T4 Analysis of financial statements

Question 1

What is the formula for Gross Profit?

Answer 1

(Gross profit/Revenue) x 100 = %

Question 2

What is the formula for Operating Profit Margin?

Answer 2

(Operating profit/Revenue) x 100 = %

Question 3

What is the formula for Return on capital employed

Answer 3

(Profit before tax / Capital employed) x 100 = %

Question 4

What is the formula for Net asset turnover?

Answer 4

Sales Revenue / Capital Employed = Amount of times per annual (How well the management can use the net assets to generate sales)

Question 5

What is Capital Employed?

Answer 5

How much money we have put into the business through internal (equity) and external (Long-term debt + Short term lease) Finance.

Question 6

What is the formula for Current Ratio?

Answer 6

Current Assets / Current Liabilities : 1
The amount of times the current assest can cover the current liabilities.

Question 7

What is the formula for Quick Ratio (Acid Test)?

Answer 7

(Current assets - Inventory) / Current liabilities

Question 8

What is the formula for Inventory turnover period

Answer 8

(Inventory / Cost of sales) x 365

Question 9

What is the formula for Receivables Collection Period?

Answer 9

(Trade Receivables / Credit Sales) x 365 = days

Question 10

What is the formula for Inventory turnover period but in times per annum instead of days

Answer 10

(Cost of sales / Inventory)

Question 11

What is the formula for Payables payment period?

Answer 11

(Trade payables / Credit purchases) x 365 = Days

Question 12

What is the formula for Gearing 1 (Debt/Equity)

Answer 12

Debt (Loans + Preference share capital) / Equity (Ordinary Share capital + Reserves + Non controlling interest)

Question 13

What is the formula for Gearing 2 (% of capital employed represented by borrowings)

Answer 13

(Loans + Preference share capital) / (Ordinary share capital + Reserves + Non controlling interest + Preference share capital)

Question 14

What is the formula for Interest cover

Answer 14

Profit before tax and interest / Interest payable

Question 15

What is the formula for Earnings per shares (EPS)

Question 16

What is the formula for PE Ratio

Question 17

What is the formula for Dividends Yield

Answer 17

Dividends per share / Current share price

Question 18

What is the formula for Dividend Cover

Answer 18

Profit after tax / Dividends

Question 19

What is Historical Cost?
and what is the issues with using historical cost?

Answer 19

It records the value of an asset at the cost of when it was first acquired.
Its not the most up to date valuation so it prevents the interpretations and analysis being meaningful because management may struggle making decisions based on ratios that include historical costs.

Question 20

What is creative accounting / Window Dressing? and examples.

Answer 20

Directors want bonuses and they only get them if the company is profitable so to make sure they are even if the business has had a poor year, they can move costs and sales around the accounts to give the impression that the business is doing better than reality.
Window dressing is making financial decisions that could neagtively affect the business long term but looks good on the financial statements E.g increasing trade credit terms from 30 days to 90 days.

Question 21

How can accounting policies affect ratios?

Answer 21

Changing standards (e.g Historical cost and depreciation) can completely change the accounts

Question 22

How does Seasonal trading affect financial statements?

Answer 22

If the year end lines up with a busy perido for one comany and a low period for another e.g Ice cream seller and umbrella seller had the year end 31 August, you would excpect the ice cream seller to have more in the bank at the year end.

Question 23

What additional information would be useful when completing analysis for a entity or group?

Answer 23

Cashflow statement
Recent news reports
Share price
Budgets
Staff turnover
Minutes from meeting
Auditors report
CEO reports
Internal memo’s
Future Plans
Company objectives.