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Financial Accounting > FInancial accounting cours 9 > Flashcards

FInancial accounting cours 9 Flashcards

1
Q

Describe financial ratios.

A
  • They are relative values (size effects do not bias them).
  • They provide an objective view of a company for external users.
  • They allow benchmarking with other companies in the same industry.
  • They allow a comparative analysis of the financial evolution of a company from one year to the next.
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2
Q

What are performance ratios?

A

They measure the profitability of the entity’s operating activities in relation to sales, assets, and equity.

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3
Q

What are activity ratios?

A

They measure the quality of operational management (profit margins, cost control, etc.)

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4
Q

What are financing ratios?

A

They evaluate the long-term financial structure, and the use of external financing.

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5
Q

What are liquidity ratios?

A

They calculate the liquidity generated and the short-term solvency of the company.

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6
Q

Which statement reflects performance?

A

The statement of Profit or Loss.

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7
Q

Describe the gross profit margin.

A
  • It indicates the proportion of sales that a company retains after covering costs directly related to sales.
  • Provides information on pricing strategy and cost of sales control.
  • This ratio is directly affected by the selling price and the cost of sales.
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8
Q

What is the formula for the gross profit margin?

A

Gross profits/Sales (%)

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9
Q

What can gross margin increases will indicate?

A
  • Better inventory control.
  • Reduced procurement costs.
  • Reduction in the cost of purchasing/manufacturing goods.
  • Increase in selling price.
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10
Q

What is the alternate way to find the gross profit?

A

In the note “cost of inventories expensed in the year”.

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11
Q

What is EBITDA?

A

Acronym for: Earnings before Interest, Taxes, Depreciation, and Amortization.

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12
Q

What does EBITDA indicate?

A

It is a performance indicator that is not affected by management choices concerning investment and financing, or by taxation.

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13
Q

What is EBIT?

A

Earning Before Interest and Taxes.

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14
Q

What does EBIT indicate?

A

It is a performance indicator that is not affected by financing choices or taxation.

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15
Q

What does the operating margin do?

A

Provides information on the % of operational profitability taking into account operating costs only.

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16
Q

How do you have an operating margin excluding interest and income tax expenses?

A

EBIT/sales revenue (%)

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17
Q

How do you have an operating margin excluding interest, income tax, depreciation, and amortization expenses?

A

EBIT/Sales revenue (%)

18
Q

Describe the net profit margin.

A
  • It indicates the proportion of sales that turn into profit.
  • It shows what each $ of sales generates in net income.
  • It shows links can be made to cost management and also to pricing policy.
  • This ratio is highly dependent on the sector of activity.
19
Q

What is the formula for the net profit margin?

A

Net income/Sales (%)

20
Q

What is the return on assets (ROA)?

A

It indicates the company’s ability to generate results (or profits) from all its assets.

21
Q

What does the ROA represent?

A
  • It represents the return on the company’s resources.
  • It represents the net income generated by each dollar of assets.
22
Q

What is the formula of the ROA?

A

Net income/Total assets (%)

23
Q

Describe the ROA in terms of $.

A

$ of net income generated by each $ invested in resources.

24
Q

What is asset turnover? ($)

A

$ of sales generated by each $ invested in resources. It is a volume.

25
Q

What is the formula for Asset Turnover?

A

Sales/Total Assets.

26
Q

What is the Net Profit Margin? ($)

A

$ of net income generated by each $ of sale. It is the net margin.

27
Q

What is the formula for the Net Profit Margin?

A

Net Income/Sales

28
Q

What does return on assets equal?

A

Asset turnover*Net Profit Margin= Return on Assets

29
Q

What is Return on Equity?

A
  • It indicates the return to shareholders on their invested capital.
  • It is possible to calculate ratios by type of shareholders (common or preferred).
30
Q

What is the formula for the ROE?

A

Net income/shareholders’ equity (%)

31
Q

Describe the Earnings per share (EPS).

A
  • It allows the user of the financial statement to assess the impact of the company’s results on each outstanding share.
  • It measures the portion of net income earned by each common share.
32
Q

Can the EPS be compared to the industry?

A

No, because the number of shares outstanding differs from one company to another.

33
Q

What happens to the EPS if a company ceases some of its activities during the fiscal year?

A

The EPS must be calculated before and after the discontinued operations.

34
Q

Is the EPS present in financial statements?

A

Yes, it is mandatory under IFRS.

35
Q

What is the formula of the EPS?

A

(Net income-Dividends on preferred shares)/(Weighted average number of common shares outstanding) ($)

36
Q

Describe the diluted earnings per share.

A
  • It measures the profit or loss attributable to each share outstanding or that could exist if all holders of dilutive instruments exercise them.
  • It is the most pessimistic estimate possible for the registered pension plan.
37
Q

Give examples of dilution instruments.

A

Stock options, convertible bonds, warrants, etc.

38
Q

Give the formula of the diluted earnings per share.

A

(Net income - Dividends on preferred shares)/(Weighted average number of common shares outstanding + common shares if dilutive instruments were converted) ($)

39
Q

What is the formula of the P/E ratio?

A

Share price/Earnings per share (it is a multiple)

40
Q

Describe the Price-to-earnings ratio.

A

This ratio makes it possible to measure the performance of a company by the stock market valuation of its shares.

41
Q

What is the interpretation of the P/E ratio?

A

How many times of earnings per share an investor is willing to pay for a share or how many years an investor is willing to wait to recover his capital?

Financial Accounting (11 decks)

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