Ratios theory Flashcards
State the difference between general-purpose and special-purpose financial reports.
General-purpose reports are the external reports which would be published if the business were a company; for example, the income statement, balance sheet and cash flow statement. While special-purpose reports are internal reports which differ according to the firm producing them as they focus on the needs of each individual business. For example, the sales reports and inventory turnover.
Define financial reports.
The function of financial reports is to communicate information to users in order to
Facilitate the decision-making process.
Define cash flow ratios.
Cash flow ratios focus on the sufficiency of cash to cover cash flow needs and the efficiency of the enterprise to generate cash.
Cash flow to revenue ratio definition and strategies to improve
Cash flow to revenue ratio indicates the entity’s efficiency in converting revenue based on accrual sales and other revenue to cash.
Strategies to improve include increasing cash received from operating activities, increasing cash sales compared with credit sales, introduced EFTPOS facilities and improve credit collection rate.
Cash flow adequacy ratio definition and strategies to improve
Cash flow adequacy ratio indicates the ability of an enterprise to generate cash to cover immediate cash obligations.
Strategies to improve this ratio include increasing cash from operations and investigating any apparent increases in cash for assets PPE, drawings or debt repayment.
Long term debt payment ratio definition and strategies
The long term debt payment ratio indicates an enterprise’s ability to make its long term contractual payments.
Strategies to improve include increasing cash from operations and decreasing debt.
State three interested parties of financial reports and state the decision/s which may be made by these interested parties in light of the financial reports.
- Investors – decide to sell, retain or increase the investment.
- Lenders – decide to provide, withdraw or refuse future loan requests.
- Suppliers – decide to stop, continue or expand credit facility.
The reported profit in the Income Statement is an estimate of the true profit because in this statement there are accounts which are subject to estimation and/or opinion. State two accounts in the Income Statement which reflects this statement and explain why this is the case. DEPRECIATION
Depreciation: calculated in order to estimate the cost of a non-current asset that should be allocated to the accounting periods in which it is used to generate revenue. It is a direct result of the matching principle and the value is subjective to the method chosen, reducing balance or straight line.
The reported profit in the Income Statement is an estimate of the true profit because in this statement there are accounts which are subject to estimation and/or opinion. State two accounts in the Income Statement which reflects this statement and explain why this is the case. DOUBTFUL DEBTS
Doubtful debts: The value of the doubtful debts is subjective dependent on two general factors; the perception of the current economic climate and the effectiveness of credit policy. True value of the debts that will be bad will not be known until later. Whilst, calculation is based on historical records of accounts receivable together with a perception of whether or not the economic climate is favourable or unfavourable.
