idle time