Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

AAT-Level 4 > Interpretation of financial statements > Flashcards

Interpretation of financial statements Flashcards

1
Q

Profitability

A

-measures the relationship between income and expenses; also the profits or losses measured against equity

  • Ratios:
  • gross profit percentage
  • operating profit percentage
  • expense/revenue percentage
  • return on capital employed
  • return on shareholders’ funds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

liquidity

A

-focuses on the relationship between assets and liabilities

  • Ratios:
  • Current ratio (a.k.a. working capital ratio)
  • Acid test ratio (a.k.a. quick ratio/liquid capital ratio)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

use of resources

A

-Analyses how efficiently assets and liabilities have been used by the company

  • Formulas:
  • inventory holding period (days)
  • inventory turnover (times per year)
  • trade receivables collection period (days)
  • trade payables payment period (days)
  • working capital cycle (days)
  • asset turnover (non-current assets) ratio
  • asset turnover (net assets) ratio
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

financial position

A

-compares the relationship between the equity and the non-current liabilities of the company

  • Formulas:
  • interest cover
  • gearing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

gross profit margin (percentage)

A

Formula:
*gross profit / revenue x 100

  • Additional notes*
  • the higher the better
  • Higher:
  • an increase in revenue aspect (selling price, volume, or both)
  • and/or a decrease in cost of sales (cost savings in material usage, material price, labor efficiency/rate, etc.)
  • A fall:
  • opposite of “the higher”
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

operating/net profit margin (percentage)

A

Formula:
*operating or net profit / revenue x 100

  • Additional notes*
  • operating profit (a.k.a. net profit) = profit before finance costs and tax
  • The higher the better
  • Higher:
  • increase in gross profit percentage
  • and/or a decrease in one or more expenses
  • A fall:
  • opposite of “the higher”
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

expense/revenue percentage

A

Formula:
*specified expense / revenue x 100

-It is important to understand cost behaviour (fixed, variable, or semi-variable). If revenue is 2x last year’s figure, not all expenses will be doubled.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

capital employed

A

total equity + non-current liabilities

  • Additional notes*
  • capital employed = net assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

return on capital employed (ROCE) “primary ratio” percentage

A

Formula: either one of the below

  • profit from operations / (total equity + non-current liabilities) x 100
  • profit from operations / (capital + non-current liabilities)
  • profit from operations / (total assets - current liabilities) x 100
  • profit from operations / (non-current assets + net current assets)
  • operating profit margin x asset turnover (net assets)
  • Additional notes*
  • the higher the better
  • reason for including non-current liabilities in the capital employed is that the company has the use of the money from these contributors for the forseeable future, or certainly for a fixed time period
  • an additional return to allow for the extra risk in running a company is needed
  • reason for the last formula is because “the operating profit margin” and “asset turnover (net assets)” have “revenue” in the equation that can be cancelled out
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

return on net assets

A

Formula:

*operating profit / net assets x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

value added

A

Formula:
*Sales - (cost of materials used and bought in services)

  • Additional notes*
  • “value added” refers to “value of outputs - value of inputs”
  • shows the increase in monetary value which has resulted from the work done and the use of assets within the organisation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

value added per employee

A

Formula:

*Value added ÷ number of employees

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

return on shareholders’ funds

A

Formula:
*profit after tax / total equity x 100

  • Additional notes*
  • the higher the better.
  • Shows how effective the firm is in using its share capital to generate profit
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

working capital

A

current assets - current liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

current ratio (working capital ratio)

A

Formula:
*current assets / current liabilities = x : 1

Additional notes

  • Acceptable ratio:
  • 2:1
  • Too high or too low a ratio is not a good thing
  • too high (might be due to too much assets tied up in unproductive activities, e.g. too much stock)
  • too low (risk of not being able to pay your way)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

acid test ratio (quick ratio/liquid capital ratio)

A

Formula:
*(current assets - inventories) / current liabilities = x : 1

Additional notes

  • ideal ratio:
  • 1:1

-inventories are the least liquid current asset as they have to be sold, turned into trade receivables and then the cash has to be collected

17
Q

Inventory holding period/average age of inventory (days)

