Interpretation Rote Flashcards
What if a company hasn’t owned another company for very long?
Returns from acquisition won’t be instant
Trade payables increase?
Having trouble paying suppliers
What is unwise to do when working capital is needed?
To pay a dividend
If acquisition was funded by a share issue instead of loan notes?
Returns would have been diluted
Period prior to disposal calculation?
Current year - prior year
What should be considered if there is high gearing?
Which industry
Reason for a higher ROCE?
Better asset turnover
When using a ratio (answering)?
Compare result, explain the cause and effect in the analysis
if there is insufficient evidence to make a conclusion?
Note this in the analysis
Going from consolidated profit to single entity profit?
Add back depreciation and unwinding of discount
Deduct post-acq profit and savings
Decline in interest cover?
Decrease in profit from operations
An increase in finance costs
Profit from disposal?
Improves profit on operations
What can a disposal do?
Improve liquidity (e.g. disposal)
Net current liability meaning?
Less than 1
Cause of poor liquidity?
Overdraft balance
High payables
If subsidiary sold on last day of the year?
It will be included in financial statements of the first year
Not possible to compare signle entity to group (transactions)
Intra-group transaction are eliminated. However, single entity includes
Not possible to compare signle entity to group (change in equity)
Group equity increased by NCI and RE of sub
Risk with an increase in revenue?
Management must review the individual revenue streams
Sharp decrease in membership and sundries reasons?
Quality of services
Lack of demand
Increase in share capital and increase in gearing throguh taking out a loan?
Helped liquduity but reduced profitability as there’s interest charges
What is a negative action to increase the cash flow when a business is struggling
Issuing share capital and increasing loans
Provision affect on profitability?
Reduces it as costs need to be paid
Calculate increase/decrease in cash? (For liquduity)
Operating activities + investing activities + financing activities
Reasons behind an accounts receivable increase?
New revenue streams for the business
Purchasing inventory at high-volume close to year-end?
Can’t be used to pay suppliers
Short-term finance example?
Bank overdraft
Long-term finance example?
Loans
Operating profit far larger than operating cash flow?
Company can’t seem to cover day-to-day operations
Potential problem with issuing shares?
Shareholders earnings can become diluted
If shareholders aren’t receiving dividends?
They will share their holdings
Issue with not receiving settlement discounts?
Have to pay more to suppliers, thereby impacting profitability
Negative operating cash?
Always bad
Positive investing cash?
Can be good, depends on operating
Positive financing cash?
Can be good, depends on operating
Issue with only positive financing and investing but negative operating?
Businesses may only have that because of proceeds
Reason for losing out on settlement discounts?
Not paying suppliers early
How do leases affect PBIT?
Increase it as they are now depreciation and interest expense
Trade payables increase?
Could mean company is having difficulty paying suppliers on time
Issue with ROCE if acquisition was near beginning of the year?
There will be less return as less months profits are used
If acquisition was funded through a share issue (shareholders)?
Shareholders returns are diluted
If acquisition was funded through loan notes (shareholders)?
Servicing debt may take priority, therefore shareholders receive less
What will an acquisition do in terms of profitability?
If it was done later in the year, more profitabiltiy will be recorded
Removal of a lease liability decreases?
Non-current liabilities
Disposal affects?
Operating profit positive
Intragroup (consolidation and single)
Consolidation: Removed
Single: Remain
What must be done to comepnsate increased borrowings?
Increase working capital efficiency
Reduce costs
When looking at the profit figure?
Always compare it with previous years and note the movement
Is a new discount from sub related to itnragroup?
Yes
Poor performance from subsidiary?
Impacts parent during consolidation
What does an impairment loss decrease?
Equity through revaluation and the assets
Settlement discount affect on current ratio?
Makes cash received lower than receivables. This decreases the current ratio
Bonus issue of ordinary shares and cash?
Generates no cash at all
Rights issue of ordinary shares and cash?
Increases cash and share capital
What does working capital efficiency represent?
How well a company manages its short-term assets and liabilities to support its day-to-day operations
What does a higher payable period mean?
Allows company to hold onto cash much longer, improving liquidity
Excessive inventory affect on working capital?
Excess inventory ties up cash which can be used elsewhere in the business
What does a shorter receivables collection period allow?
Faster cash inflows, which improves liquidity and working capital efficiency
Increase in working capital (receivables collection)
Change in credit policy
Inefficiencies in AR
Seasonal variation in sales
Decrease in working capital (receivables collection)
Effective AR management
Negotiated payment terms with suppleirs and discounts for early payments
Improved inventory management
Increase in working capital (payables payment)
Increase in purchases due to higher purchasing activity from company (seasonal fluctuations)
Inventory build up
Extended payment terms
Decrease in working capital (payables payment)
Timely payment of payables
Reduced purchases from the company
Negotiated discounts offered by suppliers for early payment
Increase in working capital (inventory holding)
Slow-moving inventory
Excess inventory
Obsoleste inventory
Decrease in working capital (inventory holding)
Improved inventory management
Improved logistics and transportation efficiency
Better supplier relationships
Decrease in gross profit margin?
Offering discounts can stimulate sales but also leads to lower selling price
Write-offs of inventory
Higher sale of low margin items compared to high margin items
Increase in gross profit margin?
Inventory management
Favourable term1s with suppliers (volume discounts)
Differentiation through unique products
What factors affect EPS?
Profit
Shares
What can mitigate a fall in ROCE?
An increase in net assets turnover
Do assets held at historical cost affect ROCE?
Yes, it overstates it
Additional goodwill in consolidation?
Investment cost more than the net assets
Why is measuring benefit of an investment difficult in consolidation?
Intragroup has been eliminated
Reasons for a decrease in profitability but an increase in revenue?
Failing gross profit and operating profit
Potential reason for sharp decrease/increase in operating profit?
One-off cost or disposal
When there is a discount adjustment?
Relates to cost of sales
Cost of sales: £72000
Archway buys 50% of its purchases for resale from Cardol Co one of its rivals and receives a bulk buying discount of 10% off normal prices
Debit £4000 COS
CALC
72000 * 50% = 36000
36000/90% - 36000 = $4000
Sales revenue would be 5% lower than currently?
Sales revenue * 95%
Revaluation gain restated if revaluation at start of period single entity?
Deducted from NCA for next period
Depreciation restated?
Added to NCA
Charge to cost of sales restated single entity?
Added to cost of sales
Do accounting policies distort differences?
Yes
Should comparative size of company be considered in an analysis?
Yes, one might be new and expanding. Anotehr might be old and stagnating
If reporting date coincides with end of reporting period?
inventory levels are lower than average
Trade receivables higher than average
FIFO and WAC COS?
FIFO gives a lower cost of sales than WAC, therefore higher profitability ratios
Cost vs revaluation model?
Cost gives lower depreciation and therefore higher profits
Expenditure charge to SPL calculation?
Opening balance - closing balance
Netting off approach government grant?
Cost - grant. Then depreciated
Overstatement in opening inventory
Debit COS
Thereyb reduces gross profit
Impairment effect on ROCE and gearing?
Increases the ratios
Revaluation effect on ROCE and gearing?
Decreases the ratios
Closing inventory understated?
Decreases current assets, therefore understates current ratio
How is control established?
Through reference to voting shares
Why are settlement discounts beneficial for AR?
Allows customers to pay faster
Acquisition funded through loan notes? (Priority)
Servicing of debt will take priority, therefore shareholders will receive less
Foreign currency risk?
Affects operating expenses
What does removing a lease liabiltiy do for non-current liabilities?
Decrease them
