EC-1021 Equations

Question 1

Accounting equation

Answer 1

Assets = equity + liabilities

Question 2

Equity components

Answer 2

Equity = contribution from owners + income - expenses -
distribution to owners/shareholders

Question 3

Gross profit %

Answer 3

(Gross profit / revenue) x 100

A low margin implies selling prices too low or cost of sales too high

Question 4

Expenses to Revenue ratio

Answer 4

(spec. Expenses / revenue) x 100

Focuses on individual expenses in relation to total revenue

Question 5

Current ratio

Answer 5

Current assets / current liabilities

Indicates how well creditors are covered by assets, ideally 2:1

Question 6

Inventory holding period

Answer 6

(inventories/cost of sales) x 365 = x days

Average number of days inventory is held by a firm. Lower the better

Question 7

Receivables collection period

Answer 7

(recievables/revenue) x 365 = x days

How long it takes debtors to settle their accounts (debt collecting)

Question 9

EPS

Answer 9

Profit after tax / No. ordinary shares

Shows profit made by investors on a pence per share basis

Question 10

Gearing ratio

Answer 10

(NC liabilities / equity + NC liabilities) x 100

The higher the gearing ratio the lower the long term financial stability

Question 11

Interest cover

Answer 11

Operating profit / finance costs = X

Interest on debt has to be paid before dividends