A

Formula: either

  • average inventory / cost of sales x 365 days (if you know both opening and closing inventory figures); or
  • closing inventory / cost of sales x 365 days
  • Additional notes*
  • Indicates the number of days inventories are held on average
  • the shorter the better
18
Q

inventory turnover (times per year)

A

Formula:

  • cost of sales / average inventory = x times per year; or
  • cost of sales / closing inventories = x times per year
  • Additional notes*
  • Indicates the number of times at which a company’s inventory is turned over
  • The higher the better (in general) but it depends on the type of business.
19
Q

trade receivables collection period (days)

A

Formula:

  • trade receivables / credit sales x 365 days; or
  • trade receivables / total sales x 365 days
  • Additional notes*
  • The shorter the better
  • Ideally, trade receivables’ days should be shorter than trade payables’ days. So that money is being received from trade receivables before it is paid out to trade payables
20
Q

trade payables payment period (days)

A

Formula:

  • trade payables / credit purchases x 365 days; or
  • trade payables / cost of sales x 365 days
  • Additional notes*
  • The longer the better
  • Ideally, trade payables’ days should be longer than trade receivables’ days. So that money is being received from trade receivables before it is paid out to trade payables
21
Q

working capital cycle (days)

A

Formula:
*inventory days + receivable days - payable days

  • Additional notes*
  • the shorter the time, the better (because of the lower amount of working capital needed)
  • Ways to reduce working capital cycle:
  • reduce inventory
  • speed up the rate of debt collection
  • lower the credit period given to receivables
  • slow down the rate of payment to suppliers
22
Q

asset turnover (non-current assets) ratio

A

Formula:
*revenue / non-current assets = x times

  • Additional notes*
  • Measures the efficiency of the use of assets in generating revenue
  • the higher the better
  • Falling ratio could be due to a decrease in revenue or increase in assets
23
Q

asset turnover (net assets) ratio

A

Formula:

  • revenue / (total assets - current liabilities) = x times; or
  • revenue / capital employed = x times
  • Additional notes*
  • Measures the efficiency of the use of assets in generating revenue
  • the higher the better
  • Falling ratio could be due to a decrease in revenue or increase in assets
24
Q

gearing ratio

A

Formula:

  • non-current liabilities / capital employed x 100; or
  • debt / (debt + equity) x 100

Additional notes

  • the lower the better
  • high gear (less secure because the business is exposed to more interest rate fluctuations, paying back interest and loans before being able to reinvest earnings

-Anything above 50% is dangerous

25
Q

gearing (debt to equity) ratio

A

Formula:
*debt / (ordinary share capital + reserves) x 100

Additional notes

  • the lower the better
  • high gear (less secure because the business is exposed to more interest rate fluctuations, paying back interest and loans before being able to reinvest earnings
  • Anything above 50% is dangerous
  • this ratio will always result in a higher percentage than the gearing ratio when based on the same data
26
Q

interest cover

A

Formula:
*profit from operations / finance costs = x times

Additional notes

  • the higher the better
  • profit can cover finance costs
27
Q

pyramid of ratios

A

Formula:
*return on capital employed = (operating profit percentage) x (asset turnover–net assets)

  • Additional notes*
  • capital employed = net assets
28
Q

efficiency ratio

A

Formula:
(standard hours for actual production) / (actual hours worked) x 100%

  • Additional notes*
  • if the ratio is 100%, the employees have worked at the standard level of efficiency
  • if < 100%, then they have worked more slowly; adverse variance
  • if > 100%, they have worked more quickly than standard; favorable variance
29
Q

idle time ratio

A

Formula:
(idle hours) / (total hours) x 100%

  • Additional notes*
  • measures the percentage of total hours that are lost due to idle time
30
Q

activity ratio

A

Formula:
(standard hours for actual production) / (budgeted hours) x 100%

  • Additional notes*
  • an indicator of how actual output compares with the budgeted output
31
Q

production volume ratio

A

Formula:

(actual output) / (budgeted output) x 100%

32
Q

capacity ratio

A

Formula:

(actual hours worked) / (budgeted hours) x 100%

33
Q

EBITDA interest cover

A

Formula:
EBITDA/ interest payable

*the higher the figure, the lower the risk

34
Q

EBITDA to debt

A

Formula:
EBITDA/ debt

*the higher the figure, the lower the risk

AAT-Level 4 (16 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions