Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FR - Financial Reporting > Chapter 22 - Interpretation of Financial Statements > Flashcards

Chapter 22 - Interpretation of Financial Statements Flashcards

1
Q

How do we calculate gross profit margin?

A

gross profit / revenue x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are some reasons for the movement of gross profit margin?

A

Selling price
Sales mix
Purchase cost
Production cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

How do we calculate the operating profit margin?

A

operating profit (PBIT) / Revenue x100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are some reasons for movement of operating profit?

A

gross profit
expenses: admin/distribution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How do we calculate asset turnover?

A

Revenue / capital employed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

how do we calculate capital employed?

A

equity + non-current liabilities (would not include deferred tax or deferred income)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What would lead to a movement in asset turnover?

A
  • increase/decrease in revenue
  • increase/decrease in NCA
  • increase/decrease in working capital
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

How do we calculate return on capital employed?

A

Operating profit (PBIT) / Capital employed x100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What would lead to a movement in ROCE?

A

efficiency: movement in asset turnover
profitability: movement in operating profit margin
combination of both

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the profitability ratio relationships?

A

operating profit margin x asset turnover = ROCE
profitability x efficiency = Return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How do we calculate the current ratio?

A

Current assets / current liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How do we calculate the quick ratio?

A

(Current assets - inventories) / Current liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What would cause a movement in Current/quick ratio?

A

increase/decrease in cash balance
increase/decrease in inventory
increase/decrease in receivables
increase/decrease in payables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How do we calculate inventory turnover?

A

Cost of sales / inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is inventory turnover?

A

number of times inventory is turned over in the period. Higher turnover = higher efficiency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How do we calculate inventory holding period?

A

(Inventory / COS) x 365 days

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is inventory holding period?

A

average number of days for which inventory held. Lower days = higher efficiency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are some reasons of movement of inventory ratios?

A
  • improved/worse inventory control
  • obsolete inventory
  • increased level of inventory to stimulate sales
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

How do we calculate the receivables collection period?

A

(Trade receivables / revenue) x 365

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What are reasons of movement in receivables collection period?

A
  • improved/worse credit control
  • irrecoverable debts
  • increase credit terms to stimulate sales
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

How do we calculate payables payment period?

A

(Trade payables / COS) x 365 days

22
Q

What are reasons of movement in payables payment period?

A
  • new credit arrangement
  • new supplier
  • higher days may indicate inability to pay
23
Q

What does the working capital cycle show?

A

the length of time between paying for inventory and receiving cash from customers for the inventory. Length of time for which we are funding our inventory

24
Q

How do we calculate working capital?

A

inventory turnover period + receivables collection period - payables payment period

24
Q

How do we calculate the gearing ratio?

A

Debt / equity
or
Debt / (debt +equity) x 100

25
Q

What does a shorter working capital indicate?

A

higher level of efficiency

25
Q

How may working capital be shortened?

A

by reducing inventory and/or receivable days and/or increasing payable days

26
Q

What does debt include?

A

all long-term borrowings e.g., loan notes, redeemable preference shares

26
Q

What does high gearing mean for a company?

A
  • large proportion of fixed-return capital
  • greater risk of insolvency
  • proportionately greater returns to shareholders if profits are growing
  • perceived as higher risk
26
Q

What does equity include?

A

all elements of equity e.g., share capital, reserves, non-controlling interest

26
Q

What does low gearing mean for a company?

A
  • scope to increase borrowings for potential new projects
  • borrow more easily
  • perceived as lower risk
26
Q

How do we calculate interest cover?

A

Operating profit / finance cost

26
Q

What are some reasons of the movement of gearing (decreased)?

A
  • repayment of loan notes or preference shares treated as liability
  • redemption of convertbble debt instruments
  • trading profits increasing retained earnings
  • revaluation of non-current assets, increasing revaluation surplus
27
Q

What are some reasons of the movement of gearing (increased)?

A

-issue of loan notes or preference shares treated as liability
- assets acquired using lease
- trading losses causing reduction in retained earnings
- excessive dividends reducing retained earnings

28
Q

What is interest cover?

A
  • indicates how many times interest costs could be paid from current profit level
  • higher the better
29
Q

Who would look at interest cover?

A
  • used by lenders to assess risk of default
  • lenders may insist on maintenance of minimum interest cover as part of loan agreement.
30
Q

If gearing is low what would we look at next?

A

interest cover

31
Q

How do we calculate earnings per share?

A

Profit available to ordinary shareholders / no. of ordinary shares

32
Q

How do we calculate the Price/earnings (P/E) ratio?

A

current market price per share / earnings per share (EPS)

33
Q

What is the P/E ratio?

A
  • represents a measure of market confidence in company’s capacity for growth
  • high P/E ratio suggests that high growth is expected
34
Q

How do we calculate dividend yield?

A

dividend per share / market price per share

35
Q

What is the dividend yield?

A

-potential return on investment for prospective investors
- can be compared to yields available on alternative investments

36
Q

How do we calculate dividend cover?

A

Earnings per share / dividend per share
or
total earnings / dividends

37
Q

What is dividend cover?

A

-similar to interest cover, indicates how many time current dividend could be paid from current profit level
- high cover indicates that current dividend level is able to be maintained

38
Q

What are some limitations of financial statement analysis?

A
  • Year-end figures not representative
  • no predictive value
  • ignore management action
  • window dressing management
  • different accounting policies
  • distortion by related party transactions
39
Q

What is non-financial information?

A
  • market share
  • key employee information
  • long-term management plans
  • governance
  • environmental and social impact
40
Q

How is value for money achieved?

A

Combination of the 3 E’s

41
Q

What are the 3 E’s?

A

Effectiveness
Efficiency
Economy

42
Q

What is effectiveness?

A

Success in achieving its objectives/ providing its service

43
Q

What is efficiency?

A

how well its resources are used

44
Q

what is economy?

A

keeping costs of input low

45
Q

What is the impact on Intra-group transactions?

A
  • distorted margins due to transfer pricing policy
  • low-rate finance available from parent

FR - Financial Reporting (23 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions