Financial Statements And Performance Analysis

Question 1

Importance of Benchmarks 4

Answer 1

1. Must be compared with ratios
2. Pre determined targets for ratios set by the company
3. Ratios of companies of similar size with are engaged in similar business activities
4. Average ratios for business sector in which a company operates Ratios for the company from past

Question 2

Profitability ratios 6

Answer 2

1. Gross profit margin
2. Net profit margin
3. Return on assets
4. Return in capital employed (ROCE)
5. Asset turnover ratio
6. Return on equity

Question 3

Gross profit margin

Answer 3

Efficiency of operations and pricing policy

Question 4

Net profit margin

Answer 4

Profitability with taxes and expenses

Question 5

Return on assets

Answer 5

Profitability on the assets of the firm

Question 6

Activity ratio 8

Answer 6

Show how afficiently a company has managed short term assets and liabilities

1. Receivable ratio
2. Receivable turnover
3. Payable ratio
4. Payable turnover
5. Inventory turnover
6. Average collection period
7. PT in days
8. Total asset turnover

Question 7

Payable ratio

Answer 7

Days to pay raw materials, when you buy goods on credit

Question 8

Payable turnover

Answer 8

Promptness of payment to suppliers

Question 9

Inventory turnover

Answer 9

Effectiveness of the inventory

Question 10

Average collection period

Answer 10

Average number of days that receivables are outstanding

Question 11

PT in days

Answer 11

Average number of days that payables are outstanding

Question 12

Total asset turnover

Answer 12

Overall effectiveness of the firm in using its assets to generate sales

Question 13

Liquidity ratios 2

Answer 13

1. Current
2. Quick

Question 14

Current

Answer 14

Shows a firm’s ability to cover its current liabilities with its current assets

Question 15

Quick

Answer 15

Shows a firm ability to meet current liabilities with its most liquid assets

Question 16

Gearing ratios 5

Answer 16

How a company is financed with respect to debt and equity and can be used to access the financial risk that arises with increasing debt.

1. Debt to equity
2. Capital gearing ratio
3. Debt to total assets
4. Total capitalisation
5. Interest coverage

Question 17

Debt to equity

Answer 17

Shows the extent to which the firm is financed by debt

Question 18

Capital gearing ratio

Answer 18

Shows the extent to which the firm is finance by debt

Question 19

Debt to total assets

Answer 19

Shows the percentage of the firms assets that are supported by debt financing

Question 20

Total capitalisation

Answer 20

Shows the relative importance of long term debt to the long term financing of the firm

Question 21

Interest coverage

Answer 21

Indicates a firm ability to cover interest charges

Question 22

Investor ratio 3

Answer 22

1. Dividend per share
2. Earnings per share
3. Price earings ratio

Question 23

Problems with ratio analisis 4

Answer 23

1. One day of the year
2. difficult to find similar company for comparison
3. complex financial instruments
4. should be seen as a start for further investigation

Question 24

Economic profit

Answer 24

Is similar to residual income = profit after tax - cost of capital charge on capital employed

Question 25

Economic value added EVA 2

Answer 25

1. Similar to economic profit but seeks to find a fair value for invested capital by amending published financial statements
2. Creates wealth for shareholders

Question 26

EVA suggets shareholder value created by 4

Answer 26

1. Seeking ways to increase net operating profit after tax without increasing capital invested
2. Investing in projects giving returns greater than company’s cost of capital
3. reducing capital charge by reducing cost of capital or
4. reducing amount of invested capital