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Accountancy > InInterpreting Financial Statements > Flashcards

InInterpreting Financial Statements Flashcards

1
Q

What do ratios help with?

A

Comparisons between businesses of different sizes.

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2
Q

What would you look at to see if a 20% return was a good or poor result?

A

Compare with:
- Same ratio from the past
- Budgeted/ planned ratio
- Similar Businesses
- Industry averages

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3
Q

What are the categories of ratios?

A

Profitability, Efficiency and Liquidity

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4
Q

What does the profitability ratios show?

A

What return from capital and assets.

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5
Q

What does the efficiency ratios show?

A

Is the business making efficient use of its resources.

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6
Q

What do the liquidity ratios show?

A

If there is enough short term cash and if the current obligations can be met.

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7
Q

How is the gross profit margin calculated?

A

The gross profit divided by the revenue.

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8
Q

What does the gross profit margin show?

A

The gross profit as a percentage of revenue.

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9
Q

What does the return on capital employed show?

A

It shows PbIT as a percentage of capital employed.

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10
Q

How is the RoCE calculated?

A

PbIT divided by the share capital+reserves+long-term loans

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11
Q

What is the profit that operational managers have the most control over?

A

PbIT

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12
Q

What is the operating profit margin?

A

The operating profit as a % of revenue

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13
Q

How do you calculate the operating profit?

A

PbIT divided by the revenue

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14
Q

What does the asset turnover show?

A

The revenue as a % of the capital employed. How many times the revenue was turned over in assets.

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15
Q

What are the problems with the RoCE?

A
  • Calculation methods can vary.
  • Different analysts will calculate the ratio in different ways.
  • Are assets valued at “current prices”?
  • Capital investment often results in low returns in the early years.
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16
Q

What do efficiency ratios show?

A

How well is a company using its resources (especially in the short-term)

17
Q

What is the inventory turnover period?

A

The average number of days inventory is held.

18
Q

How is the inventory turnover calculated?

A

Inventory divided by cost of sales

19
Q

What kind of inventory turnover is preferred?

A

A low one

20
Q

What is receivables collection?

A

How long credit customers take to pay their bills.

21
Q

How do you calculate the receivables collection?

A

Trade receivables divided by the credit sales (per day)

22
Q

What can be wrong with the receivables collection as a ratio?

A

It’s an average so one high or low value could distort it.

23
Q

What is the payables payment (Creditors)?

A

How long it takes to pay suppliers.

24
Q

How do you calculate the payables payment?

A

Trade payables/ cost of sales

25
Q

Whats wrong with the payables payment?

A

Its an average and so can be distorted by a high or low value.

26
Q

What is the working capital cycle a measure of?

A

The difference between payments made to suppliers and cash received from customers.

27
Q

What are the general rules for the WC cycle?

A
  • WC cycle should be as short as possible
  • Shorter cycle = money is tied up in the WC for as little as possible.
  • This will reduce the amount of short-term capital required to operate.
28
Q

What does a decrease in the WC cycle mean?

A

Less money required to operate in the short-term which is usually a good sign, but the payables increase is the largest factor and may be risky.

29
Q

What is liquidity?

A

Ability to meet short-term obligations when due.

30
Q

What does the liquidity ratios show?

A

If there is enough short-term cash to pay bills. Banks, customers and suppliers are all interested in liquidity.

31
Q

How do you calculate the current ratio?

A

Current assets divided by the current liabilities.

32
Q

How do you calculate the acid-test ratio?

A

The current assets - the inventory divided by the current liabilities.

33
Q

WHat does a higher current ratio mean generally?

A

More liquidity

34
Q
A

Accountancy (6 decks)

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