FRA Flashcards
What is the formula for RoE?
Profit / equity
Higher is better
What is formula for ROCE?
Profit before interest and tax (PBIT) / Capital employed (total assets - total current liabilities)
(Solely measures revenue generated by operations, EBIT includes additional income)
- overall performance of the entity
Higher is better
Net profit margin ratio formula
PBIT / Revenue
Higher is better
Gross profit formula
Gross profit / revenue
Higher is better
Asset turnover formula
Revenue / Capital employed
Higher better
Non-current asset turnover formula
Revenue / Non-current assets
Higher
Inventory turnover formula
Closing inventory * 365 / cost of sales
Higher better
Trade receivables ratio formula
Trade receivable * 365 / revenue
Higher better
Trade payables formula
Trade payables * 365 / credit purchases
higher better
What is the cash cycle + formula?
Accounts receivable days + inventory days - accounts payable days = cash cycle
- measures the numbers of days it takes to acquire and sell invent ory and convert this into cash
Current ratio formula
Current assets / Current liablities
- companies that generate cash can often operate with it under 1
Quick ratio formula
Current assets - inventory / current liabilities
Interest cover formula
EBIT / interest expense
Depends on industry - regulated low would be find, in volatile industries, high is preferred
Gearing ratio formula
Total debt / shareholder equity
High > 50% | 25-50% usually optimal | <25% Low
What does IAS 32 Debt and equity imply?
Debt - liability: obligation, outflow, reliably measured
Equity - no obligation -> residual interest
What does IAS 32 compound instruments mean?
Fair value - amount that an asset can be exchanged for
Total FV - LiabilityFV = residual equity FV
What is convertible debt?
Debt that appears as both equity and debt - split presentation into libaility and equity amounts
What is the IAS 37 provision criteria?
- Present obligation from past event
- Probable outflow of economic benefits
- Method to evaluate timing and amount
= all 3 = provision
What are the two types of obligation?
Contractual and Legal
What to do with expected values?
When there is a large number of items, use weight them (% * number)
What is an onerous contract?
When the unavoidable costs of meeting obligations under a contract outweighs the benefits of the contract
What is discounting?
When there is time between the settlement of an obligation - record a liability at present value of expenditure required
What does IAS 37 restructuring mean?
Restructuring creates constructive obligation when: detailed plan and expectation from those impacted
What does IAS 36 impairments relate to?
Ensures assets carried at no more than the recoverable amount
What does IAS 38 intangibles mean?
Recognition criteria for development costs and applying accounting principles
What does IAS 38 BEAUTI stand for?
Benefits
Expenditure
Adequate resources to carry out
Usefulness
Technically feasible
Intention to complete
What are exceptional items?
Charge incurred by a company that must be noted separately - distorts ratios
(e.g. profits or losses from selling a business)
What happens if gearing is high?
- Further borrowing might be hard
- Might indicate that there has been investment that will lead to higher profits - need to know how they have been borrowed
What are some evaluation points of ratios?
- Different accounting policies have been applied (non-current assets could have been recorded at depreciated cost or revalued)
- Different commerical practices (leasing or buying)
- Have ratios been defined the same way?
How do you report development costs?
Write off profit and loss as incurred - expenditure on research
