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Accounting > Financial Ratios > Flashcards

Financial Ratios Flashcards

1
Q

Definition of Financial ratios

A

Used to descirbe the calculations aspect of interpretation of financial statements.

The term ratio means the performance indicators include percentages, time periods, as well as ratios in the strict sense of the word.

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2
Q

Profitability

A

Is the relatioship between profit and sales revenue, assets and capital employed

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3
Q

definition of Liquidity

A

The stability of the business on a short term basis

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4
Q

Efficiency

A

The effective and efficient use of assets and liabilities

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5
Q

Capital structure

A

The stability of the business on a long term basis

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6
Q

Formula for Gross profit margin

A

Gross profit
—————– x 100
revenue

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7
Q

Formula for Gross profit mark-up

A

Gross Profit
—————— x100
Cost of sales

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8
Q

Formula for Expenses in relation to revenue

A

Expenses
————– x 100
Revenue

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9
Q

Formula for Profit in relation to revenue

A

Profit before tax
———————- x 100
Revenue

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10
Q

Formula for Return on capital employed ( Sole trader )

A

Profit before Interest
—————————— x100
Capital employed

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11
Q

Formula on capital employed ( Limited Company)

A

Profit from operations
——————————– x 100
Capital employed

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12
Q

Formula for Net Current assets

A

Current assets - Current liabilites

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13
Q

Formula for Liquid capital

A

(Current assets - inventory) - Current Liabilities

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14
Q

Formula for Current Ratio

A

Current liabilities

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15
Q

Formula for Liquid capital ratio

A

Current liabilities

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16
Q

Formula for Rate of Inventory Turnover ( days)

A

Average inventory
—————————- x 365
Cost of sales

17
Q

Formula for Rate of inventory turnover ( times per year)

A

Cost of sales
Average inventory

18
Q

Formula for Trade receivables days

A

Trade receivables
————————- x 365
Credit sales

19
Q

Formula for Trade Payable days

A

Trade payable
——————— x 365
Credit purchases

20
Q

Formula for Capital gearing

A

Non-current liabilities
——————————————————————————- x100
Issued share capital + reserves+ Non current liabilities

21
Q

Limitations In the Use Of Financial Ratios

A

Retrospective nature of ratios - Based of past performances

Differences In accounting Policies - some previous statements may not of been drawn up on the same basis as those currently being worked on.

Inflation - when comparing year to year

Reliance on standards - relying too heavily on certain standards and ignoring other factors

Other considerations eg. Economic, state of the business, comparing like with like

Accounting (14 decks)

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