Brainscape's Knowledge GenomeTM

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


See full index

Year 1 Accounting (SPR EXAM) > Ratio Analysis > Flashcards

Ratio Analysis Flashcards

1
Q

What is the importance of ratio analysis? What does context mean in this aspect?

A
  • Time and Effort spent on financial statement
  • This means that you should do something using it
  • Interpretation is key to decision of financial improvement
  • Ratios on their own mean very little
  • Have to be used for comparison
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Name the 5 types of ratios

A
  • Profitability
  • Efficiency
  • Liquidity
  • Gearing
  • Investor
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the 3 types of Profitability ratios?

A
  • Return on Capital Employed (ROCE)
  • Gross Profit Margins (GPM)
  • Operating Profit Margins (OPM)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the Return on Capital Employed ratio? Give the formula for it

A
  • The fundamental measure of a firm’s performance
  • Operating Profit Vs Average Long-Term Capital Investment
  • Formula:
    (Operating Profit)/Capital Employed X 100%
  • Capital Employed: Retained Profit, Reserves, SC, SP and Non-Current Liabilities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How can the Return on Capital Employed be interpreted?

A
  • Inputs and Outputs
  • Tells us how well-used funds are
  • Can they get a better return elsewhere?
  • ROCE should be greater than competitors, interest rate and last years
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the Gross Profit Margin ratio? Give the formula for it

A
  • Measures the percentage of sales that a firm keeps
  • Formula:
    (Gross Profits)/Sales x 100%
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How can the Gross Profit Margin be interpreted?

A
  • How much Profit is retained?
  • Represents what a company keeps (- COGS)
  • Compared to the industry average or last year
  • If CoP increases, GPM will generally fall (ceteris paribus)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the Operating Profit Margin ratio? Give the formula for it

A
  • Measures Operating Profit Vs Sales
  • Formula:
    (Operating Profits)/Sales x 100%
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How can the Operating Profit Margin be interpreted?

A
  • Very similar to GPM, so are looked at together
  • The higher the better, <5% is poor
  • A lot of changes over time generally
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the 4 types of Efficiency ratios?

A
  • Non-Current Asset Turnover Ratio
  • Average Receivables Collection Period
  • Inventory Holding Period
  • Average Payables Collection Period
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the Non-Current Asset Turnover ratio? Give the formula for it

A
  • Measures how efficiently the firm is using its Long-Term assets to generate sales
  • Formula:
    Sales / Non-Current Assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How can the Non-Current Asset Turnover be interpreted?

A
  • If assets aren’t producing sales, they represent a ‘drain on resources’
  • This however may be distorted by failure to replace assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the Average Receivables Collection Period ratio? Give the formula for it

A
  • Measures the average time to collect TR
  • Assume all sales are credit sales unless explicitly stated
  • Formula:
    TR / Credit Sales X 365 Days
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How can the Average Receivables Collection Periods be interpreted?

A
  • Firms will prefer shorter settlement periods
  • Can result in lower sales
  • When this is high, shows poor control; if this happens, you need an ID firm or Factoring
  • Best period would be 45-75 days
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the Inventory Holding Period ratio? Give the formula for it

A
  • Measures the time taken to turn inventory into sales
  • Formula:
    Inventory / Cost of Sales X 365 Days
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How can the Inventory Holding Period be interpreted?

A
  • Don’t want it held for too long
  • Might be distorted by seasonality
  • Too Long? Need a marketing system
17
Q

What is the Average Payables Collection Period ratio? Give the formula for it

A
  • Measures the average time to pay back supplies
  • Use COGS if cannot find Credit Payables
  • Formula:
    TP / Credit Purchases X 365 Days
18
Q

How can the Average Payables Collection Periods be interpreted?

A
  • Can be distorted based on different deals from suppliers
  • ‘Free’ source of finance so businesses would like to leave this as long as possible
  • But, leaving it too long will annoy suppliers
19
Q

What is the Net Trade Cycle? Give the formula

A
  • Measures time between when you pay suppliers and when you receive the TR
  • NTC = IHP + RCP - PCP
20
Q

What are the 2 Types of Liquidity Ratios?

A
  • Current Assets
  • Quick Assets
21
Q

What is the Current Asset ratio? Give the formula for it

A
  • How many £ of Current Assets for each Current Liabilities
  • Formula:
    Current Assets / Current Liabilities
22
Q

How can the Current Asset Ratio be interpreted?

A
  • Increased ratio, more liquidity
  • Ideal = 2:1, but this depends on the industry
  • Too high; too much tied up in CA
  • Too low; CL becomes worrying
23
Q

What is the Quick Asset ratio? Give the formula for it

A
  • Excludes the least liquid of CA
  • Formula:
    (Current Assets - Inventory) / Current Liabilities
24
Q

How can the Quick Asset Ratio be interpreted?

A
  • Ideal = 1:1, but this depends on the industry
25
Q

What are the 2 Types of Gearing Ratios?

A
  • Gearing
  • Interest Cover Ratio
26
Q

What is the Gearing ratio? Give the formula for it

A
  • The Ratio between external (debt) and internal (equity) long-term finance
  • Measures the risk of an organisation
  • Formula:
    Long-Term Debt / Capital Employed x 100
27
Q

How can the Gearing Ratio be interpreted?

A
  • Should be low if the industry is susceptible to volatile demand and profits
  • Over 50% is risky- debt>equity
28
Q

What is the Interest Cover ratio? Give the formula for it

A
  • Indicates how well interest can be afforded
  • Formula:
    PBIT / Interest
29
Q

How can the Interest Cover Ratio be interpreted?

A
  • High-interest cover suggests that lenders payments are secure
  • BUT, if too high, it could be good to take on more things
30
Q

What are the 2 Types of Investor Ratios?

A
  • Earnings Per Share (EPS)
  • Dividends Cover Ratio
31
Q

What is the Earnings Per Share ratio? Give the formula for it

A
  • Measures for each share, relative earnings
  • Formula:
    Profits After Tax / Total Share in Issue
32
Q

How can the Earnings Per Share Ratio be interpreted?

A
  • Want it as high as possible
  • The go-to investor information
33
Q

What is the Dividends Cover ratio? Give the formula for it

A
  • Measures how affordable dividends is
  • Formula:
    Profit After Tax / Dividends
34
Q

How can the Dividends Cover Ratio be interpreted?

A
  • If it is high, Dividends are low
  • BUT, they could be looking to spend in the future
35
Q

Name the limitations of ratios

A
  • Highlights change- does not explain it
  • Deterioration isn’t bad management
  • Broad Picture: Use a lot of ratios
  • Comparability/ Choices of accounting
  • Seasonality
  • Quality of financial statement - “Window Dressing”
  • Restricted vision of ratios
  • Ratios relating to SOFP; snapshot

Year 1 Accounting (SPR EXAM) (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions