FInancial statements and investment appraisal

Question 1

What is the general structure of financial ratios?

Answer 1

one line/another line x 100 (to make a %)

Question 2

what are the three main types of financial ratio needed?

Answer 2

profitability
liquidity
efficiency

Question 3

Whats the general structure for profitability ratios?

Answer 3

type of profit/rev

Question 4

Return on capital employed formula?

Answer 4

net profit / capital employed

Question 5

capital employed formula?

Answer 5

Total assets - current liabilities

Question 6

whats the general liquidity ratio structure?

Answer 6

a type of current assets / current liabilities

Question 7

Acid Test formula

Answer 7

CA - stock / CL

Question 8

current ratio

Answer 8

current assets / current liabilities

Question 9

whats the general
turnover ratio structure?

Answer 9

one line from the income statement/ related line on the balance sheet

Question 10

inventory turnover ratio?

Answer 10

cost of goods sold / inventory

Question 11

payables turnover ratio?

Answer 11

cost of goods sold / payables x 365

Question 12

what does ARR mean?

Answer 12

Average Rate of Return

Question 13

what does NPV mean?

Answer 13

net present value

Question 14

How to calculate ARR?

Answer 14

total return = total net cashflows - investment

total return / years running = Average annual return

Average annual return / investment x 100

Question 15

How to calculate NPV?

Answer 15

cash flow x discount factor = present value
then add all together

Question 16

what are financial statements?

Answer 16

accounting reports which summarise the financial activities and performance of a business

Question 17

what are the three types of financial statement

Answer 17

balance sheet
income statement
cash flow forecast

Question 18

What does an income statement show?

Answer 18

the revenue and expenses of a business over a period of time

Question 19

what does a balance sheet show?

Answer 19

the assets liabilities and equity at a point in time

Question 20

Why do we use profitability ratios?

Answer 20

to measure how efficiently a business generates profit

Question 21

How to calculate gross profit?

Answer 21

rev - cost of sales

Question 22

How to calculate operating profit?

Answer 22

operating profit?
gross profit - operating expenses

Question 23

How to calculate net profit?

Answer 23

operating profit - interest

Question 24

Return on Equity formula?

Answer 24

Net profit / equity

Question 25

why do we use liquidity ratios?

Answer 25

to tell how well a business can cover short term debts

Question 26

why do we use efficiency ratios?

Answer 26

how quickly a business is selling inventory, how reliable it is at paying and how quick it receives money

Question 27

receivable turnover ratio?

Answer 27

revenue / receivables

Question 28

what are the three types of investment appraisal?

Answer 28

payback, ARR, NPV

Question 29

how is payback measured?

Answer 29

time: days/months/years

Question 30

how is ARR measured?

Answer 30

% return

Question 31

How is NPV measured?

Answer 31

monetary values

Question 32

How to calculate payback?

Answer 32

identify net cash flow for each year
keep a running total of cash flows (cumulative)
calculating the precise payback by residual / next cash inflow