Chapter 34 - Analysis Of Published Accounts

Question 1

Current Ratio

Answer 1

A ratio that compares the current assets with the current liabilities of the business.

Question 2

Current Ratio Formula

Answer 2

Current Assets / Current Liabilities ( 2 : 1 )

Question 3

Acid Test Ratio

Answer 3

Compares liquid assets to current liabilities.

Question 4

Acid Test Ratio Formula

Answer 4

Liquid Assets / Current Liabilities ( Liquid Assets = Current Assets - Inventory ) ( 1.5 :1 )

Question 5

Profitability

Answer 5

A relative measure of a business’s ability to make profit from sales or a capital investment.

Question 6

Gross Profit Margin Ratio

Answer 6

A ratio that compares gross profit ( profit before deduction of overhead expenses ) with revenue.

Question 7

Gross Profit Margin Ratio Formula

Answer 7

Gross Profit / Revenue * 100

Question 8

Operating Profit Margin

Answer 8

A ratio that compares operating profit for the year with revenue

Question 9

Operating Profit Margin Formula

Answer 9

Operating Profit / Revenue * 100

Question 10

Return On Capital Employed

Answer 10

A ratio that compares operating profit and the capital employed in the business

Question 11

ROCE Formula

Answer 11

Operating Profit ( Net Profit ) / Capital Employed * 100

Question 12

Capital Employed

Answer 12

The total value of all long-term finance invested in a business.

Question 13

Methods to increase profit margins

Answer 13

• Reduce direct costs
• Increase Prices
• Cut interest cost
• Reduce overhead costs

Question 14

Rate Of Inventory Turnover

Answer 14

The number of times in a year that inventory is bought in and sold.

Question 15

Rate if IT Formula

Answer 15

Cost of sales / Average Inventory

Question 16

Average Inventory

Answer 16

Inv @ Start + Inv @ End / 2

Question 17

Trade Receivables Turnover ( Days )

Answer 17

The average time taken ( In days ) to receive payment from customers who have bought products on credit.

Question 18

Trade Receivables Turnover Formula

Answer 18

Trade Receivables / Credit Sales * 365

Question 19

Trade Payables Turnover ( Days )

Answer 19

The average time taken in days to pay suppliers for supplies bought on credit.

Question 20

Trade Payables Formula

Answer 20

Trade Payables / Credit Purchases * 365

Question 21

Credit Purchases

Answer 21

The value of materials and other supplies bought by a business on credit ( over one year ) .

Question 22

Gearing Ratio

Answer 22

A ratio that measures the proportion of capital employed in the business that is financed by long-term borrowing (non-current liabilities ).

Question 23

Gearing Ratio

Answer 23

Non-current liabilities / Capital Employed * 100

Question 24

Share Price

Answer 24

THe quoted price of one share on the stock exchange.

Question 25

Dividend

Answer 25

The share of the company profits paid to shareholders.

Question 26

Dividend Yield Ratio

Answer 26

A ratio that measures the annual return from dividends as a percentage of current market share price.

Question 27

Dividend per Share

Answer 27

The financial amount received in dividends on one share.

Question 28

Dividend Yield Ratio Formula

Answer 28

Dividend Per Share / Market Share Price * 100

Question 29

Dividend Per Share Formula

Answer 29

Total Annual Dividends / Total Number of issued shares.

Question 30

Dividend Cover Ratio

Answer 30

A ratio that measures how many times dividends could be paid from profit for the year.

Question 31

Dividend Cover Ratio Formula

Answer 31

Profit For The Year / Annual Dividends

Question 32

Price Earnings Ratio

Answer 32

The number of years it would take at the current earnings per share to purchase one share at the current market price.

Question 33

Earnings Per Share

Answer 33

The amount of profit after tax and interest earned per share.

Question 34

PE Ratio Formula

Answer 34

Market share price / Earnings per share

Question 35

Earnings Per Share Formula

Answer 35

Profit for the year / Number of shares issued