Interpretation Last Minute Revision Flashcards
Problem with FV?
Tries to mask performance
Low liquidity ratios?
Liquidity problems
Too high liqudiity ratios?
Poor use of funds
Deterioration in current ratio but not quick ratio?
Inventory obsolescence
Effect of leasing assets on ROCE?
Increases capital employed, therefore reduces ROCE
Reducing amount of assets in ROCE?
Increases ROCE
Revaluation of assets in ROCE?
Decreases ROCE
Invest in new asset close to year end ROCE?
Decreases ROCE as not all profits are determined
ROCE broken into parts
Profit margin * asset turnover
Asset turnover?
Revenue / capital employed
Higher payables?
Improved liqudiity as more cash is available
What is working capital cycle?
How long it takes a transaction to generate cash
Levels of inventory and discounts on purchase?
Discounts on purchasing inventory increases it
Settlement discounts in receivables and revenue?
Reduces revenue and receivables collection
Generous payment terms and receivables?
Increases collection periods
If entity is receiving settlement discounts from suppliers (payables)
Reduces payables
What do settlement discounts do?
Speed up the conversion process
Increase in gearing (debt and equity)
Increased debt and a reduction in equity
Decrease in gearing (debt and equity)
Repayment of borrowings
Rights issue of shares
Revaluation of assets and gearing?
Decreases gearing as equity increases. Operating profit also decreases
Reasons for increase in interest cover?
Lower profits
Higher finance costs
Settlement discounts?
Reduce receivables and payables
High payables?
Extended credit terms
More purchasing
Low payables?
Fast payments
Less purchases
Calculate working capital?
Inventory + receivables - payables
What is the working capital cycle?
Difference between current assets and liabilities
Increasing in working capital and liquidity?
Decreases liquidity
What does bonus issue always cause?
A dilution. As shares are the same but earnings decrease
The possible results of a rights issue?
Can be dilutive depending on how proceeds are used
When is AVCO better than FIFO (industry)
Industries where inventory costs fluctuate significantly
FIFO when prices are rising?
There is more profitability than AVCO
Where does AVCO improve on FIFO?
Ignores one-off events that affect profit
FIFO when prices are falling?
There is less profitability than AVCO
Asset turnover?
Revenue / (total assets - current liabilities)
Does disposal improve liquditiy?
Yes as there’s more cash to meet obligations
Discounted selling prices affect the inventory holding period?
Reduce the inventory holding period
Advantages of cash flow?
Usability
Shows daily operations
Avoids misleading
Comparability affects?
Accounting policies
What does understandability and timeliness relate to?
Users of financial statements
What does relevance relate to?
Materiality
What does faithful representation relate to?
Reflects economic substance rather than legal form
When a subsidiary doesn’t contribute a lot to sales?
It is a bad subsidiary
Exiting from a lease?
Decreases finance costs
Sharp decrease in cash?
Decreases liquidity
What is another term for credit sales in receivables working?
Revenue
Difference in industries?
Analysis might be irrelevant
Issue with PE ratio?
Can be manipulated for better results
How should influences be discovered?
Through business factors and accounting policies
What may a retailer have over a manufacturing business?
Higher turnover but lower margins
Another term for cash consdieration payable?
Deferred consideration
Deferred tax provision always provided?
Yes
Paying back a loan just before year end does what?
Reduces gearing
When can a company take out of borrowings?
When gearing decreases
How does acquiring another company affect revenue and profit?
No effect on revenue, but increases profit
Value for money objectives?
Economy
Effectiveness
Efficiency
Risk for business diversifying for ROCE?
Resource structure will likely change, more apparent if made at end of year
IFRS 5 discontinued operation criteria?
Separate major line
Acquried exclusively for resale
Single co-ordianted plan
Issue with disposing a subsidiary? (comparability)
Assets and liabilities are not comparable
Are preference shares involved in gearing?
Yes
Increase in gearing?
Issuing a loan note or obtaining a bank loan
Leases
If retained earnings were to fall due to dividend payments
Decrease in gearing?
Repayment of borrowings
A rights issue of shares, not a bonus issue
Revaluation of assets affect on gearing?
Increases equity, therefore DECREASES gearing
When are carrying amonuts of assets greater (depreciation method)
depreciated on a reducing balance basis rather than a straight-line basis (over the same useful life)
Large increase in capital employed reason?
Issuing of shares
