Interpreting Financial Statements Flashcards
What are the usual needs for users to make accounting information?
- Investors - would the money invested make a suitable return?
- Suppliers - is the business able to pay for goods brought on credit?
- Customers - is the business able to supply the goods that customers require?
- Lenders - does the business have enough money to make payments to lenders?
- Employees - Does the business make enough profit to make payments to employees?
- Government - Calculating tax due/ meeting laws
- Public - employment, pollution, health and safety
What is the technique of ratio analysis formulas?
- ROCE (Return On Capital Employed) = (profit before tax and long-term loan interest/net assets) x 100
- ROA (Return On Assets) = (profit before tax and long term loan interest/total assets) x 100
- ROE (Return on Equity) = (profit before tax but after interest/shareholders equity) x 100
How do you calculate inventory days?
(Average inventory/cost of goods sold) x 365
How do you calculate number of days of credit granted to customer?
(Trade debtors/credit sales) x 365
How do you calculate average time before debtors are paid?
(Trade creditors/credit purchases) x 365
What are liquidity ratios?
the ability of the company to generate cash to meet short term obligations
What are solvency ratios?
The ability of the company to generate cash internally and from external sources to meet long term financial obligations
What is the formula for current ratio?
(Current assets / current liabilities) x 100
What is the formula for acid test ratio?
(Current assets - inventory) / current liabilities
What is the importance of benchmarks?
It provides context to financial metrics and assists in identifying strengths and weaknesses
What are a few limitations of ratio analysis?
- Inflation and price changes could make ratio analysis invalid
- Ratio analysis is based on historical accounting information
- It does not identify short term fluctuations within one year in assets and liabilities
- Non - monetary factors aren’t reflected
What is the formula for Operating Profit Margin?
(Operating profit/ revenue) x 100
What is the formula for settlement period for trade receivables?
(Trade receivables/revenue) x 365
What is the formula for settlement period for trade payables?
(Trade payables/gross profit) x 365
What is the formula for Earnings Per Share?
Profit after tax / Shares
