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Accounting 2 > Financial Ratios > Flashcards

Financial Ratios Flashcards

1
Q

What are financial ratios

A

Express relationships between finical accounts and between expected relationships from one point in time to another

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2
Q

Classification of financial ratios

A

Profitability, liquidity, solvency, investment

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3
Q

Profitability

A

Ability to earn a profit from delivering goods and services

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4
Q

Liquidity

A

Ability to meet short term obligations

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5
Q

Solvency

A

ability to meet long term obligatos

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6
Q

Investment

A

The ability to provide return on investment for shareholders

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7
Q

Percentage change equation

A

(new value- old value) / old value x100

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8
Q

What are profitability ratios

A

Equity investors are concerned with the firms ability to generate sustain and increase profit

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9
Q

How are profitability ratios measured

A

Relationship between profit and sales

Relationships between profit and investment required got generator them

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10
Q

Return on equity

A

Net profit/ Equity x 100

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11
Q

What is return on equity

A

How much profit a company generates with the money the shareholders have invested

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12
Q

Return on capital employed

A

Operating profit / (equity + non-current liabilities)

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13
Q

What is return on capital employed

A

Relationship between operating profit and long term capital invested in the business

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14
Q

gross profit margin

A

Gross profit/ sales revenue x100

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15
Q

What is gross profit margin

A

How much is left as gross profit after deducting the cost of sales

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16
Q

Operating profit margin

A

Operating profit/ sales revenue x 100

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17
Q

What is operating profit

A

How much is left as operating profit after deducting cost of sales and operating costs

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18
Q

Net profit margin

A

Net profit/ sales revenue x100

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19
Q

What is net profit margin

A

How much is left as net profit after deducting all costs and taxation

20
Q

Inventories turnover period

A

Inventories/ cost of sales x 365

21
Q

What is inventories turnover period

A

measures the average period inventories are being held (better if shorter)

22
Q

Settlement period for receivables

A

trade receivables/ credit sales revenue x 365

23
Q

What is settlement period for receivables

A

How long on average customers take to pay back the amounts they owe (shorter better as less money tied up)

24
Q

settlement for payables

A

Trade payables/ credit payables x 365

25
Q

What is settlement period for payables

A

How long on average businesses take to pay those on credit

26
Q

Sales revenue to capital employed

A

sales revenue/ (Equity + non-current liabilities)

27
Q

What is sales revenue to capital employed

A

Net asset turnover. Examines how capital employed (net assets) are being used to generate sales (higher prefered as more sales revenue for each £1 of capital employed)

28
Q

Sales revenue per employee

A

Sales revenue/ number of emploees

29
Q

What is sales revenue per employee

A

measure of workplace productivity, high value implies productive development of staff

30
Q

Current ratio

A

Current assets/ current liabilities

31
Q

What is current ratio

A

Compares liquid assets with current liabilities. Higher means more liquid which is preferable as it can cover the liabilities.

32
Q

Quick ratio (acid test)

A

(Current assets - inventories) / Current liabilities

33
Q

What is quick ratio (acid test)

A

Many businesses cannot convert inventories as fast, may suggest that a business is not as liquid as they thought.

34
Q

Gearing ratio

A

Non current liabilities / (equity + non-current liabilities) x 100

35
Q

What is gearing ratio

A

Financial leverage - measures contribution of long term lenders to long term capital structure.

36
Q

Interest cover ratio

A

Profit before interest and tax/ Interest (finance cost)

37
Q

What is interest cover ratio

A

Measures the amount of operating profit available to cover interest payable. Lower suggests increased risk to lenders that interest payments will not be met

38
Q

Dividend payout ratio

A

Dividends announced for year/ earnings available for the year for dividends x 100

39
Q

What is dividend payout ratio

A

Proportions of earnings paid to shareholders in the form of dividends

40
Q

Dividend cover ratio

A

Net profit/ Dividend announced for year

41
Q

What is Dividend cover ratio

A

How many times the earnings available for dividend, covers the actual dividend paid

42
Q

Earnings per share

A

Net profit/ number of ordinary share

43
Q

Dividend yield ratio

A

Dividend per share/ market value per share x 100

44
Q

What is dividend yield ratio

A

cash return from a share to its current market value

45
Q

Price earning ratio

A

Market value per share/ earnings per share

46
Q

What is price earning ratio

A

A measure of market confidence in the future of a business. Higher means a greater confidence in the future earning power of the business

Accounting 2 (10 decks)

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