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Management Case Study > F2 - 15. Ratios > Flashcards

F2 - 15. Ratios Flashcards

1
Q

What are the 3 key uses of accounting ratios?

A
  1. Highlight unusual results
  2. Clarify trends
  3. Make more informed decisions
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2
Q

What in particular is needed to make accounting ratios useful?

A

A comparator - prior year, vs budget, vs competitor

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3
Q

Who are the 4 main users of financial statements?

A
  1. Shareholders/potential investors
  2. Suppliers/lenders
  3. Employees
  4. Management
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4
Q

What 3 other things must accompany accounts to be useful?

A
  1. Events after the reporting period
  2. Accounting policies used and significant judgements made
  3. Impact of one off costs or transactions
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5
Q

What are the 4 profitability ratios?

A
  1. Gross profit
  2. Operating profit
  3. ROCE
  4. Asset turnover
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6
Q

What are the 5 liquidity ratios?

A
  1. Current ratio
  2. Quick ratio
  3. Receivables collection period
  4. Payables payment period
  5. Inventory turnover
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7
Q

What are the 3 gearing ratios?

A
  1. Gearing
  2. Debt to equity
  3. Interest cover
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8
Q

What is the use of gross profit margins?

A

Make pricing decisions, understand cost increases/price reductions

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9
Q

What is the use of operating profit margins?

A

Reflect how efficiently a business is being run, through overhead control or economies of scale

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10
Q

What is the use of net asset turnover?

A

See how much sales revenue is being generated for every £ of assets being employed

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11
Q

What is the use of ROCE?

A

See how much profit is being generated for every £ of assets being employed, how efficiently the company uses its assets

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12
Q

What is the use of ROE?

A

How much profit is generated for the shareholders for every £ of equity invested

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13
Q

What is the main advantage of high gearing?

A

Debt is cheaper than equity

  • Interest is tax deductible
  • Interest is fixed but profits grow
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14
Q

What are the 2 benefits of EBITDA?

A
  1. Improves comparability between different capital structures
  2. Removes non cash balances that could be influenced by bias
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15
Q

What are the 2 criticisms of EBITDA?

A
  1. Misunderstood as being a measure of cash flow

2. Used by some to publicise a higher measure of earnings

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16
Q

What are the 4 main limitations of ratio analysis?

A
  1. Based on historical information
  2. Different accounting policies make less comparable
  3. Inflation may distort performance over time
  4. Only look at financial information
17
Q

What 5 things can distort comparisons between reporting entities?

A
  1. Accounting policies
  2. Seasonality
  3. Related party transactions
  4. Size
  5. Management policies e.g. leasing vs buying
18
Q

What are the 4 main considerations when comparing entities in different countries?

A
  1. Different economic environments
  2. Interest rates
  3. Tax rates
  4. Government policies

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